ProfessorBainbridge.com

Grilled Quail in Port Marinade

Prepare the marinade first:

• 2 tablespoons olive oil (NOT extra virgin!)
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• 2 medium shallots, minced fine
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• 1 cup tawny port
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• 1-1/2 teaspoons crystallized ginger, minced fine
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• 2 teaspoons Chinese five spice powder
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• Pinch allspice
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• Pinch anise seeds
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• teaspoon black pepper
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• dash hot sauce

Put the olive oil in a medium sauce pan over medium heat. Sweat the shallots until translucent, but not colored. Add the port and bring to the boil; then reduce the heat to a low simmer. Add the spices. Simmer 5 minutes. Set aside and allow to cool.

I strongly recommend using real Portuguese tawny port rather than domestic imitations.

Responses and Reactions to "Minorities, Shareholder and Otherwise" by Anupam Chander

The Yale Law Journal Pocket Part has published a collection of responses to Anupam Chander's article, Minorities, Shareholder and Otherwise: Comparing Corporate and Constitutional Minority Protections, including one by yours truly.

In There Is No Affirmative Action for Minorities, Shareholder and Otherwise, in Corporate Law, 118 Yale L.J. Pocket Part 71 (2008), http://thepocketpart.org/2008/10/28/bainbridge.html, I argue that Chander's analysis of corporate law doctrine is fundamentally flawed. Chander argues that, unlike constitutional law, "corporate law places minorities at the heart of its endeavor." Central to his project is an empirical claim that corporate law has an "elaborate framework" for "minority interests in the corporation." I argue that Chander's theoretical construct rests on a doctrinal foundation of sand. He persistently overstates the extent to which corporate law protects minority shareholders, while understating the freedom that law gives majority shareholders.

Katayun I. Jaffari and Mu'min Islam:

For more than a decade, determining the appropriate level of compensation for corporate executives has been a controversial issue within the courtroom, the boardroom and among shareholders. During a period of increased activism by shareholders, more authority, commonly referred to as "say on pay," is being demanded over executive compensation packages. Say on pay importance will most likely increase in popularity in the wake of the subprime mortgage and financial institutions crisis affecting the U.S. financial markets and the federal economic stimulus plan. Within the debate over the federal economic stimulus plan, one of the issues included the outcry for compensation limits on executive pay as well as restrictions on golden parachutes for failing corporations. This article will briefly outline the components and history of say on pay, describe support and opposition to its implementation and finally discuss the future of say on pay proposals.

Later in the article:

One of the strongest attacks on say on pay proposals comes from critics fearful of distorting shareholders' and directors' responsibilities by providing shareholders' managerial authority. In his remarks made at the University of Pennsylvania's March 2007 Law and Economic Institute's Chancery Court Program, professor Stephen M. Bainbridge stated say on pay "is part of an ongoing effort by a handful of activists to shift substantially the locus of [corporate] decision making authority." In traditional public corporations, shareholders should not be involved in the management and daily activities of the corporation. They should be passive investors. Instead, the shareholders' role is to vote for directors who will place the shareholders' interests first and foremost and ultimately make decisions in the best interest of the corporation. Requiring shareholders to approve executive compensation packages essentially takes away the directors' power to manage corporations in general and specifically compensation levels. Although the shareholder vote is nonbinding, directors face the difficult decision of either accepting the shareholders' vote or facing public embarrassment for going against the shareholders' will. Critics of say on pay warn that the slippery slope of shareholder activism is the gateway to shifting the traditional paradigm of the corporate structure, which could lead to the ineffective management of corporations.

You can download my Remarks on Say on Pay: An Unjustified Incursion on Director Authority or watch them on Youtube:

View the other 4 parts of the speech here.

Turning Bad Faith into Full Employment for Lawyers

Edward M. McNally and Patricia A. Winston have posted an article seeking to give content to the emergent Delaware concept of "bad faith" director conduct. It's worth reading. Setting aside the merits of their definitional efforts, however. I was struck by their conclusion:

Ryan suggests that directors must be cautious when confronting unusual corporate actions or any corporate action not in the normal course of its business. Directors should seek the advice of counsel when undertaking any unusual corporate action. Counsel will advise directors of the applicable law, legal obligations and the effects of action or inaction. Such advice will allow directors to defend any allegation of intentional wrongdoing by waiving attorney client privilege and revealing the steps taken in good faith reliance on that advice. This course of action will make it difficult for plaintiffs to establish a claim that the directors failed to act or consciously disregarded their responsibilities.

In other words, Ryan v. Lyondell is "The Lawyer (and sometimes Investment Banker, Auditor, Compensation Consultant, Risk Management Guru, or Whatever Other Expert is Relevant) Full Employment Act of 2008." If this holds up, Ryan will continue the legacy of Smith v Van Gorkom as a source of excess investment in process. If their advice is followed, even more board decisions will be subjected to exhaustive review, with detailed presentations by experts. Why? The answer lies in the incentive structures of the relevant players. Who pays the bill if the director is found liable for breaching the duty of care? The director. Who pays the bill for hiring lawyers and investment bankers to advise the board? The corporation and, ultimately, the shareholders. Suppose you were faced with potentially catastrophic losses, for which somebody offered to sell you an insurance policy. Better still, you don?t have to pay the premiums, someone else will do so. Buying the policy therefore doesn?t cost you anything. Would not you buy it?

It?s also important to consider the incentives of the lawyers who advise corporations. Deciding how much time and effort to spend on making decisions is itself a business decision. Because that decision is driven by liability concerns, however, legal advice is usually critical to the making of the decision. Why might lawyers have an incentive to encourage boards to over-invest in the decisionmaking process? The cynical answer is that a more complicated decisionmaking process, which is driven by liability concerns, is likely to result in higher fees. A less cynical explanation is that the law is full of sports, mutants, and mistakes. Clients often lack the information or willingness to recognize that their situation was one of the exceptions that proves the rule. Instead, clients tend to blame the lawyer for an adverse outcome even if the lawyer did nothing wrong. Because the lawyers will be blamed even if losing the case was an act of god equivalent to a 100-year flood, lawyers are often conservative in giving advice. (The term conservative here is not used in its political sense, but rather in the sense of being cautious.) In economic terms, lawyers are risk averse. In a risky situation, the best thing for the lawyer to do is to point the client towards strategies whose outcome is certain.

In sum, the incentives of both sellers and buyers of legal advice are congruent. Lawyers have strong incentives to encourage clients to expend a lot of time, energy, and money on the decisionmaking process (and to write articles recommending such expenditures, for that matter), while corporate boards of directors have strong incentives to take that advice.

Remarks on Shareholder Activism for the UCLA Business Law Breakfast

Let me add my welcome. In recent years, UCLA law school has redoubled its efforts in business law and this program is a good example of how committed we are to this field of study.

When we planned this program some months ago, shareholder activism looked to be one of the hot button issues this fall during the run up to the 2009 proxy season.

Today, of course, the elephant in the room is the seemingly ever-broadening financial crisis.

The two are closely related, however.

Reuters recently reported, for example, that:

For U.S. investor advocates, the financial crisis could be the opportunity to rally more shareholders around a slew of long-sought corporate reforms -- with a big bull's-eye on executive payouts and board independence. ?

AFSCME plans to introduce resolutions at an array of companies that would require top managers to hold all of their stock options and restricted stock awards for two years past their tenure with the company.

[Activists also plan] to press some ? perennial issues, such as "say on pay" votes to give shareholders a greater voice on executive pay as well as advocating bans on tax "gross-ups" that use shareholder money to help pay the tax obligations of top executives.

Where then do we stand on shareholder activism?

Back in 2006, the US Second Circuit appeals court ruled in AFSCME v. AIG that shareholders could use Rule 14a-8?the shareholder proposal rule, which allows shareholders to put a proposal on the company?s proxy and a short supporting statement in the proxy statement?to put forward for a shareholder vote an amendment to the bylaws that would ?establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot.?

In 2008, the SEC adopted rules making clear that a shareholder proposal may be excluded from the proxy statement if it results in an immediate election contest by making or opposing a director nomination for a particular meeting or establishes a process for a shareholder to conduct an election contest in the future by requiring the company to include the shareholders? director nominees in the company?s proxy materials for future meetings.

The SEC, however, has indicated that it has ongoing interest in this area. Many observers, including myself, expect that the SEC will revisit this issue next year. Chairman Cox has announced that he will be leaving the SEC regardless of who wins the Presidency. If Senator Obama wins, of course, the partisan balance will shift to a Democratic majority. In general, Democrats have been more favorable to shareholder activism than have Republicans.

Although director nominations are currently barred, not all election-related proposals have been precluded. Over the summer, we had a very important development in the CA v. AFSCME fight.

In this case, the SEC made use for the first time of a newly adopted provision of the Delaware constitution that allows the SEC to certify questions of state law to the Delaware Supreme Court for an advisory opinion, just as federal courts long have had the power to do.

In CA v. AFSCME, the shareholder proposal would have amended the bylaws to require the CA board of directors to reimburse the reasonable fees of any stockholder that sought to elect less than half of the board (a so-called short slate) and succeeded in electing at least one director.

The SEC certified two questions of law to the Supreme Court: (i) whether the Proposal is a proper subject for action by stockholders as a matter of Delaware law and (ii) whether the Proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.

The Supreme Court answered the first question?whether the Proposal was a proper subject for action by stockholders?in the affirmative.

The Supreme Court, however, also went on to answer the second question?whether the Proposal, if adopted, would cause CA to violate any Delaware law?in the affirmative. The Court found that the Proposal could require the board to reimburse dissident stockholders in circumstances where a proper application of fiduciary principles would preclude them from doing so (such as when a proxy contest was undertaken for ?personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation"). Accordingly, the Supreme Court held that the proposed bylaw, as written, would violate Delaware law if enacted by stockholders.
Despite these modest constraints on the options available to activist shareholders, there remains a wide array of permissible proposal types. Accordingly, the 2009 proxy season promises to be an exciting one.

Braised Veal Short Ribs with Chive Gnocchi

Braise

• 1 six ounce container beef demi-glace
  
• 1 tablespoon peanut oil
  
• 1 medium yellow onion, peeled and roughly chopped
  
• 2 medium carrots, washed, scrubbed, and roughly chopped (don’t bother peeling)
  
• 1 celery rib, roughly chopped
  
• 3 cloves garlic, peeled and cut in half
  
• 1 tablespoon peanut oil
  
• 8 veal short ribs
  
• instant flour
  
• fine sea salt
  
• 1 box Pomi chopped tomatoes, drained of their juice
  
• 1 tablespoon dried herbes de Provence
  
• 1 dried bay leaf
  
• 1 bottle dry red wine (I used an inexpensive but tasty Chinon; never cook with anything you wouldn’t drink)

Put demi-glace in a medium slow cooker set to high. Heat first tablespoon of oil in a large nonstick skillet. Add onion, carrot, celery, and garlic. Cook until they are soft and beginning to brown. Transfer veggies to slow cooker.

Add another tablespoon of oil to the same skillet and return to heat. Thoroughly dry short ribs with paper towels. Dust with instant flour. Sprinkle with salt. Sear on all sides. Transfer to slow cooker.

Add drained tomato pulp to slow cooker. Sprinkle with herbs. Add bay leaf.

Deglaze skillet with red wine and then add enough of the wine to slow cooker to barely cover all the other ingredients. Cook 2 hours on high. Reduce heat to low and cook another 2 hours.

Remove short ribs from slow cooker, transferring to a glass baking dish. Cover with foil and put in refrigerator.

Strain braising liquid through a fine sieve. Reserve liquid. Discard veggie pulp. Transfer braising liquid into a large fat separator. Put in refrigerator.

Service

• 1 tablespoon butter
  
• 1 tablespoon olive oil
  
• 1 medium carrot, peeled, and diced fine
  
• 1 large shallot, peeled and diced fine
  
• 3 cloves garlic, peeled and sliced thin
  
• 5 white mushrooms, rinsed and diced fine
  
• ¾ teaspoon fine sea salt
  
• ½ teaspoon freshly ground black pepper
  
• 2 teaspoons dried herbes de Provence
  
• 4 sundried tomatoes in olive oil, drained and chopped fine
  
• 6 ounces veal demi-glace
  
• 2 cups braising liquid separated from fat
  
• 1 tablespoon black truffle tapenade
  
• 2 tablespoons basil chiffinoade
  
• 1 tablespoon cognac
  
• 2 tablespoons good quality balsamic vinegar (at least 10 years old)
  
• 1 tablespoon butter
  
• chives

About 40 minutes before service, combine butter and oil in a large nonstick skillet over medium high heat. After butter stops foaming, add carrots. Cook 3 minutes. Add shallot. Cook 1 minute. Add garlic. Cook 30 seconds. Add mushrooms. Season with salt, pepper, and herbs. Cook 2 or 3 minutes until mushrooms begin to soften and slightly brown. Add tomatoes. Cook 1 miniute. Add demi-glace and braising liquid. Raise heat and bring to a boil. Reduce heat to a low simmer and allow liquid to reduce to a glaze consistency. Add truffles, basil, cognac and balsamic vinegar. Return to simmer then reduce heat to lowest setting. Just before serving, add last tablespoon of butter and mix well.

About 30 minutes before service, transfer the baking dish holding the short ribs to a preheated 250° oven. When ready to plate, put some gnocchi in a large pasta bowl. Add 4 short ribs per bowl. Spoon sauce over. Sprinkle finely chopped chives over all and serve immediately.

Chive Gnocchi

• 2 russet potatoes (approx. 1-½ pounds), rinsed, scrubbed, wrapped in foil, and baked at 400° for 60-70 minutes until done
  
• 1 large egg
  
• 2 tablespoons half-and-half
  
• pinch ground nutmeg
  
• 1-½ teaspoons fine sea salt
  
• ¾ teaspoon ground white pepper
  
• 1 tablespoon finely chopped fresh chives
  
• ½ tablespoon dried chives
  
• ½ teaspoon garlic powder
  
• ½ teaspoon onion powder
  
• 1-½ cups semolina flour

Peel potatoes while still hot. Transfer to a large bowl. Mash well with a potato masher. Cool for 15 minutes. Add egg, half-and-half, nutmeg, salt, pepper, chives, garlic and onion powder, and mix well. Add 1 cup flour and mix well with hands. You want a soft, slightly sticky dough ball to form. You may need to use up to the full 1-½ cups semolina flour, but add the last ½ cup about a tablespoon at a time until dough ball forms. Divide dough into 4 pieces. On a floured work surface, roll each dough piece out until it forms a rope shape about ¾ inch thick. Reserve about half the dough ropes for another use tomorrow night, storing them in a plastic container in the refrigerator. Let tonight's ropes rest 15 minutes. Cut into ¾ long pieces. Roll each piece over the tines of a dinner fork to make the characteristic grooves.

Meanwhile, bring a large pasta pot of well salted water to a boil. When a rolling boil is achieved, add gnocchi pieces. In about 5 minutes, they should be floating at the top. Check one for doneness and then use a slotted spoon or spider to dish into pasta bowls. Add short ribs, spoon sauce over, top with chives, and serve.

Good Faith and Risk Taking

In Business Associations today, I taught Smith v. Van Gorkom (BTW, have you read my "story" article on the case? If not, why not?) One of the issues I always raise when teaching it is the standard governing the extent to which directors must inform themselves. To quote from my Corporation Law and Economics text:

The central issue in Van Gorkom was the board's failure to make an informed decision. The legal standard that emerges from the decision is straightforward--directors must inform themselves of all material information reasonably available to them. This standard seemingly requires an in-depth study of the problem. The board must be informed of the company's value to the bidder, the course of the negotiations, the terms of the offer and their fairness, and the like. ...

In contrast, the MBCA and the ALI PRINCIPLES only require directors to be informed to the extent that they reasonably believe to be appropriate under the circumstances. Unlike the Delaware standard, at least as read literally, the ALI standard permits directors to make decisions on less than all reasonable available information, provided they reasonably believe doing so is appropriate given the situation. The time available to make the decision may require that the directors take risks to secure what appears to be a good outcome, which includes the risk that they do not have all of the relevant facts. A decision to accept that risk in order to secure the benefits of a proposed transaction will be appropriate under some circumstances.

Is the Delaware standard in fact substantively different than the ALI/MBCA one? In Brehm v. Eisner, the Delaware supreme court stated that:

Compare the American Law Institute test, which requires that a director must be ?informed ... to the extent the director reasonably believes to be appropriate under the circumstances.? Principles of Corporate Governance, supra note 30, at ? 4.01(c)(2). Because this test also is based on the objective test of reasonableness, it could be argued that it is essentially synonymous with the Delaware test. But there is room to argue that the Delaware test is stricter. See Roswell Perkins, ALI Corporate Governance Project in Midstream, 41 Bus.Law. 1195, 1210-11 (1986). In the end, the debate may be mostly semantic

So let's assume that the difference is not just semantic. Let's further assume that a board conscious decided to make a decision even though the directors knew that there were factors as to which they were uninformed, and which might make the decision look bad in hindsight, but the opportunities available justified taking that risk and going forward on the basis of incomplete information. Under Stone v. Ritter--and, especially, Ryan v. Lyondell--this scenario raises a new and even more troubling question.

In Stone, the Delaware Supreme Court held that: "In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: ... where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties." Would directors who conscious decided to take action even though they knew there were facts they didn't know therefore have acted in bad faith? It would seem as though they consciously failed to act in the face of their duty to gather all material information reasonably available to them.

One would hope that the doctrine of good faith will not deter risk taking. After all, a key rationale of the business judgment rule is to encourage risk taking. Good faith shouldn't be allowed to gut that key function.

There are two ways the Delaware courts could get at this problem and I would advocate both. First, Delaware should explicitly adopt the MBCA/ALI standard that requires directors to inform themselves to the extent the directors reasonably believe required under the circumstances. This would allow the directors to take appropriate risks with respect to information. Second, Delaware should make it clear that the conscious disregard prong of good faith relates only to duties involving self-dealing. This would clarify that good faith cannot be used to end run the prohibition on judicial review of substantive due care.