Yearly Archives: 2007

A Friendly Tale of Hot Dogs and Trainwrecks

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Tuesday, June 19, 2007
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As I mentioned last week, Lawdragon has recently published a six-part profile, Storming the Castle, that describes the innovative integration of insights from practice into the newest corporate law course offerings here at Harvard.  The profile emphasizes how Professor Robert Clark and Vice Chancellor Leo Strine, who last year co-taught Mergers, Acquisitions, and Split-Ups, populated their syllabus with both the doctrinal building blocks favored by professors and the pragmatic lessons practitioners have gleaned from decades of experience negotiating mergers.

Topics ranged from poison pills to shareholder activism, and rarely does a one-semester syllabus dare to cover so much ground.  But what truly made the course unique was the panel discussions, hosted by the Program on Corporate Governance, in which expert practitioners were invited to explain and defend their views before overflow crowds of students and faculty.

Part III of Lawdragon‘s profile, A Friendly Tale of Hot Dogs and Trainwrecks, offers a fascinating description of the first panel presentation, which emphasized the notion that a merger functions, in many ways, as an extraordinary experience in contract negotiation.  (The role of contract law as an analytical tool for assessing mergers has been a frequent subject of courts and commentators alike.) The panelists included Richard Climan of Cooley Godward and Eileen Nugent and Lou Kling of Skadden Arps, each of whom brought decades of negotiating merger agreements–occasionally, apparently, with each other–to bear on the discussion.

The Hot Dogs and Trainwrecks profile, available here, is a must-read, giving readers insights on the negotiation of the famed material-adverse-change clause and its implications for buyer’s remorse in the merger market. In addition, the Program on Corporate Governance has posted a video of the entire panel discussion here. (video no longer available)

Response: Bringing Directors and Stockowners Together

Posted by Broc Romanek, TheCorporateCounsel.net, on
Tuesday, June 19, 2007
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This post is by Broc Romanek of TheCorporateCounsel.net.

I can’t help but post a brief response to Carl Olson’s recent post about allowing shareholders to directly communicate with directors. Although I agree that many companies should be doing a better job of ensuring that directors hear the perspective of shareholders–and even hear directly from shareholders under certain circumstances–I think it is unreasonable and impractical for shareholders to have unfettered access to directors.

The reality is that most communications sent to directors are of a trivial nature and would distract directors from the valuable (and limited) attention they can give to overseeing the company. Do we really want directors reviewing emails and letters from shareholders, who might also be customers with petty complaints about a product or service being defective? Shareholders don’t have unfettered access to senior managers at a company; why should they have that kind of access to directors who serve on a part-time basis?

As for the role of corporate secretaries in the “vetting shareholder communications” process, I can tell you from first-hand experience–I know many of the folks that serve in this capacity, and serve on the National Board and as head of the Mid-Atlantic Chapter of the Society of Corporate Secretaries–that secretaries view their primary duty as one of serving directors, not senior management. Thus, if a shareholder sends a communication that truly deserves to be seen by independent directors, corporate secretaries will ensure that directors see it.

Moreover, for those companies listed on the NYSE, under Section 303A.03 of the NYSE’s Listed Company Manual (as clarified in FAQ D.1, issued by the NYSE Staff in January 2004), corporate secretaries are required to follow instructions from non-management directors regarding “what, when, and how they want to review” any communications sent to the directors. In other words, the corporate secretary isn’t permitted to make any independent decisions as to what communications the directors see–and, of course, can’t share any communications with management unless instructed to do so by the non-management directors. This seems to me to be the most reasonable approach to ensuring that shareholders can communicate with directors–and hopefully is a solution that addresses Carl’s concerns about inappropriate screening of valuable shareholder communications.

Bebchuk’s “Case for Increasing Shareholder Power”: An Opposition

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on
Friday, June 15, 2007
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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.

Paul Rowe, William Savitt, and I have just released Bebchuk’s “Case for Increasing Shareholder Power”: An Opposition.  The Article argues that the sweeping changes in corporate law proposed in Lucian Bebchuk‘s The Case for Increasing Shareholder Power–in particular, vesting in shareholders the power to change the company’s charter and to authorize mergers–represent radical, risky changes in Delaware corporate law that would be both unwise and impractical.  In short, the case for Bebchukian revolution falls short.  The abstract describes the Article as follows:

This paper sets out the view that Lucian Bebchuk’s “case for increasing shareholder power” is exceedingly weak.  It demonstrates that Bebchuk’s proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bebchuk’s case is unsupported by any empirical data; that Bebchuk’s premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower), and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach.

The full Article is available here.

Storming the Castle

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, June 14, 2007
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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

Posted by Carl Olson, Chairman, Fund for Stockowners' Rights, on
Monday, June 11, 2007
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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:

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The Daily Deal on Steve Bainbridge

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Friday, June 8, 2007
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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.”

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The Daily Deal on Lucian Bebchuk

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, June 7, 2007
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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.

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

Posted by Larry Ribstein, University of Illinois College of Law, on
Wednesday, June 6, 2007
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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.

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Delaware’s Zone of Insolvency Doctrine Refined

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on
Tuesday, June 5, 2007
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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

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, June 4, 2007
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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.

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