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.
