My article Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement By Proposal, 85 Fordham Law Review 705 (2016), is now available online here
Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called “Shareholder Proposal Rule”) to not just manage but even micromanage corporate decisions.
The Rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micromanagement. The Rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion of proposals relating to ordinary business operations under Rule 14a-8(i)(7) is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. For example, corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters. This creates a gap through which countless proposals have made it onto corporate proxy statements.This Article proposes an alternative standard that is not only grounded in relevant state corporate law principles but is easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
Your Publicly Available (Scholarly and Other Papers) and Privately Available Papers on SSRN as of 17 October 2016 have:
121,807 TOTAL DOWNLOADS
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(Note: The totals above are calculated specifically for this author letter as of 17 October 2016 for all your papers on SSRN (summing the data on both your publicly and privately available papers) and therefore may differ slightly from the numbers on the SSRN site.)
Your Author Statistics as of 10/01/2016 (out of 321,551 authors in SSRN, based only on Publicly Available, Downloadable Papers)
34 is your AUTHOR RANK, based on 121,483 TOTAL DOWNLOADS.
95 is your AUTHOR RANK, based on 7,837 DOWNLOADS IN THE LAST 12 MONTHS.
1,192 is your AUTHOR RANK, based on 455 TOTAL CITATIONS.
You can find the complete table of the Top Authors Ranking by Downloads and Citations at https://hq.ssrn.com/rankings/Ranking_display.cfm?TRN_gID=7
As compared to a single-Director structure, a multi-member independent agency also helps to avoid arbitrary decisionmaking and to protect individual liberty because the multi-member structure – and its inherent requirement for compromise and consensus – will tend to lead to decisions that are not as extreme, idiosyncratic, or otherwise off the rails. Cf. Stephen M. Bainbridge, Why a Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 12-19 (2002) (summarizing experimental evidence finding group decisionmaking to be superior to individual decisionmaking).
This week's Economist includes a very nice mention of Todd Henderson and my new book Limited Liability: A Legal and Economic Analysis:
Critics of corporate “excesses” have developed an even more fundamental corrective: “concession theory”. Ronald Green of Dartmouth College says that society has a right to demand socially responsible behaviour in return for the privilege of limited liability and the right to impose externalities on society. Will Hutton, a British journalist with a certain following, calls for a new law for firms that would grant them the privileges of incorporation only if they pursue some “noble, moral business purpose”.
In their new book, “Limited Liability”, Stephen Bainbridge of the University of California, Los Angeles and Todd Henderson of the University of Chicago give both arguments short shrift. Veil-piercing is hard to enforce because, in a world where the average holding period for shares is 22 seconds, it is impossible to determine who is liable for what. But even if you can enforce it there is no evidence that veil-piercing produces more responsible behaviour by firms. One reason is judges are unpredictable in when they choose to pierce the corporate veil. There are better ways of disciplining wayward companies, such as prosecuting managers.
I am delighted to announce that you can now pre-order Limited Liability: A Legal and Economic Analysis, which I had the honor of co-writing with my dear friend Professor Todd Henderson of the University of Chicago Law School. Here's the blurb:
The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest allows for more risks to be taken at a lower cost.
This comprehensive economic analysis of the policy debate surrounding the laws governing limited liability examines limited it not only in an American context, but internationally, as the authors consider issues of limited liability in Britain, Europe and Asia. Stephen Bainbridge and M. Todd Henderson begin with an exploration of the history and theory of limited liability, delve into an extended analysis of corporate veil piercing and related doctrines, and conclude with thoughts on possible future reforms. Limited liability in unincorporated entities, reverse veil piercing and enterprise liability are also addressed.
This comprehensive book will be of great interest to students and scholars of corporate law. The book will also be an invaluable resource for judges and practitioners.
And here are some reviews:
This book does a wonderful job of bringing sharp and clear analysis to a breathtakingly complex and poorly understood area of law. In particular, the book is distinctive for its careful treatment of the inefficiencies generated by current confusion and apparent subjectivity of the law in many states. Also of interest is the book's thoughtful economic analysis of the various ways that parent companies and other controlling investors react to the confused state of the law.' --Jonathan Macey, Yale University
'Professors Bainbridge and Henderson have made an outstanding contribution to the literature on limited liability. There is something valuable for everyone in this book, which provides not only a clear and comprehensive exposition of the doctrine and theory of limited liability, but also with a cogent and clever solution to limited liability's deeply troubled exception, veil-piercing. This is an important book in one of the most important areas of business law, and is a tremendous, versatile resource for attorneys, entrepreneurs, students and scholars alike.' --Peter Oh, University of Pittsburgh
'Bainbridge and Henderson have given us one of the most important books on one of the most important contemporary legal issues, the liability of individual and corporate shareholders for corporate debts. There is no issue in corporate law more subject to uncertainty and no issue more likely to be litigated. No single book has ever attempted, much less carried off, the complete historical, international, economic and legal theoretical exegesis of limited liability, which these two authors do with range, depth, confidence and even a bit of panache. This monograph, of crucial interest both to scholars and practitioners, will become an instant classic and an immediate authority.' --Stephen B. Presser, Northwestern University and the author ofPiercing the Corporate Veil
Including one by yours truly:
Economics of Corporate Law (Economic Approaches to Law series)
Edited by Claire A. Hill, Professor and James L. Krusemark Chair in Law and Brett H. McDonnell, Professor and Dorsey & Whitney Chair in Law, University of Minnesota Law School
Scholarly analysis of corporate law in the United States has come to be dominated by an economic approach. Professor Hill and Professor McDonnell here draw together seminal articles which represent major milestones along the road that economics has traveled in coming to play this central role in corporate law scholarship. The focus is on the analysis of corporate law, drawing mainly upon legal scholarship and particularly on US scholarship, which is the originator of the application of modern economic analysis to corporate law and has had much influence in other countries.
Claire A. Hill and Brett McDonnell
PART I ECONOMICS OF THE FIRM
1. Ronald Coase (1937), ‘The Nature of the Firm’, Economica, 4, 386–405
2. Michael C. Jensen and William H. Meckling (1976), ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics, 3 (4), October, 305–60
3. Oliver Williamson (1984), ‘Corporate Governance’, Yale Law Journal, 93 (7), June, 1197–230
PART II THE BOARD AND PURPOSE
4. A.A. Berle, Jr. (1931), ‘Corporate Powers as Powers in Trust’, Harvard Law Review, XLIV (7), May, 1049–74
5. E. Merrick Dodd, Jr. (1932), ‘For Whom are Corporate Managers Trustees?’, Harvard Law Review, XLV (7), May, 1145–63
6. Stephen M. Bainbridge (2003), ‘Director Primacy: The Means and Ends of Corporate Governance’, Northwestern University Law Review, 97 (2), 547–606
7. Margaret M. Blair and Lynn A. Stout (1999), ‘A Team Production Theory of Corporate Law’, Virginia Law Review, 85 (2), March, 247–328
8. Sanjai Bhagat and Bernard Black (1999), ‘The Uncertain Relationship Between Board Composition and Firm Performance’, Business Lawyer, 54 (3), May, 921–63
9. Donald C. Langevoort (2001), ‘The Human Nature of Corporate Boards: Law, Norms, and the Unintended Consequences of Independence and Accountability’, Georgetown Law Journal, 89, 797–832
PART III STATE COMPETITION
10. William L. Cary (1974), ‘Federalism and Corporate Law: Reflections Upon Delaware’, Yale Law Journal, 83 (4), March, 663–705
11. Ralph K. Winter, Jr. (1977), ‘State Law, Shareholder Protection, and the Theory of the Corporation’, Journal of Legal Studies, 6 (2), June, 251–92
12. Roberta Romano (1985), ‘Law as a Product: Some Pieces of the Incorporation Puzzle’, Journal of Law, Economics, and Organization, 1 (2), Fall, 225–83
13. Bernard S. Black (1990), ‘Is Corporate Law Trivial?: A Political and Economic Analysis’, Northwestern University Law Review, 84 (2), 542–97
14. Robert Daines (2001), ‘Does Delaware Law Improve Firm Value?’, Journal of Financial Economics, 62 (3), December, 525–58
15. Ehud Kamar (1998), ‘A Regulatory Competition Theory of Indeterminacy in Corporate Law’, Columbia Law Review, 98 (8), December, 1908–59
16. Mark J. Roe (2003), ‘Delaware’s Competition’, Harvard Law Review, 117 (2), December, 588–646
An introduction to both volumes by the editors appears in Volume I
PART 1 TAKEOVERS AND TAKEOVER DEFENCES
1. Henry G. Manne (1965), ‘Mergers and the Market for Corporate Control’, Journal of Political Economy, 73 (2), April, 110–20
2. Frank H. Easterbrook and Daniel R. Fischel (1981), ‘The Proper Role of a Target’s Management in Responding to a Tender Offer’, Harvard Law Review, 94 (6), April, 1161–204
3. Ronald J. Gilson and Reinier Kraakman (1989), ‘Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?’, Business Lawyer, 44 (2), February, 247–74
4. Jeffrey N. Gordon (1997), ‘”Just Say Never?” Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett’, Cardozo Law Review, 19 (1–2), September–November, 511–52
5. Lucian Arye Bebchuk, John C. Coates IV and Guhan Subramanian (2002), ‘The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy’, Stanford Law Review, 54 (5), May, 887–951
PART II SHAREHOLDER SUITS AND OTHER AGENCY MECHANISMS
6. Janet Cooper Alexander (1991), ‘Do the Merits Matter? A Study of Settlements in Securities Class Actions’, Stanford Law Review, 43 (3), February, 497–598
7. Melvin Aron Eisenberg (1993), ‘The Divergence of Standards of Conduct and Standards of Review in Corporate Law’, Fordham Law Review, 62 (3), 437–68
8. Edward B. Rock (1997), ‘Saints and Sinners: How Does Delaware Corporate Law Work?’, UCLA Law Review, 44, 1009–107
9. Bernard Black, Brian Cheffins and Michael Klausner (2006), ‘Outside Director Liability’, Stanford Law Review, 58 (4), February, 1055–159
10. Lucian Arye Bebchuk, Jesse M. Fried and David I. Walker (2002), ‘Managerial Power and Rent Extraction in the Design of Executive Compensation’, University of Chicago Law Review, 69, 751–846
11. John C. Coffee, Jr. (2002), ‘Understanding Enron: “It’s About the Gatekeepers, Stupid”’, Business Lawyer, 57 (4), August, 1403–420
12. Tom Baker and Sean J. Griffith (2006), ‘The Missing Monitor in Corporate Governance: The Directors’ and Officers’ Liability Insurer’, Georgetown Law Journal, 95, 1795–842
PART III OTHER PERSPECTIVES
13. Mark J. Roe (1991), ‘A Political Theory of American Corporate Finance’, Columbia Law Review, 91, 10–67
14. Henry Hansmann and Reinier Kraakman (2001), ‘The End of History for Corporate Law’, Georgetown Law Journal, 89 (2), June, 439–68
15. Henry Hansmann and Reinier Kraakman (2000), ‘The Essential Role of Organizational Law’, Yale Law Journal, 110 (3), December, 387–440
There was an insightful letter to the editor in today's WSJ:
Regarding “IPO Market Cools As Private Deals Rise” (page one, Aug. 1): Is it really hard to understand why a company would prefer to sell shares to a private-equity firm staffed with highly educated professionals who not only will serve on the board but contribute value as opposed to going public and being second guessed by every plaintiffs’ lawyer, SEC staffer and Justice Department enforcer who has never held a job outside of the regulatory quagmire in Washington?
The IPO is no longer the desired outcome because of litigation and burdensome and expensive regulation. The end result is that affluent investors in private-equity funds continue to hold stakes in promising upstarts while common investors get stuck with their parent’s and grandparent’s portfolio options.
I made a similar argument at length in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-13. Available at SSRN: http://ssrn.com/abstract=1696303:
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.
A revised version of my paper The Parable of the Talents has been posted to SSRN:
On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished.
Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship.
Obeid v. Hogan, No. CV 11900-VCL, 2016 WL 3356851, at *13 (Del. Ch. June 10, 2016):
With the benefit of hindsight, one can discern in Zapata the foundational concepts that animate enhanced scrutiny, the intermediate standard of review that the Delaware Supreme Court introduced openly some four years later in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985). First, there is a specific and recurring decision-making context where the realities of the situation “can subtly undermine the decisions of even independent and disinterested directors.” Second, there is a need for an intermediate position which recognizes that “[i]nherent in these situations are subtle structural and situational conflicts that do not rise to a level sufficient to trigger entire fairness review, but also do not comfortably permit expansive judicial deference.”16 Third, the resulting intermediate standard involves examining the reasonableness of the end that the directors chose to pursue, the path that they took to get there, and the fit between the means and the end. The Zapata test thus can be properly regarded as a nascent form of enhanced scrutiny and integrated within the larger body of case law applying the intermediate standard.
16 In re Rural Metro Corp. S'holder Litig., 88 A.3d 54, 81 (Del. Ch.2014), aff'd sub nom. RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del.2015); see Dollar Thrifty, 14 A.3d at 597 (“Avoiding a crude bifurcation of the world into two starkly divergent categories—business judgment rule review reflecting a policy of maximal deference to disinterested board decision-making and entire fairness review reflecting a policy of extreme skepticism toward self-dealing decisions—the Delaware Supreme Court's Unocal and Revlon decisions adopted a middle ground.”); Golden Cycle, LLC v. Allan, 1998 WL 892631, at *11 (Del. Ch. Dec. 10, 1998) (locating enhanced scrutiny under Unocal and Revlon between the business judgment rule and the entire fairness test); see also Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del. J. Corp. L. 769, 795–96 (2006) (explaining the Delaware Supreme Court's creation of an intermediate standard of review between the entire fairness and business judgment rule standards); Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J. Corp. L. 491, 496 (2001) (“In Unocal, the Delaware Supreme Court chose the middle ground that had been championed by no one. The court unveiled an intermediate standard of review....”).
Pell v. Kill, No. CV 12251-VCL, 2016 WL 2986496, at *16 (Del. Ch. May 19, 2016):
The question of what causes enhanced scrutiny to serve as the operative standard of review is a different inquiry than what it takes to satisfy or fall short of the parameters of the test. Stated generally, enhanced scrutiny applies “where the realities of the decisionmaking context can subtly undermine the decisions of even independent and disinterested directors.” “Inherent in these situations are subtle structural and situational conflicts that do not rise to a level sufficient to trigger entire fairness review, but also do not comfortably permit expansive judicial deference.”11
11 In re Rural Metro Corp. S'holder Litig., 88 A.3d 54, 81 (Del. Ch.2014), aff'd sub nom. RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del.2015); see Dollar Thrifty, 14 A.3d at 597 (“Avoiding a crude bifurcation of the world into two starkly divergent categories—business judgment rule review reflecting a policy of maximal deference to disinterested board decisionmaking and entire fairness review reflecting a policy of extreme skepticism toward self-dealing decisions—the Delaware Supreme Court's Unocal and Revlon decisions adopted a middle ground.”); Golden Cycle, LLC v. Allan, 1998 WL 892631, at *11 (Del. Ch. Dec. 10, 1998) (locating enhanced scrutiny under Unocal and Revlon between the business judgment rule and the entire fairness test); see also Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del. J. Corp. L. 769, 795–96 (2006) (explaining Delaware Supreme Court's creation of an intermediate standard of review between the entire fairness and business judgment rule standards); Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J. Corp. L. 491, 496 (2001) (“In Unocal, the Delaware Supreme Court chose the middle ground that had been championed by no one. The court unveiled an intermediate standard of review....”).
It's interesting that Vice Chancellor Laster used the same footnote to make similar points.
Law professor Scott Pryor has some interesting and thoughtful comments on my essay on the Parable of the Talents. His conclusion seems especially apt; indeed, so much so that I'm going to quote it in the next draft.