Monthly Archives: June 2007

Storming the Castle

Lawdragon has just published Storming the Castle, a six-part profile on the sweeping curricular changes that have generated unprecedented participation by practitioners in the newest offerings in corporate law coursework here at Harvard.  The profile offers a detailed look at Mergers, Acquisitions, and Split-Ups, a course co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, and emphasizes the corporate governance events held last year at the law school as part of the course.  The first part of the article, which focuses on the course in general–and the influence of practitioners’ insights on the curriculum–is available here

Later this month, I will add details on the exciting events held on campus last year as part of the course, which featured expert panelists in nearly every field related to corporate governance.  We’ll also post videos of the panels and discuss Lawdragon‘s coverage of the events.  In the meantime, our readers can find the full article here.

Bringing Directors and Stockowners Together

This post is by Carl Olson of the Fund for Stockowners’ Rights.

Corporate governance theory states that the directors of corporations represent the interests of stockowners.  But in practice directors are prevented from hearing from individual stockowners and their views on corporate matters.  Conscientious fulfillment of corporate duties is obviously impaired.

Longstanding corporate policies intentionally erect barriers for avenues of direct communication from stockowners to directors.  It’s not easy to contact a corporation’s directors through the corporate offices; they are almost never on the premises, their direct contact information is almost never made available by the corporation, and that information is usually not otherwise public.  Individual directors undoubtedly have direct business mailing addresses, telephone numbers, faxes, and e-mail addresses.  Directors have no legitimate excuse for not being available for input from the persons they are supposed to represent.  Those tens of thousands of dollars in directors’ fees should buy some reasonable access for stockowners.

Generally this lack of access is an unwritten rule of corporate practice.  However, Edison International was more explicit on page 14 of the proxy statement for its 2007 meeting:


The Daily Deal on Steve Bainbridge

Following up on yesterday’s post, The Daily Deal has also just published a profile of Steve Bainbridge. Also written by Dan Slater, that piece is available for our readers below.

The Contrarian
Stephen Bainbridge vs. Lucian Bebchuk: an intellectual battleStephen Bainbridge

“Yes, accountability is important, but there are countervailing advantages to authority that people like Lucian Bebchuk don’t give credence to,” says Stephen Bainbridge, a corporate law professor at the University of California, Los Angeles, who’s waged an intellectual battle against Bebchuk in law reviews and on his well-read blog. “He’s too caught up with this image of American businessmen and women as rapacious people who must be controlled by activist shareholders.”

A graduate of Western Maryland College, Bainbridge, 48, got a master’s in biophysical inorganic chemistry at University of Virginia before checking in to UVA law school in 1982. “After a series of unfortunate lab accidents, my research adviser suggested I might be better off in a field that didn’t involve potentially explosive chemicals,” he says. Unlike Bebchuk, Bainbridge spent a two-year stint in practice, at Arnold & Porter LLP’s Washington office. There, he worked on a team supporting a Business Roundtable lobbying effort. In 1988, he joined the faculty at the University of Illinois College of Law. He moved to UCLA in 1996. “As I started doing my own research, I began to understand that the issue Berle and Means raised in the 1930s — that the separation between ownership and control is a problem we need to fix — is really the thing that makes the American corporation, which I regard as the greatest economic engine in our history, possible.”


The Daily Deal on Lucian Bebchuk

The Daily Deal just published a detailed profile of Lucian Bebchuk. The profile, written by Dan Slater, runs as follows:

The Activist Professor
By converting his academic work on takeover defenses and executive comp into bylaw proposals at major corporations, Harvard’s Lucian Bebchuk has become an unlikely corporate governance star

Lucian BebchukAt Home Depot Inc.’s 2006 shareholder meeting, its then-CEO, Robert Nardelli, wore his arrogance on his sleeve. Nardelli appeared at the meeting with two unidentified lackeys — presumably attorneys or public relations executives — and no board of directors. He ordered the erection of two digital timers and announced that questions would be limited to one person and one minute. The second speaker discussed his union’s proposal that shareholders be allowed an advisory vote on executive compensation and then covered the litany of Nardelli’s pay abuses: guaranteed bonuses, a $10 million loan that cost shareholders $21 million (after taxes) and so on. When the minute expired, Nardelli flatly recited the phrase he would use frequently that day. “The board recommends that you reject this proposal.”

Seven months later, on Jan. 4, 2007, Nardelli resigned, taking an exit package valued at about $210 million. That day, the board adopted a bylaw, submitted by Home Depot shareholder and Harvard Law School professor Lucian Bebchuk, which required approval of executive compensation by at least two-thirds of the board’s independent directors rather than a mere majority of the directors on the compensation committee.

The shareholder proposal at Home Depot is one of 14 that Bebchuk, a professor-cum-shareholder-activist, has made during the last two proxy seasons. While many law school professors agree that shareholder disenfranchisement in matters of corporate governance is a negative trend in need of a remedy, most are content to write law review articles and occasional op-eds that decry director primacy while extolling the virtues of a shareholder-first model. But Bebchuk is taking more direct action. Having converted his academic work on takeover defenses and executive compensation into specific (and binding) bylaw proposals, Bebchuk, much to the chagrin of such companies as American International Group Inc., Walt Disney Co., Exxon Mobil Corp. and Home Depot, is carrying his prescriptions directly to the boardroom — and demanding a vote.


The Gheewalla Case: The Delaware Supreme Court Clarifies Directors’ Duties in Bankruptcy

This post is by Larry Ribstein of the University of Illinois College of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court settled a nagging question about corporate directors’ duties and liabilities to creditors, holding that “the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation’s directors.”  The court explained:

[D]irectors owe their fiduciary obligations to the corporation and its shareholders. . . .  When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.

The Court therefore rejected Vice Chancellor Strine‘s conclusion in Production Resources Group v. NCT Group, Inc. that creditors of an insolvent companies may bring direct claims against directors for breach of fiduciary duties.  However, the Court concluded that “the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.”

In reaching these conclusions, the Court’s position was closer to the one espoused by me and and Kelli Alces in our article, Directors’ Duties in Failing Firms, than to the theory espoused by Steve Bainbridge in Much Ado About Little? Directors’ Fiduciary Duties in the Vicinity of Insolvency.

Because I think that the differences between the papers help in understanding the Gheewalla opinion, I think it’s worth laying out our respective positions.


Delaware’s Zone of Insolvency Doctrine Refined

This post is by Theodore Mirvis of Wachtell, Lipton, Rosen & Katz. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Doubtless, the “zone of insolvency” is a scary place.  But it got a bit less scary, at least as to fiduciary claims against directors by creditors, when the Delaware Supreme Court affirmed the dismissal of a claim against the directors of Clearwire Holdings.  The decision, noted in this Memorandum, suggests an important refining of who-owes-what-duties-to-who when directors are in the “zone.”

The VLR Symposium on The Myth of the Shareholder Franchise

The May 2007 issue of the Virginia Law Review is now out.  The issue includes The Myth of the Shareholder Franchise, by Lucian Bebchuk, and five responses to it.  The respondents put forward vigorous critiques to Bebchuk’s call for reforming corporate elections.

One response, The Many Myths of Lucian Bebchuk, is by Martin Lipton and William Savitt of Wachtell, Lipton, Rosen & Katz.  Lipton has previously participated in two high-profile exchanges with Bebchuk.  In 2002, Lipton published Pills, Polls, and Professors Redux in the University of Chicago Law Review, a response to Bebchuk’s article on The Case Against Board Veto in Corporate Takeovers.  And in 2003, Lipton and his partner Steven A. Rosenblum published Election Contests in the Company’s Proxy: An Idea Whose Time Has Not Come in The Business Lawyer, setting forth their objections to Bebchuk’s analysis in The Case for Shareholder Access to the Ballot.

A second response, Too Many Notes and Not Enough Votes: Lucian Bebchuk and Emperor Joseph II Kvetch About Contested Director Elections and Mozart’s Seraglio, is by Yale Law School professor Jonathan R. Macey.  In 2002, in The Business Lawyer, Macey published a critique of an article by Bebchuk and Allen Ferrell, A New Approach to Takeover Law and Regulatory Competition, which called for strengthening shareholder rights with respect to certain rules-of-the-game decisions.  Bebchuk and Ferrell responded with On Takeover Law and Regulatory Competition.

A third response, Professor Bebchuk’s Brave New World: A Reply to The Myth of the Shareholder Franchise, is by John F. Olson, a senior partner with Gibson, Dunn & Crutcher.

A fourth response, The Mythical Benefits of Shareholder Control, is by UCLA Law School professor Lynn A. Stout.  Stout has also responded to Bebchuk’s work in the past.  In 2002, she published Do Antitakeover Defenses Decrease Shareholder Wealth? in the Stanford Law Review, responding to The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, by Bebchuk and his Harvard colleagues John Coates and Guhan Subramanian.

The final response, The Stockholder Franchise is Not a Myth: A Response to Professor Bebchuk, is by E. Norman Veasey, retired Chief Justice of the Delaware Supreme Court.

Judging by the lengthy history of the debate on shareholder rights and the allocation of power between boards and shareholders, the last word on this subject may not have been spoken.

Implications of the New SEC Penalty Policy

This post is by Theodore Mirvis of Wachtell, Lipton, Rosen & Katz.

SEC Chairman Christopher Cox recently announced a new protocol for the negotiation of a monetary settlement by the agency’s enforcement staff.  In a pilot test, the staff will be required to get a green light from the Commission before starting to negotiate.  There is some uncertainty, to say the least, about how this will work, as this memo points out, including as to the established Wells process.

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