Steve Davidoff reports that:
Responding to hedge funds’ efforts to give incentives to nominees to company boards, the law firm Wachtell, Lipton, Rosen & Katz in essence came over the top on Thursday in a memo distributed to clients. Signed by the leading deal lawyer Martin Lipton and seven other Wachtell partners, the memo proposes that company boards consider adopting a bylaw prohibiting shareholder activists from compensating director nominees. Excluded from this prohibition are out-of-pocket expenses and payments for indemnification.
Wachtell’s proposal takes square aim at a topic I recently wrote about: the payment by hedge funds of large amounts of incentive compensation to director nominees. The issue has come to light because of two recent activist situations. Paul Singer’s Elliott Management has nominated five directors to the 14-member board of Hess while Barry Rosenstein’s Jana Partners recently lost a contest to elect five directors to Agrium’s 12-member board. In both cases, the hedge funds’ director nominees were provided with incentive compensation linked to the performance of the companies’ shares that had the potential to pay them millions of dollars.
Since then a mini-debate has broken out online among law professors over whether these payments are legal or appropriate. Wachtell, which has done battle before with academics over their views in support of shareholders, is now citing two academics who are on its side.
The first is John C. Coffee Jr., the Columbia Law School professor, who stated that these “third-party bonuses create the wrong incentives, fragment the board and imply a shift toward both the short-term and higher risk.”
Meanwhile, Professor Stephen Bainbridge of the UCLA School of Law has written extensively on this subject and summed up his feelings by stating that “if this nonsense is not illegal, it ought to be.”
On the other side, several equally well-respected academics have signed off on these arrangements, even allowing themselves to be quoted in Elliot’s materials. In this corner we have Professor Randall Thomas of Vanderbilt Law School who said this approach made sense because it “lends itself to allowing these nominees, if elected, to focus on independent decision-making and fulfilling their fiduciary obligations on behalf of shareholders.” Another professor quoted in the materials is Larry Cunningham of George Washington University Law School who later argued that all of this “is intended to align the interests of those directors with those of the company’s shareholders.”
