In my article, Preserving Director Primacy by Managing Shareholder Interventions, I argue that, even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
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.
In the article, I propose managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
But there's also the prospect of corporate self-help. When notorious hedge fund raider Dan Loeb took a stake in Sotheby's, the firm responded by adopting a so-called activist pill. This is a variant on the classic poison pill, which is intended to give corporate boards leverage when activist investors launch an intervention. Dan Loeb sued in the Delaware Chancery Court, seeking to have the pill invalidated. He lost, although Sotheby's then caved by putting Loeb and a couple of his cronies on their board. (For good discussions of why Sotheby's caved, see Alison Frankel's analysis and, of course, Steven Davidoff's analysis.)
The reality, of course, is that an activist pill will not insulate an incompetent board faced with legitimate shareholder gripes. In practice, such a board will still face a substantial risk of losing a proxy fight with the activist despite the pill, which drives many such boards to cave in the face of an activist intervention. As Davidoff pointed out, "even Carl C. Icahn has stated that he is 'surprised' that he is being offered board seats so often to forestall a campaign."
Even so, the decision is an important one. First, by confirming that an activist pill is subject to review under the Unocal standard rather than the more demanding Blasius standard, VC Parsons may well have contributed to the further erosion of Blasius, a process that may end with Blasius being overturned, which would give boards greater freedom to resist activist campaigns.
Second, VC Parsons's decision suggests that a board comprised of disinterested and independent directors--especially when assisted by independent outside financial and legal advisors--will get a lot of deference from the courts. The decision thus suggests that Delaware case law is not moving towards a more shareholder centric model.
Third, and perhaps most critically, VC Parsons confirmed that efforts by activists to obtain de facto control without paying a control premium justifiies a defensive response by the board. This suggests that Delaware courts will be sensitive to activist interventions in which the activist(s) is pursuing private rent seeking gains rather than improved corporate governance. Which is precisely what my article argues we should be trying to do.
