John Carney looks at Icahn's raid on AIG.
I usually think Zinfandel with Thanksgiving dinner, but this year I was serving a free range, organic, heritage bird that I expected to be gamier than the usual Butterball bird. So I thought this blend of 50% Cabernet Sauvignon, 48% Merlot, and 2% Petit Verdot might make a nice match ... and I was right. Nice, pleasant, but perhaps not memorable.
When last noted two years ago, I thought this wine did not have a long future. Tonight's bottle had improved a bit from my recollection of that bottle, but even so I recommend drinking it up over the next couple of years.
Purple shading to ruby color. Modest sediment. Jammy bouquet suggesting saddle leather, cocoa, cherries, prunes, and casis. Although it's below 14% alcohol, you notice a slightly hot element in the bouquet. Likewise, the finish is a bit hot. Otherwise, the palate follows the nose. Grade: 88
Will runs through a bunch of higher educations recent greatest hits and concludes:
So, today give thanks that 2015 has raised an important question about American higher education: What, exactly, is it higher than?
To celebrate the end of the semester, we had some steaks and a bottle of Pahlmeyer Pinot Noir. This is a big wine. Deep ruby in color with strong legs. The bouquet is full of black cherry, blackberry, chocolate, and toasty vanilla oak. On the palate, there is a long finish suggesting cherries dipped in dark chocolate and red berries. Well balanced. Drinkable now but should improve. I'm going to hunt down some more. Grade: 92
L. Gordon Crovitz discusses the University of Chicago's statement on free speech on campus, which seems increasingly pertinent these days:
The University of Chicago formed a committee under law professor Geoffrey Stone “in light of recent events nationwide that have tested institutional commitments to free and open discourse.”
The committee report, released in January, cited former university president Robert Hutchins, who defended a speech on campus by the 1932 Communist Party presidential nominee by saying the “cure” for objectionable ideas “lies through open discussion rather than through prohibition.” Another former president, Hanna Gray, said: “Education should not be intended to make people comfortable, it is meant to make them think.”
The Chicago statement on free expression echoes these sentiments: “It is not the proper role of the University to attempt to shield individuals from ideas and opinions they find unwelcome, disagreeable, or even deeply offensive.”
Instead, “the university’s fundamental commitment is to the principle that debate or deliberation may not be suppressed because the ideas put forth are thought by some or even by most members of the university community to be offensive, unwise, immoral, or wrong-headed. It is for the individual members of the university community, not for the university as an institution, to make those judgments for themselves, and to act on those judgments not by seeking to suppress speech, but by openly and vigorously contesting the ideas that they oppose.”
Purdue and the Princeton faculty have voted to adopt the Chicago principles. The Foundation for Individual Rights in Education is encouraging other universities to sign up.
I'd love to see UCLA adopt the Chicago principles. But I won't be holding my breath.
One of the persistent ideas among shareholder activists is mandating that the chairman of the board of directors--who in the USA is often also the company's CEO--be an independent, non-executive individual. I've written about this effort to split the CEO/Chairman before, arguing that the empirical evidence does not support it. Now there's a new study confirming that having the CEO serve as chairman of the board does not harm shareholder interests:
We use over 22,000 firm-year observations from 1995-2010 to investigate whether combining roles of CEO and board-chair causes poor performance. Our research design allows us to reconcile disagreement in the literature about whether CEO-chair duality impacts shareholder value. CEOs are awarded the additional title of board-chair following superior firm performance. A naïve analysis indicates a drop in firm performance following CEO promotion to chair. However, a research design that controls for the propensity to combine roles and performance mean-reversion reveals no post-appointment underperformance. Consistent with a learning explanation, investors react positively to combining both roles early in CEO’s tenure, but exhibit no reaction to combinations later in CEO’s tenure. Increases in post-combination compensation are unrelated to proxies for managerial power. Overall, there is no evidence that combining the CEO-chair positions hurts shareholder interests.
Jayaraman, Narayanan and Nanda, Vikram K. and Ryan, Harley E., Does Combining the CEO and Chair Roles Cause Firm Performance? (September 18, 2015). Georgia Tech Scheller College of Business Research Paper No. 2015-11. Available at SSRN: http://ssrn.com/abstract=2690281
I'm an admirer of Bob Thompson's scholarship, so I always look forward to reading a new article from him. But his latest is especially close to my heart. He argues that:
Prominent theories of corporate governance frequently adopt primacy as an organizing theme. Shareholder primacy is the oldest and most used of this genre. Director primacy has grown dramatically, presenting in at least two distinct versions. A variety of alternatives have followed — primacy for CEOs, employees, creditors. All of these theories can’t be right. This article asserts that none of them are. The alternative developed here is one of shared power among the three actors named in corporations statutes with judges tasked to keep all players in the game. The debunking part of the article demonstrates how the suggested parties lack legal or economic characteristics necessary for primacy. The prescriptive part of the article suggests that we can better understand the multiple uses of primacy if we recognize that law is not prescribing first principles for governance of firms, but rather providing a structure that works given the economic and business environment in place for modern corporations where there is separation of function and efficiencies of managers as a starting point. Thus the familiar statutory language putting all power in the board must be read against the reality of the discontinuous nature of the board (and shareholder) involvement in governance. Corporate governance documents of the largest American corporations, as discussed in the article, are consistent with this reality, assigning management to officers and using verbs like oversee, review and counsel as the director functions. The last part examines dispute resolution and the role of judges in such a world, with a particular focus on the shareholder/director boundary. At this boundary there are two distinct judicial roles, the traditional role focusing on use of fiduciary duty to check conflict and other director incapacity and the less-recognized role of protecting shareholder self-help. In this more modern context shareholders, because of market and economic developments, are able to effectively participate in governance in a way that wasn’t practical three decades ago, when the key Delaware legal doctrines were taking root. What is particularly interesting here is how courts, commentators and institutional investors act in a way that is consistent with a shared approach to power, as opposed to the primacy of any of the theories initially suggested.
It's an interesting and provocative argument. I look forward to engaging with it in detail.
At Francis Pileggi's Delaware Corporate & Commercial Law Blog, Aimee Czachorowski reports "that a controlling stockholder must formally ratify a self-dealing transaction by a vote at a meeting of stockholders or by written consent in order to shift the standard of review from entire fairness to the business judgment rule."
In Espinoza v. Zuckerberg et al., C.A. No. 9745-CB (Del. Ch. Oct. 28, 2015), Chancellor Bouchard stated that: “The controlling stockholder of a Delaware corporation wields significant power, including the power in some circumstances to ratify interested directors’ decisions and thereby limit judicial scrutiny of such actions. But a controlling stockholder should not, in my view, be immune from the required formalities that come with such power.” This case involved Mark Zuckerberg, the controlling stockholder of the popular social media site Facebook, Inc.
At Jay Brown's Race to the Bottom blog, Celia Taylor reports that the Delaware Chancery Court addressed a question of first impression:
Can a disinterested controlling stockholder ratify a transaction approved by an interested board of directors, so as to shift the standard of review from entire fairness to the business judgment presumption, by expressing assent to the transaction informally without using one of the methods the Delaware General Corporation Law prescribes to take stockholder action?
As we know, the court held that Zuckerberg had to comply with the requisite statutory formalities.
This case called to mind a couple of cases from the casebook I coauthor with Bill Klein and Mark Ramseyer: First, Bayer v. Beran, 49 N.Y.S.2d 2 (Sup. Ct. 1944), which involved a shareholder challenge to a board decision to begin a radio advertising program in which the wife of the CEO performed:
It is urged that the expenditures were illegal because the radio advertising program was not taken up at any formal meeting of the board of directors, and no resolution approving it was adopted by the board or by the executive committee. The general rule is that directors acting separately and not collectively as a board cannot bind the corporation. There are two reasons for this: first, that collective procedure is necessary in order that action may bedeliberately taken after an opportunity for discussion and an interchange of views; and second, that directors are the agents of the stockholders and are given by law no power to act except as a board. Liability may not, however, be imposed on directors because they failed to approve the radio program by resolution at a board meeting.
It is desirable to follow the regular procedure, prescribed by law, which is something more than what has, at times, thoughtlessly been termed red tape. Long experience has demonstrated the necessity for doing this in order to safeguard the interests of all concerned, particularly where, as here, the company has over 1,375,000 shares outstanding in the hands of the public, of which about 10% are held by the officers and directors.
But the failure to observe the formal requirements is by no means fatal. The directorate of this company is composed largely of its executive officers. It is a close, working directorate. Its members are in daily association with one another and their full time is devoted to the business of the company with which they have been connected for many years. In this respect it differs from the boards of many corporations of comparable size, where the directorate is made up of men of varied interests who meet only at stated, and somewhat infrequent, intervals. The same informal practice followed in this transaction had been the customary procedure of the directors in acting on corporate projects of equal and greater magnitude. All of the members of the executive committee were available for daily consultation and they discussed and approved the plan for radio advertising. While a greater degree of formality should undoubtedly be exercised in the future, it is only just and proper to point out that these directors, with all their loose procedure, have done very well for the corporation.
The other is Broz v. Cellular Information Systems, Inc., 673 A.2d 148 (Del.1996), in which director Broz was sued by the corporation for having usurped a corporate opportunity. Broz did not get formal board rejection of the opportunity, but did informally run his taking the opportunity past several of the board members. The court held that:
We assume arguendo that informal contacts and individual opinions of board members are not a substitute for a formal process of presenting an opportunity to a board of directors. Nevertheless, in our view such a formal process was not necessary under the circumstances of this case in order for Broz to avoid liability. These contacts with individual board members do, however, tend to show that Broz was not acting surreptitiously or in bad faith.
All of which raises the question of when formal procedures can be regarded as mere best practice as opposed to a mandatory requirement.
Two candidates come to mind: (1) Formal action is required when shareholders act but not when boards act. (2) Formal procedures are required when complying with statutory mandates.
There is language in Espinoza to support an argument that formalities are mandatory in either setting. First, the court discusses case law involving shareholder ratification in cases where the ratification is required by prior judicial precedent rather than by statute:
One foundational case is Gantler v. Stephens. As the Supreme Court recently noted, Gantleris “a narrow decision focused on defining a specific legal term, ‘ratification.’ ” In Gantler, the Supreme Court held that the scope of “the shareholder ratification doctrine must be limited ... to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval in order to become legally effective.” In my view, Gantler's use of the phrase “fully informed shareholder vote” in defining the concept of ratification was deliberate and was not intended to mean something less formal than an actual stockholder vote (or an action by written consent in lieu thereof).
But then the court went on to discusses cases in which the shareholder vote was required by statute:
Another example is 8 Del. C. § 144(a)(2), which prevents the voiding of a director's interested transaction if the “transaction is specifically approved in good faith by vote of the stockholders.” In describing that process, this Court stated in Wheelabrator that “[a]pproval by fully informed, disinterested shareholders pursuant to § 144(a)(2) invokes the business judgment rule and limits judicial review to issues of gift or waste with the burden of proof upon the party attacking the transaction.” Although the statutory language plainly refers to the need for a “vote of the stockholders,” Wheelabrator simply uses the word approval to indicate this formal requirement, suggesting again that Delaware courts naturally assume that stockholder approval requires adherence to formalities.
Precedent also suggests that compliance with statutory formalities is necessary even for an individual controlling stockholder.
Is there a reason to think board decision-making processes would be treated differently? One hint is provided by the court's observation that:
... the policies underlying the DGCL provisions governing the taking of stockholder action further support the conclusion that stockholders—including controlling stockholders like Zuckerberg—must observe statutory formalities when seeking to ratify director action. Doing so will avoid ambiguity and misinterpretation by ensuring that actions taken by stockholders are defined with precision and—where a single controlling stockholder is not present—that the requisite level of approval was obtained, and will promote transparency for the benefit of all stockholders. As the Delaware Supreme Court recently stated, “[c]ertainty and efficiency are critical values when determining how stockholder voting rights have been exercised.”
Where you have a small number of decision makers the risk of imprecision seems less significant.
Having said that, however, maybe Broz and Bayer are outliers. After all, there are cases holding that boards must also follow formal procedures:
Corporate law requires that a board of directors must act through meetings of its directors, and not simply collect their opinions, unless the charter or by-laws of a company provide differently. Del.Code. Ann. Tit. 8 § 141(b)(f); N.Y. Bus. Corp. Law § 708(a)-(b); Douglas Dev. Corp. v.. Carillo, 64 N.Y.S.2d 747 (N.Y.Sup.Ct.1946) (citing Hauben v. Morris, 291 N.Y.S. 96 (N.Y.Sup.Ct.1936) (procedures for formal board action cannot be bypassed).
Woods v. Boston Sci. Corp., 2007 WL 754093, at *6 (S.D.N.Y. Feb. 9, 2007).
O'Neal & Thompson's close corporation treatise suggests that the case law is all over the map, especially with respect to close corporations:
Even in the absence of a statute expressly sanctioning informal action, courts frequently give effect to informal action taken by persons managing a close corporation if its directors and shareholders are the same people. The courts will treat action by the participants as having been taken in whichever capacity (as shareholders or as directors) is appropriate to give it validity. Courts are also likely to sustain informal action if a corporation has a pattern or custom of informal action. As was said by a New York court in sustaining informal action by the board of directors of a close corporation,
[A]ction, concurred in by all [the directors, who owned all the shares], although separately, and not as a body, binds the corporation. We must recognize the fact … that they [close corporations] are, in perhaps the majority of instances, conducted by officers and directors little informed in the law of corporations, who often act informally, sometimes without meetings or even bylaws. To hold that in all instances technical conformity to the requirements of the law of corporations is a condition to a valid action by the directors would be to lay down a rule of law which could be used as a trap for the unwary who deal with corporations, and to permit corporations sometimes to escape liability to which an individual in the same circumstances would be subjected.
The same court pointed out that the reasons usually given as supporting the requirement of formal director action do not apply, at least not in full vigor, to unanimous director action in a close corporation, because (1) if all the directors are of one mind, discussion is futile, and (2) if the directors own all the corporate stock, they are both principals and agents and their unanimous acts as directors carry their consent thereto as shareholders. A close corporation has been held to be bound by the informal action of directors who hold all the common stock, even though some of the preferred shareholders were not represented on the board. ...
If less than all the directors undertake to act informally, the decisions are in conflict on whether the action is valid.
2 Close Corp and LLCs: Law and Practice § 8:3 (Rev. 3d ed.). O'Neal and Thompson also suggest that the result may depend on whose ox is being gored:
The decisions which uphold informal director action by less than all directors frequently invoke legal doctrines such as ratification, estoppel, or unjust enrichment to support the result. Some courts embrace these doctrines in fact situations in which an insistence on corporate formalities would enable the corporation to escape legitimate obligations. ...
In many instances effect must be given to such informal action to avoid injustices to persons dealing with the corporation and relying on informal acts of its shareholders or directors, and most courts will probably continue to validate informal corporate action in circumstances similar to those in which they have done so in the past.
Perhaps we thus might identify a multi-factor test:
Zuckerberg would seem to lose on at least 3 of the 4 factors.
My friend, UCLAW colleague, coauthor, and office next door neighbor Iman Anabtawi has a post up at CLS' Blue Sky Blog discussing her new article on predatory management buyouts.
Even where the business judgment rule does not apply in the first instance because its preconditions are not satisfied, Delaware corporate law allows the use of ex ante procedural protections to avoid ex post substantive judicial review. D. Gordon Smith makes this point in “The Modern Business Judgment Rule,” which is forthcoming in the Research Handbook on Mergers and Acquisitions. In my forthcoming article, “Predatory Management Buyouts,” I analyze the related question whether the procedural mechanisms that, under Delaware law, boards may implement in order to “sanitize” the conflict-of-interest taint present in management buyout (MBO) transactions are adequate to achieve parity between transactions in which the business judgment rule attaches in the first instance and MBOs that invoke a procedural route back to the business judgment rule. The article raises a broader issue that I plan to address in future work whether, when we round-trip from the business judgment rule and back again via procedural mechanisms, we always end up in the same place.
Kevin Paul Bishop thinks so:
Earlier this week, I wrote about an amicus curiae brief submitted by 19 law school professors Friedrichs v. Cal. Teachers Ass’n, a case now pending before the United States Supreme Court. In particular, I questioned whether these academics properly described the holding Finley v. Superior Court, 80 Cal. App. 4th 1152 (2000). The professors claimed that the case represented a “rare example” of a court holding that the business judgment rule is a defense to an attack on a corporate contribution. In fact, the reported holding in the case was that the business judgment rule was a defense to the decision of a special litigation committee.
The 19 law professors also incorrectly described the holding in another California case, Barnes v. State Farm Mut. Auto. Ins. Co., 16 Cal. App. 4th 365 (1993) (“claim by policyholder of mutual insurance company seeking to stop insurer from engaging in political activities dismissed because the decision was protected by the business judgment rule . . .”). Although the Court of Appeal did invoke the business judgment rule in Barnes, it did so in the context of the policyholder’s separate claim that the company was maintaining too large a surplus. The policyholder’s challenge to political expenditures was made on constitutional grounds and the Court of Appeal’s analysis of that claim did not involve the business judgment rule.
Keith goes on to note that:
Even though the law professors erroneously cited Finley and Barnes, I do believe that courts should, and do, apply the business judgment rule to director decisions to make political and other contributions.
Alison Frankel has the details on pending litigation involving claims that "pharmaceutical company Valeant’s partnership with Bill Ackman’s Pershing Square in a bid for Allergen" involved illegal insider trading. Raider-activist alliances must surely rank very high on target management's list of nightmare scenarios, but as Frankel points out:
Pershing’s Allergan profit was the product of the stealth it maintained by acquiring shares through options deals that carried the added benefit, under Pershing’s thinking, of insulating the hedge fund from insider trading liability to Nomura counterparties. Judge Carter’s decision strips away the insulation, putting Pershing’s profit at risk.
If hedge funds can’t count on short-term profits from stealth partnerships with hostile bidders, why team up with them? For the longer term? Just ask Ackman how that’s working out for him and Valeant.