You Say Ph.D., I Say Toast

For those interested in the vigorous debate among academics and practitioners on the virtues and vices of shareholder activism, Part V of Storming the Castle, Lawdragon‘s recent profile on the discussion panels held last year here at Harvard as part of Professor Robert Clark‘s and Vice Chancellor Leo Strine‘s course Mergers, Acquisitions, and Split-Ups, is a real treat.  (I’ve encouraged readers to check out other parts of this fascinating piece in posts here, here, and here.)  In this Part–which Lawdragon has aptly entitled You Say Ph.D., I Say Toast–the piece gives a behind-the-scenes look at a clash among many of the major players in today’s shareholder activism debates.

The panel, entitled Stockholder Activism and M&A: Has Just Say No Become Always Say Yes?, featured Martin Lipton, of Wachtell, Lipton, Rosen & Katz; Jay Lorsch, of Harvard Business School; Lucian Bebchuk, from Harvard Law School; Josh Friedman of Canyon Capital Advisers; James Morphy, of Sullivan and Cromwell; and Ed Haldeman of Putnam Investments.  The discussion, which played to a packed house, began with Professor Bebchuk explaining his role in offering a proposed bylaw as a Computer Associates stockholder that would require a unanimous board vote in order to adopt a poison pill.  The CA board sought to exclude the proposal from the proxy under Rule 14a-8 on the ground that, if adopted, the bylaw would violate the DGCL.  Professor Bebchuk sought a declaration from Chancery that the bylaw, if adopted, would not violate the General Corporation Law; and although he did not reach the merits because the case was unripe, Vice Chancellor Lamb’s opinion strongly suggested that the bylaw could not be left off the proxy under Rule 14a-8.  The bylaw eventually got 41% of the shareholder vote, and CA eventually adopted a pill that shareholders can redeem under certain circumstances.

Aside from Professor Bebchuk, virtually no panelist at Has Just Say No Become Always Say Yes? thought this was a good thing.  Martin Lipton, who authored a two-page Memorandum that described this sequence of events as “very disturbing,” suggested that Professor Bebchuk’s analysis, while perhaps sound in theory, was rather disconnected from the daily realities faced by corporate boards.  “Lucian,” Lipton said, “has never met a board of directors that he trusts,” and thus has concluded that “the key to proper functioning of a corporation is to give shareholders a stick to club the board of directors” with.  Lipton also treated the audience to a description of his work in conceiving the poison pill, noting that his invention was not “designed to entrench management” but to “rest in the business judgment of the board of directors what should be done.”

James Morphy, head of Sullivan and Cromwell’s esteemed merger practice, also suggested that, while the proposed bylaw represented some “lofty ideas,” corporate law is often practiced “down in the weeds . . . on a daily basis.”  Even fellow academic Jay Lorsch, of Harvard Business School, suggested that CA’s directors acquiesced in a more shareholder-friendly version of the pill because they were “annoyed,” not because they were persuaded that the revised pill was in the interests of shareholders.  For his part, Professor Bebchuk insisted that the data we have on poison pills (and their use with effective staggered boards) suggests that their use reduces shareholder returns.

This panel had something for everyone interested in corporate governance: the debate on the social optimality of shareholder activism, the history and purpose of the very first poison pills, and the relationship between corporate law scholarship and practice.  The Lawdragon piece describing the debate is available here, and the Program on Corporate Governance has made video of the entire discussion available here. (video no longer available)