ProfessorBainbridge.com

Jamie Dimon Crushes Challenge from Politicized Shareholder Activists

JP Morgan shareholders decisively rejected an effort by a highly politicized group of shareholder activists to divest CEO/Chairman of the Board Jamie Dimon of the latter title:

Jamie Dimon won more investor support this year than in 2012 to remain chairman, surviving a push to divide the roles after the biggest U.S. bank suffered a record trading loss.

The proposal to divide Dimon’s duties drew 32 percent of votes, down from 40 percent last year, the lender said today at its annual meeting in Tampa, Florida.

Matthew Yglesias pompously proclaims his ability to read the minds of thousands of shareholders, opining that:

Dimon was able to push back by deploying a highly effective tactic that just happens to illustrate precisely why he shouldn't hold both jobs: He threatened to quit.

He said that if he was forced to step down as chairman he would step down as CEO as well. And shareholders thought, not implausibly, that doing so would throw the firm into disarray and hurt its share price. So they stuck with Dimon.

In contrast, I have way of knowing for sure why thousands of disparate and anonymous shareholders voted the way they did. Lacking Yglesias' ESP, I'm limited to throwing out theories. For example, the shareholder activists who supported this effort to strip Dimon of his Chairman title likely were not interested in good governance. After all, who were the leaders of the effort? They were outfits like the American Federation of State, County & Municipal Employees (AFSCME) pension fund and the NY City pension funds. AFSCME, of course, is a major Democrat supporter and NYC Comptroller John Liu--who controls those funds--is himself a Democrat with aspirations for higher office. Jamie Dimon, of course, has famously earned liberal ire. As the WSJ opined recently:

For the sin of steering the bank through the disaster intact, the JP Morgan Chase chairman and CEO now finds himself the target of a political campaign to weaken his authority and shut him up. ...

Though a longtime Democrat, Mr. Dimon became a Beltway-union-media target by speaking out against Washington's regulatory frenzy in the wake of the 2010Dodd-Frank law. He has highlighted the costs of the myriad new rules emanating from the capital, such as the Volcker Rule, which is still unfinished three years on. As a rare CEO of a big bank who avoided the worst of the mortgage crisis, Mr. Dimon carries an influential voice, and one that many politicians would rather not hear.

Charles Gasparino likewise noted that the dump Dimon "effort is being pushed by union and public pension funds run by liberal politicians" and speculated that:

Despite some recent mishaps, including an errant trade that led to a $6 billion “London Whale” trading loss, investors still regard Dimon as America’s most capable banker. He famously steered Morgan clear of the excess that led to the 2008 banking collapses — and even with the Whale loss, it cranked out a record $21 billion in profits last year.

Yet not a day seems to go by without a strategically leaked story that JPMorgan is being investigated by some federal agency. In one account, a regulator told Dimon he’s losing credibility with people in Washington. Yes, the political dolts whose policies caused the 2008 crash are losing confidence in the one banker who steered clear of it.

But the bull’s-eye on Dimon is real. As a lifelong Democrat, his disdain for President Obama’s high taxes, massive government growth and over-regulation of businesses (particularly the big banks) was all the more powerful. ...

So maybe JP Morgan's shareholders figured there was no reason to toss Jamie Dimon under the bus just to make a bunch of Democrats and their union allies happy.

Just a theory.

Tweets re Jamie Dimon's Win

Shareholder activists took one on the chin today with Jamie Dimon's crushing victory. Some tweets on the subject I liked:

BREAKING: JPMorgan shareholders vote to keep Jamie Dimon as Chairman/CEO

— Bloomberg News (@BloombergNews) May 21, 2013

Barry Diller on Jamie Dimon: "This isn’t about good governance; it’s about busybodies without a clue” nyti.ms/10TZQH1

— Andrew Ross Sorkin (@andrewrsorkin) May 14, 2013

JPMorgan's Jamie Dimon gets backing from more shareholders this year than last on chairman/CEO voteon.wsj.com/10LL9KD

— David Wessel (@davidmwessel) May 21, 2013

Wham! Pow! Bang! Jamie Dimon Crushes Critics soa.li/IYCAZ7G

— John Carney (@carney) May 21, 2013

Hedge Fund Bonuses for Corporate Directors: Cunningham Enters the Fray

Larry Cunningham enters the fray with links to the various debater's statements:

A hot debate rages among corporate law professors amid one of the largest proxy battles in a decade: Hess Corp., the $20 billion oil giant, is the focus of a contest between its longstanding incumbent management and the activist shareholder Elliott Associates.   Ahead of Hess’s annual meeting on May 16, where 1/3 of the seats on Hess’s staggered board are up, antagonists offer dueling business visions.  They battle bitterly over such fundamentals as sectors to pursue, degrees of integration to have and cash dividend policy.

The professorial debate, more civil, is about a novel pay plan Elliott proposes for its director nominees, which Hess’s incumbents condemn and Elliott defends as suited to shareholders. On one side, all quoted in Elliott’s investor materials circulated April 16, are me, Larry Hammermesh (Widener), Todd Henderson(Chicago), Yair Listoken (Yale) and Randall Thomas (Vanderbilt); on the other  Steve Bainbridge (UCLA), Jack Coffee (Columbia) and Usha Rodriques (Georgia), all of whom have blogged since the matter was first reported by Steven Davidoff(Ohio State) in the New York Times April 2 (for which he connected with me for comment). ...

Hess incumbents portray the bonuses as objectionable (and Steve, Jack and Usha agree). Incumbents say they give nominees incentives to maximize short-term shareholder value rather than serve as long-term stewards.   They say the pay somehow makes the directors beholden only to Elliott, preventing the exercise of business judgment for the benefit of the corporation and its shareholders as a whole.

I have taken a different view, set out in Elliott’s materials last month (p. 148):  The bonuses seem surgically tailored to tie the payoff to Hess’s stock price performance compared to competitors. That is intended to align the interests of those directors with those of the company’s shareholders.  Elliott makes the promise at the outset and then has no role to play afterwards, other than to pay up if milestones are met.  No one is beholden to Elliott and the independence of those directors is not compromised.  There is no incentive to liquidate the company or concentrate on the short term but every incentive to manage to outperform peer company stock price performance over three years. ...

In a blog post responding to Prof. Davidoff’s April 7 story, Prof.  Bainbridge perceived a clear conflict of interest for directors in the arrangement, likewise based on the assertion of directors somehow being beholden to Elliott or because of the three-year time horizon.

Actually, the basis of my argument was neither that "directors [are] somehow being beholden to Elliott or because of the three-year time horizon," although I concede that my point was not made as clearly as it should have been.

When I described these transactions as involving a conflict of interest, what I had in mind was the general conflict of interest ban contained in Restatement (Second) of Agency sec 388:

Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.

Surely the hedge fund payments here qualify as, for example, the sort of gratuties picked up by comment b to sec 388:

An agent can properly retain gratuities received on account of the principal's business if, because of custom or otherwise, an agreement to this effect is found. Except in such a case, the receipt and retention of a gratuity by an agent from a party with interests adverse to those of the principal is evidence that the agent is committing a breach of duty to the principal by not acting in his interests.

Illustrations:

 4. A, the purchasing agent for the P railroad, purchases honestly and for a fair price fifty trucks from T, who is going out of business. In gratitude for A's favorable action and without ulterior motive or agreement, T makes A a gift of a car. A holds the automobile as a constructive trustee for P, although A is not otherwise liable to P.

How is the hedge fund's gratitude for good service by the Hess director any different than T gift to A?

To be sure, directors are not agent of the corporation, but "The relationship between a corporation and its directors is similar to that of agency, and directors possess the same rights and are subject to the same duties as other agents." In re Adams Laboratories, Inc., 3 B.R. 495, 499 (Bkrtcy. Va. 1980). See also Daniel J.H. Greenwood, Looting: The Puzzle of Private Equity, 3 BROOK. J. CORP., FIN. & COM. L. 89 (2008)("Directors are not agents, of course, but they too are bound by almost identical fiduciary duties requiring them to work for the firm rather than themselves.")

Thus, I believe, even if the hedge fund nominee/tippees are scrupulously honest in not sharing confidential information with the funds, put the interests of all shareholders ahead of those of just the hedge funds, and so on, there would still be a serious conflict of interest here.

Problem No. 27 with Institutional Investor Activism: Politics

In Corporate Governance after the Financial Crisis, I explained that the risk of political interference with public pension funds is an important argument against empowering shareholder activists:

Public employee pension funds are vulnerable to being used as a vehicle for advancing political/social goals unrelated to shareholder interests generally. Mid-decade activism by CalPERS, for example, reportedly was “fueled partly by the political ambitions of Phil Angelides, California’s state treasurer and a CalPERS board member,” who planned on running for governor of California in 2006.  In other words, Angelides allegedly used the retirement savings of California’s public employees to further his own political ends.

Another CalPERS case in point:

In 1999, the legislature enacted SB 105 (Burton) which obligates CalPERS and CalSTRS to support, whenever feasible, shareholder resolutions at domestic and international corporations in which those funds have invested that are designed to encourage, among other things:

• Increased representation of individuals from underrepresented religious groups in the work force, including managerial, supervisory, administrative, clerical, and technical jobs; and
• Banning of provocative religious or political emblems from the workplace.

Cal. Gov’t Code Section 7513.5.  While this law is limited to operations in Northern Ireland, it is surprising to see that the California legislature actually mandated support for: (1) affirmative action based on religion; and (2) restraints on free speech.

It's a classic example of how activism by public pension funds can be counter to the interests of othger investors, coupled with an unusually blatant attack on free speech and freedom of association.

Time to regulate ISS and Glass Lewis

Steven Davidoff reports that:

The annual proxy season battle between shareholders and corporations appears to have reached a tipping point in favor of shareholders this year. ...

Activists owe part of their success to I.S.S. and a rival, Glass, Lewis & Company. I.S.S. in particular is followed by many mutual funds and other institutional investors, and studies have found that it can sway up to 10 percent of the vote and much more in highly public elections. And it often recommends in favor of the dissidents. 

I discuss ISS and Glass Lewis at some length in my Corporate Governance after the Financial Crisis. In it, I argue that ISS has gotten too powerful, has too many conflicts of interest, and is too biased against management. It's time for it to get reined in.

Why should we think shareholder activists have anything useful to say?

Steve Davidoff reports that:

The California teachers’ pension fund has joined forces with the investment firm Relational Investors to campaign for the breakup of the Timken Company into steel and bearing businesses.

This is, of course, the same CalSTRS of which it was said in 2012 that:

The folks running CalSTRS projected a 7.75% return on equity.  Then they changed it to 7.5%. In fact it was 1.8%.  And no one was fired.

Any yet these are the same idiots that people like Lucian Bebchuk want to empower to run corporate America.

My bottom line is that there is no reason to think portfolio managers will make good business decisions and that goes double for people who aren't even competent portfolio managers.

The Economist is ineducable on shareholder activism

I still enjoy reading The Economist even though it seems at times to be drifting away from its classical liberal roots towards a mushy center-leftist space. But the people who work there seem to be ineducable on the issue of shareholder activism. Latest case in point from the new print edition:

Shareholders own companies. Managers and directors should serve them. If the owners do not like the way their servants are performing, they have a right to do something about it. Trying to improve the way a firm is run is more constructive than the traditional “Wall Street walk”, whereby disgruntled shareholders simply sell their shares.

Wrong. Shareholders do not own corporations. Shareholders own a security representing a bundle of rights that typically includes the residual claim and a vote. See this post for a quick summary of the argument and links to other, longer posts. For the full treatment, see Stephen M. Bainbridge, The Board of Directors as Nexus of Contracts. Available at SSRN: http://ssrn.com/abstract=299743.

To be sure, part of the shareholders' contract with the corporation is the proposition that "A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end." Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919). But that doesn't give the shareholders the "right to do something."

To encourage freedom of action on the part of directors, or to put it another way, to discourage interference with the exercise of their free and independent judgment, there has grown up what is known as the “business judgment rule.” ... “Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” Bayer v. Beran, 49 N.Y.S.2d 2 (Sup.Ct.1944).

As I have noted time and again, often in response to this sort of argument from The Economist, corporate law--at least in the United States--is a system of director primacy, not one of shareholder primacy. See The New Corporate Governance in Theory and Practice, for a full defense of shareholder primacy. For those with short attention stands, here are the usual bullet points:

• Director primacy is board-centric, but shareholder wealth focused.
• Director primacy thus differs from both shareholder primacy and Stout & Blair’s team production model, not to mention the various stakeholder theories.
• I claim that the debate between these models has conflated the means and ends of corporate governance.
• For example, shareholder primacy really makes two distinct claims. As to the ends of corporate governance—in other words, the social purpose and role of the corporation—shareholder primacy claims that the duty of directors and managers is to maximize shareholder returns within the bounds of law. Director primacy concurs.
• As to the means of corporate governance—who ultimately has decision-making authority—shareholder primacy says it is—or, rather, ought to be—the shareholders. Here, director primacy says no.
• The powers of the board of directors are original and undelegated. The board of directors is the nexus of corporate contracts. The shareholders’ claim on the corporation is merely one of those contracts.
• The intersection of the power of directors to manage the corporation and their obligation to do so in the shareholders’ interest creates a variant of the principal-agent problem.
• There is a core tension between the board’s authority and the need to ensure that the board uses its authority responsibly.
• Shareholder voting rights are one of the mechanism by which directors are held to account.
• If we try to make more of shareholder voting, if we try to elevate it into a functioning part of the governance system, however, we undermine the centralization of power in the board that makes the modern public corporation possible.
• The power to review, after all, is the power to decide. Every time we increase the shareholder’s right to review board decisions, we are thus undermining the core of corporate governance by shifting the power of decision to shareholders.
• This transfer of authority from board to shareholders is undesirable in itself.
• Worse yet, the interests of activist investors likely to differ from those of shareholders as a whole
• State/local and union funds are among the most active on governance issues. They have private interests: 
  “progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers.” (Romano)
• Director primacy thus calls for constraints on proposals to expand the role of shareholders in corporate governance.

The Economist disputes the claim that left-wing shareholder activism by Democrat Party-affiliated union and state/local employee pension funds is a problem, by claiming that:

... shareholder activists are unloved. From the right comes the gripe that they have the wrong motives. Last year only 1% of shareholder resolutions in America were proposed by investors “unaffiliated with organised labour or a social, religious, or public-policy purpose”, says the Manhattan Institute, a think-tank. But so what? Last year only 1% of shareholder resolutions in America were proposed by investors “unaffiliated with organised labour or a social, religious, or public-policy purpose”, says the Manhattan Institute, a think-tank. But so what? Activists prevail only when they persuade a majority of shareholders that their ideas will make money. An eco-warrior who buys a few Exxon shares and tries to stop the firm from pumping oil will not get far.

Wrong again. In the first place, people who are risk averse by definition will seek to avoid a loss even if the event in question has a positive expected value. As shareholder activism’s chief priest, Lucian Bebchuk puts it, managers “prefer not to lose votes” and, as he has put it elsewhere, “managers are risk-averse.”  Accordingly, managers may still give in to blackmail by activist shareholders even where an objective analysis suggests the proposal has little chance of passage.

Second, there are several situations in which a rent-seeking proposal by activists plausibly could threaten to achieve majority support. The rent seeking institution might propose a value-increasing change, for example, which it will agree to drop in exchange for some private benefit.  Bebchuk has conceded this possibility, but dismissed it on grounds that “a blackmail argument can be made not only against increasing shareholders’ power, but also against maintaining the power that shareholders currently have,” which no one proposes reducing on this account.  It’s not clear, however, why the absence of proposals to further disempower shareholders necessarily provides a case for granting them extensive new powers.

Alternatively, an activist seeking private benefits could bundle a value-increasing and value-decreasing proposal in hopes of increasing the prospects of passage. The considerable attention paid to the recent anti-bundling decision invalidating Apple’s proxy notwithstanding, courts almost never invalidate proposals for being bundled. The activist also might offer side payments to other shareholders seeking their support. Vote buying, after all, is only illegal when management does it. In lieu of side payments, the activist might seek to assemble a coalition of other shareholders that would also receive private benefits, which is perhaps the most likely scenario in which an investor coalition would coalesce.

Accordingly, the majority vote requirement is an inadequate constraint on rent seeking by union and public pension funds (or other institutional investors, such as hedge funds, for that matter). To be sure, like any other agency cost, the risk that management will be willing to pay private benefits to an activist is a necessary consequence of vesting discretionary authority in the board and the officers. It does not compel the conclusion that we ought to limit the board’s power. It does, however, suggest that we ought not give investors even greater leverage to extract such benefits by further empowering them. 

Finally, in response to The Economist's claim that "Empowering shareholders is a good idea," see my essay Director Primacy and Shareholder Disempowerment, which you can download here. This essay was a response to Lucian Bebchuk's article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow "shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements."

In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm?s organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.

Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.

Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.

Does the Apple proxy decision mean anything? No.

Schumpeter:

... a legal action brought against Apple by Greenlight Capital, a hedge fund run by David Einhorn, a high-profile financier, has now become something of an embarrassment for the tech giant. On February 22nd a judge ruled in favour of Greenlight, which has a stake in Apple, giving Mr Einhorn a symbolic victory in his battle to get the company to return more of its $137 billion cash mountain to shareholders.

The legal tussle revolves around Apple’s plan to have its shareholders vote on a proposal that critics such as Mr Einhorn fear will make it harder for the company to issue preferred shares in the future. Greenlight’s boss has been urging Apple to issue such shares with a perpetual 4% dividend as a way to hand back more of the computer maker's Croesus-like stash of cash.

Greenlight has won this round on a technicality: issuing a preliminary injunction, the judge handling the case said that a vote on Apple’s proposed move could not go ahead as planned at its annual shareholder meeting on February 27th because the firm had bundledthe preference-share matter together with other, unrelated ones in a single proxy. However, he also added that Greenlight was likely to succeed in its challenge to Apple's proposed move "on the merits of the case". The hedge fund was quick to hail the decision as “a significant win for all Apple shareholders and for good corporate governance”.

But it's really not all tha big a deal, as Larry Cunnigham explains:

The substantive fight is about how Apple should allocate substantial accumulated cash, running to some $140 billion. The board wishes to retain it; the shareholder wants it distributed to shareholders. Einhorn envisions using a specific approach to distributing the cash that would involve the issuance of a new class of preferred stock to existing shareholders with a stated cash dividend. Einhorn has no right to direct the board on such a matter and any claim challenging the board’s decision would be decisively dismissed. In fact, I cannot imagine any reputable attorney filing such a suit. Boards, not shareholders, set dividend policy. ...

Einhorn won this technical round but the substantive power about the dividend policy remains firmly in the board’s hands.

Exactly.

Did shareholder empowerment weaken banks and help cause the financial crisis?

I argued that to be the case in Corporate Governance after the Financial Crisis. New research confirms that "banks with empowered shareholders were more likely to be bailed out." Put another way, "shareholder empowerment leads to decisions that make banks weaker and less able to weather the crisis."

Not that i expect the shareholder empowerment crowd to take notice.

Do apolitical investors want corporations to disclose political contributions?

Some but not most:

The Center for Political Accountability released on December 10, 2012 its annual survey of mutual fund support for corporate political disclosure. The analysis, which is available on CPA’s website, reviewed how 40 of the largest mutual fund families voted on shareholder resolutions that asked for disclosure of political spending based on the CPA model.

The review’s key findings include the following:

• In the 2012 proxy season, 40 of the largest mutual fund families supported, on average, 34 percent of the 29 CPA-model shareholder resolutions for corporate political disclosure. They abstained on 12 percent and opposed 54 percent.
• Average mutual fund support in 2012 decreased slightly from 2011′s record 35 percent average support.

The bulk of the support for such disclosure comes not from typical investors but from Democrat-leaning union pensions, state and local government pensions, and academics. Hmmm....

Let Blasius go the way of the Dodo

Anti-Delawarite Jay Brown is offering up his annual list of the 5 most anti-shareholder Delaware decisions--i.e., the five Delaware decisions most likely to be correct. ;-))

For example, he cites:

Keyser v. Curtis, 2012 Del. Ch. Lexis 175 (Del. Ch. July 31, 2012), [which] was the latest salvo in eroding the Blasius standard.  We discussed the case back in October.  In effect, the court found that in a case implicating both the duty of loyalty and the standard from Blasius, it would apply the standard from the duty of loyalty.  In other words, the court opted for the test that was easier for the board to meet.  Moreover, the court did so largely by disparaging the Blasius standard, portending further erosion.  Id.  (opinion stating that the main role of Blasius "to the extent it has one" is as an iteration of the intermediate standard fromUnocal).  

If the Chancery Court has its way, the need for "compelling justification" will go the way of the Dodo.  

If Blasius really is on the way out, I would applaud loudly. I direct the reader's attention to Harry G. Hutchison, Director Primacy and Corporate Governance: Shareholder Voting Rights Captured By the Accountability/Authority Paradigm, 36 Loy. U. Chi. L.J. 1111 (2005), which deploys my director primacy model to very good effect in analyzing shareholder voting rights, and makes a compelling case for scuttling Blasius.

What you ask is Blasius? Well, Gordon Smith once explained that:

One of my favorite Delaware decisions is Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), written by then-Chancellor Bill Allen.Blasius has a narrow assignment in Delaware jurisprudence, requiring a "compelling justification" for any corporate action "intended primarily to thwart effective exercise of the franchise." Not many corporate actions over the years have been subjected to that standard, but Allen's defense of the shareholder vote is a classic:

The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests. Generally, shareholders have only two protections against perceived inadequate business performance. ...

To which I must respectfully dissent. 

As I wrote in The Board of Directors as Nexus of Contracts:

“The theory of our corporation law confers power upon directors as the agents of the shareholders; it does not create Platonic masters.” So opines former Delaware Chancellor William Allen, whom many regard as the leading corporate law jurist of our era. To paraphrase a television commercial of my youth, when Chancellor Allen speaks, people listen. Yet, as Horace cautioned, “even the worthy Homer sometimes nods.” The central thesis of this Article is that directors are not mere agents of the shareholders. To the contrary, the corporation’s board of directors in fact is a Platonic Guardian. All others with interests in the corporation are mere constituents.

Hence, in Director Primacy and Shareholder Disempowerment, I described Allen's holding in Blasius as "mere ipse dixit."

Democrat-run pension fund goes after Qualcomm for info on political spending

Yahoo finance reports that:

New York State's $150-billion public pension fund has sued Qualcomm Inc., seeking to force the chipmaker to reveal its political spending, according to the state comptroller.

The suit was filed late on Wednesday in Delaware Court of Chancery, after Qualcomm refused the request by the New York State Common Retirement Fund -- a Qualcomm shareholder -- to inspect records detailing the use of corporate resources for political activities, said state comptroller Thomas DiNapoli, who oversees the fund.

"Without disclosure, there is no way to know whether corporate funds are being used in ways that go against shareholder interests," DiNapoli, a Democrat who is up for re-election in 2014, said in a statement.

The suit opens a new front in the fight over corporate political spending, which has risen dramatically since the U.S. Supreme Court's 2010 ruling in Citizens United.

In a way, it's sort of interesting that Democrat DiNapoli is going after Qualcomm. After all Qualcomm co-founder and ex-boss Irwin Jacobs is a huge Obama donor. But I don't think that renders the suit apolitical.

In any case, if the issue goes to court, things could get very interesting from a doctrinal point of view. As I explain in Corporation Law, DGCL § 220(b) authorizes shareholders to inspect the corporation’s stockholder list and other books and records upon making a written demand setting forth a "proper purpose" for the request. The statute further defines a "proper purpose" as one "reasonably related to such person's interest as a stockholder." If the corporation denies the shareholder access to its records, the shareholder may sue in the Chancery Court. Under subsection (c), where the shareholder only seeks access to the shareholder list or stock ledger, the burden of proof is on the corporation to show that the shareholder is doing so for an improper reason. Where the shareholder seeks access to other corporate records, however, the shareholder must prove that he is doing so for the requisite proper purpose.

Attempts to investigate alleged corporate mismanagement are usually deemed proper, although the shareholder must have some factual basis for making the request and is not allowed to conduct a fishing expedition. See, e.g., Nodana Petroleum Corp. v. State, 123 A.2d 243, 246 (Del.1956); Helmsman Mgmt. Servs., Inc. v. A & S Consultants, Inc., 525 A.2d 160, 165 (Del.Ch.1987); Skouras v. Admiralty Enters., Inc., 386 A.2d 674, 678 (Del.Ch.1978).

Improper purposes include attempting to discover proprietary business information for the benefit of a competitor, to secure prospects for personal business, to institute strike suits, and­—most pertinently to present purposes—to pursue one's own personal social or political goals. Tatko v. Tatko Bros. Slate Co., 569 N.Y.S.2d 783 (App.Div.1991).

The latter improper purpose—pursuit of noneconomic social or political goals—has proven an especially problematic subject for courts. In the well known State ex rel. Pillsbury v. Honeywell, Inc. decision, the plaintiff belonged to an antiwar group trying to stop Honeywell from producing anti personnel fragmentation bombs for the military. 191 N.W.2d 406 (Minn.1971) (interpreting Delaware law). After buying some Honeywell stock, plaintiff requested access to Honeywell's shareholder list and to corporate records relating to production of such bombs. In denying plaintiff access to those records, the court emphasized that plaintiff's stated reasons were based on his pre existing social and political views rather than any economic interest. Accordingly, the court carefully limited its holdings to the facts at bar: "We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long or short term economic effects on Honeywell resulting from the production of war munitions." The court further noted that the "suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell." As such, Honeywell puts more emphasis on proper phrasing of one's statement of purpose than on the validity of the purpose itself. So long as one's social agenda can be dressed up in the language of economic consequences, one gets access to the list.  See, e.g., Conservative Caucus Research, Analysis & Education Foundation, Inc. v. Chevron Corp., 525 A.2d 569 (Del.Ch.1987) (a political group successfully sought access to Chevron's shareholder list for the stated purpose of warning its fellow "stockholders about the allegedly dire economic consequences which will fall upon Chevron if it continues to do business in Angola").

Does this formalistic approach make sense? The Delaware Chancery Court seems to think not, as at least one Chancery decision opines that Delaware law has de facto rejected Honeywell's requirement that the shareholder's purpose must relate to the "enhancement of the economic value of the corporation." Food & Allied Serv. Trades Dep't, AFL-CIO v. Wal-Mart Stores, Inc., 1992 WL 111285 at *4 (Del.Ch.1992).

My guess is that the NY pension fund will be smart enough to claim they’re motivated solely by economic concerns rather than admitting that this is all part of the left’s effort to silence corporate political speech.

If so, Qualcomm’s best bet would be to argue that the request is too broad. The Delaware Supreme Court has held, however, that a request to access such records must be very narrowly tailored: “A Section 200 proceeding should result in an order circumscribed with rifled precision.” Security First Corp. v. U.S. Die Casting and Development Co, 687 A.2d 563 (Del.1997).

In addition, Qualcomm should argue that in the absence of any facts suggesting breach of duty on the part of management that the pension fund is engaged in a fishing expedition. Cf. Cooke v. Outland, 144 S.E.2d 835, 842 (N.C.1965) ("Considering the huge size of many modern corporations and the necessarily complicated nature of their bookkeeping, it is plain that to permit their thousands of stockholders to roam at will through their records would render impossible not only any attempt to keep their records efficiently, but the proper carrying on of their businesses.").

An insufficiently narrow fishing expedition should not be allowed, especially given that we all know what DiNapoli is really up to. 

Shareholder empowerment and management earning manipulation

Interesting new paper. Lail, Bradley E., Martin, Gregory W. and Thomas, Wayne B., The Influence of Strong Shareholders on Earnings Management (December 5, 2012). Available at SSRN: http://ssrn.com/abstract=2185448

Abstract:  We examine whether shareholder rights impact the use of accruals to manage earnings. Presumably, shareholder rights aim to better align the actions of managers with the interests of shareholders; however, it is not clear whether such alignment mitigates or exacerbates managers’ propensity to manage earnings. Using a model recently developed by Dechow, Hutton, Kim and Sloan (2012), we document that when shareholder rights are stronger, managers are more likely to (1) manage earnings upward when meeting or slightly beating analyst expectations and (2) manage earnings downward when easily beating analyst expectations. Additional tests confirm that the propensity to manage accruals downward allows managers to reserve current accruals to meet expectations in future periods. Overall, the results are not consistent with the traditional expectation that shareholder rights serve a governance role by reducing discretionary reporting behavior. Given recent demands to enhance shareholder rights, our study highlights an interesting financial reporting consequence.

These are the people the shareholder "rights" folks want to empower

WSJ:

The stock of Iridex Corp., a maker of lasers used to treat visual ailments, had been hovering around $3.43 all day on June 29. At 3:55 p.m., five minutes before the market close, it took off. It moved to $3.65, then $3.80. Less than a half second before the trading day and calendar quarter ended, Iridex jumped 4% to $4.17, capping a nearly 22% rise for the day. ... The next trading day, July 2, Iridex dropped 10%—and it didn't hit $4 again until late October.

Regulators and market analysts have an explanation for the unusual pattern. They say some money managers wait until the waning moments of the quarter to bid aggressively for more shares of a stock they already own, which drives up the value of their entire position in the stock. That, in turn, boosts their performance at the very moment when they report results, making their funds look more appealing to potential investors. Even if the jump in stock price is only temporary, the managers can attract new money and earn higher fees.

The practice, known as "marking the close" or "portfolio pumping," is a form of "window dressing"—a term for a variety of techniques employed by asset managers to make their results look better at the end of the quarter. Some forms of window dressing, such as selling losing stocks right before reporting quarter-end holdings to investors, are perfectly legal. But regulators say marking the close violates prohibitions on deceptive trading in the federal securities laws.

Why the shareholder rights crowd thinks that empowering these sort of traders would enhance corporate governance is a bit of a mystery to me. I don't think they bring squat to the table. Asking them to weigh in on corporate governance and empowering them to have more influence over corporate management is like asking gamblers and shady characters to run a business.

Why shareholder empowerment is dangerous, at least for banks

In Corporate Governance after the Financial Crisis, I explained that: 

... regulators and some commentators identified executive compensation schemes that focused bank managers on short-term returns to shareholders as a causal factor in the financial crisis of 2007-2008.[1] As we have also seen, shareholder activists long have complained that these schemes provide pay without performance. This was one of the corporate governance flaws Dodd-Frank was intended to address, most notably via say on pay.

The trouble, of course, is that shareholders and society do not have the same goals when it comes to executive pay. Society wants managers to be more risk averse. Shareholders want them to be less risk averse. If say on pay and other shareholder empowerment provisions of Dodd-Frank succeed, manager and shareholder interests will be further aligned, which will encourage the former to undertake higher risks in the search for higher returns to shareholders.[2] Accordingly, as Christopher Bruner aptly observed, “the shareholder-empowerment position appears self-contradictory, essentially amounting to the claim that we must give shareholders more power because managers left to the themselves have excessively focused on the shareholders’ interests.”[3]

Now there's additional evidence that sharehjolder empowerment is dangerous, at least for banks. From Ferreira, Daniel, Kershaw, David, Kirchmaier, Tom and Schuster, Edmund-Philipp, Shareholder Empowerment and Bank Bailouts (November 2, 2012). Available at SSRN: http://ssrn.com/abstract=2170392:

We investigate the hypothesis that shareholder empowerment may have led to more bank bailouts during the recent financial crisis. To test this hypothesis, we propose a management insulation index based on banks’ charter and by-law provisions and on the provisions of the applicable state corporate law that make it difficult for shareholders to oust a firm’s management. Our index is both conceptually and practically different from the existing alternatives. In a sample of US commercial banks, we show that management insulation is a good predictor of bank bailouts: banks in which managers are fully insulated from shareholders are roughly 19 to 26 percentage points less likely to be bailed out. We also find that banks in which the management insulation index was reduced between 2003 and 2006 are more likely to be bailed out. We discuss alternative interpretations of the evidence. The evidence is mostly consistent with the hypothesis that banks in which shareholders were more empowered performed poorly during the crisis.

Somehow, however, I don't expect the apologists for shareholder empowerment to admit their error anymore than I expect the apologists for turning corporate governance over to the SEC to admit theirs.