Monthly Archives: October 2007

What Happens to Votes on Stockowner Proposals?

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

Corporate democracy depends upon stockowners being able routinely to promote actions on the governance of the corporation. Unfortunately, managements have been able to ignore votes on stockowner proposals, essentially doing whatever they choose notwithstanding the shareholder vote. Bylaws are typically bereft of any provisions governing the implementation of stockowner proposals, and it is nearly impossible for stockowners to discover the results of the vote, the require standard for passage of the proposal, the board’s subsequent deliberations on a “passed” proposal, and the stockowners’ ability to enforce a “passed” proposal.

One major company, however, does disclose these procedures to the public. Occidental Petroleum Corporation started reporting the procedural requirements governing stockowner proposals in 2003 when it was confronted with my proposal requesting that it do so, and Occidental has reported every year since.

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Efforts To Protect Privilege Falling Short

This post comes to us from Jonathan Hayter of the National Law Journal.

The National Law Journal recently published Efforts To Protect Privilege Falling Short, an analysis of the effectiveness of the so-called McNulty Memorandum, which is designed to curb misconduct by prosecutors seeking privileged information from companies during corporate investigations. The article describes a report on the issue recently produced by former Delaware Chief Justice E. Norman Veasey, now a senior partner at Weil, Gotshal & Manges LLP, for the Senate Judiciary Committee.

Serving pro bono as a “neutral narrator” at the request of the Coalition to Protect the Attorney-Client Privilege, the former Chief Justice spoke personally with defense counsel about the progress made by the Justice Department and other government agencies since the McNulty Memorandum was issued. According to the article, many respondents reported progress by the government, but those presenting post-McNulty information expressed doubts about the effectiveness of the Memorandum in curbing the practices it was intended to address.

Respondents reported a range of experiences with prosecutors. In some cases, according to the article, respondents said that prosecutors claimed not to know about the existence of the Memorandum–and sometimes attempted to avoid the Memorandum’s reporting requirements by pressuring defense counsel.

The full article is available here.

Scheme Supreme

I recently published Scheme Supreme, an analysis of Stoneridge Investment Partners LLC v. Scientific Atlanta, Inc., in which the Supreme Court will decide whether third parties may be held liable for violations of federal securities laws. The article points out that much commentary on Stoneridge has oversimplified the case, suggesting that third-party liability was foreclosed in Central Bank v. First Interstate Bank when in fact Central Bank explicitly left the issue open.

Having served as special counsel to the U.S. Senate Committee on Government Affairs in the Enron investigation, in my view Stoneridge will be crucial in determining whether the true culprits in major corporate scandals can be held liable under the securities laws. The opening paragraph of Scheme Supreme explains:

The Supreme Court recently heard oral argument in the case of Stoneridge Investment Partners LLC v. Scientific Atlantic, Inc. The case will be the latest of numerous Supreme Court cases that have given substance to the nature and extent of liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. The facts in Stoneridge, as well as those of other companion cases awaiting action by the Court (e.g., Enron), have been the subject of numerous Wall Street Journal editorials over the past two years. The most recent, A Class Action Scheme, referred to Stoneridge as “the business case of the year.” That’s cliche and, like much of the discussion of the theoretical underpinnings of the case of the last two years, understates the importance of the case. Stoneridge will be the most important securities case in a generation–a veritable Brown v. Board of Education of securities law–further refining the question of who can be sued and who cannot under Rule 10b-5.

The full article is available for download here.

Judicial Scrutiny of Deal Protection Measures

This post is from Steven M. Haas of Hunton & Williams LLP. 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.

One consequence of the M&A boom that charged into the first half of 2007 before sputtering out this summer is that it put the validity of deal-protection measures back in the spotlight.  I co-authored a piece with Travis Laster in last month’s M&A Lawyer entitled Judicial Scrutiny of Deal Protection Measures that discusses several recent Delaware decisions focusing, in particular, on termination fees.

The Caremark decision, for example, balked at the notion that a 3% termination fee was reasonable per se, while subsequent decisions–namely Netsmart, Topps, and Lear–upheld the validity of significantly higher termination fees.  (Editor’s Note: Our contributors give further background and analysis on Netsmart and Topps in posts here and here; analysis of Caremark is available here and here.)

The lesson for directors remains that the context of the deal always matters, and our article describes many of the typical justifications for deal protections that should be considered by boards and their counsel. We also build on recent court commentary on the issue of “equity value” versus “enterprise value” in reviewing termination fees under Unocal.

The full article is available here, and is being reproduced with the permission of Thomson West.

The SEC: Gatekeeper of Shareholder Rights?

Editor’s Note: The following post is from J. Robert Brown, Jr., University of Denver Sturm College of Law, and Sandeep Gopalan, Arizona State University Sandra Day O’Connor College of Law. Lynn Stout discussed her Wall Street Journal op-ed on the SEC’s upcoming vote in a post available here. Lucian Bebchuk recently posted here on a comment letter on these proposals submitted to the SEC by thirty-nine law professors.

Professor Lynn Stout recently published an op-ed in the Wall Street Journal entitled Corporations Shouldn’t Be Democracies. The piece opposes shareholder access to the proxy for the adoption of election-related bylaws and urges the Commission to adopt a proposed rule that would eliminate such access. (One of us has explained our opposition to the no-access proposal in a comment letter submitted by the Race to the Bottom Blog.) The absence of concrete data in the piece exemplifies the difficulty opponents have had in developing credible positions against shareholder access.

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Does Delaware Compete?

This post is from Lawrence A. Hamermesh of Widener University School 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.

On Friday, September 28, on the occasion of the Annual Francis G. Pileggi Distinguished Lecture in Law, sponsored by Widener University Law School’s Delaware Journal of Corporate Law, Harvard Law Professor Mark Roe presented his paper Does Delaware Compete?. The audience included leading Delaware lawyers and judges–both sitting and retired–eager to hear about the state of interstate corporate chartering competition. Yet, describing what he calls a “revisionist perspective,” Professor Roe argued that such competition no longer meaningfully exists: Delaware has won, and no other state is bothering to compete.

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The Economic Consequences of Legal Origins

Recently, in the Law School’s Seminars in Law & Economics and Law, Economics, and Organization, Florencio Lopez de Silanes presented his latest work with Rafael La Porta and Andrei Shleifer (LLS) on legal origins. Over the last ten years, LLS and different co-authors collected data on various sets of legal rules in up to 129 countries. They covered areas of law ranging from civil procedure to military conscription, but mostly focused on legal rules particularly relevant to corporate finance. In all their studies, LLS invariably found that common law countries had “better” laws than civil law countries, particularly those of the French legal family. In particular, it appeared that common law countries were much better at protecting investors, and hence developed larger and more liquid financial markets.

These findings had an enormous academic and real-world impact–and generated a good deal of controversy. In The Economic Consequences of Legal Origins, written for the Journal of Economic Literature and presented at the Law and Economics seminar, LLS provide a synthesis of the academic debate that has taken place over the last ten years. Here is their abstract:

“In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also examine the effects of legal origins on resource allocation and economic growth. Finally, we address a broad range of objections to the empirical claim that legal origins matter.”

The paper’s survey of the existing literature is outstanding. Yet the paper’s main contribution is its articulation of a “unified interpretation” of the empirical results. LLS “develop the Legal Origin Theory, namely that legal origins represent fundamentally different strategies of social control of economic life.” A big advantage of this theory is that it can explain why legal origins also seem to matter in areas dominated by statutes, such as military conscription or the regulation of entry of new businesses. These subjects had eluded previous attempts at explanation; earlier hypotheses had usually focused on the differences between judicial and legislative law-making.

One may wonder, however, what is specifically “legal” about the “Legal Origins Theory” as now articulated by LLS. To be sure, the theory predicts differences in legal rules as found in the data collected by LLS and others. But the theory seems to locate the root cause of these differences in the cultural and political inclinations of countries’ populations or elites rather than in institutional differences (even though LLS argue vigorously against competing cultural and political explanations in the paper). Among the many questions raised by the theory, then, is how these inclinations could have been so profoundly influenced by the identity of the colonizing power–which is ultimately what legal origins refers to (where a country chose its legal family, as in the case of Japan, legal origin is endogenous and hence does not have explanatory power). Likewise, one might ask how these inclinations could be so stable over time, especially through the many and often profound changes in local political climate.

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CEO Tenure, Performance and Turnover

This post is from John Coates and Reinier Kraakman of Harvard Law School.

The Program on Corporate Governance has recently released our paper CEO Tenure, Performance and Turnover in S&P 500 Companies.  As Dennis Berman noted recently, our study identifies two groups of CEOs, ”owner-CEOs” and ”manager-CEOs,” and shows that manager-CEO retirements increase substantially during the fifth year of the CEO’s tenure.  The abstract of the piece is as follows:

The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance.  However, less is known about the institutional and personal correlates of CEO turnover.  In this study, we find two CEO characteristics interact with turnover: tenure and ownership.  We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns–”owners” (who have large personal shareholdings) and ”managers” (who have smaller holdings).  The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions.  Turnover of all kinds is low during a CEO’s first four years on the job.  In contrast, once a CEO reaches his fifth year, retirements begin a multi-year increase and exits via merger exhibit a large one-year spike.  These term effects are strongest for relatively young CEOs, and appear to be independent of such factors as firm performance or retirement norms.  We also find that deals and retirements are partially related, but partially distinct, modes of CEO turnover in other respects, which are similar along some dimensions but sharply different along others.

The full Article can be downloaded here.

Shareholder Rights?

This post is from Robert A.G. Monks of Lens Governance Advisors.

A recent decision of the federal District Court for the District of Massachusetts has ruled that I cannot serve as class representative in a securities-fraud class-action because, the court said, I am an “activist shareholder.”  The decision concludes:

“Both [John P.M.] Higgins and Monks are “shareholder activists” and, as such, subject to unique defenses.  Specifically, defendants aver, Higgins and Monks purchased shares of [the company] to “engag[e] in activist strategies [and] overcome existing corporate governance problems to enhance shareholder value.” In particular, defendants argue that Higgins and Monks purchased shares . . . on the theory that the company was poorly managed and that the stock price would likely decline; therefore, they could not have relied on any alleged misstatements.  They point to, inter alia, the following facts: (1) Higgins and Monks “had numerous communications with . . . directors and management”; (2) Monks had two friends “[who] were [directors], whom he regarded as sources of inside information”; and (3) Monks “published several books . . . which undermine any suggestion by plaintiffs’ counsel that Monks[ or] Higgins relied on any alleged misstatements by Defendants.”

While their status as “shareholder activists” does not, ipso facto, disqualify Higgins and Monks from serving as class representatives, in this case, the record suggests that they may be subject to unique defenses and therefore do not satisfy the “typicality” requirement.  Accordingly, I decline to name them class representatives.”

Over many years of active involvement in the governance of American corporations, I have come to the conclusion–documented in Corpocracy, to be published by Wiley this November–that shareholder rights are, in fact, a nullity.  It has often been observed that the only meaningful role for an American shareholder is as a plaintiff, particularly in class-action litigation.  There is, therefore, profound irony in the fact that someone characterized as an “activist shareholder” would, by virtue of that designation, be foreclosed from representing a class in securities-fraud suits.  The logical and linguistic torture of being excluded from the class–made all the more difficult by the fact that it was gratuitous, given that the court permitted another plaintiff to serve as class representative–simply because I am a “shareholder activist,” subject only to the assurance that this status is not an ipso facto disqualifier from serving as a representative, is less painful than the realization that, in the year 2007 in the Commonwealth of Massachusetts, one is literally powerless to have an impact in cases of acknowledged corporate fraud.

The district court’s Memorandum of Decision is available here.

Corporations Shouldn’t Be Democracies

Editor’s Note: This post is from Lynn A. Stout of Cornell Law School. We also recently posted a comment letter from thirty-nine other law professors urging the SEC not to adopt any proposal that would interfere with shareholder access to the corporate ballot. That post is available here.

The Wall Street Journal recently published my op-ed, Corporations Shouldn’t Be Democracies, on the SEC’s forthcoming decision on two proposed rules governing shareholder access to the corporate proxy.  As the article notes, Chairman Cox is about to cast a crucial vote on the issue, and he should vote not to expand shareholder access to the corporate ballot. The piece explains:

Successful corporations are not, and never have been, democratic institutions. Since the public corporation first evolved over a century ago, U.S. law has discouraged shareholders from taking an active role in corporate governance, and this “hands-off” approach has proven a recipe for tremendous success.

The full article is available here.

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