ProfessorBainbridge.com

I'm no Google fan, but this lawsuit alleging breach of fiduciary duty by its directors strikes even mean weak

Bloomberg reports:

Google’s top brass face claims they shirked their duties to shareholders by fostering a “culture of misconduct” that exposed the company to a wave of scandals and lawsuits.

The “uninformed and uninvolved” directors of Google parent Alphabet Inc. deferred to its star-studded leadership team, giving the company’s co-founders and their lieutenants leeway to run their divisions with little board oversight, according to a complaint unsealed May 20 in Delaware Chancery Court.

“This culture that fostered autonomy, however, also led to systematic sex and age discrimination, sexual misconduct perpetrated by high-ranking executives, and a disregard for protecting user privacy,” the partly redacted suit says.

The “dark underside of Google’s culture” is responsible for multiple class actions over its privacy practices, unequal pay for women, age discrimination, and sexual harassment, according to the 70-page complaint, which was filed under seal May 14.

Here's the complaint.

At it's core, it's a Caremark claim. For an overview of Caremark, see this post. 

In Stone v. Ritter, the Delaware supreme court confirmed that “Caremark articulates the necessary conditions for assessing director oversight liability.” In doing so, however, the court described Caremark as a case in which the operative standards are good faith and loyalty rather than care, stating that:

[T]he Caremark standard for so-called “oversight” liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence). In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: . . . where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.

Stone further held that “In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions to assure a reasonable information and reporting system exists and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.” Liability will arise only where there are alleged “red flags” that are “either waved in one’s face or displayed so that they are visible to the careful observer.” Rattner v. Bidzos, 2003 WL 22284323 at 13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. 2003). Stringing together a bunch of negative news reports does not amount to the necessary red flags.

Caremark claims are notoriously the most difficult corporate law claim fora plaintiff to establish (see here). So good luck.

Centros, California’s Women on Boards Statute and the Scope of Regulatory Competition

There's a really interesting new article by Jill Fisch and Steven Davidoff Solomon:

We examine the Centros decision through the lens of SB 826 – the California statute mandating a minimum number of women on boards. SB 826, like the Centros decision, raises questions about the scope of the internal affairs doctrine and its role in encouraging regulatory competition. Despite the claim that US corporate law is characterized by regulatory competition, in the US, the internal affairs doctrine has led to less variation in corporate law than in Europe. We theorize that this is due to the shareholder primacy norm in US corporate law which results in the internal affairs doctrine focusing on matters of shareholder interest and, primarily, shareholder economic interest. We argue that the internal affairs doctrine should be understood within the context of the shareholder primacy norm and therefore directed to rules oriented to enhancing firm economic value. In contrast, EU corporate law has traditionally had broader stakeholder orientation. We posit that the limited impact of the Centros decision, an impact which differed significantly from its predicted revolutionary effect, can be attributed to the greater focus of EU corporate law on social ordering and extra-shareholder interests. This difference leads to a new understanding of SB 826 as reflecting a move toward more EU-style governance focused on social ordering. Ironically, California’s adoption of SB 826 may portend a movement of the United States towards Centros-style governance. Under this analysis, we argue that SB 826 should not be viewed as inconsistent with the internal affairs doctrine since it involves social ordering rather than purely shareholder interests.

Fisch, Jill E. and Davidoff Solomon, Steven, Centros, California’s 'Women on Boards' Statute and the Scope of Regulatory Competition (May 7, 2019). European Business Organization Law Review (Forthcoming).; U of Penn, Inst for Law & Econ Research Paper No. 19-23. Available at SSRN: https://ssrn.com/abstract=3384768

What, you may be asking, is this Centros decision of which they speak? From the Columbia Journal of European Law:

In 1999 the European Court of Justice (the “ECJ”) handed down its decision in the now famous case of Centros Ltd v. Erhvervs- og Selskabsstyrelsen. The case concerned the ability of two Danish nationals to incorporate their company in the UK without carrying out any business there for the purpose of operating their company in Denmark through a “branch,” all the while skirting Danish rules on minimum capitalization. Despite the Danish government’s protestations that this constituted blatant fraud and endangered creditors, the ECJ held that the Danish nationals’ scheme was permissible under the right to freedom of establishment as guaranteed by the EC Treaty.

Centros, in the words of one commentator, immediately provoked “great waves of unrest on the continent.” To understand why this is so, it is necessary to understand the system of conflict-of-laws approaches within Europe – a system which at this point rises to the level of deeply held convictions. Although the ECJ did not explicitly address conflict-of-laws in Centros, many commentators have argued that the case has serious implications for this issue.

The Netherlands, the UK, Ireland and Denmark subscribe to incorporation theory in their conflict-of-laws legislation, while the rest of Europe subscribes to the system of siège réel, or seat theory. As far as the Netherlands, the UK, Ireland and Denmark are concerned, they are willing to recognize any corporation as a legal entity so long as it has been duly incorporated under the laws of a particular jurisdiction. The rest of Europe, however, insists that a company’s legal personality be bound to the place of its “real seat,” or central administration. Therefore, a duly incorporated company seeking to locate its central administration in a seat theory state will not be recognized legally until it reincorporates itself under that state’s laws.

For years, seat theory has guaranteed those countries that adhere to it effective control over the businesses whose activities concentrate within their borders. Indeed, seat theory is designed as a first line of defense against corporations governed by (presumably less stringent) foreign laws. It has also effectively prevented the prospect of regulatory competition within the European Union (the “EU”) in the area of company law.

Should Congress or the SEC Regulate Stock Buybacks?

I commend to your attention a CLS Blue Sky blog post by George Ugeux, which makes some interesting points.

First, he makes the point that the differential tax treatment of dividends and stock buybacks is all that really differentiates the two, which raises the pertinent question of why people like Senator warren are so worked up about them. In addition, the recent surge in stock buybacks is probably Congress' fault, since it is probably linked to the recent tax cuts.

Second, "a share buyback is a recognition that the company does not have anything better to do with its money than return it to shareholders." In other words, when people like Senator Warren advocate restricting stock buybacks, they are essentially arguing that corporations should make negative net present value investments. See generally Jensen, Michael C. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers." The American Economic Review 76, no. 2 (1986): 323-29. http://www.jstor.org/stable/1818789 

Third, he argues that:

Despite the good intentions of politicians who aim to limit or even ban buybacks, the issue is much more nuanced. ...

The SEC polices the fairness and the transparency of corporate actions. The capital increase of a listed company is accompanied by an underwriting process, due diligence, and justification of the board in a prospectus. Share buybacks deserve similar transparency and authorization requirements – perhaps more than under the current Rule 10B-18 regime that covers buybacks. The SEC is right to assess the wider implications of buybacks.

There's an error in there and also a misapprehension. As to the error, in general, the SEC is not allowed to regulate the substantive fairness of transactions. Consider that when the SEC adopted its going private rule, it did not adopt a proposal "that would have gone beyond disclosure requirements and placed substantive fairness limitations on an issuer's attempt to go private." § 48.3.Federal regulation of going private transactions, 20 Ind. Prac., Business Organizations § 48.3. As another example, the Supreme Court has consistency described "the ‘fundamental purpose’ of the [Securities Exchange] Act as implementing a ‘philosophy of full disclosure’; once full and fair disclosure has occurred, the fairness of the terms of the transaction is at most a tangential concern of the statute." Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477–78 (1977). "The SEC has no authority to decide whether a particular security may be offered to the public or if the terms of an offering are fair; it can only insist that the issuer make full disclosure of all material facts." Stephen H. Case & Mitchell A., Current Issues in Prepackaged Chapter 11 Plans of Reorganization and Using the Federal Declaratory Judgment Act for Instant Reorganizations, 1991 Ann. Surv. Am. L. 75, 121 (1992).

The misapprehension is that the SEC is somehow a nonpartisan regulator. As Roberta Karmel observes, however: "The SEC is supposed to be a collegial agency of nonpartisan experts. Instead it has become an agency riven by partisanship due to politicians trying to score points and gain publicity." Roberta S. Karmel, Threats to the SEC's Independence, 2016 Bus. L. Today 1, 3 (December 2016). 

Case note on Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.

Delaware Supreme Court Clarifies Appraisal Law https://t.co/5cOUFtIllt Case note on Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.

— Professor Bainbridge (@ProfBainbridge) May 1, 2019

Kahn v. MFW requires controller self-disablement early

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review https://t.co/HAgLzLGQJM Controller must self-disable before substantive economic bargaining starts

— Professor Bainbridge (@ProfBainbridge) May 1, 2019

Delaware Chief Justice Leo Strine on independent directors--I've been saying the same thing for years

From an interview of Strine at Directors & Boards:

We have a lot of unrealistic expectations for independent directors, and I think it would be better to rebalance boards a little bit. We need folks who are genuinely independent directors, but we also need directors with expertise, and we need directors who were active in business and who understand the industry. And some of the rules and incentives can get so tight that we actually discourage people with the right kind of qualities from serving on boards.

It doesn’t really matter if you’re independent if you don’t have expertise. But can you be independent and also have the expertise and the knowledge? I’m sure you can.

We just independent directorized the world. We went from having a bare majority of them to having a supermajority of them. We don’t actually empower them. We take away their ability to think long term because we put in place Say on Pay. We don’t do Say on Pay every four years or five years, where you would really have a long-term pay plan, we do it every year as a vote on generalized outrage.

Independent directors are not like trustees at universities, who usually have prior affiliations with the university and the community in which it exists, and that they care deeply about. Independent directors are weather vanes for the market. Not to denigrate them, but let’s think about the definition of an independent director. They tend to have no prior affiliation or current association with the company, and thus they really have no reason to deeply care about it or any aspect of it. Now you can say that’s independence, but it’s also a blank slate.

There’s great competition to be an independent director. Independent director pay has gone up. The typical pay just to be on one company board is higher than my judges in our judiciary. If you’re on three boards, you’re often making more than a half million dollars a year just as a director.

The old concern was that directors had to be popular with management to stay on boards, but now you have to stay popular with the institutional investor community and with the proxy advisers, and therefore these directors are highly responsive to market sentiment.

Maybe my lack of popularity with the self-appointed shareholder spokesmen who run ISS and its ilk, not to mention institutional investors generally explains my lack of board seats?

Anyway, the usually board-bashing/activist-loving folks at The Corporate Counsel observe that:

It’s refreshing to hear somebody with influence in the corporate governance debate finally say something like this. As I’ve blogged previously, my guess is that in 50 years people may really wonder why we thought it was a good idea to demand that the boards of the world’s largest corporations be comprised overwhelmingly of people with no ties to or experience with the company. Who knows? Maybe Chief Justice Strine’s remarks are a signal that we won’t have to wait 50 years for people to start asking that question.

I've been a sharp critic of independent director mandates going back to one of my first articles, see Independent Directors and the ALI Corporate Governance Project, 61 Geo. Wash. L. Rev. 1034 (1992). In my book Corporate Governance after the Financial Crisis, I wrote that:

... the board of directors has three basic functions. First, while boards rarely are involved in day-to-day operational decision making, most boards have at least some managerial functions. Second, the board provides networking and other services. Finally, the board monitors and disciplines top management.

Independence is potentially relevant to all three board functions. As to the former two, outside directors provide both their own expertise and interlocks with diverse contact networks. As to the latter, at least according to conventional wisdom, board independence is an important device for constraining agency costs. On close examination, however, neither rationale for board independence justifies the sort of one size fits all mandate adopted by the exchanges at the behest of Congress and the SEC.

After a lengthy review of the evidence on director independence, I concluded that "the empirical evidence on the merits of board independence is mixed." I then observed that:

The fetish for board independence has costs. Two are already on the table; namely, those associated with the information asymmetry between outsiders and insiders and those occasioned by the need to incent outsiders to perform. A third is the lost value of insider representation.

Oliver Williamson suggests that one of the board’s functions is to “safeguard the contractual relation between the firm and its management.”[1] Insider board representation may be necessary to carry out that function. Many adverse firm outcomes are beyond management’s control. If the board is limited to monitoring management, and especially if it is limited to objective measures of performance, however, the board may be unable to differentiate between acts of god, bad luck, ineptitude, and self-dealing. As a result, risk averse managers may demand a higher return to compensate them for the risk that the board will be unable to make such distinctions. Alternatively, managers may reduce the extent of their investments in firm-specific human capital, so as to minimize nondiversifiable employment risk. Insider representation on the board may avoid those problems by providing better information and insight into the causes of adverse outcomes.

Insider representation on the board also will encourage learned trust between insiders and outsiders. Insider representation on the board thus provides the board with a credible source of information necessary to accurate subjective assessment of managerial performance. In addition, however, it also serves as a bond between the firm and the top management team. Insider directors presumably will look out for their own interests and those of their fellow managers. Board representation thus offers some protection against dismissal for adverse outcomes outside management’s control.

Such considerations likely explain the finding by Klein of a positive correlation between the presence of insiders on board committees and firm performance.[2] They also help explain the finding by Wagner et al. that increasing the number of insiders on the board is positively correlated with firm performance.[3]

The fetish for independence cost us these potential benefits from insider representation. Congress’ refusal to permit private ordering means that those firms where those costs are highest are unable to opt out of the one size fits all straightjacket.

"Is a board of directors absolutely mandatory in a corporation/company?"

I offered the following answer to the titular question at Quora:

Section 8.01(a) of the Model Business Corporation Act (in force in over 2/3 of the states) provides that: “Except as may be provided in an agreement authorized under section 7.32, each corporation shall have a board of directors.”

In turn, section 7.32(a) provides that: “An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the corporation even though it is inconsistent with one or more other provisions of this Act in that it: (1) eliminates the board of directors ….”

Note, however, that such an agreement must be unanimous and be made known to the corporation. It must be disclosed on share certificates.

If the agreement eliminates the board of directors, there is no prescribed replacement. As the Official Comment to section 8.01(a) states, “the shareholders of a corporation may, in an agreement that satisfies the requirements of section 7.32, dispense with a board of directors and structure the corporation’s management and governance to address specific needs of the enterprise.”

Although section 7.32 is not limited to closely held corporations, many states have limited the option of eliminating the bard of directors to closely held corporations.

Indeed, it is essentially unheard of for publicly held corporations to have such agreements and equally unheard of for publicly held corporations to eliminate the board. See, e.g., POST PROPERTIES, INC., SEC No Action Ltrs. WSB File No. 0329200417 (“It is inconceivable, for example, that shareholders of a publicly-traded company such as Post Properties would attempt to eliminate the board of directors entirely, to designate an outside person to manage its business, or to give to one of its shareholders the power to cause corporate dissolution. These limits are totally incompatible with public ownership ….”

Delaware General Corporation Law section 141(a) provides that: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.”

Assume a Theranos director knew what was going on, what should they have done?

DGCL § 141(b) provides that:

Each director shall hold office until such director’s successor is elected and qualified or until such director’s earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events.

The American Bar Association’s authoritative Corporate Director’s Guidebook recommends that:

If, after a thorough discussion, a director disagrees with any significant action the board is taking, the director should consider abstaining or voting against the proposal. The director should also consider requesting that the abstention or dissent be recorded in the meeting’s minutes. Except in unusual circumstances, taking such a position should not cause a director to consider resigning. Resignations should be considered if a director believes that management is not dealing with the directors, the shareholders, or the public in good faith or that the information being disclosed by the corporation is inadequate, incomplete, or incorrect and the director is unable to convince the board to take action. Directors may also consider resigning when they feel their point of view is being disregarded entirely. Public corporations are required to disclose director resignations in an SEC filing, and this disclosure, like others, should be done in consultation with legal advisors.[1]

An earlier edition of the Guidebook stated that:

If, after a thorough discussion, a director disagrees with any significant action proposed to be taken by the board, the director may vote against the proposal and request that the dissent be recorded in the meeting’s minutes. Except in unusual circumstances, taking such a position should not cause a director to consider resigning. However, if a director believes that information being disclosed by the corporation is inadequate, incomplete or incorrect, or that management is not dealing with the directors, the shareholders or the public in good faith, the director should first encourage that corrective action be taken. If that request is not satisfied or the problem continues, the director should encourage the board to replace management and, if such a change does not occur, the director should resign.[2]

In Shocking Technologies, Inc. v. Michael,[3]the court held that:

First, fair debate may be an important aspect of board performance. A board majority may not muzzle a minority board member simply because it does not like what she may be saying. Second, criticism of the conduct of a board majority does not necessarily equate with criticism of the corporation and its mission. The majority may be managing the business and affairs of the corporation, but a dissident board member has significant freedom to challenge the majority’s decisions and to share her concerns with other shareholders. On the other hand, internal disagreement will not generally allow a dissident to release confidential corporate information.

In Wechsler v. Squadron, Ellenoff, Plesent & Sheinfeld, LLP,[4]the court held that:

Can a director of a public corporation who believes that the company is engaged in ongoing securities fraud “blow the whistle” by disclosing to the SEC information protected by the company’s attorney-client privilege, where the company’s Board has not waived the privilege? As a matter of public policy, the Court holds that the answer is yes, although the company could sue the whistle-blowing director for breach of fiduciary duty if such disclosure were not in the company’s best interest.

Should the law regard corporations as a “person”? Why or why not?

The titular question was brought to my attention on Quora, which elicited this response from yours truly:

The idea that a corporation is a legal person with constitutional rights is, of course, a controversial one. Some commentators argue that it's bad policy. In my view, however, it is a well-settled principle of US constitutional law and justifiably so.

On the one hand, the courts have never empowered corporations with "privileges of citizenship." The second clause of the 14th Amendment - the so-called Privileges and Immunities - states that: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." But it is settled that the Privileges and Immunities Clause does not protect corporations, because corporations are not deemed citizens for purposes of the 14th Amendment. Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 656 (1981). Conversely, however, "It is well established that a corporation is a 'person' within the meaning of the Fourteenth Amendment." Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881 (1985).

The common law had long recognized the legal personality of corporate bodies. See Book I, Chapter 18 of Blackstone, Commentaries on the Laws of England (1765-1769). But what of the Constitution?

The key case for constitutional law purposes is Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886). Curiously, if one carefully reads Justice Harlan's decision in that case, one will find neither a clear statement nor a citation of authority concerning whether corporations are "persons." That point, instead, is made in the syllabus by the Reporter, who related that at oral argument the Chief Justice had stated that:

The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.

Despite it's somewhat odd parentage, the principle is sound.

The legislative history of the Fourteenth Amendment suggests that Congress substituted the word ''person'' for the word ''citizen'' precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation. We see this view further confirmed Roscoe Conkling's recounting of the relevant legislative history in Conkling's arguments in San Mateo County v. Southern Pac. R.R., 116 U.S. 138 (1885). Conkling had been a member of the Joint Congressional Committee that drafted the 14th amendment and in Southern Pacific argued to the Justices that it had been the intent of Congress for the word "person" to include "legal" persons (corporations) as well as "natural" persons within the protective scope of the due process and equal protection clauses of the amendment. The Court accepted Conkling's argument.

As Larry Ribstein argues, this development made policy sense:

... corporations are people – the owners and others the corporation represents in litigation. These people have speech rights, rights not to be discriminated against, and so forth. I’ve written on this ...:

The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95 (1995); Corporate Political Speech, 49 Wash. & Lee L. Rev. 109 (1992) and in my book with Henry Butler, The Constitution and the Corporation (1995) ....

So the African-American owners of this SBA-certified minority-owned contractor shouldn't lose their civil rights because they chose to do business in the corporate form. They might be required to sue as a corporation, as in this case, because that’s a convenient way to handle litigation, but that doesn’t determine their individual rights.

But courts also should recognize that, by the same principle, people shouldn't lose their speech rights just because they exercise these rights though the corporation in which they have invested.

"Strine Says" on Twitter

Strine Says is a new (at least, to me) Twitter account I'm following: 

Illinois proposal to mandate gender and racial diversity on corporate boards gathers steam

Bloomberg reports:

Lawmakers in Illinois have advanced a bill that would require public companies headquartered in the state to place at least one female and one African-American director on their boards of directors.

H.B. 3394, which passed the Illinois House on March 29 by a vote of 61-27, amends the state’s Business Corporation Act and imposes various reporting duties on public companies. It also creates a compliance deadline of Dec. 31, 2020. The Office of the Secretary of State can impose penalties on companies for violations.

The bill underscores some policy-makers and diversity advocates’ heightened attempts to remake U.S. corporate boards through specific legal requirements. It could have an impact on some of the biggest corporate names on the S&P 500. Major public companies headquartered in the state include Walgreens Boots Alliance Inc., Boeing Co., Archer Daniels Midland Co., Caterpillar Inc., Allstate Corp., United Continental Holdings Inc. and McDonald’s Corp.

I am highly dubious of the constitutionality of these statutes to the extent they purport to apply to companies incorporated in other states. See my WLF post California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge. I'm also dubious of these statutes on the merits. The initial empirical study of the California statute found that:

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota for all firms headquartered in California. We find that the introduction of the quota is associated with significantly negative announcement returns for these firms. Consistent with the quota imposing frictions, the effect is larger for firms requiring more female directors to comply with the quota and for firms with poor corporate governance. We also document negative spillover effects to non-Californian firms. They are larger for firms operating in industries in which Californian firms lack more female directors, suggesting that valuable female directors may migrate from non-Californian to Californian firms. We also document negative spillover effects for firms headquartered in states that are more likely to follow California’s lead. These are firms headquartered in states dominated by the Democratic Party and states which followed California’s lead in legalizing cannabis consumption and raising minimum wages exceeding the federal rate. Finally, we show that, already as of month-end December 2018, female representation on the boards of Californian firms increased. Newly appointed female directors are younger, less experienced, and less independent than incumbent and leaving directors.

von Meyerinck, Felix and Niessen-Ruenzi, Alexandra and Schmid, Markus and Davidoff Solomon, Steven, As California Goes, So Goes the Nation? The Impact of Board Gender Quotas on Firm Performance and the Director Labor Market (February 22, 2019). Available at SSRN: https://ssrn.com/abstract=3303798 or http://dx.doi.org/10.2139/ssrn.3303798

I'm also puzzled by the decision to limit quotas to African-Americans. What about other under-represented minorities? I'm not enough of a constitutional lawyer to know if that will affect judicial review of the statute under the Equal Protection Clause, but I'm guessing it won't help.

Is it possible for a single majority shareholder who owns the company take his own company to court?

I saw the titular question over at Quora and offered the following answer: Probably not. See Justice Marchall’s dissent in Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703, 721 (1974): "The sole shareholder who defrauds or mismanages his own corporation hurts only himself. For the corporation to sue him for his wrongs is simply to take money out of his right pocket and put it in his left." That is the reverse situation, of course, but I suspect it would be the same result.

 

 

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!