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July 2018

07/24/2018

We get mail re the Papa Johns fight: Anybody know the answers to questions 1 and 2? (Updated with answers)

In response to our earlier post on the Papa Johns fight, a friend sent along three additional questions:

(1) Can the board exclude Schnatter from board meetings?  (2) If the board can’t exclude Schnatter from attending meetings, can they (a) prevent him from attending with the assistance of his own legal counsel and other advisers; and/or (b) exclude him from meetings on which he is not a committee member? (3) What rights, if any, does Schnatter have to inspect corporate records? 

To which I replied:

3 is easy. He would be entitled to the same rights as any other shareholder to inspection under DGCL 220. In addition, so long as he remains a director, "Under Delaware law, a director who has a proper purpose is entitled to virtually unfettered access to the books and records of the corporation.” McGowan v. Empress Ent., Inc., 791 A.2d 1, 5 (Del. Ch. 2000).

I am not aware off the top of my head of any Delaware law on points 1 and 2. My best guess would be (1) No. (2) (a) Maybe (b) Probably.

Update: A friend who is an outstanding lawyer sent along these thoughts:

The board can remove him as chairman. Not sure you need a citation - the chair role is not statutory, it's created by the bylaws.

The board also cannot exclude him from board meetings.

The more interesting question is whether they could form an executive committee consisting of everyone but him. This is an open issue in Delaware, but for helpful commentary, see J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 34 Bus. Law. 33, 57 (Winter 2014/2015). ("A largely uncharted area under Delaware law is the ability of a board to use a committee to isolate a blockholder director.... [T]he equitable limitations on this delegation have yet to be explored.").

OTK Associates, LLC v. Friedman, 85 A.3d 696 (Del. Ch. 2014), contains some helpful analysis, though not directly on point, of a dissident director's rights not to be misled and to access privileged advice to the company.

The Laster & Zeberkiewicz article also includes some discussion relevant to Question 2(a). 

Consistent with their duty of care, directors must have an opportunity to review and consider all information material to the decision they are being asked to make. Thus, directors generally must have the right to consult with their own counsel and other advisors to assist in their evaluation of the materials presented to them by management or their fellow directors. While there are no clear Delaware cases on point, a strong argument may be made, by analogy to section 220(d) of the DGCL, that directors generally cannot be prevented from consulting with their own advisors in discharging their fiduciary duties. Even before the enactment of the current iteration of section 220(d), the Delaware courts had recognized an almost absolute right of directors to examine the corporation's books and records, and to rely on advisors in doing so. (Page 47)

It continues:

While not squarely addressing the issue of whether a director may have his attorneys present at a meeting of the board, this reasoning--that the director remains the responsible fiduciary and that the advisors serve to facilitate the director's fiduciary decision-making function--supports the argument that individual directors generally should be permitted to have their advisors present for board meetings to assist with the discharge of their duties on behalf of the corporation and all of its stockholders. There is arguably no principled distinction between what is necessary for a director to understand fixed information created in the past (i.e., books and records) as opposed to information being presented to the board in real time. By analogy, a director generally should be able to have a personal advisor present in the boardroom to assist the director in understanding the information being presented for the purpose of discharging his fiduciary duties to the corporation and all of its stockholders.

The idea that directors could bring personal advisors into the boardroom, however, is understandably not warmly received by management, corporate counsel, and other directors. There is a natural concern that if a director brings a lawyer or other advisors to the meeting, then those advisors will speak out and dominate the conversation. There is also an understandable concern that if one director retains and brings personal counsel or advisors, then other directors will feel the need to bring their own personal advisors. The number of people involved in the meeting could grow to the point where the meeting becomes dysfunctional.

As with many issues, there is a range of reasonable positions on the use of advisors, as well as points where a court would grant equitable relief, either to the director or to the remainder of the board. For example, the premise of board-centric governance is that the directors have the right to deliberate and share views at the meeting. If a director was using counsel or other advisors as his mouthpiece or to dominate a meeting or advocate an agenda that diverges from the director's duty to advance the interests of the corporation and all of its stockholders, a board would have stronger grounds to regulate the involvement of those advisors. A line could be drawn between having the advisors present so they could hear the proceedings and assist the director versus allowing the advisors to participate actively in the meeting. By contrast, if management was making a presentation about a highly technical issue and the director wanted the assistance of a technical expert who could question management, then a restriction barring the advisor from participating may be more difficult to justify. Reflecting the need for case-by-case balancing, a leading treatise states that “[a]s a general rule, directors may be allowed to have their own counsel present, but a board of directors may be able to exclude a director's personal lawyer.”68 The same treatise suggests that the certificate of incorporation and bylaws may restrict the presence of non-directors at board meetings.69 How a court rules in a particular dispute involving a director's personal advisors will likely depend heavily on the facts and equities of the case and whether the respective parties involved appear to have acted reasonably.(Pages 48-49)

FYI: The treatise they cite is R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS § 4.8[B], at 4-25 (Supp. 2014).

Posted at 11:21 PM in Corporate Law |

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The Papa John's Fight Raises Many Interesting Corporate Law Issues

Bloomberg reports that:

Papa John's International Inc.’s embattled founder John Schnatter plans to reach out to shareholders to rally support as he tries to avoid being banished from the company's board, according to a person familiar with the matter.

Schnatter, who resigned as chairman recently after coming under fire for using a racial slur, ... is determined to hold onto his board seat even as the company tries to distance itself from its controversial founder ....

The board announced a so-called poison-pill plan on Sunday, July 22, to fend off any attempt by Schnatter to gain a controlling interest in the company. The former chief executive officer, who left that role in December, is concerned that the board is planning to call a special meeting of shareholders to vote him off the board, the person said.

What a great issue spotter exam question!

  1. Schnatter "voluntarily" resigned a chairman. Suppose he had not done that (memo to law students: do NOT do this on an actual exam; fighting the hypothetical will only annoy the professor and discussing irrelevant legal issues will not win you points). Could the board have removed him as chairman?
    1. I am quite confident act, under Delaware law, the board may remove its chairman from that office. But I cannot lay my hands on the source at the moment. (Anybody got one? If so, send me an email.)
    2. Papa John's bylaws provide that the Chairman of the Board shall be considered an officer of the corporation (art. IV, sec. 1). They further provide that "Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors." (art. iv; sec. 3)
    3. So, yes, the board could remove Schnatter from his post as chairman.
  2. Could the Papa John's board remove Schnatter from the board itself; in other words, remove him as a director?
    1. No. There is no provision under Delaware law for the board of directors to remove one of its members. Indeed, there is case law specifically holding that the board lacks power to remove one of its own members. See, e.g., Dillon v. Berg, 326 F. Supp. 1214 (D. Del. 1971).
    2. Under Delaware General Corporation Law § 141(k) only shareholders are authorized to remove a board member.
  3. Could the board call a special meeting and ask the shareholders to vote to remove Schnatter?
    1. Yes. DGCL 211(d) provides that "Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws."
    2. Papa John's bylaws provide that "a special meeting of stockholders, unless otherwise required by statute, may be called at any time only by (a) the Board of Directors, (b) the Chairman of the Board of the Corporation, or (c) the holders of not less than 60% of the shares entitled to vote at the special meeting."
    3. Hence, the board could call a special shareholder meeting even over Schnatter's objection. Interestingly, however, Schnatter also could have unilaterally called such a meeting if he had remained chairman of the board.
  4. Could the board use written consents to obtain shareholder approval of removing Schnatter from the board without calling a special meeting?
    1. Yes. DGCL section 228(a) provides: "any action ... which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted."
  5. If the board simply waits until the end of the company's fiscal year and then chooses not to nominate Schnatter for reelection as a board member, does he have any entitlement to be nominated?
    1. No. The board could simply wait him out (although for PR reasons it may not want to do so).
    2. The outgoing board of directors nominates a slate of directors to be elected at the next annual meeting of the shareholders. A simple majority is all that's required.
    3. No provision of Delaware law entitles a sitting director to be nominated for reelection.
  6. If the board gets shareholder approval to remove Schnatter or simply fails to renominate him at the end of his current term, is there anyway Schnatter can get back on the board over the other directors' objection?
    1. Sure. He could run a proxy contest asking the shareholders to elect him.
    2. The interesting strategic question would be whether Schnatter runs alone, as part of a short slate, or as part of a full slate seeking to oust the board members who ousted him.
  7. Can the board act against Schnatter's interests with impunity?
    1. No. The case that comes to mind (although it's not on all fours) is Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994).
    2. It held that, absent very unusual circumstances involving some sort of serious overreaching by the majority, a board may not act to undermine the majority's control (as by making a dilutive stock issuance).
    3. Schnatter is not a majority shareholder (he probably isn't even a controlling shareholder under Delaware's restrictive test), but the idea that boards have duties to a company's large shareholders as well as their small ones still holds true.
    4. Is this one of those unusual circumstances? Schnatter's continued involvement with the company may have a negative impact on revenues, but what I think Mendel had in mind were cases like Perlman v. Feldmann, in which the controlling shareholder got a benefit from which the minority shareholders were excluded at which came at their expense.
  8. Why don't you think Schnatter is a controlling person?
    1. Under Delaware law, a shareholder is deemed to have control if the shareholder either owns a majority of the voting stock or exercises control over corporate decision making. See, e.g., Solomon v. Armstrong, 747 A.2d 1098, 1116 n. 53 (Del.Ch.1999)(“Under Delaware law, the notion of a ‘controlling’ stockholder includes both de jure control and de facto control.”).
    2. If the shareholder owns less than 50 percent of the voting stock, plaintiff must show evidence of actual control of corporate conduct. See, e.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1221 n. 8 (Del.1999). Similar standards have been adopted in other jurisdictions, as well. See, e.g.,Locati v. Johnson, 980 P.2d 173, 176 (Or.App.1999)(“In order to be a controlling shareholder who owes fiduciary duties a shareholder must either be (1) an individual who owns a majority of the shares or who, for other reasons, has domination or control of the corporation or (2) a member of a small group of shareholders who collectively own a majority of shares or otherwise have that domination or control.”).
    3. Given the board's demonstrated antagonism to Schnatter and its demonstrated ability to take major actions contrary to his wishes and interests--most notably adopting the poison pill, which is plainly aimed at him--I see no evidence of the requisite de facto control.
  9. Papa John's board has adopted a poison pill.
    1. According to the company press release: "Under the Rights Plan, the rights generally would become exercisable only if a person or group (including a group of persons who are acting in concert with each other) acquires beneficial ownership of 15% or more of Papa John’s common stock in a transaction not approved by the Papa John’s Board of Directors. In that situation, each holder of a right (other than the acquiring person or group, whose rights will become void and will not be exercisable) will have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of Papa John’s common stock having a market value of twice such price. In addition, if Papa John’s is acquired in a merger or other business combination after an acquiring person acquires 15% or more of Papa John’s common stock, each holder of the right would thereafter have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of common stock of the acquiring person having a market value of twice such price. The acquiring person or group would not be entitled to exercise these Rights."
    2. It further states that "Schnatter and his affiliates and associates who currently beneficially own shares of common stock in excess of 30% have been grandfathered under the Rights Plan but will become an acquiring person upon their acquisition of 31% or more of our outstanding shares of common stock, subject to certain exceptions as described in the Rights Plan."
    3. In other words, the company wants to prevent Schnatter from getting control of any additional shares. Why? Because someone who controls 50%+1 of a company's voting shares (absent cumulative voting or dual class stock) gets to elect the entire board of directors even if the holders of all the other shareholders are opposed. If Stinter and his associates already control 30% of the voting stock, they are already well within striking distance of the minimum. (Note that the minimum is actually lower than 50% of the outstanding shares because many shareholders don't vote.) People holding much less than a 30% stake have prevailed in proxy contests. but people holding more than 30% have an even higher chance of success. So the board wants to freeze Schnatter at his present ownership level.

Update: Still more Q&A

Posted at 03:15 PM in Corporate Law |

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07/21/2018

Grilled pork chops with spicy peach glaze

Posted at 08:24 PM in Food and Wine |

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07/20/2018

Are institutional investors still getting inside information almost two decades after Reg FD?

A new paper provides circumstantial evidence for an affirmative answer. To quote Captain Louis Renault, "I am shocked—shocked"

Posted at 11:45 AM in Securities Regulation |

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Conflict mineral rollback forthcoming?

Bloomberg reports:

A draft executive order targeting a requirement that companies trace their use of minerals from war-torn regions in Africa is the latest sign that Republicans are wasting no time rolling back the Dodd-Frank Act's corporate disclosure provisions. ...

Dodd-Frank authorizes the SEC to revise or temporarily waive the requirements of the rule for up to two years if the president determines it is in the national security interests of the U.S. The commission declined to comment.

Back in 2015, Foreign Policy reported that:

At the beginning of September, 70 academics, researchers, journalists, and advocates published a blistering open letter criticizing Dodd-Frank and its backers, asserting that the groups and activists pushing to stop the trade of conflict minerals risk “contributing to, rather than alleviating, the very conflicts they set out to address.” Their campaign “fundamentally misunderstands the relationship between minerals and conflict” in Congo, the signatories said. (Some critics have gone further still, charging that the advocates who sculpted and pushed Dodd-Frank have even misrepresented, in the name of what they see as a greater good, the situation on the ground in Congo.) Two months later, on Nov. 30, the Washington Post published a long investigative feature describing how Dodd-Frank “set off a chain of events that has propelled millions of miners and their families deeper into poverty.”

Earlier this year, Capital & Main reported that:

But the law’s opponents include progressive journalists and academics who say the rule rests on an overly simplistic analysis of a complex crisis. Some say it has done more harm than good to Eastern Congolese mining communities, whose livelihoods are already precarious.

The law has deprived “very vulnerable populations, already very poor people, of their sole means of livelihood,” says Séverine Autesserre, a political science professor at Barnard College and Columbia University, and a former humanitarian aid worker who studies the DRC. “The legislation has actually made the situation worse for these people.”

So I'm inclined to support a rollback.

For prior commentary see:

Breaking news (updated): SEC Conflict MineralsRule partially invalidated by court

The WSJ reports that: A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in...

Posted at 10:22 AM in SCOTUS and Con Law, Securities Regulation, Wall Street Reform | |Comments (0)

The SEC Conflict Minerals Roundtable

The SEC is scheduled to hold a roundtable on conflict minerals disclosures tomorrow. When the roundtable was announced, BNA reported that: The matters to be debated include appropriate reporting approaches for the final rule, the cha...

Posted at 10:52 AM in Securities Regulation | | Comments (0)

Conflict minerals disclosure repeal in the works?

Marcia Narine reports that: Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure ...

Posted at 11:28 AM in Securities Regulation, Wall Street Reform | | Comments (0)

WLF on the SEC's Conflict Minerals Rule

From the Washington Legal Foundation: On March 17, 2017 WLF filed comments with SEC in response to Acting Chairman Piwowar’s January 31 request for input on the Conflict Minerals Rule. WLF seeks repeal of the rule, which implements § ...

Posted at 03:29 PM in Securities Regulation |

Conflict minerals and corporate civil disobedience

Can corporations engage in civil disobedience and, if so, on what issues should they do so? Securities lawyer David Fisher points to conflict minerals disclosure as a case study: "An Act to promote the financial stability of the Unite...

Posted at 09:42 AM in Corporate Social Responsibility, Securities Regulation |

If you're an investor, do you care about conflictmineral disclosure?

Broc Romanek: Last Friday, the SEC extended the deadlines for submitting comments on a trio of Corp Fin proposals: conflict minerals, mine safety and resource extraction disclosure. The new deadline is March 2nd. Last year, I blogged s...

Posted at 11:31 AM in Securities Regulation | | Comments (0)

Posted at 11:24 AM in Securities Regulation, Wall Street Reform |

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07/19/2018

Phill Gramm versus Shareholder Proposals

Posted at 01:25 PM in Shareholder Activism |

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07/13/2018

As I predicted, the ratchet effect is going to save Dodd-Frank. Sigh.

In my book, Corporate Governance after the Financial Crisis, I wrote that:

... the federalization of corporate governance has resulted in rules that were wrong from the outset or may quickly become obsolete, but are effectively carved into stone with little prospect for change.

In sum, the federal role in corporate governance appears to be a case of what Robert Higgs identified as the ratchet effect. Higgs demonstrated that wars and other major crises typically trigger a dramatic growth in the size of government, accompanied by higher taxes, greater regulation, and loss of civil liberties. Once the crisis ends, government may shrink somewhat in size and power, but rarely back to pre-crisis levels. Just as a ratchet wrench works only in one direction, the size and scope of government tends to move in only one direction—upwards—because the interest groups that favored the changes now have an incentive to preserve the new status quo, as do the bureaucrats who gained new powers and prestige. Hence, each crisis has the effect of ratcheting up the long-term size and scope of government.

We now observe the same pattern in corporate governance. As we have seen, the federal government rarely intrudes in this sphere except when there is a crisis. At that point, policy entrepreneurs favoring federalization of corporate governance spring into action, hijacking the legislative response to the crisis to advance their agenda. Although there may be some subsequent retreat, such as Dodd-Frank’s § 404 relief for small reporting companies, the overall trend has been for each major financial crisis of the last century to result in an expansion of the federal role.

And so it goes:

A top Republican lawmaker wants the GOP to move on from its nearly decade-long obsession with killing the Dodd-Frank Act.

Rep. Patrick McHenry (R-N.C.), the GOP frontrunner to become the next chairman of the Financial Services Committee, said his party should instead focus on legislation that will help prevent the next economic crisis and addresses all the ways that technology is rapidly reshaping banking. Such policies might draw bipartisan support, unlike efforts to gut Obama-era financial regulations.

Posted at 12:25 PM |

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Professor Bainbridge on Trulia

As a supplement to the previous post on Florida's decision to adopt the Trulia standard government settlements of M&A litigation, I offer a compilation of prior posts on Trulia:

Will Trulia Drive “Merger Tax” Suits Out Of Delaware?

Anthony Rickey and Keola Whittaker tackle the titular question in a WLF Backgrounder. It concludes: While there are some preliminary indications of a short-term decline in merger litigation, this may not last. Trulia’s influence...

Posted at 05:39 PM in Mergers and Takeovers |

The effect of the Zillow/Trulia decision

Congratulations to Fordham Law Professor Sean Griffith, whose outstanding crusade against the pernicious wave of disclosure-only settlements is now coming to fruition. As Forbes reports: Plaintiff lawyers were warned last year, and no...

Posted at 02:18 PM in Mergers and Takeovers | | Comments (0)

Sean Griffith wins while losing on disclosure-only settlements, but will Delaware lose?

Kudos to Sean Griffith for his campaign to object to disclosure-only settlements of mergers and acquisitions litigation, which typically benefit only the lawyers on both sides. Although Sean lost this round, the court's opinion bodes wel...

Posted at 10:20 AM in Mergers and Takeovers | | Comments (0)

Trulia is working, but imagine if Delaware had kept fee shifting bylaws!

The good news on the litigation front comes from Cornerstone, which reports that: For the first time since 2009, the percentage of M&A deals valued over $100 million and challenged by shareholder litigation dropped below 90 percent in 2...

Posted at 05:02 PM in Corporate Law | | Comments (0)

Is Trulia really working?

A friend and longtime blog reader sent along this response to the preceding post: I actually disagree that Trulia is working, at least for certain values of working. I think they key number is on page 3: while only 64% of M&A deals ...

Posted at 09:56 AM in Corporate Law | | Comments (1)

Will non-Delaware courts effectively gut Trulia?

Alison Frankel reports that: There were two big takeaways from a new Cornerstone Research study of shareholder suits challenging big M&A announcements. First, Cornerstone confirmed what other analysts have previously reported: Plainti...

Posted at 10:58 AM in Corporate Law | | Comments (0)

Posted at 12:03 PM in Corporate Law |

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Props to Sean Griffith: Florida adopts Trulia

My congratulations to the indefatigable Sean Griffith, who has fought the good fight against frivolous M&A litigation and the especially pernicious phenomenon of disclosure-only settlements. In Griffith v. Quality Distribution, Inc., Sean and his counsel persuaded the Florida Court of Appeals to adopt the Delaware rule laid out in In re Trulia:

In In re Trulia, the Delaware Court of Chancery discussed the proliferation of "disclosure settlements" and the problems associated with a request to approve such a settlement. 129 A.3d at 887, 891-99. The court was asked to approve a proposed settlement of a class action brought by shareholders of Trulia, Inc., for breach of fiduciary duty relating to a proposed merger with Zillow, Inc. 129 A.3d at 887-88. The parties engaged in limited discovery, and within four months after the complaint was filed, the shareholders entered into an agreement to settle. Id. at 887.

In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia's stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs' counsel.

Id. at 887. The agreement provided that plaintiffs' counsel could seek an award of attorney's fees and expenses up to $375,000. Id. at 889-90.

The Court of Chancery explained that "disclosure settlements" are becoming increasingly more common:
Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target's directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.
...
In just the past decade, the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014. Only recently has the percentage decreased, falling to 87.7% in 2015 due to a decline near the end of the year. In Delaware, the percentage of such cases settled solely on the basis of supplemental disclosures grew significantly from 45.4% in 2005 to a high of 76.0% in 2012, and only recently has seen some decline. The increased prevalence of deal litigation and disclosure settlements has drawn the attention of academics, practitioners, and the judiciary.
Id. at 891-92, 894-95 (footnotes omitted). The court explained how such settlements are achieved in these class action lawsuits:
In such lawsuits, plaintiffs' leverage is the threat of an injunction to prevent a transaction from closing. Faced with that threat, defendants are incentivized to settle quickly in order to mitigate the considerable expense of litigation and the distraction it entails, to achieve closing certainty, and to obtain broad releases as a form of "deal insurance." . . . .
Once the litigation is on an expedited track and the prospect of an injunction hearing looms, the most common currency used to procure a settlement is the issuance of supplemental disclosures to the target's stockholders before they are asked to vote on the proposed transaction. The theory behind making these disclosures is that, by having the additional information, stockholders will be better informed when exercising their franchise rights. Given the Court's historical practice of approving disclosure settlements when the additional information is not material, and indeed may be of only minor value to the stockholders, providing supplemental disclosures is a particularly easy "give" for defendants to make in exchange for a release.
Id. at 892-93 (footnotes omitted). The court further explained that "[o]nce an agreement-in-principle is struck to settle for supplemental disclosures, the litigation takes on an entirely different, non-adversarial character," which the court described as problematic. Id. at 893.
The lack of an adversarial process often requires that the Court become essentially a forensic examiner of proxy materials so that it can play devil's advocate in probing the value of the "get" for stockholders in a proposed disclosure settlement. . . . In an adversarial process, defendants, armed with the help of their financial advisors, would be quick to contextualize the omissions [in the original disclosures] and point out why the missing details are immaterial (and may even be unhelpful) given [information] already disclosed in the proxy. In the settlement context, however, it falls to law-trained judges to attempt to perform this function, however crudely, as best they can.
Id. at 894. The court opined that these dynamics and the court's willingness to approve such settlements "have caused deal litigation to explode in the United States beyond the realm of reason." Id.
The court concluded that in light of the concerns expressed above, disclosure settlements should be met with disfavor "unless the supplemental disclosures address a plainly material misrepresentation or omission[] and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently." Id. at 898. The supplemental information will be considered plainly material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote" or, in other words, if "from the perspective of a reasonable stockholder, there is a substantial likelihood that it 'significantly alter[s] the "total mix" of information made available.' " Id. at 899 ....

The Florida court noted that:

The Seventh Circuit applied the In re Trulia decision in rejecting a proposed class settlement in what the court termed a "strike suit" or "deal litigation." Hays v. Walgreen Co., 832 F.3d 718, 721 (7th Cir. 2016). ... Recognizing that "Delaware's Court of Chancery sees many more cases involving large transactions by public companies than the federal courts of [the Seventh Circuit]," the court adopted the standard set forth in In re Trulia. Id. at 725.

The Florida court likewise "recognize[d] the complexity of merger litigation and the Delaware courts' expertise in such matters." It therefore "adopt[ed] the standard set forth in the well-reasoned In re Trulia decision and clarified in the Hays decision."

Posted at 12:01 PM in Corporate Law |

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07/11/2018

The implications of investor ideology for Delaware's shareholder ratification doctrine

It seems increasingly clear that Delaware courts are punting key corporate decisions to the shareholders. Ron Gilson made this point about hostile corporate takeovers 15 years ago, arguing that Delaware law on point had "developed into an unexplained and likely inexplicable preference that control contests be resolved through elections rather than through market transactions."

We see the same shift these days with respect to mergers and acquisitions generally, as well as a variety of shareholder transactions. In Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 314 (Del. 2015), Delaware Chief Justice Leo Strine wrote that "where the stockholders have had the voluntary choice to accept or reject a transaction, the business judgment rule standard of review is the presumptively correct one and best facilitates wealth creation through the corporate form." Even where the transaction involves a controlling shareholder, approval by the disinterested and independent shareholders has become a critical factor in setting the standard of review courts will apply. See, e.g., Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (holding that "where the controller irrevocably and publicly disables itself from using its control to dictate the outcome of the negotiations and the shareholder vote, the controlled merger then acquires the shareholder-protective characteristics of third-party, arm's-length mergers, which are reviewed under the business judgment standard").

The logic behind this trend seems to be an assumption that shareholders can protect their interests through the vote. As Corwin explained, "When the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them." See also In re Lear Corp. S'holder Litig., 926 A.2d 94, 114–15 (Del. Ch. 2007) (“Delaware corporation law gives great weight to informed decisions made by an uncoerced electorate. When disinterested stockholders make a mature decision about their economic self-interest, judicial second-guessing is almost completely circumscribed by the doctrine of ratification.”).

A key difficulty I have with this line of cases is that it seems to assume homogeneity of interests on the part of shareholders. We know that voting--in any setting--is more likely to develop serious pathologies when the constituents have competing interests. The divergent interests of shareholders and stakeholders, for example, is one reason only one constituency gets to elect directors. See generally Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 612 (2006) ("The remaining question is why shareholders are the chosen constituency, rather than employees. ... One plausible answer rests on the divergence of interests within constituency groups."). Likewise, it is the heterogeneity of interests among shareholders that is a major reason corporate law is premised on director rather than shareholder primacy. See id. at 608 ("The divergence of interests ... looms large as a bar to the use of consensus in capitalist firms."). See also Michael C. Schouten, The Mechanisms of Voting Efficiency, 2010 Colum. Bus. L. Rev. 763, 773 (2010) ("When shareholders have heterogeneous preferences and some vote with a view to maximizing their private interests rather than their pro-rata share of the firm's future cash flows, the probability that a majority of the shares is voted for the correct option decreases dramatically."). See generally Kenneth A. Stahl, The Challenge of Inclusion, 89 Temp. L. Rev. 487, 506 (2017) (arguing with reference to voting within communities that "the more homogeneous the population, the more likely that voters will have a fairly uniform set of preferences that can be satisfied without interest group conflict and without creating a resentful class of 'losers'").

Now we get to the nub. It has long been clear that shareholders have heterogeneous interests. Lynn A. Stout, Are Stock Markets Costly Casinos? Disagreement, Market Failure, and Securities Regulation, 81 Va. L. Rev. 611, 616 (1995) (“[I]n a world of costly and imperfect information, rational investors are likely to form heterogeneous expectations--that is, to make different forecasts of stocks' likely future performance.”). My friend and UCLAW colleague Iman Anabtawi and the late Lynn Stout have further argued that "as shareholders are becoming more powerful, their interests are becoming more heterogeneous. Increasingly, the economic interests of one shareholder or shareholder group conflict with the economic interests of others. The result is that activist shareholders are using their growing influence not to improve overall firm performance, as has generally been assumed, but to profit at other shareholders' expense." Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev. 1255, 1258 (2008).

All of which leads me to the new paper that triggered this post, namely Bolton, Patrick and Li, Tao and Ravina, Enrichetta and Rosenthal, Howard, Investor Ideology (June 11, 2018). Columbia Business School Research Paper No. 18-21; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 557/2018. Available at SSRN: https://ssrn.com/abstract=3119935:

This paper estimates a spatial model of proxy voting, the W-NOMINATE method for scaling legislatures, and maps institutional investors onto a left-right dimension based on their votes for fiscal year 2012. The far-left are socially responsible and the far-right are “money-conscious” investors. Significant ideological differences reflect an absence of shareholder unanimity. The proxy adviser ISS, similar to a political leader makes voting recommendations that place it center-left; to the left of most mutual funds. Public pension funds and other investors on the left support a more social and environment-friendly orientation of the firm and fewer executive compensation proposals. (Emphasis supplied.)

Instructively, there appears to be heterogeneity not only with respect to obviously political issues falling within the corporate social responsibility rubric but also as to financial and investment decisions.

All of this seems to call into question the logic of the trend in Delaware law towards treating the shareholder vote as dispositive. If it is the case, as seems to be true, that investors have differing interests and preferences, we cannot trust ratification votes to be free of pathologies, which call the validity of that vote into question.

Maybe Delaware needs to rethink the trend of its ratification doctrines. But. at least, the Delaware courts need to come up with a better justification for the direction they've taken.

Update: A friend sends along this comment:

 I think Patrick's paper focuses on votes on Rule 14a-9 shareholder proposals, not on merger votes, the main focus of Delaware "ratification" stuff, where I think that shareholder unanimity would generally prevail (or at least would not have a "political" dimension).

It is true that the paper focuses on proposals. It's not obvious to me, however, that ideology would be irrelevant to other issues n which shareholders vote. A fairly obvious example, it seems to me, would be where shareholders vote to ratify executive compensation plans proposed by the board. Granted, however, mergers seem on first blush to be less overtly political.

Posted at 02:13 PM in Corporate Law |

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07/09/2018

Bainbridge and Henderson on Limited Liability Gets a Strong Review

German scholar Thilo Kuntz has published a fairly lengthy essay reviewing my book with Todd Henderson, Limited Liability: A Legal and Economic Analysis. See Thilo Kuntz, Asset Partitioning, Limited Liability and Veil Piercing: Review Essay on Bainbridge/Henderson, Limited Liability. 19 European Business Organization Law Review 439-463 (2018), which unfortunately is not open access and is available to non-subscribers as a preview only.

Fortunately, however, a working draft is available on SSRN: Kuntz, Thilo, Asset Partitioning, Limited Liability and Veil Piercing - Review Essay on Bainbridge/Henderson, Limited Liability (March 14, 2017). European Business Organization Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2949685

Here's the working draft's abstract:

One of the core features of modern corporate law is the partitioning of the corporation’s assets and the shareholders’ (private) assets affirmatively and defensively in the sense that the claims of a corporation’s creditors are prior to those of shareholders’ personal creditors with respect to corporate assets and that claims of the shareholders’ personal creditors have priority over those of corporate creditors with respect to shareholders’ private assets. The second principle is the rule of limited liability. What makes it special is that it may not be created by contract – or only under severe restrictions. Courts in many jurisdictions curtail the rule of limited liability by doctrines such as “piercing the corporate veil”, exposing shareholders to a creditor’s claim and therefore to personal liability for the corporation’s debts. The circumstances giving cause to such measures are not clear, however. Additionally, in historical perspective, combining business entities with defensive asset partitioning is not a self-evident maneuver; even modern scholars challenge the idea of limiting liability in general, at least vis-à-vis tort creditors. Stephen Bainbridge and M. Todd Henderson thus take up an important and timely topic with their book on limited liability and veil piercing. Considering the many aspects they discuss, their book provides a welcome chance not just to write a short review, but to take up some general issues of asset partitioning and veil piercing. This review essay, accepted for publication in the European Business Organization Law Review, runs the following course: After providing a historical perspective on limited liability in section II., section III. turns to its relationship with incorporation. Section IV. deals with the question why limited liability should be accepted at all, thus preparing the stage for a look at alternative approaches in section V.

And here's the conclusion from the final, as published version:

Bainbridge and Henderson’s book has a lot to offer for readers interested in limited liability and veil piercing. They provide a rich survey of the most important US literature in the field and add to the discussion by bringing new and interesting arguments to the table. Taking into account how long this debate has been going on and the sheer mass of contributions, this is by no means a small feat. Furthermore, that the authors try to provide a comparative view is a welcome and enriching move as it pushes the academic debate to a broader forum, showing the importance and fruitfulness of comparative approaches. Bainbridge and Henderson make a strong case for abolishing veil piercing, offering a whole package of arguments in favor of reform. Their treatment of veil piercing concepts, the work’s prime rib, is a rewarding read.

I am sure Todd will join me in thanking Professor Kuntz for providing such a detailed, thoughtful, and helpful analysis of our work.

Posted at 06:49 AM in Books, Dept of Self-Promotion |

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07/07/2018

Beef Medallions with Caramelized Tomato Mushroom Pan Sauce, Broken Spaghetti Risotto, Chopped Caprese Salad, and Fattoria di Fèlsina Berardenga Fontalloro 2011

IMG_0155For dinner last night, I made two recipes from Chef John of the Food Wishes You Tube channel: Beef Medallions with Caramelized Tomato Mushroom Pan Sauce (like Chef John I used an All-Clad skillet without a nonstick coating; it develops great fond) and Broken Spaghetti Risotto. I also made a chopped Caprese salad from a Food Network recipe. I couldn't get the cut spaghetti locally and although I could have just cut up some regular spaghetti, I bought some Barilla Cut Spaghetti from Amazon. All three were delicious.

IMG_0154I poured a 2011 Fattoria di Fèlsina Berardenga Fontalloro. Still very young with firm tannins, but it's well balanced with deep raspberry, cherry, and plum flavors and aromas. For near term consumption I recommend double decanting. Or cellaring for another 5 years. Grade: 91

 

 

Posted at 03:15 PM in Food and Wine |

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07/06/2018

Conservatives Against Capitalism: A Review Essay

I've posted to SSRN a new paper:Book Review Essay: Conservatives Against Capitalism: From the Industrial Revolution to Globalization by Peter Kolozi (July 2, 2018). American Affairs, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 18-06. Available at SSRN: https://ssrn.com/abstract=3206963

In Conservatives Against Capitalism, Peter Kolozi, an associate professor with the Department of Social Sciences at the City University of New York, discusses the long tradition of skepticism about—and sometimes outright hostility to—capitalism among important strains of American conservative thought. Kolozi takes a chronological approach focusing on key thinkers representative of the prevailing conservative school of thought in each of six periods: John C. Calhoun, James Henry Hammond, and George Fitzhugh representing the antebellum defenders of slavery; Brook Adams and Theodore Roosevelt of the Progressive Era; the Southern Agrarians; post-war traditionalists such as Russell Kirk and Robert Nisbet; Reagan-Bush era neoconservatives; and paleoconservatives such as Patrick Buchanan and Samuel Francis.

Posted at 02:18 PM in Dept of Self-Promotion, Politics | | Comments (0)

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07/04/2018

Still more on David Yosifon's book Corporate Friction

Posted at 06:16 AM |

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07/03/2018

Reading David Yosifon's Corporate Friction

I'm reading David's new book. And so should you.

Posted at 05:32 PM in Books, Corporate Law, Corporate Social Responsibility |

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