From the National Law Review:
UCLA Law Professor Stephen Bainbridge recently posted an article calling Delaware’s recently enacted S.B. 75 a “self-inflicted wound”. ... What I find particularly interesting is Professor Bainbridge’s thesis that the Delaware legislature acted at the behest of the Delaware bar which has a vested interest in maintaining, not limiting, stockholder litigation ....
Now I just need a student-edited law review to take note and publish it.
I've just posted a new article to SSRN:
Abstract: In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.
In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.
This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the state’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.
Bainbridge, Stephen M., Fee Shifting: Delaware's Self-Inflicted Wound (June 29, 2015). UCLA School of Law, Law-Econ Research Paper No. 15-10. Available at SSRN: http://ssrn.com/abstract=2624750
Now it just needs to find a law review home.
Joan Heminway makes the point, kindly linking some of my work:
A number of scholars [at a recent conference] referenced, in their presentations or in comments to the presentations of others, "shareholder primacy." As I listened, it was clear these folks were referring to the prioritizing of shareholder interests--especially financial interests--ahead of the interests of other stakeholders in corporate decision-making, rather than the elements of corporate control (few as there are) enjoyed by shareholders. As I began to recognize this, several things happened in rapid succession.
First, I remembered David Millon's recent paper on this subject, which (among other things) tells a history of the use of the "shareholder primacy" term. It's well worth a read. Or a re-read!
Second, I remembered Steve Bainbridge's earlier work on this same topic. Ditto on that paper; read it or re-read it. His chart in Figure 1 of that paper is an amazing visual summary.
Third, and largely as a result of those two papers, I wondered why we use the same term for these two aspects of corporate modeling (whether you label them them radical versus traditional shareholder primacy, shareholder protection versus monitoring, corporate ends versus means, or anything else). It's confusing! I kept wanting to interrupt, as folks were using "shareholder primacy," to ask: "which kind?" to move my understanding and analysis further forward faster.
Here's my pitch. I advocate moving away from using the term "shareholder primacy" when a more specific term is available.
Works for me.
Praise for Bainbridge's Corporate Law (2d ed): "It's a great summary -- very concise and easy to understand." http://t.co/YNK7IV8MXS— Stephen Bainbridge (@ProfBainbridge) May 12, 2015
Praise for Mergers and Acquisitions: Bainbridge is a phenomenal writer, and this book does not disappoint http://t.co/xatQEwcqTO— Stephen Bainbridge (@ProfBainbridge) May 12, 2015
Bob Thompson has announced this year's list of the top ten articles in corporate and securities law, which I am proud to say includes:
Bainbridge, Stephen M. and M. Todd Henderson. Boards-R-Us: Reconceptualizing Corporate Boards. 66 Stan. L. Rev. 1051-1119 (2014).
I must give Todd full credit for coming up with the basic idea and many thanks for inviting me to help him flesh it out.
Francis Pileggi blogs about Quadrant Structured Products Company, Ltd. v. Vertin, C.A. No. 6990-VCL (Del. Ch. May 4, 2015), which he predicts "is destined to be cited as a seminal ruling for its historical and doctrinal analysis of important principles of Delaware corporate law, including the following:
Go read the whole thing. As counselor Pileggi kindly points out, the opinion indirectly cites yours truly by quoting (p.18 n.19) from Leo Strine's opinion in Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P.:
Professor Bainbridge‘s views regarding the substantive effect the question of insolvency should have on directors‘ ability to rely upon the business judgment rule . . . is identical to mine—short answer none. . . .
Strike is referring to my analysis in Much Ado about Little? Directors' Fiduciary Duties in the Vicinity of Insolvency. Journal of Business and Technology Law, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 05-26. Available at SSRN: http://ssrn.com/abstract=832504:
Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency.
Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and insupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation.
Concern that shareholders will gamble with the creditors' money is the principal argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency. On close examination, however, this argument proves unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are shareholders, there is no justification for imposing such a duty.
This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.
The UCLA School of Law's Lowell Milken Institute is sponsoring a Private Fund Conference: The Role of Activist Funds. During one session I will be debating the merits of shareholder activism with Patrick Foulis of The Economist, who wrote that magazine's latest paean in favor of shareholder activism.
I'll only have ten minutes to present my basic case, so let me direct interested readers to my latest article on the topic, Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415, which argues that:
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
Of course, as long time readers know, I have frequently criticized The Economist's coverage of shareholder activism, so here's a trip down memory lane:
Oct 9, 2014 ... The latest edition of The Economist is once again beating the drums for shareholder activism. (As I've said before, I love them despite their ...
Feb 8, 2015 ... The Economist is at it again, with yet another paean to shareholder activism. Or, more precisely,two: The latest print issue has both a leader and ...
Update: For an extended defense of my director primacy model of corporate governance, which I think anticipated Patrick's criticisms of it, see my book The New Corporate Governance in Theory and Practice. For an additional treatment of shareholder activism in the context of the broader set of corporate governance issues of the day, see my book Corporate Governance after the Financial Crisis.
The announcement that the Delaware bar is proposing legislation banning fee shifting bylaws raises a conundrum. Do I try to do a quick and dirty piece that could get rushed into an online review before the legislative session ends in June? Or a more considered critique of the bill (assuming it passes) for publication in a traditional law review in the fall?
Quick and dirty would likely mean basically refurbishing blog posts--i.e., SPLAT. Personally, I have no problem with SPLAT. To the contrary, in this sort of setting, I think it makes sense. (See this post) But some law reviews (yes, I'm looking at you Stanford) get all moralistic about it.
Anyway. Thoughts would be welcome.
BTW, here are the posts I'd be splatting:
Nov 18, 2014 ... (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have ...
Nov 17, 2014 ... I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy ...
I like to have music or the TV on in the background when I'm working. Today I'm working at home and there's an Eric Clapton documentary on Palladium. Right now they're doing an acoustic version of Layla. I am very happy.
In 2007, as the late Larry Ribstein observed, "the North Dakota Legislature adopted the North Dakota Publicly Traded Corporations Act. To quote the Act’s sponsor, the North Dakota Corporate Governance Council, the Act “ 'provides a governance structure for publicly traded corporations that gives shareholders greater rights than they currently have under other state laws. It has been designed to reflect the best thinking of institutional investors and governance experts and addresses each of the current hot topics in corporate governance.' ”
In brief, the law permits firms incorporated under North Dakota law after July 1, 2007 to elect to include a provision in their articles that they elect to be subject to the new statute. Shareholders then get a set of provisions that looks like a shareholder rights advocate’s wish list, including majority voting for directors, advisory shareholder votes on executive compensation committee reports, a right for certain shareholders to propose board nominees on the company’s proxy statement; reimbursement of proxy expenses to shareholders to the extent they are successful in getting nominees elected; a requirement of a non-executive board chair; and restrictions on poison pills and other takeover devices. The Economistrecently applauded the Flickertail State‘s plan “to poach company incorporations from Delaware” as “injecting some much-needed competition into the field of corporate law and governance.”
In my essay, Why the North Dakota Publicly Traded Corporations Act Will Fail (March, 18 2009), available at SSRN: http://ssrn.com/abstract=1364402, I argued that:
North Dakota hopes that the Act will empower it to compete with Delaware in the market for corporate charters. In my view, North Dakota is doomed to failure. If state chartering competition is a race to the bottom, managers will prefer Delaware to North Dakota because the former facilitates the extraction of private rents. If state competition is a race to the top, investors will prefer the director primacy approach taken by Delaware to the shareholder primacy one adopted by North Dakota. Either way, North Dakota loses.
Now we learn from Myron Steele that:
North Dakota had two publicly traded corporations in 2007, when they adopted everybody's wish list of faith based corporate governance. And just two remain.
Former Chief Justice Myron T. Steele, Lecture: Continuity and Change in Delaware Corporate Law Jurisprudence, 20 Fordham J. Corp. & Fin. L. 352, 366 (2015).
So I was right. The statute flopped. Now the question is: Why?
I was intrigued by another amicus brief filed on the defendants’ behalf. Not the brief by onetime SEC defendant and billionaire sports team owner Mark Cuban, but the one by three professors as famous in the securities law biz as Cuban is in the rest of the world. Stephen Bainbridge of UCLA, Jonathan Macey of Yale and Todd Henderson of the University of Chicago argued in a brief docketed Thursday that the 2nd Circuit panel in the Newman and Chiasson case was exactly right on what constitutes a personal benefit to a corporate insider. (As it happens, the same three, along with Allen Ferrell of Harvard, also filed an amicus brief backing Mark Cuban when the SEC appealed the dismissal of its case against him to the 5th Circuit.)
Wait one second. How come Macey and Henderson got bold typeface but not yours truly? (Update: The squeaky wheel gets the bold typeface.)
The professors said that despite the SEC’s arguments in Dirks for the prohibition of all trades based on material, non-public information, the Supreme Court concluded blanket insider trading rules would “ultimately damage the overall health of the market, because they limit the incentives of market participants to seek out information on which to trade.”
Instead, the professors’ brief said, the Supreme Court came up with the “personal benefit” test, which was supposed to draw an objective line between tips passed by a corporate insider with an improper motive and information provided innocently. The Dirks opinion did say that an insider’s improper purpose can be to enrich a friend, but, according to the securities professors, the court “was not endorsing the proposition that an insider who discloses inside information to a ‘friend’ is therefore seeking a personal benefit.”
... The professors contend that the government interpretation – which the Justice Department and the SEC want the 2nd Circuit to enshrine in a reconsideration of the Newman and Chiasson decision – would undermine the free-market policy concerns at the heart of Dirks. They urged the 2nd Circuit to deny the government’s petition.
Bainbridge said in an email that he’s done about 10 such amicus briefs in his 25-year career and that the Newman filing reflects views he has been espousing on his blog, ProfessorBainbridge.com, for about a year.
Leo Strine and Nicholas Walker's provocative article Conservative Collision Course?: The Tension Between Conservative Corporate Law Theory and Citizens United has now been published in the Cornell Law Review (100 Cornell L. Rev. 335). So this seems like an opportune moment to remind you of my response Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014), available at SSRN: http://ssrn.com/abstract=2494003:
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.