ProfessorBainbridge.com

NFL Draft

Live Tweeting the draft at http://twitter.com/ProfBainbridge. Click follow button in right side bar.

Sokol's legal troubles

Steven M. Davidoff and Peter J. Henning have a very good round up of the legal issues facing former Berkshire-Hathway exec David Sokol in connection with his purchase of Lubrizol stock in advance of Berkshire's acquisition of Lubrizol.

Sokol and the corporate opportunity doctrine

A while back I argued that former Berkshire-Hathaway executive likely violated the corporate opportunity doctrine by buying stock in Lubrizol before trying to persuade Berkshire to acquire Lubrizol.

M&A Law Prof blogger Brian JM Quinn analysed the issue and reached the same conclusion I did:

I think the case that Sokol, by buying ahead of Berkshire and then pushing the deal on his employer violated his duty of loyalty to the corporate by usurping a corporate opportunity.  So what measure of damages is appropriate?  Disgorgement of the approximately $3 million of profits he made on his $10 million investment would seem right.  He should turn that over to Berkshire on his way out the door.

In reaching that conclusion, Quinn offers up a nice, concise summary of the relevant legal principles. Good read.

I really, really want an E-type

When I was a kid, there were two iconic sports cars after which I lusted: The Porsche 911 and the Jaguar E-type. I was lucky enough to scratch my 911 itch a few years ago. But video by AutoWeek associate publisher Dutch Mandel celebrating the E-type's 50th anniversary has brought the E-type itch raging back to the fore:

Gawd, that's a gorgeous car. I'm not a car collector. But I would dearly love to find a E-type in driver condition to tool around the Southern California canyons on the weekend. In an ideal world, it'd be a right hand drive version in British Racing Green.

Free trade has to be a two way street

Interesting article on how free trade with China is working out:

Prior to China's accession to the World Trade Organization almost a decade ago, free trade proponents argued that the move would create American jobs and eliminate the country's trade deficit. Neither prediction has proven accurate.

The U.S. trade shortfall with China hit a record high $273 billion last year and government data shows some 40 percent of factories with more than 250 employees closed down from 2001 to 2010.

While it can't all be laid at China's door, it is not a coincidence that after decades of more gradual decline, U.S. manufacturing took a nose dive after China's entry into the WTO.

Cheap labor is one huge advantage for China, of course. But numerous academics, former trade officials and labor union officials say predatory trade practices, subsidized exports and other controversial economic policies also make Chinese companies tough to compete against.

And they warn that unless the U.S. works out a way to bolster and promote the sector, future prosperity and America's superpower status will eventually be at risk. This is only underlined by the U.S. economy's fragile state, with the jobless rate at 8.8 percent, growth tepid, and a huge government budget deficit and debt burden. ...

Chinese companies benefit from a raft of subsidies -- from what they see as an undervalued yuan currency, to artificially cheap or even free land in some cases, low-interest loans and even subsidized energy bills -- and the U.S. government and major companies say or do little in response. ...

Mounting evidence also suggests China is appropriating proprietary technology from Western firms and then using it to compete directly in ever more advanced fields.

The Chinese government has also been accused by foreign businessmen of changing the rules at home to favor local manufacturers for government contracts over foreign competitors.

I'm a big believer in free trade and open borders, but it has to be a level playing field. It seems increasingly clear that China relentlessly tilts the playing field in its favor. The US government supinely allows it to continue, while US-based multinationals affirmatively enable the Chinese government.

The Reuters article quotes lots of Washington talking heads who worry about a trade war. But what if we're already in a trade war but only our opponent realizes it?

Will the MBCA protect or erode director primacy?

My friend and former ABA Committee on Corporate Laws colleague has a new article on The Model Business Corporation Act at Sixty: Shareholders and Their Influence (April 25, 2011), which is available at SSRN: http://ssrn.com/abstract=1822401

Abstract: In the sixty years since the Committee on Corporate Laws (Committee) promulgated the Model Business Corporation Act (MBCA), there have been significant changes in corporate law and corporate governance. One such change has been an increase in shareholder activism aimed at enhancing shareholders’ voting power and influence over corporate affairs. Such increased shareholder activism (along with its potential for increase in shareholder power) has sparked considerable debate. Advocates of increasing shareholder power insist that augmenting shareholders’ voting rights and influence over corporate affairs is vital not only for ensuring board and managerial accountability, but also for curbing fraud and other forms of misbehavior.

Corporate-governance scandals involving entities such as Enron and American International Group (AIG), as well as the recent financial meltdown, have spurred efforts to enhance shareholder power because they highlight the need for greater accountability and improved safeguards against corporate malfeasance. Opponents contend that increasing shareholder power inappropriately shifts the balance of power away from boards. In their view, such a shift undermines directors’ ability to act independently or otherwise consider the interests of all shareholders and corporate constituents, while increasing the pressure on boards to focus on short-term financial results. Opponents also insist that such a shift inappropriately enhances the power of shareholders with special or narrow agendas who may advance their personal interests at the expense of the broader shareholder class. In many respects, the debate regarding the propriety of shareholder activism and increased shareholder power has been as intense as shareholder activism itself. Importantly, however, shareholder activism has culminated in considerable corporate-governance changes that challenge the board-centric model of corporate governance embedded in the MBCA. These changes likely reflect a permanent shift in the dynamics between boards and shareholders. Although the impact of that shift is not clear, it is clear that the MBCA must take account of that shift, and provide guidance for corporations seeking to determine how best to allocate power between shareholders and directors. Hopefully, the next sixty years will reflect such guidance.

As one of those opponents who defended what the Committee calls the "board centric" model and that I call "director primacy," I was pleased to see the Committee issue a report strongly affirming board centric governance in Committee on Corporate Laws of the American Bar Association Section of Business Law (2010), “Report on the Roles of Boards of Directors and Shareholders of Publicly Owned Corporations,” available at: http://www.abanet.org/media/nosearch/task_force_report.pdf. Having said that, however, I was disappointed to see the Committee concede to the activist agenda on various issues like majority voting, bylaws, reimbursement, and so on.

Given the huge advantages of director primacy and the huge costs of shareholder activism, as I document in my essay Director Primacy, somebody needs to draw a line in the sand and defend the board centric model against the unrelenting attack launched by special interest shareholders like union and state and local government pension funds and their academic enablers. Hopefully it will by the MBCA's drafters.

Pileggi on Sokol

Respected Delaware lawyer and blogger Francis Pileggi was quoted by Reuters re the Berkshire-Hathaway audit committee report discussed in the posts below:

"It hardly sounds like Berkshire is trying to circle the wagons to protect Sokol," said Francis Pileggi, a partner at Fox Rothschild L.P. in Wilmington, Del. "If I had my druthers, I would rather be representing Berkshire in this matter than Sokol in a Delaware court."

Ditto.

Quoted re Sokol & Berkshire-Hathaway Audit Committee

Andrew Frye at Bloomberg reports:

David Sokol violated Berkshire Hathaway Inc. (BRK/A)’s insider-trading rules and misled the company about his personal stake in Lubrizol Corp., which he recommended as a takeover target to Chairman Warren Buffett, the firm said. ...

Sokol’s purchase of about $10 million in Lubrizol stock while facilitating Buffett’s deal to buy the lubricant maker “violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its insider-trading policies and procedures,” according to the report.

Buffett, 80, is facing questions about his oversight of managers and criticism for not condemning the stock trading that preceded Sokol’s resignation from Berkshire. Buffett had said March 30 in announcing Sokol’s departure that he didn’t believe the trades were unlawful.

“They’re throwing Sokol under the bus,” said Stephen Bainbridge, a professor at the UCLA School of Law who has written and taught about corporate governance.

See prior post for more details.

Berkshire Hathaway throws Sokol to the proverbial wolves

You will recall that we have been following the story about former Berkshire-Hathaway executive David Sokol's trading in the shares of potential Berkshire takeover target Lubrizol. Most recently, for example, I argued that Sokol likely violated his fiduciary duty not to usurp corporate opportunities and that the Berkshire board likely could not be held liable for failure to monitor Sokol.

There's been a stunning development. Berkshire's audit committee has released a report (downloadable from here), which makes damning findings about Sokol:

• His purchases of Lubrizol shares while serving as a representative of Berkshire Hathaway in connection with a possible business combination with Lubrizol violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its Insider Trading Policies and Procedures.
• His misleadingly incomplete disclosures to Berkshire Hathaway senior management concerning those purchases violated the duty of candor he owed the Company.
• These events should serve as an opportunity to reinforce to all officers, directors and employees of Berkshire Hathaway and its subsidiaries the importance of adhering to those policies and avoiding conduct that comes close to, or strays over, the line of propriety. To that end, we authorize Warren Buffett to release this report.

Nor is the audit committee finished. It reports that the committee will continue to:

• Work with Company management and legal counsel to identify and implement lessons learned from these events, including possible enhancements to its procedures.
• Cooperation with any government investigations relating to this matter, and monitoring any developments that may emerge from them
• Consideration by the Board, or the Audit Committee, or such other committee as the Board may think appropriate, of possible legal action against Mr. Sokol to recover any damage the Company has sustained, or his trading profits, or both, and of whether the Company is obligated to advance Mr. Sokol’s legal fees associated with proceedings in which he is named.

If my analysis was correct, and Sokol did usurp a corporate opportunity--or breached the duty of candor discussed by the audit committee--the shareholder derivative suit filed against Sokol still would have faced very seriously obstacles. In particular, in order for a shareholder to proceed, the shareholder must convince the court that it would have been futile for the shareholder to make demand on the board of directors before filing suit. A demand is simply a request that the board sue. Procedural rules governing derivative suits require that plaintiff either make demand or show to the court that demand should be excused because it would have been futile. In the usual case, plaintiff goes the latter route. Basically that means that before the plaintiff can sue the plainitff must convince the court that the board of directors can't be trusted to make a good faith, independent judgment about whether to sue the defendant or not. This audit committee report just made the Kirby plainitff's job on that score immensely harder. Critically, however, there is no such obstacle to the company bringing suit. So a Berkshire suit against Sokol puts him in serious jeopardy.

The advancement issue is huge too. In the usual case, a company will advance funds to a director or officer defendant so they can pay their legal bills. It looks like Berkshire may try to refuse to do so. Look for Sokol to sue Berkshire to force them to pay.

What's really interesting is that the audit committee largely exonerates Buffett. With respect to the first meeting at which Sokol pitched the Lubrizol deal, the audit committee states that:

It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol’s comment about owning the shares was in response to Mr. Buffett’s question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of its shares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition.

Notice how Buffett is being insulated by throwing Sokol under the bus. The latter is being sacrificed, perhaps deservedly, to protect the former's reputation.

We see this again in the way the audit committee describes the alleged breach of fiduciary duty on Sokol's part:

Under Delaware law, corporate representatives owe their company a duty of loyalty. The duty of loyalty includes a duty of candor, which requires them to disclose to the corporation all material facts concerning corporate decisions, especially decisions from which they might derive a personal benefit. Mr. Sokol’s actions did not satisfy the duty of full disclosure inherent in the Berkshire Hathaway policies and mandated by state law. His remark to Mr. Buffett in January, revealing only that he owned some Lubrizol stock, did not tell Mr. Buffett what he needed to know. In the context of Mr. Buffett’s question how Mr. Sokol came to know Lubrizol, its effect was to mislead: it implied that Mr. Sokol owned the stock before he began considering Lubrizol as an acquisition candidate, when the truth was the reverse. A candid disclosure would have revealed the timing and size of the purchases, and the communications with Citi concerning obtaining a meeting to mutually explore interest in a potential acquisition that had preceded them. Knowledge of those facts would likely have prompted further questions by Mr. Buffett and could have allowed Berkshire Hathaway to evaluate measures that could have been taken to alleviate the problem before negotiations proceeded with Lubrizol.

A Buffett skeptic might ask whether Buffett should have pushed Sokol harder for details rather than allowing himself to be misled. Given Berkshire's supposedly stringent policy against insider trading, it would seem logical to have insisted on knowing the dates Sokol traded at the first meeting.

My initial reaction to the report was that it could be seen as an implied reprimand to Buffett. On closer inspection, however, I see the report as tossing Sokol to the wolves so as to ensure that Saint Warren's halo remains untarnished.

Others, however, apparently do see at least an implied reprimand to Buffett:

“The gloves are off,” said Michael Yoshikami, chief investment strategist at Berkshire shareholder YCMNet Advisors. Buffett’s “response was benevolent, and now the audit committee is coming back and saying, ‘You might be benevolent but, as a protector of the values of the firm, we don’t think benevolence is appropriate.’”

Kommissar Goodell of the People's Republic of Football

America's sport is dominated by an oligarchy of capitalist plutocrats who behave like socialists. I can't decide whether that's odd or appropriate. It was a point driven home to me today by Roger Goodell's WSJ op-ed:

In the union lawyers' world, every player would enter the league as an unrestricted free agent, an independent contractor free to sell his services to any team. Every player would again become an unrestricted free agent each time his contract expired. And each team would be free to spend as much or as little as it wanted on player payroll or on an individual player's compensation.

Any league-wide rule relating to terms of player employment would be subject to antitrust challenge in courts throughout the country. Any player could sue—on his own behalf or representing a class—to challenge any league rule that he believes unreasonably restricts the "market" for his services. ...

No minimum team payroll. Some teams could have $200 million payrolls while others spend $50 million or less.

In other words, football would have to behave like any other business in a free market system.

A free market, of course, is precisely what Goodell fears most. In his own words:

A league where the competitive ability of teams in smaller communities (Buffalo, New Orleans, Green Bay and others) is forever cast into doubt by blind adherence to free-market principles that favor teams in larger, better-situated markets?

Welcome to the free world, Kommissar Goodell. You've gotten away for decades with running a quasi-socialist cartel in which the owners share revenues without competition and the workers are exploited until they outlive their usefulness, at which point they are discarded, often with life-threatening injuries and illnesses. A dose of free market competition would do you good. As Milton Friedman once observed, "The economic miracle that has been the United States was not produced by socialized enterprises, by government-unon-industry cartels or by centralized economic planning. It was produced by private enterprises in a profit-and-loss system." Give it a try.

Turning from the abstract to the practical for a moment, by the way, I must take issue with something else the Kommissar said:

For many years, the collectively bargained system—which has given the players union enhanced free agency and capped the amount that owners spend on salaries—has worked enormously well for the NFL, for NFL players, and for NFL fans....

For clubs and fans, the trade-off afforded each team a genuine opportunity to compete for the Super Bowl, greater cost certainty, and incentives to invest in the game. Those incentives translated into two dozen new and renovated stadiums and technological innovations such as the NFL Network and nfl.com.

It was the owners, not the players, who opted out of the collective bargaining agreement. If that agreement had worked so well, why did you opt out of it?

"Underlying most arguments against the free market is a lack of belief in freedom itself."--Milton Friedman

Say on pay litigation

In state law, executive compensation decisions by the board of directors is subject to the business judgment rule, making shareholder pay lawsuits extremely hard to win.

When the federal government decided to stick its nose into the pay imbroglio (at the behest of unions and some academics with time on their hands), the Congress decided to let the shareholders vote on executive compensation--so-called say on pay.

As I will explain in my forthcoming book Corporate Governance After the Crises:

Dodd-Frank § 951 creates a new § 14A of the Securities Exchange Act, pursuant to which reporting companies must conduct a shareholder advisory vote on specified executive compensation not less frequently than every three years. At least once every six years, shareholders must vote on how frequently to hold such an advisory vote (i.e., annually, biannually, or triannually). The compensation arrangements subject to the shareholder vote are those set out in Item 402 of Regulation S-K, which includes all compensation paid to the CEO, CFO, and the three other highest paid executive officers. In addition, a shareholder advisory is required of golden parachutes.

Now here's the kicker. Dodd-Frank and the legislative history make clear that while both the say on pay and say when on pay votes must be tabulated and disclosed, neither is binding on the board of directors. The act and its legislative history further make clear that the votes shall not be deemed either to effect or affect the fiduciary duties of directors. S. Rep. No. 111-176, at 134 (2010).

Despite all this, Broc Romanek reports that:

Mike Melbinger in his blog on CompensationStandards.com ... blogged about how some of the first companies to fail to receive majority support on their SOP have been sued (as well as their compensation committee members and even their compensation consultants) in shareholder derivative suits. Not only have the early failures of this proxy season been sued, but two of the companies that failed last year were sued (one case has been settled and one is still pending, as noted in this Schulte Roth memo).

It'll be interesting to see what legal theories these plaintiffs lawyers come up with. My guess is a waste claim that will go nowhere and a securities fraud claim attacking the company's CD&A disclosures. Surely they won't have the brass balls to claim that say on pay is binding, will they?

I don't blame the plaintiffs' lawyers who brought these suits. Bringing suits even though it is clear the legislature intended for a statute to to give rise to a cause of action is what plaintiff lawyers do. And why not? Sharks got to eat. Until Rule 11 has real teeth and we adopt loser pays with respect to class action legal fees, lawyers are going to bring these sorts of cases.

I blame Congress for having passed this asinine law in the first place, even though folks like yours truly had repeatedly warned Congress that say on pay would be abused and turned from a supposed non-binding voting exercise into a club to beat directors with. As that Schulte Ross memo makes clear, that's exactly what's happening:

In 2010, out of approximately 290 SOP votes held, a majority of votes cast were voted against NEO compensation in only 3 instances. Given the number of SOP votes still to come in 2011, now that SOP is mandatory for a much larger group of companies, it is safe to assume that there will be more negative SOP votes than in 2010. Although the vote is advisory in nature, a negative SOP vote can have serious repercussions. The vote may translate into votes against directors. It also is likely to result in significant unfavorable publicity, which was the case at all 3 of the companies that received negative votes on SOP in 2010. In addition, lawsuits alleging breach of fiduciary duty and corporate waste were filed against directors at 2 of the companies that received a negative SOP vote in 2010. In one case, the lawsuit was settled, while it is still pending at the other company. At both of these companies, there also were changes to executive compensation policies and/or leadership.

At the 2 companies that have thus far had negative outcomes on SOP resolutions in 2011, in preparation for a possible lawsuit, plaintiffs’ firms already have announced investigations on behalf of shareholders concerning breaches of fiduciary duty relating to historical and potential NEO compensation.

NFL lockout lifted: Some thoughts from a non-labor lawyer

US District Court Judge Susan nelson has granted a preliminary injunction lifting the NFL's lockout of its players. I must confess that this is not my area of the law, but I'm struck by a couple of things.

First,the judge insisted at p.47 that the NFLPA's decision to decertify is a two way street. Yes, the NFL could not lock out the players once the union decertified, but the players no longer have the right to strike:

The League objects, arguing that the Players cannot just flip the “light-switch” and disclaim the Union. But again, employees have the right not to be a union as much as they have the right to be or organize as a union. Moreover, if negotiating as a union has proven unsuccessful, such organized employees also have the right to terminate the union. There is nothing inherently unfair or inequitable about a disclaimer effecting an immediate termination of the framework of labor law. Such an election cannot be viewed as mere gamesmanship, because it only comes with serious consequences to the Players making the election.The Players no longer derive the negotiating benefit of collective bargaining or any of the other rights they had enjoyed while they were unionized.35

35. For example, unionized employees have the right to strike as the counterpart to management’s right to lockout its unionized employees. But once the Players have renounced their Union, they could not engage in any meaningful “strike.” The League could simply fire them all for failure to show up for work.

But is the right to "fire" Peyton Manning or Tom Brady really a very meaningful one? It's not exactly like firing the proverbial "Joe Six-Pack," after all. Those of us of a certain age are old enough to have seen scab football and it wasn't pretty. In this rather unique context, decertification clearly was pure gamesmanship, designed to produce precisely this legal outcome so as to give the "union"negotiating leverage. So there does seem to be something inequitable here. The NFL has lost the ability to lock out the players, but the players can still de facto strike and shut down the league.

Second, one of the criteria for granting a preliminary injunction is "consideration of the public interest. Judge Nelson opines at p.87 that:

...the public interest represented by the fans of professional football–who have a strong investment in the 2011 season–is an intangible interest that weighs against the lockout. In short, this particular employment dispute is far from a purely private argument over compensation.

If I understand her correctly, she seems to be saying that if you have a really successful and popular business whose temporary absence from the scene would bum out a lot of people, you lose an important economic right and labor bargaining tool. So much for free enterprise.

Third, the NFL has argued that "that stopping the lockout would open all 32 teams up to additional antitrust claims simply for working together to solve the labor dispute." At p.48, Nelson observed that: "But for the labor laws, a strike would be an illegal boycott under the antitrust laws and, similarly, a lockout would be an illegal boycott, as well, under the antitrust laws." Doesn't that suggest that the league has a valid point? To be sure, the court observed at p.80 that (a) it was only ruling on the lock out and not on any other antitrust issues and (b) that she was not making a merits determination:

This Court is not presently addressing whether the non-statutory antitrust exemption would still apply, after the NFLPA’s unequivocal disclaimer of representation, to the mandatory terms of collective bargaining, that is, the terms and conditions of the Players’ employment. And in issuing a preliminary injunction against the lockout, this Court is, of course, only ruling that the Brady Plaintiffs have a fair chance of prevailing on that particular claim. Such an injunction is not an adjudication that the NFL is liable for any antitrust violation.

Yet, at p.88 she opines that:

The nation’s labor laws have always applied only where an action involves or grows out of a labor dispute. Such a labor relationship exists only where a union exists to bargain on behalf of its members. Where those employees effectively renounce the union as their collective bargaining agent–and accept the consequences of doing so–and elect to proceed in negotiating contracts individually, any disputes between the employees and their employers are no longer governed by federal labor law.

If the labor laws have been tossed out the window, how can the union and the players bargain without violating the antitrust laws?

Chancellor Chandler to retire from bench

Delaware's respected Chancellor William Chandler is stepping down from his position as chief judge of the Chancery Court. Francis Pileggi reports that:

Chancellor William B. Chandler III of the Delaware Court of Chancery formally notified the Governor today that he is resigning before the completion of his current 12-year term. ... Here is the article in today's News Journal by Maureen Milford.

Delaware court- watchers are aware that the process to fill the figurative "big shoes" of the "chief judge" of the Court of Chancery will be as follows: (1) The Judicial Nominating Commission (JNC) will interview applicants for the position and then send the Governor a list of proposed names of persons they selected and from which (2) the governor usually makes his appointment--though he has the power to appoint someone not on the JNC's list, or he can ask the JNC to send him a new list. (3) Then the Delaware Senate either confirms or rejects the appointment.

Chandler has written many important and influential opinions during his tenure, such as the Disney case challenging Michael Ovitz's pay. As a BoardMember.com piece recently observed:

From a two-story brick colonial courthouse in Georgetown, Delaware, that has been likened to Hollywood’s mythical small town of Mayberry, Chandler has ruled for two decades on the highest stakes and most factually tortuous disputes between shareholders and directors, corporate raiders and defenders. He was elevated to the Chancery bench in 1989 and became chancellor in 1997. ...

Chandler’s most famous decision, delivered in 2005 in the Walt Disney case, exemplifies the tension between Delaware’s traditionally wide berth for directors and officers and the growing consciousness of shareholder rights and demands for best practice. The chancellor let Disney’s board off the hook, but used the occasion to condemn company CEO Michael Eisner as “Machiavellian and imperial” and warned that, “For the future, many lessons of what not to do can be learned from defendants’ conduct here.” Chandler ruminated at length about a “fiduciary duty of good faith” that directors might violate by “a conscious disregard for one’s responsibilities.” This significantly, if somewhat vaguely, raised the bar for board members’ conduct beyond the long-established duties of “care and loyalty.” ...

Chandler himself is widely revered as a scholar and a gentleman.... Chandler’s opinions are “entertaining to read,” Yale’s Romano says, with erudite references to authors like Shakespeare and Lewis Carroll. In one recent decision, Chandler footnoted Macbeth to underline a chaotic line of reasoning by the plaintiff. Moreover, the chancellor’s courtroom demeanor is courteous and unruffled. “He is one of the most even-keeled people I have ever met,” one seasoned Delaware litigator observes.

You can count me as an admirer. Not only am I highly impressed by his opinions, he has been unfailingly gracious whenever we've met. A true scholar and gentleman.

And now we can begin to speculate on who will replace him. I wonder if the Judicial Nominating Commission has ever considered a California academic for the job?

Royal wedding. Bah. Humbug.

The NY Times reports that the Royal Wedding is drawing Little U.S. Interest: http://nyti.ms/f93PLO

As well it should. After all, 25,000 Americans died to free us from British Royals.

But If I were British, there is a present I'd want to give William and Kate for their wedding. It's called a Republic.

Can the Berkshire Board be held liable for Sokol's trades?

D&O Blogger Kevin LaCroiz posts on the lawsuit against former Berkshire-Hathaway executive, who resigned after purchasing Lubrizol stock in advance of recommending that Berkshire acquire Lubrizol:

Over at the Delaware Corporate and Commercial Litigation Blog (here), esteemed fellow blogger Francis Pileggi has assembled a host of helpful links and commentaries about the lawsuit. (I would be remiss if I did not also mention here my thanks to Francis for his blog’s provision of a link to the Complaint, as well.) Among the more interesting sources he cites is UCLA Law Professor Stephen Bainbridge’s thorough analysis of the possible merits of the claim, which can be found here and here. ...

Professor Bainbridge’s analysis is interesting and persuasive. But it doesn’t answer what is for me the even more interesting question this lawsuit presents, which relates to the breach of fiduciary duty claim alleged against the Berkshire directors. Can the directors – or any one of them (say, for example, Buffett) possibly be held liable for failing to take actions that allegedly could have prevented supposed harm to the company?

First, thanks for the kind words. Second, I think the question LaCroix poses has an easy answer. To wit, no.

Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart 833 A.2d 961 (Del.Ch. 2003), strikes me as being on all fours with the Sokol case. The Stewart case arose out of Martha Stewart's insider trading troubles. Plaintiff claimed that "the director defendants and defendant Patrick breached their fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the Company, its intellectual property, or its business." (970-71) In other words, plaintiff claimed that the MSO directors failed to fulfill their Caremark duties by failing to prevent Stewart from engaging in insider trading.

The Chancellor opined that:

The “duty to monitor” has been litigated in other circumstances, generally where directors were alleged to have been negligent in monitoring the activities of the corporation, activities that led to corporate liability. Plaintiff's allegation, however, that the Board has a duty to monitor the personal affairs of an officer or director is quite novel. That the Company is “closely identified” with Stewart is conceded, but it does not necessarily follow that the Board is required to monitor, much less control, the way Stewart handles her personal financial and legal affairs.

And he continued by observing that "it is unreasonable to impose a duty upon the Board to monitor Stewart's personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart's public image."

Maybe you could argue that Sokol's conduct is somewhat less personal, because he traded in stock of a company he knew he would be pitching to Berkshire as a takeover candidate. OTOH, however, Sokol is far less “'closely identified' with" Berkshire than Stewart was with MSO.

So I think there is zero chance that a Caremark claim against the directors of Berkshire-Hathaway.

For more on Caremark claims see my articles The Convergence of Good Faith and Oversight and Caremark and Enterprise Risk Management.