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Chancellor Bouchard's disappointing and unnecessary intervention in the fee shifting debate

Peter Ladig reports:

Chancellor Bouchard who issued his opinion in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch.) on March 16, 2015 ... addressed plaintiff’s motion for partial judgment on the pleadings that a fee-shifting bylaw adopted after the challenged transaction did not apply to him. The Court found that the fee-shifting bylaw did not apply to the plaintiff in this case, and in reaching this conclusion, made some interesting comments that will undoubtedly further the debate over the proposed legislation to eliminate fee-shifting bylaws and regulate forum selection bylaws. ...

The Court then stated:

As a practical matter, therefore, applying the Bylaw in this case would have the effect of immunizing the Reverse Stock Split from judicial review because, in my view, no rational stockholder – and no rational plaintiff’s lawyer – would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even though the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct. This reality demonstrates the serious policy questions implicated by fee-shifting bylaws in general, including whether it would be statutorily permissible and/or equitable to adopt bylaws that functionally deprive stockholders of an important right: the right to sue to vindicate their interests as stockholders.

Notwithstanding this stinging language, the Court found that it did not need to reach those issues, because the motion before it focused solely on the timing of the adoption of the bylaw.

With a proposal to ban fee shifting bylaws pending before the Delaware legislature, it is hard to see this unnecessary dicta as anything but a judicial intervention in the political process designed to give ammunition to the opponents of fee shifting provisions. Of course, it's not terribly surprising that a trial judge would intervene in a debate that could effect Delaware lawyer incomes and do so in a way that helps protect those incomes, but it's still disturbing.

For my argument that banning fee shifting bylaws is classic interest group legislation intended to protect the incomes of lawyers rather than to benefit society, see:

Delaware's Decision: Viewing fee shifting bylaws through a public ...   Nov 18, 2014 ... (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have ... www.professorbainbridge.com/.../delawares-decision-viewing-fee-shifting- bylaws-through-a-public-choice-lens.html

For my argument that allowing fee shifting bylaws is the correct public policy outcome, see:

The case for allowing fee shifting bylaws as a privately ordered ...   Nov 17, 2014 ... I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy ... www.professorbainbridge.com/.../the-case-for-allowing-fee-shifting-bylaws- as-a-privately-ordered-solution-to-the-shareholder-litigat.html

Wha's the point of the implied covenant of good faith? Other than generating fees for lawyers?

“Modern contract law has generally recognized an implied covenant to the effect that each party to a contract will act with good faith towards the other with respect to the subject matter of the contract.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). Accordingly, in Delaware as well as other US jurisdictions, it is now accepted that “the implied covenant of good faith and fair dealing … inheres in every contract.” Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 168 (Del. 2002).

The implied covenant of good faith and fair dealing (hereinafter ICGF) comes up at several points in my corporate law courses. And every time it does, I find myself asking: What’s the point? What work does the damned thing do?

Consider, for example, Delaware Supreme Court Chief Justice Leo Strine’s recent opinion in Nationwide Emerging Managers LLC v. Northpointe Holdings LLC, No. 441, 2014 (March 18,2015). The invaluable Francis Pileggi explains that:

This Delaware Supreme Court opinion is notable for at least the following reasons:

(i) it provides the latest iteration of Delaware law on the amorphous but important contract provision imposed by law on every Delaware contract: the implied covenant of good faith and fair dealing. This 32-page opinion reversed the trial court’s finding that the implied covenant did apply to the contract at issue in this case. The Supreme Court’s reversal is another reminder of how challenging it is to make a successful claim based on the implied covenant;

(ii) many basic contract interpretation principles are explained in this opinion, but one that I found especially notable is that before the court can “fix a typographical error” in a contract, it must first satisfy the exacting prerequisites that would entitle one to the remedy of reformation of a contract, just as if it were a material term apparently.

There is much more to commend this opinion for its scholarly analysis and interesting facts, including the backstory of the buyer of an investment advisory firm who thought it was entitled to millions of dollars in damages because it did not think the seller gave it everything that it thought it was buying. That is not an uncommon complaint, but I still find it interesting that it remains such a common allegation.

Indeed. The inherent wimpiness of the ICGF is nicely illustrated by Strine’s statement that:

When a court implies a term in a contract, much less one as detailed as the Purchase Agreement, it must be very careful.

The supporting footnotes explains that:

See Nemec, 991 A.2d at 1125 (“The implied covenant of good faith and fair dealing involves a cautious enterprise, inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated. . . . We will only imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. When conducting this analysis, we must assess the parties’ reasonable expectations at the time of contracting and not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both.”) (internal quotations omitted); Cincinnati SMSA Ltd. P’ship, 708 A.2d at 992 (noting that use of the implied covenant of good faith and fair dealing should be “rare and fact-intensive, turning on issues of compelling fairness”); Allen v. El Paso Pipeline GP Co., 2014 WL 2819005, *11 (Del. Ch. 2014) (noting that the Delaware Supreme Court has “admonish[ed] against a free-wheeling approach” to invoking the implied covenant of good faith and fair dealing), aff’d, 2015 WL 803053 (Del. 2015).

A doctrine that is to be applied cautiously, rarely, and so on is not a doctrine that’s going to do a lot of work.

We see this reluctance in other contexts, as well. In the labor low area, for example, the Third Circuit has noted that “Delaware courts have been reluctant to recognize a broad application of the implied covenant of good faith and fair dealing out of concern that the covenant ‘could swallow the doctrine of employment at will.’” Murphy v. Bancroft Constr. Co., 135 F. App'x 515, 518 (3d Cir. 2005).

The problem is inherent in the test applied by Delaware courts:

Delaware courts often state the test for breach of the implied covenant as follows: “‘is it clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith-had they thought to negotiate with respect to the matter?'" Allied Capital Corp. v. GC–Sun Holdings, L.P., 910 A.2d 1020, 1032 (Del.Ch.2006). Therefore, resort to the implied covenant is only appropriate when the contract is truly silent with respect to the matter at hand, and when the expectations of the parties were so fundamental it is clear that they did not feel it was necessary to negotiate them.

Langley v. Chase Bank USA, N.A., No. 3:10-CV-587-O, 2010 WL 8266202, at *2 (N.D. Tex. Aug. 18, 2010) aff'd sub nom. Langley v. Chase Bank USA NA, 430 F. App'x 312 (5th Cir. 2011).

With all due deference, that test makes no fraking sense. How do you know whether the contract is silent because the parties failed to discuss the issue or because they discussed it and decided to leave the contract silent? This is especially problematic when you consider that Delaware law states that “the implied covenant inquiry initially focuses on the four corners of the contact itself, and parol evidence is only admissible once an ambiguity arises from the text.” Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1033 (Del. Ch. 2006).

Second, if the issue really was so important to the parties, wouldn't you have expected them to address it? If so, isn't silence itself proof that their expectations on the relevant points were not fundamental ex ante?

Third, Delaware law makes clear that the ICGF cannot be used to add terms to the contract. See Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del.Ch.2004) (holding that "the implied covenant should not be used to give plaintiffs “contractual protections that they failed to secure for themselves at the bargaining table"). So what good is it? If the express terms don't solve the problem and you can't add terms to solve the problem, does't the problem remain unsolved?

In sum, I have come to believe that the ICGF is a judicially created tax on transactions for the benefit of lawyers. It generates a lot of litigation, but rarely changes outcomes, so it does the parties no good, while costing them huge legal fees. And, of course, the risk of ICGF litigation justifies ex ante lawyering by transactional lawyers. 

Kill it. Kill it now.

What Josh Fershee Believes About Corporate Governance: Annotated

I'm Catholic. I take creeds seriously. So I was amused and interested by Josh Fershee's statement of belief, which I offer with my annotations:

I believe in the theory of Director Primacy.[1]  I believe in the Business Judgment Rule as an abstention doctrine,[2] and I believe that Corporate Social Responsibility is choice, not a mandate.[3] I believe in long-term planning over short-term profits, but I believe that directors get to choose either one to be the focus of their companies.[4]  I believe that directors can choose to pursue profit through corporate philanthropy and good works in the community or through mergers and acquisitions with a plan to slash worker benefits and sell-off a business in pieces.[5] I believe that a corporation can make religious-based decisions—such as closing on Sundays—and that a corporation can make worker-based decisions—such as providing top-quality health care and parental leave—but I believe both such bases for decisions must be rooted in the directors’ judgment such decisions will maximize the value of the business for shareholders for the decision to get the benefit of business judgment rule protection.[6] I believe that directors, and to [sic; did he mean not?} shareholder or judges, should make decisions about how a company should pursue profit and stability.[7]  I believe that public companies should be able to plan like private companies,[8] and I believe the decision to expand or change a business model is the decision of the directors and only the directors.[9] I believe that respect for directors’ business judgment allows for coexistence of companies of multiple views—from CVS Caremark and craigslist to Wal-Mart and Hobby Lobby—without necessarily violating any shareholder wealth maximization norms.[10] Finally, I believe that the exercise of business judgment should not be run through a liberal or conservative filter because liberal and conservative business leaders have both been responsible for massive long-term wealth creation.[11] This, I believe. 

---

[1] I concur, of course. See my book The New Corporate Governance in Theory and Practice, especially Chapter 1 thereof. See also Director primacy, http://en.wikipedia.org/w/index.php?title=Director_primacy&oldid=621020942 (last visited Mar. 30, 2015).

[2] Again, I concur. See my article The Business Judgment Rule as Abstention Doctrine (July 29, 2003). UCLA, School of Law, Law and Econ. Research Paper No. 03-18. Available at SSRN: http://ssrn.com/abstract=429260

[3] I agree with Henry Manne that an action qualifies as CSR, inter alia, only if it is voluntary and “one for which the marginal returns to the corporation are less than the returns available from some alternative expenditure.” That definition excludes a lot of stuff that we casually call CSR. But as to corporate acts that meet that definition, I think they violate directors’ duties (albeit that in most cases that will not result in liability due to the BJR).

[4] I agree, subject to the caveat that I think too many hedge funds are pressing too many boards to pursue short-term gains at the expense of sustainable long-run shareholder wealth maximization and, accordingly, that boards need more insulation from shareholder pressure. See my essay Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013). Research Handbook on Shareholder Power and Activism, Forthcoming; UCLA School of Law, Law-Econ. Research Paper No. 13-09. Available at SSRN: http://ssrn.com/abstract=2298415

[5] Agreed, subject to the provisos embedded in footnote 3.

[6] See my post "Corporate Law after Hobby Lobby"

[7] Agreed. Again, see my book The New Corporate Governance in Theory and Practice, especially Chapters 3 and 5 thereof.

[8] I’m not sure what that means.

[9] Agreed. Again, see my essay Research Handbook on Shareholder Power and Activism, Forthcoming; UCLA School of Law, Law-Econ. Research Paper No. 13-09. Available at SSRN: http://ssrn.com/abstract=2298415

[10] Agreed.

[11] Now that gets complicated. But those complications are for another day.

Omnicare through a civil procedure lens

Ann Lipton offers an interesting analysis of the pleading implications of the Supreme Court's recent Omnicare decision, which dealt with whether and when opinions can give rise to 1933 Act Section 11 claims.

Tweeting about over-criminalization

Reynolds: You are probably breaking the law right now http://t.co/sMORmEm3CM over criminalization is a growing problem

— Stephen Bainbridge (@ProfBainbridge) March 30, 2015

Three Felonies A Day: How the Feds Target the innocent by Harvey Silverglate is a must read http://t.co/4pELqDVwA2 via @amazon

— Stephen Bainbridge (@ProfBainbridge) March 30, 2015

Delaware's proposed ban on fee shifting bylaws and its application to federal securities litigation

John Coffee highlights an important wrinkle in the legislation proposed by the Delaware state bar to ban fee shifting bylaws and charter provisions:

Fee-shifting bylaws and charter provisions are only precluded “in connection with an intracorporate claim.” What is that? Proposed new Section 115 of the DGCL would define “intracorporate claim” to mean “claims, including claims in the right of the corporation, (I) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (II) as to which this title confers jurisdiction upon the Court of Chancery.” ...

Coffee goes on to point out, I think correctly, that the legislative language appears to have been carefully crafted to permit fee shifting bylaws that apply to federal securities regulation:

Before we assume that the narrow phrasing of Sections 102 and 109 was an oversight by the Corporation Law Council, we need to consider the alternative possibility: namely, that they deliberately wrote it narrowly. Why? This is speculative and may sound cynical, but the Corporation Law Council may have wanted to cover only traditional “Delaware-style” litigation (where the interests of the Delaware Bar on both sides were jeopardized if “loser-pays” fee-shifting were to reduce the volume of such litigation). In contrast, securities litigation tends not to be brought in Delaware nor to involve Delaware counsel in most cases. If the goal was to protect the local Bar, nothing more needed to be done than to exempt “Delaware-style” litigation from the impact of “loser pays” fee shifting.

Because I believe that the bill is intended to protect the interests of the Delaware bar, I find that a very plausible hypothesis.

Coffee goes on to offer a detailed preemption analysis, which concludes--albeit somewhat tentatively--that state laws authorizing (even implicitly) fee shifting bylaws that apply to federal securities regulation would be invalid.

Apropos of which, William Sjostrom has a new article out that deals with the preemption issue:

The Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, the Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, the Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.

Note: The Appendix at the end of the Article includes some data on corporations that have adopted fee-shifting bylaws or charter provisions between May 8, 2014 and March 16, 2015.

The Intersection of Fee-Shifting Bylaws and Securities Fraud Litigation (March 19, 2015). Washington University Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2580943

I recommend reading both pieces.

Related articles

Delaware legislative proposals on fee shifting and forum selection bylaws

Could fee fee-shifting be a disruptive innovation that turns Delaware into, say, Kodak - ProfessorBainbridge.com

An Open Letter to the Delaware Legislature re Forum Selection Bylaws

Why proposed legislation in Delaware won't end loser-pays fight

Cooley lawyer proposes bringing back tenure voting in response to shareholder activism

Badawi on "Influence Costs and the Scope of Board Authority"

Adam Badawi has a really interesting new paper out, which I recommend highly:

Here's the abstract:

Economists have long attributed the existence of firms to their ability to exercise authority through a hierarchy. Superiors can command subordinates through fiat and, in so doing, avoid the negotiation and haggling costs that come with the use of contracts. Yet the body that wields ultimate authority in the firm, the board of directors, exercises relatively little of its plenary authority to run the corporation. Boards typically make only a handful of decisions, they meet only a few times a year, and many directors have a full-time job doing something else. This Article asks why boards put such sharp limits on their day-to-day involvement with the companies they control when the exercise of authority is so central to the existence of firms.

To answer this question, this Article draws on recent developments in the theory of the firm. This work examines how firms are likely to allocate authority among different constituencies, and it identifies the dangers associated with intrafirm lobbying. If the people who care most about a decision do not have the power to make that decision, they may exert substantial effort trying to influence those choices. This Article argues that this intrafirm dynamic can help to explain why boards circumscribe their authority. If directors try to exert too much authority, managers may spend too much of their time trying to influence the board rather than devoting effort to more productive tasks. This theory suggests that the scope of authority the board exercises will depend, in part, on a tradeoff between the minimization of agency costs and lobbying costs. This Article argues that this conception of the board’s role helps to understand why the movement to make boards more independent has not been a uniform success and why corporate law takes a unique approach to the regulation of agency costs.

Influence Costs and the Scope of Board Authority (August 17, 2014). 39 J. of Corp. L. 675 (2014). Available at SSRN: http://ssrn.com/abstract=2579976

Justice Kagan gets off on the wrong foot in Omnicare

What is it about Omnicare, Inc., that generates such awful judicial opinions? The Delaware supreme court's decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003), was one of that Court's worst decisions.

And now in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, Justice Kagan gets off on the wrong foot with her very first sentence:

Before a company may sell securities in interstate commerce, it must file a registration statement with the Securities and Exchange Commission (SEC). 

Granted, she recovered almost immediately by observing in the next paragraph that:

With limited exceptions not relevant here, an issuer may offer securities to the public only after filing a registration statement. 

But, as a FB friend of mine observed, why didn't somebody correct the over broad opening sentence?

As for the merits of the decision, Richard Booth aptly observes that "The bottom line is that Omnicare resolves an issue that most thought settled already, while ignoring the standard(s) of care that remain applicable under the 1933 Act." Alison Frankel similarly noted that:

This is getting to be an annual rite. The U.S. Supreme Court agrees to take a case that could significantly reshape the securities class action business. Defendants get their hopes up, loading the docket with amicus briefs calling on the justices to impose new restrictions on the cases. But ultimately the justices leave the status quo more or less intact, to the relief of shareholder lawyers across the land.

Kevin LaCroix has a typically detailed and cogent analysis of the relevant legal issues on his blog. He also reprints a helpful Skadden client memo on the case.

Corporate Social responsibility-The Policy Debate- A PowerPoint Deck

Biz Law Prawfs on Twitter: The Updated List

Updated business law #professors on twitter list: http://t.co/gluOFWv36D … Glad to welcome @ProfessorOrozco (FSU Business)

— Haskell Murray (@HaskellMurray) March 18, 2015

The latest M&A neologism

New M&A jargon from Tulane: Bumpatrage. Activists buying block & threatening to vote no on signed deal if bid isn't increased.

— Ronald Barusch (@Dealpolitik) March 19, 2015

Cooley lawyer proposes bringing back tenure voting in response to shareholder activism

Cydney Posner:

In “Seeking a Cure for Raging Corporate Activism,” published on March 17, 2015, in the WSJ, the author discusses a technique resurrected from the 1980’s that could, on reexamination, be “a bulwark against short-termers who roam the markets, looking to force buybacks or an untimely company sale.” Known as “tenure voting,” the concept would give investors additional votes if they hold their shares for at least a specified period of time, thus rewarding long-term holders by giving them more say in the future of the company than say, short-term hedge fund activists that may favor short-term profits over long-term business strategies. 

The author notes a number of problems with actually implementing this proposal, to which I would add the stock exchange one vote/one share listing standards, about which I have written occasionally, principally in The Short Life and Resurrection of SEC Rule 19c-4. Washington University Law Quarterly, Vol. 69, Pp. 565-634, 1991. Available at SSRN: http://ssrn.com/abstract=315375

"Modern Lessons from the Early History of Congressional Insider Trading"

I really enjoyed Michael Perino's new paper A Scandalous Perversion of Trust: Modern Lessons from the Early History of Congressional Insider Trading (March 9, 2015), available at SSRN: http://ssrn.com/abstract=2575835:

The Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”) affirms that members of Congress are not exempt from insider trading prohibitions. Legal scholars, however, continue to debate whether the legislation was necessary. Leveraging recent scholarship on fiduciary political theory, some commentators contend that because members owe fiduciary-like duties to citizens, to their fellow members, and to Congress as an institution, existing insider trading theories already prohibited them from using material nonpublic information for personal gain. These arguments, while plausible, are incomplete. They rely on broad conceptions of legislators as fiduciaries, but provide scant evidence that members violate institutional norms when capitalizing on confidential information, a crucial step for fitting their trading into existing legal doctrines.  

This Article fills that gap. Like other scholarship on governmental fiduciaries, it examines the foundational norms in Congress, focusing specifically on an episode not previously discussed in the literature. In 1778, Samuel Chase, a member of the Second Continental Congress, used his knowledge of plans to purchase supplies for the Continental Army to reap a substantial profit by cornering the market for flour in his home state. This Article documents the reaction to the Chase scandal and demonstrates that from the earliest days of the institution congressmen expected that members would not attempt to use confidential information for financial gain. Alexander Hamilton and other critics universally concluded that Chase had committed a “scandalous perversion of [his] trust.” This episode and other evidence compiled here strongly suggest that the STOCK Act was unnecessary to hold members of Congress liable for insider trading.

Of course, I was one of those who thought the STOCK Act was necessary. Perino's analysis of the relevant history almost persuades me I was wrong. Almost.... ;-)

The corporate purpose: Strine versus the Modern Corporation Project

An outfit named The Modern Corporation Project has launched the Purpose of the Corporation Project, which has issued The Modern Corporation Statement on Company Law. They've gotten a bunch of law professors to sign it, some of whom are quite good friends of mine for whom I have a lot of respect.

Most of the statement is perfectly anodyne. As for the more contestable bits, I agree with many of them (e.g., "shareholders do not own corporations; nor do they own the assets of corporations. Shareholders only own shares of stock – bundles of intangible rights, most particularly the rights to receive dividends and to vote on limited issues.").

But then we come to the final of the Statement's 10 principles:

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes. 

This strikes me as demonstrably wrong, for reasons I have frequently expressed here and elsewhere. See, e.g., The relationship between the shareholder wealth maximization norm and the business judgment rule, which explains why the business judgment rule is consistent with the director's' "legal obligation to maximise profits for their shareholders."

But don't take just my word for it. No less a personage that Delaware Supreme Court Chief Justice Leo Strine has just posted an article entitled The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, which is available at SSRN: http://ssrn.com/abstract=2576389.

Here's the abstract:

There is now a tendency among those who believe that corporations should be more socially responsible to pretend that corporate directors do not have an obligation under Delaware corporate law to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion. These advocates of corporate social responsibility contend that Delaware directors may subordinate stockholder welfare to other interests, such as those of the company’s workers or society generally. That is, they do not argue simply that directors may choose to forsake a higher short-term profit if they believe that course of action will best advance the interests of stockholders in the long run, they argue that directors have no legal obligation to make – within the constraints of positive law – the promotion of stockholder welfare their end. But, the problem with that argument is that it is inconsistent with both judge-made common law of corporations in Delaware and the design of the Delaware General Corporation Law (“DGCL”).

More important, pretending that the nation’s leading corporate law is fundamentally different than it is runs contrary to the goal of ensuring that for-profit corporations behave lawfully, responsibly, and ethically. Lecturing others to do the right thing without acknowledging the rules that apply to their behavior and the power dynamics to which they are subject is not a responsible path to social progress. Rather, it provides an excuse to avoid tougher policy challenges, such as advocating for stronger externality regulation and encouraging institutional investors to exercise their power as stockholders responsibly. Those challenges must be confronted if we are to ensure that for-profit corporations are vehicles for responsible, sustainable, long-term wealth creation.

In the paper, Strine sharply criticizes those scholars who "pretend that directors do not have to make stockholder welfare the sole end of corporate governance within the limits of their legal discretion, under the law of the most important American jurisdiction – Delaware." Granted, Strine's talking about long-term shareholder welfare, not short-term profit maximization. And maybe you can reconcile Strine's position with that of the Statement's signatories by invoking that dichotomy. But I think those who attempt to do so need to grapple with the fact that in the accompanying footnote (note number 7 on page 3), Strine cites several of the signatories as being examples of those with whom he is taking issue.

The signatories of the Statement explicitly are seeking to set straight "business experts, the financial press, and economists" who hold "numerous common errors in the way corporate law concepts are understood and applied." But to whom should "business experts, the financial press, and economists" listen? Law professors or the chief judge of "the nation’s leading corporate law" jurisdiction?

Anyway, my thanks to CJ Strine for kindly citing my work in several places. Now kindly go read it.

Debating shareholder activism with Patrick Foulis of The Economist

The UCLA School of Law's Lowell Milken Institute is sponsoring a Private Fund Conference: The Role of Activist Funds. During one session I will be debating the merits of shareholder activism with Patrick Foulis of The Economist, who wrote that magazine's latest paean in favor of shareholder activism.

I'll only have ten minutes to present my basic case, so let me direct interested readers to my latest article on the topic, Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415, which argues that:

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.

Of course, as long time readers know, I have frequently criticized The Economist's coverage of shareholder activism, so here's a trip down memory lane:

The Economist is ineducable on shareholder activism ...

 

Mar 7, 2013 ... The Economist is ineducable on shareholder activism. I still enjoy reading The Economist even though it seems at times to be drifting away from ...

www.professorbainbridge.com/.../the-economist-is-ineducable-on- shareholder-activism.html

 

Everything The Economist says about shareholder activism is wrong ...

 

Feb 13, 2014 ... From this week's leader: An analysis of around 2000 interventions in America during 1994-2007 found not only that the share prices and ...

www.professorbainbridge.com/.../everything-the-economist-says-about- shareholder-activism-is-wrong.html

 

The Economist is at it again, making a case for shareholder activism ...   Oct 9, 2014 ... The latest edition of The Economist is once again beating the drums for shareholder activism. (As I've said before, I love them despite their ... www.professorbainbridge.com/.../the-economist-is-at-it-again-making-a-case- for-shareholder-activism.html

The Economist remains ineducable on the subject of shareholder ...   Feb 8, 2015 ... The Economist is at it again, with yet another paean to shareholder activism. Or, more precisely,two: The latest print issue has both a leader and ... www.professorbainbridge.com/.../the-economist-remains-ineducable-on-the- subject-of-shareholder-activism.html

Update: For an extended defense of my director primacy model of corporate governance, which I think anticipated Patrick's criticisms of it, see my book The New Corporate Governance in Theory and Practice. For an additional treatment of shareholder activism in the context of the broader set of corporate governance issues of the day, see my book Corporate Governance after the Financial Crisis.