ProfessorBainbridge.com

Francis Pileggi's 17th Annual Review of Key Delaware Corporate and Commercial Decisions

Francis Pileggi's annual review of Delaware corporate and commercial law is essential reading for those of us who labor in this vineyard. You can read it here.

Cleary Gottlieb's Annual Selected Issues for Boards of Directors is Out

The annual report is always worth reading. You can download it here.

Do we really want ISS setting corporate climate policy?

Cahill Gordon identifies ISS new voting policies, two of which caught my eye:

Say on Climate. ISS has adopted two frameworks for analyzing Say on Climate proposals, one for proposals submitted by shareholders and another for those submitted by management. These new policies list the main, non- exhaustive criteria that will be considered in ISS’s analysis. Vote recommendations by ISS on such proposals will be made on a case-by-case basis, taking into account the completeness and rigor of the plan and disclosures and other relevant criteria, including with respect to shareholder proposals whether the request is unduly burdensome or overly prescriptive.

Climate Accountability. ISS has adopted a new policy applicable to companies that are significant greenhouse gas (GHG) emitters, defined for 2022 as those on the current Climate Action 100+ Focus Group list. Under the new policy, ISS generally will recommend voting against or withholding votes from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in situations where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks to the company and the larger economy relating to climate change. For 2022, ISS considers such “minimum steps” to be: detailed disclosure of climate-related risks (such as those published by the Task Force on Climate-Related Financial Disclosures (TCFD) framework), and appropriate GHG emissions reduction targets.

ISS is the largest proxy advisor, with over 1700 institutional investor clients that buy its advice on how to vote shares they hold. A substantial number of those clients robo-vote in lockstep with ISS recommendations.

This gives ISS "a bully pulpit from which to harangue corporate management and boards of directors on all matters of governance and compensation ...." Yet, as the Institute for Governance reports, there are some serious concerns about ISS:

• Lack of transparency as to the process by which they arrive at formulating their recommendations; • Inaccuracies in their analysis and unresponsiveness to corporate demands for corrections;
• Conflicts of interest, in particular for ISS, by their offering of several services to the same corporations which are the subject of their proxy recommendations;
• More subtle criticisms focus on their definition of «good» governance and the lack of (or very weak) empirical evidence that their kind of governance has any influence on the performance of companies;
• Proxy advisors have a vested interest in raising the bar of «good» governance from year to year to justify their continued employment;
• The influence of proxy advisers on corporate governance makes some, many, boards of directors overly preoccupied with ensuring favorable recommendations from proxy advisers, by taking pre-emptive steps to ensure that their policies on governance and executive pay will not trigger a negative score when fed into the proxy advisers’ standardized algorithm;
• Their business model is problematic. Because their clients, institutional investors, collectively own shares in all publicly listed companies, they have to provide «advice» for all these corporations. In Canada, some 1570 companies are listed on the TSX and another 2,200 are listed on the TSX Venture. The financial year of roughly 84% of companies listed on the TSX ends on December 31st. For some 80% of TSX listed companies, there were less than 50 days between the date the Management Information Circular is received by shareholders and the ultimate date for proxy voting. (IGOPP research, 2012). These statistics create a fundamental issue for these service providers and raise basic questions about their business model. How can they cope with this mass of data and come up with fair and thoughtful recommendations for thousands of corporations in a matter of a few weeks in the spring of each year;
• Surprising and puzzling is the role these proxy advisors are now playing in all cases of mergers, acquisitions, proxy contests and all other litigious matters. Proxy advisers offer their opinion on almost all litigious, contentious issues. As these issues often come about as a result of the actions of some activist hedge funds, a proxy advisor’s favourable opinion, from ISS particularly, is a highly prized input to the argumentation of activist funds. The potential for conflicts of interest is decupled in these highly charged confrontations with huge sums of money at stakes.

The Trump-era SEC tried to put some minimal restrictions on ISS and its fellow oligopolist Glass Lewis. Under woke SEC Chairman Gary Gensler, however, the Biden-era SEC is giving ISS a free pass.

It was bad enough when ISS confined its advice to legitimate issues of corporate governance, but it is increasingly injecting itself into controverted social and economic issues.

The Democrats in Congress and the White House have embraced ISS as part of their progressive a[[roach to business, so it's hard to expect them to take action. If the Republicans win back the Congress, however, they should use their influence to pressure ISS into sticking to its knitting.

Do State Antitakeover Provisions Matter?

Interesting new paper by Andrew Baker, Do State Antitakeover Provisions Matter? (January 2, 2022). Available at SSRN: https://ssrn.com/abstract=3998607 or http://dx.doi.org/10.2139/ssrn.3998607

A longstanding debate over the impact of state antitakeover provisions has emerged among scholars in law and finance. Corporate law practitioners and researchers argue that the second generation of antitakeover statutes were made redundant by the affirmation of rights plans, while empirical scholars have found wide-ranging impacts from their adoption when used as an exogenous shocks to managerial entrenchment. This paper subjects the standard approach used in the empirical literature to a series of straightforward sensitivity analyses, consistent with the present best practice in panel data analysis. Contrary to the majority of published research, there is scant evidence for a consistent and reliable impact of antitakeover statute adoption on common firm outcome measures. These findings are consistent with the legal argument that takeover statutes provide little additional takeover deterrence in the presence of a “shadow pill.”

The number crunching aspects of the paper are outside my wheelhouse, of course, but the result makes a certain amount of intuitive sense. Most second generation state antitakeover legislation was designed to deter the sort of hostile, junk bond funded, leveraged buyouts that got so much press back in the 1980s and early 1990s. (I discuss the three generations of takeover statutes at 463-82 of my book Mergers and Acquisitions; see also my articles Redirecting State Takeover Laws at Proxy Contests State Takeover and Tender Offer Regulations Post-Mite: The Maryland, Ohio, and Pennsylvania Attempts).

In contrast, the poison pill is effective against a wide range of takeover structures and is an effective negotiating device even in more or less friendly deals.

Today, of course, hostile LBOs are very rare. Indeed, for that matter, hostile takeover bids are rare. In 1988 there were about 160 hostile takeover bids; in 2019, there were about 15. Granted, there was a slight (very) uptick in 2020, but the longterm trend has been towards negotiated takeovers.

It would thus be surprising indeed if state takeover laws mattered all that much.

Having said that, of course, it is true that you see state takeover statutes representations and warranties in most acquisitions of public corporations. The target will typically represent that there is no state antitakeover statute applicable to the deal or, if there is such a statute potentially applicable, that the target has taken all necessary steps in order to ensure that the statute will not impact the deal. But these are uncontroversial boilerplate provisions.

Lynn LoPucki "Chapter 11's Descent into Lawlessness"

Most of his work is outside of my wheelhouse, but I always learn something from Lynn's scholarship. You will too:

The bankruptcy courts that compete for big cases frequently ignore the Bankruptcy Code and Rules. This Article documents that lawlessness through a detailed examination of the court file in the Belk one-day Chapter 11 and a series of empirical studies.

Chapter 11’s lawlessness reached a new extreme in Belk. Belk filed in Houston on the evening of February 23, 2021. The court confirmed the plan at ten o’clock the next morning, and the parties consummated the plan that same afternoon. Almost none of Chapter 11’s procedural requirements were complied with. The court did not give the creditors notice of the disclosure statement or plan confirmation hearings until after those hearings were held. Belk filed no list of creditors’ names and addresses, no schedules, no statement of financial affairs, and no monthly operating reports. No creditors’ committee was appointed, no meeting of creditors was held, and none of the professionals filed fee applications. The ad hoc groups that negotiated the plan failed to file Rule 2019 disclosures. Because no schedules were filed, no proofs of claim were deemed filed. Only eighteen of Belk’s ninety-thousand creditors filed proofs of claim, and Belk apparently just made distributions to whomever Belk considered worthy.

The procedural failures in Belk are just the tip of the iceberg. The competing courts are looking the other way on retention bonuses, refusing to appoint mandatory examiners, failing to monitor venue or transfer cases, granting every request to reject collective bargaining agreements, and providing debtors with critical-vendor slush funds.

LoPucki, Lynn M., Chapter 11's Descent into Lawlessness. Forthcoming 96 American Bankruptcy Law Journal (June 2022), UCLA School of Law, Law-Econ Research Paper No. 21-12, Available at SSRN: https://ssrn.com/abstract=3946577

James Park "Investor Protection in an Age of Entrepreneurship"

My friend and colleague at UCLAW Jim Park has another new article up on SSRN. As with all of Jim's work it is exceptional and worth reading:

The creation of trillions of dollars in shareholder wealth by emerging companies has challenged the investor protection policy of securities regulation. The Securities and Exchange Commission has not offered a coherent response to the question of why public investors can take on some risks but not others. This Article develops an investor protection framework based on the Knightian distinction between risk and uncertainty that better articulates the challenges of this entrepreneurial age. Securities regulation has traditionally permitted all investors to purchase public securities with measurable risks and restricted them from investing in private securities that are shrouded in immeasurable uncertainty. As private markets have become more sophisticated at valuing companies, it has become more difficult to maintain this traditional divide. Investors believe that the valuations of private companies have become more certain. As a result, emerging companies are going public through Special Purpose Acquisition Companies and direct listings without the use of an underwriter that typically assures investors that a company has a reasonable basis for its valuation. This Article argues that protecting investors from uncertainty is essential to distinguishing between investment and speculation. The SEC should be more cautious in permitting companies to access public markets without measures that protect investors from Knightian uncertainty.

Park, James J., Investor Protection in an Age of Entrepreneurship (January 2022). Harvard Business Law Review (forthcoming), UCLA School of Law, Law-Econ Research Paper No. 21-11, Available at SSRN: https://ssrn.com/abstract=3911454

UCLAW's James Park's article Karmel’s Dissent: The SEC’s Use and Occasional Misuse of Section 21(A) Reports of Investigation

My friend and UCLA colleague Jim Park has just posted a new article that will be of interest to securities lawyers:

Section 21(a) of the Securities Exchange Act gives the SEC the option of publishing a report of its findings after conducting an investigation. Typically, the SEC issues such reports about once a year to highlight major compliance and enforcement issues. This Article examines the SEC’s use of Section 21(a) investigative reports with special attention to its 1979 report in Spartek, where Commissioner Roberta Karmel filed a famous dissent. In that opinion, she argued that the report effectively sanctioned conduct over which the SEC did not have jurisdiction and that Spartek did not have sufficient notice of its regulatory obligations. While such concerns have not been at issue in most Section 21(a) reports of investigation, they were recently raised by the SEC’s report in DAO, which analyzed whether a digital token was a security under the Howey test. While the SEC’s conclusion was reasonable, it was a close call, and the report did little to clarify the scope of the SEC’s jurisdiction over tokens. The SEC should be cautious in using reports of investigation to define its own jurisdiction and should actively seek adjudication to confirm the scope of its authority.

Karmel’s Dissent: The SEC’s Use and Occasional Misuse of Section 21(A) Reports of Investigation (January 13, 2022). Brooklyn Journal of Corporate, Financial & Commercial Law (forthcoming), UCLA School of Law, Law-Econ Research Paper No. 22-01, Available at SSRN: https://ssrn.com/abstract=4008573

University students can watch class videos at double normal speed without losing significant comprehension

News you can use from UCLA:

In one experiment, the researchers divided 231 UCLA undergraduates into four groups and had them watch two 13-to-15-minute lecture videos — one on the Roman Empire and another on real estate appraisals. One group watched at normal speed, one at 1.5 times normal speed, another at double speed and the final group at 2.5 times normal speed. They were instructed not to pause the videos or take notes.

Immediately after the viewings, they were given comprehension tests on the individual videos, each comprising 20 multiple-choice and true-or-false questions. The normal-speed group averaged 26 correct answers out of 40, while the double-time group scored 25 (about the same as the 1.5-speed group). The 2.5-speed group didn’t do as well, answering only about 22 questions correctly. ...

“Surprisingly, video speed had little effect on both immediate and delayed comprehension until learners exceeded twice the normal speed,” said lead author Dillon Murphy, a doctoral student in psychology at UCLA.

So could you go through law school in 18 months instead of three years.

The SEC is trying to revive the discredited equal access test and turn insider trading by tippers into a status crime

Keith Bishop alerts us to a troubling case:

In Dirks v. SEC, 463 U.S. 646 (1983), the United States Supreme Court found that a tippee may be liable for trading on the basis of material, nonpublic information if he or she knows that the tipper disclosed inside information in breach of a duty and for a personal benefit.  The Court stated that a personal benefit may be inferred when the tipper receives something of value in exchange for the tip or "makes a gift of confidential information to a trading relative or friend".   In Salman v. United States, 137 S. Ct. 420 (2016), the Supreme Court made it clear that the tipper need not receive something of pecuniary value from the tippee, it is enough that the tipper provided the information as a gift to a trading relative or friend.

Yesterday, the Securities and Exchange Commission filed a civil complaint alleging insider trading by two individuals - David Sargent and Christopher Klundt.  Mr. Klundt was employed by the issuer in question and is alleged to be the tipper.  Mr. Sargent is alleged to be the tippee.  The SEC alleges that "Klundt communicated material nonpublic information to Sargent in exchange for a personal benefit or with the expectation of receiving a benefit".  Noticeably lacking is any allegation as to what that benefit was.  The complaint does include several allegations concerning the two defendants' friendship.  It will be interesting to see whether these allegations of the defendants' amity will suffice under Salman and Dirks. 

In effect, what the SEC is trying to do is to turn trading by tippees into a status crime. It is enough in the SEC's view that tipper and tippee are friends. This an extremely aggressive reading of Salman and Dirks.

The SEC's efforts in this area also appear to be an attempt to revive the discredited equal access theory. Under the SEC's approach, if the friend of a tipper has unequal access to information that suffices to hold him/her liable. Which the Supreme Court precedents do not allow.

As I explained in Equal Access to Information: The Fraud at the Heart of Texas Gulf Sulphur, 71 SMU L. REV. 643 (2018), available at https://scholar.smu.edu/smulr/vol71/iss3/3, that test was invented out of whole cloth by the Second Circuit and decisively rejected by the Supreme Court. But the SEC has never accepted that loss and has consistently tried to bring back equal access as the basic test.

RIP, Lani Guinier: Recalling her Scholarship on Cumulative Voting and the Socratic Method

The WSJ reports that Harvard Law Professor Lani Guinier has passed away:

Ms. Guinier’s writings and studies focused on voting rights, race and gender.  ...

Before her appointment at Harvard Law School in 1998, she was a tenured professor at the University of Pennsylvania Law School; worked in the civil rights division at the Justice Department under President Jimmy Carter ; and headed the voting rights project at the NAACP Legal Defense Fund in the 1980s. She received her law degree from Yale Law School in 1974. ...

In 1993, President Bill Clinton nominated Ms. Guinier to be the assistant attorney general for civil rights. However, her writings on voting rights came under scrutiny and the administration withdrew her nomination.

“Her scholarship changed our understanding of democracy—of why and how the voices of the historically underrepresented must be heard and what it takes to have a meaningful right to vote,” said Mr. Manning.

Obviously, condolences go out to her friends and family. I never had the privilege of meeting her, but I was very interested in her work in two areas.

First, I was fascinated by her proposal to use cumulative voting in political elections so as to promote minority representation:

Cumulative voting is based on the principal of “one person one vote” because each voter gets the same total number of votes. Everyone's preferences are counted equally.

It's not a particularly radical idea. I learned about cumulative voting from my gentleman professor of corporations back at Yale Law School. Thirty states either require or permit corporations to use this election system to protect minority shareholders, and minority in that sense is not based on race, but is based on the number of shares that the person owns in the corporation.

Cumulative voting is certainly not anti-democratic because it emphasizes the importance of voter choice in selecting public or social policy, and it is neither liberal nor conservative.

Lani Guinier, Keynote Address, 25 U. Toledo L. Rev. 875, 881 (1995). In another work, she elaborated:

Many people, not all people, but many people think of their interests along racial lines. If that is true, and that is important to them, and they choose to vote along racial lines, then it is democratic, in my view, to allow them to participate as a racial group. But we must allow people to self-identify so that if they do not want to vote along racial lines, they don't have to. Nobody is forcing them. Cumulative voting or nondistricted elections provide exit opportunities for people who do not want to vote along with the majority of their particular racial-minority group. Cumulative voting provides racial “dissenters” the opportunity to form coalitions, biracial coalitions. But it also provides racial minority groups with a chance to reach out to other groups.Because it minimizes “wasted” votes, meaning votes cast for political losers, cumulative voting enables groups to reach out beyond their racial “cul-de-sac” and negotiate and bargain excess votes on particular issues or at particular elections.

Cumulative voting does not eliminate the need for compromise. It changes, however, the timing and the atmosphere of the compromise. Compromises are made in the open; compromises are made after open exchanges of views. Compromises are not hidden in order to confuse voters; compromises are not suppressed in order to pretend one is all things to all people.

Lani Guinier, More Democracy, 1995 U. Chi. Leg. Forum 1, 17–18 (1995). I'm not a huge fan of cumulative voting in the corporate law context. Boards elected by cumulative voting tend to fall into cliques, with the majority clique often meeting prior to the formal board meeting so as to work out a mutual position that is then imposed on the minority. 

But in a federal system in which, as Justice Brandeis famously observed, the states can serve as laboratories  of democracy, it strikes me as a worthy experiment for ensuring fairer elections.

In addition, as a critic of the Socratic method, I was interested to come across a pair of critiques of the method coauthored by Professor Guinier:

... many women are alienated by the way the Socratic method is used in large classroom instruction, which is the dominant pedagogy for almost all first-year instruction.Women self-report much lower rates of class participation than do men for all three years of law school.Our data suggest that many women do not “engage” pedagogically with a methodology that makes them feel strange, alienated, and “delegitimated.”

Lani Guinier, Michelle Fine, Jane Balin, Ann Bartow, and Deborah Lee Stachel, Becoming Gentlemen: Women's Experiences at One Ivy League Law School, 143 U. Pa. L. Rev. 1, 3–4 (1994).

The Socratic method in the large classroom, though valuable as a way to teach sharp analytic skills, is ill-suited to fostering “legal imagination,” which is what lawyers need most to become effective advocates, institutional designers, transaction engineers, and leaders. It also contributes to law student disengagement, particularly for women and people of color.

Susan Sturm & Lani Guinier, The Law School Matrix: Reforming Legal Education in A Culture of Competition and Conformity, 60 Vand. L. Rev. 515, 516 (2007). All of which tended to confirm that I was right to be a Socratic method skeptic.

In sum, I found Professor Guinier's scholarship to be provocative, thoughtful, and insightful. Based on what I saw of it, she was unfairly Borked. I'm sure we disagreed on many political issues, but I found her quite admirable in many ways.

Contrary to Ewan McGaughey, Dodge v. Ford Motor Co. is still good law in Michigan

As I work away at my new book The Profit Motive: Defending Shareholder Wealth Maximization, I've been researching the foundational American corporate law decision: Dodge v. Ford Motor Co., 170 N.W. 668(Mich. 1919).

As informed readers will know, Dodge held 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. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

I'm specifically working on the chapter defending Dodge from the attacks that have been widely aimed at it by progressive corporate law scholars, one of which is a question posed by the late Lynn Stout: "Why rely on a case that is nearly one hundred years old if there is more modern authority available?” Her argument actually conflates two distinct claims. One is that there is modern authority that contradicts Dodge. As we shall see, however, modern authority supports Dodge. The other component claim is that old cases have minimal precedential weight." Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus. Rev. 163, 166 (2008).

In researching the former component of Stout's argument, I ran across the following claim by Ewan McGaughey of King’s College, London and The London School of Economics and Political Science: 

... the claim that “shareholder primacy” is the “traditional paradigm” is absurd. The single case reference is predictably Dodge v. Ford Motor Co., 204 Mich. 459 (1919) which does not represent the law in the vast majority of states, including Michigan. See Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford (UCLA, Law-Econ Research Paper No. 07-11, 2007).

Ewan McGaughey, The Codetermination Bargains: The History of German Corporate and Labor Law, 23 Colum. J. Eur. L. 135, 176 n.71 (2016).

I took note of that claim because, as long time readers will recall, McGaughey was the fellow who subjected me to the Reductio ad Hitlerum a few years back.

I am unable to find any specific reference in the SSRN version of Lynn's article to Dodge's status as a matter of Michigan law. More generally, her discussion of the case law is more nuanced than McGaughey suggests. She thinks almost all of the cases on point are dicta and that the one non-dicta decision, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., is "a dead letter." So I think Lynn's article provides very weak support for McGaughey's description of the law, at best.

Turning to the actual law, a 1935 Michigan Supreme Court decision cited Dodge with approval. Wagner Electric Corp. v. Hydraulic Brake Co., 257 N.W. 884, 887 (Mich. 1934). So did a 2006 Michigan Court of Appeals decision. Wojcik v. McNish, 2006 WL 2061499, at *5 (Mich. App. July 25, 2006). Most recently, a 2020 Michigan federal court decision concluded that it was still “well established under Michigan law that the primary purpose of a business corporation is to benefit and profit the stockholders.” Smith v. Smith, 2020 WL 2308683, at *8 (E.D. Mich. May 8, 2020) (emphasis supplied), citing Dodge for that proposition.

In addition, a 2003 Michigan appellate court decision, Churella v. Pioneer State Mut. Ins. Co., 671 N.W.2d 125 (Mich. App. 2003), explained that Michigan law draws an important distinction between business corporations and mutual insurance companies. While “the purpose of a business corporation is to provide profit to its shareholders . . . this is not the purpose of a mutual insurance company. The purpose of a mutual insurance company is to provide affordable insurance coverage to its members.” Id. at 132. The court specifically cited Dodge for its statement of the purpose of a business corporation. Id.

To repeat: Dodge is a “well established" proposition of Michigan law.

As for whether Dodge is good law in other states, while you wait to read my book (in about a year), I refer you to the relevant portion of my article Making Sense of the Business Roundtable's Reversal on Corporate Purpose, 46 J. Corp. L. 285, 289ff (2021).

Statement by SEC Commissioners Peirce and Roisman Slamming Chair Gensler’s Regulatory Agenda

Peirce and Roisman slam Gary Gensler's agenda:

While Chair Gary Gensler’s newly released regulatory agenda is ambitious in scope, we are disappointed with its content. It fails to include any items intended to facilitate capital formation and misses opportunities to foster fair, orderly, and efficient markets and further investor protection. Instead the agenda is brimming with plans to redo recently completed rules, add new regulatory obligations, and constrain investor choice. ...

The Agenda makes plenty of room for rulemakings to undo rulemakings that the Commission only recently completed.  These include proposals to further amend our rules on proxy solicitation and shareholder proposals; the Resource Extraction Payments Rule; the rules pertaining to the accredited investor definition and the private offering exemption integration framework; as well as our whistleblower rules. Not only are the Commission’s most recent amendments to each of these rules barely or less than a year old; none have been effective for more than a few months. As we said when we initially raised these concerns, we have not seen any new information that would warrant opening up any of these rules for further changes at this time.  So, why the rush to revisit them?

Why, indeed. The whole thing makes depressing reading.