ProfessorBainbridge.com

Keith Sharfman and Bill Carney on Aruba and appraisal arbitrage causes me to ask "why not just abolish appraisal"?

They begin with a brilliantly concise statement of the problem:

The corporate law world has been abuzz of late about the commendable effort by Delaware’s courts to scale back “appraisal arbitrage”: a trading strategy predicated on deal dissenters receiving via appraisal litigation more for their shares than the deal prices from which they dissent. For years, parties engaging in appraisal arbitrage enjoyed the opportunity to initiate essentially risk free appraisal litigation with substantial upside potential, because it was assumed by courts and litigants that “fair value” entitled dissenters to at least the price of the deal they were rejecting and potentially more. But happily, this misunderstanding and misapplication of the law of appraisal now appears finally to have reached its end.

They continue:

The Court of Chancery Court then struck yet a further blow in 2018 in its appraisal decision in Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., which awarded deal dissenters even *less* than the deal price. Relying on a previously underenforced provision of Delaware’s appraisal statute, Section 262(h), which excludes from fair value any value that is uniquely associated with the deal from which appraisal-seeking shareholders dissent, the Court of Chancery awarded to the dissenters as fair value only their shares’ public trading price prior to the deal’s announcement.

They go on to discuss various aspects of the debate. Do go read the whole thing. And then answer me this question: Why not just abolish appraisal?

I also commend to your attention my post from 2012 on appraisal.

A few comments on the not very interesting result that CEOs historically have given a lot of money to Republicans and the agenda for which it will be deployed

Atrios breathlessly reports on a "first of its kind" (!) study showing that "CEO political donations favor GOP." [Insert obligatory Casablanca reference here.]

The study, by professors from Harvard Law School [which is important because Harvard is Harvard and that makes anything better] and Tel-Aviv University, classifies a CEO as a Republican or a Democrat if they gave at least two-thirds of their campaign contributions to one party or the other. CEOs that distributed their contributions more evenly between the two major parties were classified as neutral.

The study is by Alma Cohen, Roberto Tallarita, Moshe Hazan and David Weiss, and is up at SSRN. They look at campaign contributions by "public-company CEOs during the 18-year period of 2000 - 2017."

Although the study claims to be politically neutral, including with respect to the issue of mandating corporate disclosure of political campaign spending, it's worth noting that Cohen and Tallarita are both proteges and co-authors of Lucian Bebchuk, and I strongly suspect their study will be deployed by Bebchuk and others to once again argue in favor of mandating corporate disclosure of political campaign contributions. Why Bebchuk and his proteges are so determined to help Democratic politicians defund Republicans continues to puzzle me, but so be it.

My principal reaction to the paper, however, is to ask "so what?" The interesting divide in American politics these days is not between "Republican" corporate elites and "Democrat" corporate elites, but between elites and non-elites. This was the principal focus of my recent Pound Lecture, of course, which you can view here. On a growing set of issues, the GOP base -- i.e., the people who joined the Tea Party and voted for Donald Trump -- are at odds with the Business Roundtable types about which the study is exclusively concerned.

Obviously, there are plenty of leftwing CEOs like Salesforce.com CEO Marc Benioff, for example, who promote progressive social activism. But we increasingly see nominally Republican CEOs with impeccable Business Roundtable credentials using their names and corporate muscle to campaign directly against GOP base-supported laws governing social issues. 

In an important recent contribution to the legal literature on corporate activism, Tom Lin discusses in detail the widespread hostile reaction by major corporations to North Carolina’s so-called “Bathroom Law” and various early Trump administration initiatives.  They serve as leading examples of what he calls “unprecedented contemporary corporate social activism.” I'd also mention a Francis Pileggi post from May 2016, in which he observed that:

Yesterday’s Wall Street Journal featured a front page article about an apparently increasing number of CEOs of public companies who use their companies’ resources, and wield their companies’ resources as a sword, to advocate in their official corporate capacities to advance their favorite social agendas–or to oppose legislation on social policies that they disfavor.

In other words, all the interesting action these days is taking place at the growing rift between CEOs who simultaneously are crony capitalists and social justice warriors on the one hand and the folks Joel Kotkin calls the American yeomanry. 

So here's what I think is the interesting story: Yes, CEOs historically gave a lot of money to Republicans, which is not surprising in the slightest, because the Republicans were (slightly) more pro-big business and pro-rich people than the Democrats. The DC GOP elite have long been bought and paid for by corporate America. But what about the future? Trump's election infuriated large swaths of the Business Roundtable CEO community. Since Trump took office, the split has become even more obvious: How many of the CEOs in the study do you think support Trump's policy on the border wall, immigration, trade, etc.., let alone hot button social issues? Will lower taxes and reduced red tape be enough to keep CEOs in the Republican coalition? On these issues, the authors are silent.

To be sure, one almost might feel sorry for the corporate titans, who increasingly look homeless. Neither the Trump Base nor the progressive wing of the Democratic Party are particularly fond of them. I'd bet a lot of them were pondering Joe Biden until his history of being handsy caught up with him this week.

Bainbridge & Henderson's Outsourcing the Board in Quartz

Quartz published a long article on my book with Todd Henderson, Outsourcing the Board. Sadly, it's behind a paywall. But you can buy the book!

A couple of comments on Kent Greenfield's amicus brief in Washington vs. Arlene's Flowers and Ingersoll vs. Arlene's Flowers

Kent Greenfield has posted an amicus brief he submitted in pending religious freedom litigation in the State of Washington: Brief for Professor Kent Greenfield As Amicus Curiae in Support of Respondents, State of Washington vs. Arlene's Flowers and Ingersoll vs. Arlene's Flowers. 

This amicus curiae brief addresses a fundamental state-law premise of Appellants’ constitutional claims that has gone largely unexplored in the prior briefing: whether Arlene’s Flowers, a Washington for-profit corporation, may obtain an exemption from generally applicable laws based on the religious beliefs of a shareholder, Mrs. Stutzman. Citing the U.S. Supreme Court’s decisions in Burwell v. Hobby Lobby Stores and Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission, Appellants assert that “Arlene’s free-exercise rights are synonymous with Mrs. Stutzman’s.” Those two cases, however, had nothing to do with Washington corporate law and took no stance on the authority of Washington corporations to raise constitutional claims of their shareholders. The assertion that Mrs. Stutzman’s rights are synonymous with the corporation depends on Washington state law and runs counter to the foundational Washington corporate law principle, expressed in Grayson v. Nordic Constr. Co., that “[a] corporation exists as an organization distinct from the personality of its shareholders.”

This amicus curiae brief addresses the significance of corporate separateness to Washington’s law of corporations and explains how Appellants’ arguments rest on a conflation of those distinctions. This Court’s consideration of the constitutional claims in this case will be aided by a full understanding of these important, antecedent aspects of Washington law.

A couple of thoughts. First, although Greenfield does a commendably thorough job of analyzing what Washington state courts say about veil piercing, I'm not convinced Washington courts practice what they preach. The empirical evidence suggests that courts applying Washington state corporate law in fact pierce the corporate veil with not inconsiderable regularity. Bob Thompson's famous 1991 study found that Washington courts pierced in 44.44% of the cases (table six on p. 1051). Importantly, the national pricing rate was 40.18% (table one on p. 1048). And over 30 states had lower piecing rates than Washington (table 6 on p. 1051). To be sure, there were only 27 Washington cases in his database, which makes drawing firm statistical conclusions difficult, but 44% is still 44%. And Washington was still above the national rate and there were still a lot of states with lower piercing rates.

Peter Oh's 2010 study found an almost identical piercing rate by courts applying Washington law at 44.93% (table 6 at p. 116). His study did suggest that Washington law was slightly more reticent about veil piercing than the national norm, as 25 states had a piercing rate of 50% or higher (p.114). Overall, state courts pierced 48.89% of the time (table 5 at p.112), which puts Washington law slightly below the norm.

Even so, however, the bottom line would seem to be that courts applying Washington state law are not as reluctant to pierce as their rhetoric claims.

Second, it is certainly true that I am not a fan of the veil piercing doctrine. Oh's claim that "Stephen Bainbridge ... despises veil-piercing" (p.96) puts it a tad more strongly than I might, but it's not an unfair comment.

Having said that, however, I continue to think that courts would do well to adopt the doctrine of reverse veil piercing as a tool for deciding when a corporation may assert constitutional religious freedom claims on behalf of its shareholders. To put it crudely, veil piercing stinks, but it stinks less than the other options.

in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, which was published in The Green Bag, Vol. 16, No. 3, Spring 2013, and is available at SSRN: https://ssrn.com/abstract=2229414, I argued that:

Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.

Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.

At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.

In my subsequent article, A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, 100 Virginia Law Review Online 1 (2014), available at SSRN: https://ssrn.com/abstract=2399638, I took on 44 corporate and criminal law professors (including Greenfield), arguing that:

The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.

On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act.

Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.

Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.

In it, by the by, I passed along what I thought was a particularly keen observation by a prominent practitioner:

Corporate law expert Keith Paul Bishop conducted a thought provoking analysis of the Brief by substituting “social responsibility” for “religious” in some of the Brief’s most breathless passages. He notes that, if the transfer of stockholder religious beliefs to the corporation would be ‘overwhelming,’ why wouldn’t the same be true of beliefs regarding climate change, the environment, or other beliefs animating the corporate social responsibility movement?” Keith Paul Bishop, 44 Law Professors Make A Case Against Corporate Social Responsibility, California Corporate & Securities Law Blog (Feb. 10, 2014), http://calcorporatelaw.com/2014/02/44-law-professors- make-a-case-against-corporate-social-responsibility/. He concludes that, “[i]f corporations can’t have religious beliefs, then it follows that they can’t believe in climate change, sustainable investment or any other beliefs embraced by the corporate social responsibility movement.” Id.

Indeed.

Note that I am emphatically not taking a position on how the pending cases should come out. I have not grappled with, among other things, the procedural posture of the cases. Greenfield may well be correct in his arguments about the factual specifics of those issues. indeed, given that he's a careful scholar, I assume he is.

Given that courts applying Washington law pierce almost half the time, however, to the extent veil piercing is at issue in these cases perhaps the Washington courts should consider reverse veil piercing as a way of solving the basic legal problem.

Memo to Ken Bertsch: If you don't like dual class stock, don't buy it

Letter to the WSJ Ken Bertsch, Executive Director of the Council of Institutional Investors:

Your editorial “Dueling over Lyft’s IPO” (March 23) misses what the Council of Institutional Investors (CII) believes Lyft should have done—“sunset” founder supervoting rights in a reasonable period.

While one-share, one-vote worked for Lyft as a private company, its board believes that as a public company founders should have 20 votes per share. Well, fine. But don’t pretend that IPO markets can adequately price in the risk of this structure 10, 20, 30 years down the road. The CII requested that Lyft include a time-based sunset on the dual-class structure of no more than seven years, renewable for multiple additional terms by shareholders voting on a one-share, one-vote basis. Academic evidence suggests that special voting rights that entrench managers can be damaging in the longer-term. And public company voting structures are difficult to change.

My guess is that Google (now Alphabet) shareholders would have approved an additional seven-year term in 2011—seven years after the IPO—but that Facebook shareholders this year (seven years after that company’s IPO) might hesitate, given questions on Mark Zuckerberg’s leadership. Let’s build in an accountability moment so that shareholders can affirm that continued protection for founders makes sense.

You know how people are always telling us that if we don't like a TV program, just change the channel. Why shouldn't the same apply to shareholder activists and their enablers? If they don't like a company's corporate governance, they should just go buy stock in some other company.

Video of my talk on corporate purpose in a populist era as the 2019 Pound Lecturer at University of Nebraska Law School

Link

Delaware Supreme Court mum at Aruba appraisal oral argument. Also, what's the point of appraisal in the case of a public held target any more?

Last year (Feb 18), VC Travis Laster issued an appraisal decision in re Aruba Networks, which found that the deal price of $24.67 was fair in light of the unaffected market price of Aruba stock of $17.13. He explained:

The Delaware Supreme Court’s decisions in Dell and DFC endorse using the market price of a widely traded firm as evidence of fair value. As in Dell and DFC, the market for Aruba’s shares exhibited attributes associated with the premises underlying the efficient capital markets hypothesis. Under Dell and DFC, these attributes provide sufficient evidence of market efficiency to make Aruba’s stock price “a possible proxy for fair value.” Aruba’s thirty-day average unaffected market price was $17.13 per share. ...

... When the merger consideration of $24.67 per share is compared to the unaffected market price of $17.13 per share, it is not possible to say that Aruba’s stockholders were exploited. The deal price therefore provides reliable evidence of fair value.

The Dell and DFC decisions recognize that a deal price may include synergies, and they endorse deriving an indication of fair value by deducting synergies from the deal price. The respondent’s expert cited a study that provides data on the base rates at which targets successfully extract a share of anticipated synergies from acquirers. Using that data, this decision arrives at a midpoint valuation indication for Aruba of $18.20 per share. ...

In this case, the best evidence of Aruba’s fair value as a going concern, exclusive ofany value derived from the merger, is its thirty-day average unaffected market price of $17.13 per share. I recognize that no one argued for this result. I also recognize that the resulting award is lower than Aruba’s proposed figure of $19.75 per share.

Not to mention being more than $7 below the deal price.

The opinion further reminds us that dissenting shareholders are not entitled to have the appraised value include either synergies created by the merger or any reduction in agency costs from the merger. Both of these are elements of value arising "from the accomplishment or expectation of the merger.” I continue to find it rather odd that appraisal would exclude such considerations, since synergies and reduced agency costs are often the chief motivating factors behind an acquisition. But their exclusion stems from the rather absurd notion that the purpose of appraisal is to give the dissenting shareholder what he would have gotten if the merger had never happened as opposed to a fair control premium.

One wonders why anyone continues to opt for appraisal in the case of an acquisition of a publicly traded target, given that the odds of getting less than the merger price are now quite high. 

In any event, the Delaware Supreme Court heard oral argument on the case this week. And no justice asked a question. Talk about a cold bench!

Greetings from Lincoln, Nebraska, where I’ll be giving the Roscoe Pound Lecture

I’m honored to have been asked to give the University of Nebraska School of Law’s Roscoe Pound Lecture, which I’ll be doing tomorrow. My lecture is based on my paper, Corporate Purpose in a Populist Era.

Can a CEO fire the board?

No. For y longer answer on Quora, go here.

Can shareholders fire the CEO

My answer at Quora

Nevada adopts fee-shifting: Should Delaware worry?

Benjamin Edwards reports:

Earlier today, Senator Cancela introduced Senate Bill 304 in Nevada.  Although the bill's text is not yet available on the website, the digest reveals that the legislation will explicitly authorize fee-shifting provisions under Nevada corporate law.  (Update--the text of the draft legislation is now available.)

The digest indicates that it will also do a few other interesting things if it passes:

• Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
• Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
• Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
• Authorize Nevada-specific forum-selection provisions;
• Authorize the Nevada Secretary of State to issue rules allowing lawyers to indemnify stockholders for any possible fee-shifting;
• Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada; and
• Require the Secretary of State to study fee-shifting's impact on the business environment and report back to the legislature in three years.

Despite the problems with shareholder litigation, Delaware opted to ban fee-shifting right as a mass of public companies began to adopt it. This, of course, didn't stop corporations chartered in Nevada and other states from adopting fee-shifting provisions anyway.  By my count, seven publicly-traded Nevada corporations already have fee-shifting charter or by-law provisions. (Disclosure:  I consulted with legislative counsel on the initial draft. Nobody paid me any money.) ...

Delaware's decision to ban fee-shifting was and remains controversial.  Despite Delaware's decision to go the other way, fee-shifting has been widely discussed and proposed by many informed commentators as a way to address the issue. Stephen Bainbridge even noted that Delaware's position on fee-shifting was a "self-inflicted wound" and "contrary to sound public policy and adverse to Delaware’s own interests."  His short piece on the controversy argued that jurisdictions where "the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws."  Nevada may fit that description.

My guess is that the Nevada statute will have an effect on incorporation decisions at the margins, but not a major effect. Cremers and Sepe’s analysis of reincorporation decisions found that between 1996 and 2011 356 companies reincorporated into Delaware. During the same time period Nevada picked up only 19. https://finance.eller.arizona.edu/sites/finance/files/ssepe.cs_delaware.02-15.pdf During the same period Delaware’s overall percentage of firms incorporated in it rose from 52% to 65%. There’s basically no evidence that Nevada poses a viable threat to Delaware’s dominance.  Fee shifting alone may affect some decisions at the margin, but Delaware’s dominance will require not just Nevada adding stuff like fee shifting but Delaware making serious errors. It’s like a race in which the winner is so far ahead that 2^nd place can only catch up if the winner stumbles.

Update: Kevin LaCroix observes:

Nevada’s legislature is not the first state legislature to take up proposed legislation authorizing fee-shifting in connection with shareholder litigation. As I discussed in a post at the time, in 2014 the Oklahoma legislature adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here. The Oklahoma legislation is noteworthy in a number of respects, including the fact that it makes the fee-shifting to the unsuccessful litigant mandatory and does not even require the company involved to have a fee-shifting charter provision.

While Oklahoma has gone before, Nevada’s move may be more significant if for no other reason that, as Professor Edwards notes (citing to this article), “Nevada is the leading alternative to Delaware corporate law.” Other states did not follow after Oklahoma’s lead, but if the Nevada legislation were to pass, other states might well follow the lead, as a part of the time-honored “race to the bottom” competition between states when it comes to corporate law provisions.

Point well taken.

Is the SEC finally going to take action on proxy advisory companies?

A report by Bloomberg suggests that the answer might be yes:

Managers likely will see developments in the Securities and Exchange Commission’s work in this area “around the end of proxy season this year,” said Dalia Blass, director of the agency’s Division of Investment Management. She was speaking at the Investment Company Institute’s Mutual Funds and Investment Management Conference in San Diego.

The agency is looking at how to promote voting practices that are in the best interest of managers’ clients and whether they should vote all proxies, Blass said. The commission also is examining how managers should handle possible proxy advisory firm conflicts of interest and evaluate the advisers’ recommendations, especially when companies disagree with the advice, she said. Proxy firms include Glass, Lewis & Co., in addition to Institutional Shareholder Services Inc.

It's about time. As I wrote in my book, Corporate Governance after the Financial Crisis:

In arguing that institutional investors have incentives to be rationally apathetic, we emphasized the costs entailed in monitoring and responding to problems at portfolio companies. These costs could be reduced if activist investors could make use of economies of scale by developing standardized voting procedures on recurring issues and standard responses to common types of managerial derelictions. We in fact observed just such a response very early in the evolution of institutional investor activism as many institutions adopted standard voting practices on issues such as takeover defenses.

Significant savings, however, would require collective action. Only by clubbing together in monitoring their portfolio companies, could institutions truly achieve economies of scale. As long as they were obliged to act individually, the size and high rate of turnover of their portfolios made achieving real economies of scale impractical.

The emergence of Institutional Shareholder Services (ISS) offered a solution to these problems. ISS was founded in 1985 to provide proxy advisory services to institutional investors.[1]The premise was that institutions could outsource to ISS the tasks of monitoring corporate governance at portfolio firms and making decisions about how to vote their shares.

ISS got a major boost in 1988 when the Department of Labor announced that ERISA pension plan fiduciaries had a fiduciary duty to make informed decisions about how they voted shares of portfolio companies. In response, pension plans began to rely on ISS for analysis of issues upon which a shareholder vote would be required and advice as to the best voting decision. A similar 2003 SEC ruling that mutual funds and other investment company advisors must adopt policies designed to ensure that shares of portfolio companies are voted in the best interests of their clients added a whole new class of institutions that outsourced their proxy decision making to ISS.

Today, ISS services some 1700 institutional investor clients, which collectively manage some $25 trillion in equity securities. The goal of reducing the expenses of activism through economies of scale thus seems well within reach.

ISS has proven highly successful at influencing shareholder voting. By some estimates, an ISS recommendation can effect a swing of 15 to 20% in a proxy vote.[2]Although competitors have entered the market for proxy advisory services, ISS remains the most powerful player in that market. Only one other advisory service, Glass, Lewis & Co., has a measurable effect on the outcome of shareholder votes and its impact remains minor compared to that of ISS.[3]

The shareholder empowerment provisions of Dodd-Frank are widely expected to further enhance ISS’s influence, especially with respect to executive compensation. Institutional investors will look to ISS for guidance on both the say when on pay and say on pay votes. The biggest effect of Dodd-Frank on proxy advisory services, however, is likely to come indirectly via NYSE Rule 452.

The NYSE rule deals with voting of shares held in brokerage accounts. The typical retail investor account is set up with the broker as the legal owner of the shares and the investor as the beneficial owner thereof. Under state law, the brokers therefore are the ones who vote the shares. Under federal law, brokers are obliged to request voting instructions from their client. Many retail investors, however, fail to provide instructions. In such cases, Rule 452 permits the broker to vote the shares in its discretion with respect to routine matters. As to non-routine matters, however, a broker without instructions must abstain.

In the past, brokers routinely voted as management recommended. As a result, management often had a substantial base of support on many issues. A 2009 amendment to Rule 452 significantly altered the environment, however, by changing the treatment of an uncontested director election from a routine to a non-routine matter. As a result, the number of retail investor-owned shares voted in director elections has fallen, increasing the proportion of institutional investor votes as a percentage of those being cast, and thereby enhancing the effect of an ISS recommendation.

Dodd-Frank § 957 will have a similar effect in a potentially wide range of issues. At a minimum, § 957 requires that votes on executive compensation be deemed non-routine. The proportion of votes coming from institutional investors therefore will rise with respect to both say on pay and say when on pay decisions. Because § 957 directs the SEC to undertake a rulemaking proceeding to determine whether there are “other significant matters” that should be deemed non-routine, which proceeding is expected to be completed by late 2012, ISS’ influence likely will continue to grow. Indeed, it seems fair to say that Dodd-Frank does more to empower ISS than it does shareholders.

Despite its success (or, perhaps, because of it), ISS has been controversial. Some critics argue that ISS is too rigid and mechanical in its advice. Martin Lipton complains, for example, that ISS routinely recommends against reelection of a board’s nominating committee if those members allow the firm’s CEO to provide recommendations or advice:

It would be a totally dysfunctional process if input and advice from the CEO were prohibited until after the committee meets and makes its decisions. There is nothing in the NYSE rule or “best practices” that warrants restricting the CEO from voicing advice or opinion until after the committee has acted. [4]

A related example of excessive rigidity on these issues came in 2004, when ISS urged its clients to oppose reelecting Warren Buffett as a director of Coca-Cola because Buffett did not satisfy ISS’ strict definition of director independence. Shortly thereafter, CalPERS announced that it would oppose Buffett’s reelection on the same grounds. Critics of the ISS and CalPERS positions pointed out that Warren Buffett is probably the most respected investor of all time, with a long record of integrity. At the time in question, Buffet’s Berkshire Hathaway Company owned almost 10% of Coke’s stock, which meant that his personal financial interests were closely aligned with those of other shareholders (albeit not perfectly). Buffett qualified as an independent director under the NYSE’s listing standards. As I argued at the time, if “Buffett doesn’t qualify as independent under the ISS and CalPERS standards, the problem is with the standards not Mr. Buffett.”[5]

Critics link this sort of check the box mentality back to the very reason for outfits like ISS to exist; namely, the cost associated with making informed voting decisions about numerous issues posed on the proxy statements of the thousands of publicly traded companies. The globalization of institutional investor holdings has compounded the problem by forcing ISS to stretch its resources to include many foreign issuers. In 2009, for example, ISS had to prepare voting recommendations with respect to more than 37,000 issuers around the world. The constantly growing number of voting recommendations that must be made, most of which are concentrated into the three to four month annual meeting season, reportedly forces even ISS to automate decision making to the fullest possible extent and, accordingly, to rely one one-size-fits-all standards instead of giving careful consideration to the specific needs and circumstances of each individual firm.

Finally, there is the question of accountability. Although both the SEC and the Department of Labor are considering regulation of the proxy advisory business, as of this writing they remain essentially unregulated. Ironically, market forces are the only thing holding ISS accountable; i.e., the same forces most shareholder power proponents claim do not work when it comes to holding management accountable.

Taken together, these concerns raise serious issues as to whether shareholder activism is an appropriate solution to the principal-agent problems of corporate governance. The view that institutional investor activists will carefully scrutinize portfolio companies to reach informed voting decisions is exposed as a fiction. Instead, shareholder activism depends on the whims of a single proxy advisor who offers limited transparency and is largely unaccountable, essentially unregulated, and poorly informed.[6]

"What Happens When the CEO or the Face of the Business Is a Risk? #MeToo and Corporate Governance"

Interesting post by Marcia Narine Weldon

No room for people of faith in the Democratic inn?

Peter Beinart:

Today’s white liberals don’t only talk about faith less than their predecessors did. They talk about it in a strikingly different way. Earlier Democrats invoked religion as a source of national unity. ...

Today, by contrast, progressive white candidates more often cite religion as a source of division. ... While white progressives once described religion as something that brought Americans together, they’re now more likely to describe it as something that drives them apart.

It’s not hard to understand why. For starters, the percentage of white Democrats who express no religious affiliation has skyrocketed. ... Secular Democrats haven’t only grown more numerous. They’ve also become some of the party’s most motivated activists. As The Atlantic’s Emma Green has noted, a PRRI poll taken last August and September found that Democrats who shun organized religion were more than twice as likely to have attended a political rally in the previous year than Democrats who identify with a religious group. Today’s Democratic candidates cannot simply assert, as Obama did in 2004, that “we worship an awesome God in the blue states,” because so many active Democrats do not.

What makes this trend especially scary is the recent data suggesting that as people become more active, the more they are inclined to think their opponents are pure evil:

... the New York Times’ Thomas Edsall published an important essay highlighting a new study that analyzed the extent of “lethal mass partisanship.” As Edsall observes, the paper contained some disturbing statistics. Among them, “42 percent of the people in each party view the opposition as ‘downright evil.’” A stunning 20 percent of Democrats and 16 percent of Republicans believe “we’d be better off as a country if large numbers of the opposing party in the public today just died.” And if the opposing party wins the 2020 election, 18 percent of Democrats and 13 percent of Republicans “feel violence would be justified.”

We hear quite a bit about “dehumanizing rhetoric” in American public life. Well, it appears that tens of millions of Americans now have dehumanizing beliefs. “One out of five Republicans and Democrats agree with the statement that their political adversaries ‘lack the traits to be considered fully human — they behave like animals.’”

I fear that this is not going to end well. As Cardinal George famously predicted:

"I expect to die in bed, my successor will die in prison and his successor will die a martyr in the public square. His successor will pick up the shards of a ruined society and slowly help rebuild civilization, as the church has done so often in human history."

Memo to Dave Hoffman (aka @HoffProf): Reading v. Regem is going nowhere

I am taking a break from Twitter for Lent (although my blogging software automatically tweets a link to new posts), but my minions occasionally alert me to tweets of interest. To wit:

I'm seriously hoping we get a corporate opportunity opinion out of this to replace an old WWII bribery case, right @ProfBainbridge? https://t.co/ee4bxstCvk

— Dave Hoffman (@HoffProf) March 13, 2019

Dave speaks, of course, of Reading v. Regem, a British case on secret profits in agency law, which has long been a staple of the Klein, Ramseyer & Bainbridge Business Associations case book. I hate to tell Dave this, but while I am just one vote out of three, I will strain every sinew to defend Reading. I love that case. It's a wonderful teaching tool.

• What is the precise nature of the fiduciary duty breach?
• Was the principal injured?
• If not, why is the agent liable?
• Was “the position which he occupies,”“the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it”?
• Why is disgorgement the remedy here?
• How do you distinguish this case from a law professor using a law school computer to work on a private blog that generates advertising revenue for the professor and not the law school?

Having said that, the college admission scandal does touch on a question that has always interested me; namely, is there a breach of the corporate opportunity doctrine when the opportunity being taken is itself illegal? (I'm assuming arguendo it would have violated some law for USC et al. to have participated in the scheme.) But that'll have to wait for a later post.