ProfessorBainbridge.com

Commissioner Hester Peirce Has Concerns About California's Gender Quota Mandate

Keith Paul Bishop reports on Commissioner Pierce's comments to the Society for Corporate Governance:

The text of the bill explicitly makes a business case to justify the law’s existence; it points to the financial benefits to firms of having women on their boards.  As I noted earlier, the mixed findings of research in this area may not support this business case.

These state efforts concern me because they micromanage an aspect of corporate governance that corporations, boards, and shareholders seem perfectly capable of handling on their own.

The full text of Commissioner Pierce's speech is here. Oddly, the Commissioner failed to cite my work on the subject.

The difference between "publicly held" and "publicly traded"

Keith Paul Bishop explains

Twitter bids farewell to Delaware Chief Justice Leo Strine and ponders Strine's next move

Breaking News: Chief Justice Leo Strine Stepping Down https://t.co/EhegYlpuaR

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

She links Strine's resignation letter. https://t.co/vBrAtlIiou

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

So the rumors were true. What's next? #Wachtell? Working with @JoeBiden campaign? Both? https://t.co/5yIJLvgc0V

— Jesse Fried (@jessefried) July 8, 2019

Sam Waltz of Delaware Business Times speculates CJ Leo Strine will spend a few years with a Wall Street firm (Del office?), sock away money to put sons through college, run for Governor in 2024. https://t.co/ZfC5VbqzQT

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

Leo Strine, Delaware Supreme Court's Chief Justice, to step down https://t.co/RDOoUBfxpO via @delawareonline

— Ann Lipton (@AnnMLipton) July 8, 2019

🤐 https://t.co/NVTfktW06p

— Strine Says (@StrineSays) July 8, 2019

It’s hard to imagine the nation’s most important court for businesses without Strine’s extremely distinctive voice.

— Alison Frankel (@AlisonFrankel) July 8, 2019

SP500 ticking up after Strine announcement. Must be causal. pic.twitter.com/VeZOVpJtCb

— Andrew Baker (@Andrew___Baker) July 8, 2019

Breaking News: Chief Justice Leo Strine Stepping Down

Bloomberg Law reports:

Leo Strine, head of the Delaware Supreme Court, is stepping down after five years of leading the state’s sole appellate court that decides most of the highest-profile business disputes in the U.S.

Strine, 55, said in a statement he doesn’t have any immediate plans for after he retires. In the past, he’s taught about Delaware corporate law at institutions such as Harvard University, the University of California at Los Angeles and Yale University and churned out law-review articles on topics ranging from defining good-faith in corporate law and investor suits that generate more compensation for lawyers than shareholders.

I suspect Chief Justice Strine will follow so many of his recent predecessors into highly remunerative legal practice with some big Wall Street firm (he's got two sons to put through college) or, maybe more likely based on various hints he's dropped over the years, he may be planning a political career. But I would give just about anything to have him join the UCLA corporate law faculty. What a tremendous coup that would be!

Delaware Business Times Publisher Sam Waltz speculates:

First, people with his background and accomplishments make a huge personal financial sacrifice in serving on the bench, although it does advance their billing rates when they re-enter private practice.

It’s not out of the realm of the expected to anticipate that Chief Justice Strine could and would pull in $1 million a year, perhaps even more, in private practice. And part of the speculative reason is that he’s at the stage with young adults heading off to college, so his family would benefit from the change.

Beyond that, though, one or two speculated that he really wants to be governor one day, and a lucrative legal career would secure his family’s future for a return to public service in an elected role.

 

 

 

California Secretary Of State Issues First Board Gender Quota Report

Keith Paul Bishop reports a couple of oddities in the first report per SB 826:

Oddly missing from the list was any indication of the number of female directors (if any) even though the law clearly requires that information.  It is also unclear why the Secretary of State chose to publish address and telephone information when that information was not required to be in the report.

He also observes that:

First, the report does not disclose the number of subject corporations that have at least one female director for the reasons explained above.  Second, it does not identify any corporation that is in violation of the law.  The reason is that the law requires that subject corporations have a minimum of one female director no later than December 31, 2019.  Cal. Corp. Code § 301.3(a).  The statute further provides that a female director having a seat for at least a portion of the year will not be a violation.  Cal. Corp. Code § 301.3(e)(3).  

Chief Justice Leo Strine rehabilitates his Oracle decision

Ann Lipton analyzes the recent Delaware Supreme Court decision in Marchand v. Barnhill, "which is notable for two reasons.  First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations."

As to the former, she observes that:

Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution.  Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.

Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him.  Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.

This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative. 

 

Courts should not automatically pierce the veil of single shareholder corporations

Joshua Fershee analyzes a Hawaii case seeming to suggest that "sole ownership and control" was enough to justify veil piercing.

Lipton on Corwin and Controlling Shareholders

Lipton, Ann, After Corwin: Down the Controlling Shareholder Rabbit Hole (May 31, 2019). Vanderbilt Law Review, Forthcoming; Tulane Public Law Research Paper. Available at SSRN: https://ssrn.com/abstract=3397390

As Delaware has developed its doctrine with respect to controlling shareholders, its view of their relationship to directors has evolved over time. This evolution has produced some pronounced inconsistencies with respect to the weight placed on director approval of controlling shareholder action. The recent Delaware Supreme Court decisions in Corwin v. KKR Financial Holdings, Kahn v. M&F Worldwide, and C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust introduced further uncertainty into the mix by making the determination as to whether a transaction involves a controlling shareholder practically outcome-determinative of many shareholder disputes. If a controlling shareholder is present, there is the potential for close court examination to ensure fairness to the minority; if not, any shareholder challenge is likely to be dismissed without even the chance for discovery.

Yet even as the presence or absence of a controlling shareholder takes on heightened importance, changes in the business landscape have made controllers more difficult to identify. More companies are adopting multiclass capital structures both in public and private markets, and the popularity of management buyouts means that shareholders with significant stakes, ties to directors, and informational advantages are often placed across the bargaining table from companies themselves. The upshot is that courts are called upon to make early, critical judgments regarding levels of control in an increasingly complex corporate ecosystem.

This Essay, prepared for the Institute for Law & Economic Policy’s 25th Annual Symposium, maps the points of doctrinal divergence and proposes changes to the law that better align the concerns posed by controlling shareholders with the law’s treatment of them. In particular, this Essay argues that courts do not pay sufficient attention to the most salient fact about controlling shareholders: their immunity to the ordinary mechanisms of market discipline. To ensure that the presence of a controller is accurately identified and the appropriate level of scrutiny applied to its self-interested transactions, courts should focus not merely on the putative controller’s influence over the board, but on the mechanisms of self-help realistically available to the unaffiliated shareholders.

Recommended.

Tuch on Kershaw's The Foundations of Anglo-American Corporate Fiduciary Law

Tuch, Andrew F., Review of David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (May 16, 2019). 78(1) Cambridge Law Journal 210 (2019). Available at SSRN: https://ssrn.com/abstract=3389482 or http://dx.doi.org/10.2139/ssrn.3389482

How does legal doctrine form, why does it change, and why do doctrines with a common starting point, in legal systems with a shared heritage, diverge? This essay reviews and critiques a book by David Kershaw that addresses these questions. The book charts the evolution of corporate fiduciary law in the United Kingdom and United States and, comparing the two systems, explains how and why the respective legal regimes evolved as they did. Kershaw weighs in on contested U.S. scholarly debates, confronting the common claim that doctrinal change is less the product of internal logic or strict precedent than a response to extra-legal factors, including interest group politics, policy concerns, and state competition for corporate charters. Kershaw rejects this claim, offering other, provocative accounts for the production of U.S. corporate fiduciary law and for Delaware’s lead in attracting incorporations.

Memo to self: I need to write about the new Blue Bell case

Thread. #corpgov #corporategovernance #corporatelaw https://t.co/FHbKRuYovB

— Professor Bainbridge (@ProfBainbridge) June 19, 2019

#StrineSays: “When...a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the co’s business operation, that supports an inference the board has not made the good faith effort that Caremark requires.” https://t.co/Cp3tQ9GgoL

— Strine Says (@StrineSays) June 20, 2019

“[T]hat Blue Bell nominally complied with FDA regulations does not imply that the **board** implemented a system to monitor food safety **at the board level**.”

— Strine Says (@StrineSays) June 20, 2019

What is a "de jure" corporation, and how is it different from a "de facto" corporation according to the US law?

I answered the titular question over at Quora, as follows:

“A de jure corporation is ordinarily thought of as one which has been created as the result of compliance with all of the constitutional or statutory requirements of a particular governmental entity. … A de facto corporation, on the other hand, can be brought into being when it can be shown that a bona fide and colorable attempt has been made to create a corporation, even though the efforts at incorporation can be shown to be irregular, informal or even defective.” Harris v. Stephens Wholesale Bldg. Supply Co., Inc., 309 So. 2d 115, 117 (Ala. Civ. App. 1975).

The distinction arises because corporation statutes provide limited liability only to validly formed corporations (i.e., “de jure corporations”). A defectively incorporated business could be viewed as a partnership or sole proprietorship, neither of which confer limited liability on their owners, rather than a corporation.

Defective incorporation was a fairly serious problem decades ago when incorporating a business involved far more technicalities than it does today. Older corporation statutes required compliance with substantial procedural formalities as a condition of incorporation, such as multiple local filings, notice by publication, minimum capital requirements, and the like. It was easy for some minor glitch in the incorporation process, such as failing to file all the requisite documents or failing to do so in all the requisite offices, to prevent the corporation from coming into existence as a legal entity.

The most widely used standard for invoking the de facto corporation doctrine is whether (1) there was a good faith effort to incorporate the business and (2) the putative shareholders carried on the business as though it were a corporation, especially with respect to the transaction in question. In Cantor v. Sunshine Greenery, Inc.,[1]for example, the incorporator mailed articles of incorporation to the secretary of state’s office. The articles were officially filed only after some unexplained delay. In the meanwhile, assuming that the articles had been filed and that the corporation existed, the shareholders entered into a lease on the corporation’s behalf. The lessor had considerable business experience, but did not require the shareholders to guarantee the lease personally. Instead, the lessor knew and expected that the corporation would be responsible for the lease. When the corporation failed to perform, lessor sought to hold the shareholders personally liable. The court held that, because of the delay in filing the articles, the business was not a legal corporation at the time the lease was made. The shareholders’ execution of articles of incorporation, the good faith effort to file them, and the carrying on of business in the corporation’s name, however, justified treating the firm as a de facto corporation. The shareholders therefore could not be held personally liable.[2]

---

[1] 398 A.2d 571 (N.J.App.Div.1979).

[2] Inactive investors present an even stronger case for invoking the de facto corporation doctrine and are rarely held personally liable for the firm’s obligations. See, e.g., Flanagan v. Jackson Wholesale Bldg. Supply Co., 461 So.2d 761, 765 (Miss.1984)(declining to hold inactive investor personally liable).

The Economist's latest piece in support of shareholder activism--First a quibble

The Economist is back boosting shareholder activism.

A quibble:

In America and a few other countries, boards can issue more shares without shareholder approval. In some countries, shareholders must approve issuance above a certain threshold. And in yet others, investors must agree before any new stock can be created.

Oddly, the Bartleby's column contradicts itself a couple of paragraphs later:

Another sign of agent-principal conflicts are shares that are privately placed with selected investors or used to pay for takeovers. In Australia any offering of more than 15% of the equity must be subject to shareholder approval; in America the threshold is 20%.

So which is it?

In fact, in the US, most public companies need shareholder approval for issuances "above a certain threshold." NYSE Listed Company Manual section 312.03(c) provides that, subject to certain exceptions, "Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if: (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or (2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock."

The NASDAQ has a similar rule for transactions not involving a public offering and various other issuances.

In addition to the stock exchange standards, a number of state corporation codes impose such requirements. Model Business Corporation Act section 6.21(f), for example, provides that:

An issuance of shares or other securities convertible into or rights exercisable for shares in a transaction or a series of integrated transactions requires approval of the shareholders, at a meeting at which a quorum consisting of a majority (or such greater number as the articles of incorporation may prescribe) of the votes entitled to be cast on the matter exists, if:

(i)  the shares, other securities, or rights are to be issued for consideration other than cash or cash equivalents, and

(ii)  the voting power of shares that are issued and issuable as a result of the transaction or series of integrated transactions will comprise more than 20% of the voting power of the shares of the corporation that were outstanding immediately before the transaction.

Delaware Chancery Court Flunks Target Firm's lawyers

From Francis Pileggi:

A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam. 

Chuckle. Go read the whole thing.

How do CEOs that are majority shareholders get outed as a CEO?

My answer to the titular question from Quora:

Short answer: They don’t.

Longer answer: The board may always oust the CEO, but if the CEO is also the majority shareholder, the CEO can simply use a written consent to remove the board of directors (I’m assuming Delaware law). The CEO would then elect new directors, who presumably would know which side of the bread their butter is on,

In theory, the incumbent board could try to take actions such as a dilutive stock issuance (Dilution Definition) to reduce the CEO’s holdings below 50%, but the legality of such actions absent serious misconduct by the CEO is suspect: “The board's fiduciary obligation to the corporation and its shareholders, in this setting, requires it to be a protective guardian of the rightful interest of the public shareholders. But while that obligation may authorize the board to take extraordinary steps to protect the minority from plain overreaching, it does not authorize the board to deploy corporate power against the majority stockholders, in the absence of a threatened serious breach of fiduciary duty by the controlling stock.” Mendel v. Carroll, 651 A.2d 297, 306 (Del. Ch. 1994). “In such an instance the board would bear a heavy burden to establish the justification for any steps purposely taken to affect the outcome of shareholder action.” Id. at 306 n.20.

Yours truly cited by Wisconsin Federal District Court re Rights of First Refusal

Dewey v. Bechthold, 18-CV-1739-JPS, 2019 WL 2193865, at *4 (E.D. Wis. May 21, 2019):

Although Wisconsin courts routinely uphold these types of provisions, some courts have held that rights-of-refusal should be narrowly construed. Frandsen v. Jensen-Sunquist Agency, Inc., 802 F.2d 941, 945–46 (7th Cir. 1986) (applying Wisconsin law and holding that a right-of-refusal is not triggered by a merger). Finally, it is worth noting that there is no legally mandated option price. Rather, the option price is set at the discretion of the corporation. See Nichols Constr. Corp. v. St. Clair, 708 F. Supp. 768, 771 (M.D. La. 1989), aff’d mem., 898 F.2d 150 (5th Cir. 1990) (holding that “the mere failure to pay ‘fair value’ for stock under a stock redemption agreement” is not “fraud or breach of fiduciary duty.”); F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440, 448 (Ind. 2003) (“to the extent that restriction devalues the shares in the hands of any individual shareholder by reason of lack of transferability, it is the result of the bargain they struck”); see also Stephen M. Bainbridge, Corporate Law, § 14.2 (3d ed. 2015) (explaining the aforesaid and noting that, where a right-of-refusal provision is in place, even option prices set at fair market value will be dramatically discounted by potential third party purchasers to account for the bargain’s low likelihood of success).