Yearly Archives: 2007

Bebchuk’s and Kraakman’s Articles Make the Top Ten List

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, May 4, 2007

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This year’s list of Ten Best Corporate and Securities Articles, selected by an annual poll of corporate and securities law academics, includes two selections from the Harvard Law faculty: Professors Lucian Bebchuk and Reinier Kraakman.  The articles were selected from a field of 450 pieces, and the selected articles will be reprinted in an upcoming issue of the Corporate Practice Commentator.  This is the seventh straight year that an article from an HLS professor has been honored, and the sixth year in a row that HLS has had multiple selections.

Bebchuk’s article, Letting Shareholders Set the Rules, was published in the April 2006 issue of the Harvard Law Review.  Kraakman’s article, Law and the Rise of the Firm, which he co-authored with Henry Hansmann and Richard C. Squire, was published in the March 2006 issue of the Harvard Law Review.

Does Enforcement Intensity Explain Financial Development?

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Thursday, May 3, 2007
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Classes may have ended here at Harvard, but the Law and Economics Seminar closed the Spring on a high note with a fascinating presentation by John Coffee of his new paper Law and the Market: The Impact of Enforcement.  The central thesis of the paper is that the intensity with which securities laws are enforced, rather than legal origin, explains differences in financial development across countries.

Professor Coffee’s paper contributes to a scholarly debate, now nearly a decade old, as to whether legal origin adequately explains differences in development.  The seminal paper on this subject concluded that common-law nations experienced faster growth than their civil-law counterparts, but the legal origins analysis has recently come under methodological and substantive criticism.  This paper argues that enforcement of securities law, rather than the source of the substantive law on the books, explains differences in financial development across countries.  Professor Coffee offers very persuasive evidence for that claim, although I’m less convinced that the evidence supports the policy implications offered in the piece.

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Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, May 1, 2007
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Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law

As the Securities and Exchange Commission prepares to hold roundtable discussions on the relationship between proxy rules and state corporation law, it might be worth considering the overall role of the Commission in the corporate governance process.  This is the subject of my recent essay, Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure, and a topic that will be discussed at The Race to the Bottom blog.

The Commission has traditionally been viewed as responsible for disclosure, with the substance of corporate governance left to the states, as if the two were distinct.  In adopting the Exchange Act, however, Congress expected disclosure to help reduce certain abusive managerial practices, including self-perpetuation in office and excessive compensation.  (The legislative history, and especially the discussion of disclosure requirements at pages 12-14 of the House Report recommending passage of the Act, make clear that Congress expected disclosure to rein in managerial abuses.)  In other words, from the outset, Congress expected the Commission to be involved in the corporate governance process. 

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Morris Nichols Memorandum on Direct Claims Challenging Controlling-Shareholder Transactions

Posted by A. Gilchrist Sparks, Morris, Nichols, Arsht & Tunnell LLP, on
Monday, April 30, 2007
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This post is by A. Gilchrist Sparks of Morris, Nichols, Arsht & Tunnell 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.

My colleagues R. Judson Scaggs, William Lafferty, and Jeffrey Wolters of Morris, Nichols, Arsht & Tunnell have prepared this highly insightful memorandum on the Delaware Supreme Court‘s recent en banc decision in Gatz v. Ponsoldt, which held that shareholders may bring direct (as well as derivative) claims to challenge transactions orchestrated by a controlling shareholder.

The memo is a must-read for corporate counsel and directors of firms with controlling shareholders, who are increasingly subject to direct claims for violations of their fiduciary obligations to minority shareholders.

The North Dakota Experiment: Bundle Up!

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, April 26, 2007
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Editor’s Note: This post is by Lawrence A. Hamermesh of the Widener University School of Law.

With the able assistance of Bill Clark (one of the finest business legislation drafters around), North Dakota has adopted legislation that permits public companies to opt into a legislative scheme that includes a whole bunch of rules that are reported to be “shareholder friendly.”  Mark Roe says (and I think he’s right) that we shouldn’t expect to see companies reincorporating in North Dakota; more likely, he says, is the possibility that IPO companies will use the new North Dakota option (although Mark wisely doesn’t put money down on this either).  Some say, in any event, that this puts a whole lot of pressure on us in Delaware to do something similarly “shareholder friendly.”

The logic of this escapes me.  I’m pretty confident that if anyone thought that this North Dakota package of rules was really a good thing for a public company, they could create the same package by incorporating in Delaware (or lots of other states, for that matter) under a Certificate of Incorporation that adopted all of the North Dakota provisions.  (Section 102(b)(1) of the Delaware General Corporation Law would permit any company incorporated there to do so.)  Or, if you thought that one or two of these provisions was a bad idea, you could simply leave them out.  Some people, for example, don’t think it’s a good idea to have a permanent statutory compulsion to separate the Chairman and Chief Executive Officer positions; others might want a threshold lower than 5% (the North Dakota rule) to qualify as a shareholder eligible to get access to management’s proxy statement.

As far as I can tell, however, it’s not clear that you can pick and choose pieces you like and throw out the ones you don’t like if you adopt a corporate charter that elects to be governed by the “shareholder friendly” North Dakota statutory package.  In terms of freedom of choice, this is pretty thin soup.  Can you imagine how a good shareholder activist would respond to a board-proposed charter amendment that provided for proxy access and mandated majority voting, but at the same time created a staggered board?  You’d hear howls of unfair bundling so fast it would make your head spin.  (Unless, of course, the SEC shot it down first under Rule 14a-4 for just that reason.)  Why should bundling accomplished by the North Dakota act be viewed as more benign?

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Joe Nacchio and SOX

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, April 25, 2007
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Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

I offer in this post some personal observations on the trial and conviction of Joe Nacchio, the former CEO of Qwest Communications, as well as some thoughts about the impact of SOX.  The Race to the Bottom has blogged the entire trial, with students or faculty attending all of the sessions. 

On Thursday, April 19, the jury found Nacchio guilty of 19 counts of insider trading (out of 42), all involving trades occurring in April and May of 2001, after the close of the first quarter.  During this time, Nacchio learned that Qwest’s “recurring revenues” (phone, internet, and data transfer) would be insufficient for the company to meet its publicly stated earnings guidance.  Despite these warnings, Nacchio reaffirmed earnings-per-share guidance and, during the same approximate time period, sold somewhere around 1.3 million shares.

A critical issue in the case concerned the failure of Qwest to disclose that its growth was dependent on non-recurring sources of revenue, a category labeled throughout the trial as “one-timers,” or Indefeasible Rights of Use (“IRUs”).  Had this information been disclosed, it is highly unlikely that the insider trading case against Nacchio would ever have  been brought.  The disclosure obligation, of course, rests with Qwest.  Why wasn’t this information disclosed?

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The Myth of the Shareholder Franchise

Posted by Lucian Bebchuk, Harvard Law School, on
Tuesday, April 24, 2007
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This post is by Lucian Bebchuk of Harvard Law School.

I recently completed my final revision of a paper on The Myth of the Shareholder Franchise. The paper will come out in the Virginia Law Review later this spring together with responses to it by Martin Lipton, Jonathan Macey, John Olson, Lynn Stout, and E. Norman Veasey. The abstract of the paper is as follows:

The power of shareholders to replace the board is a central element in the accepted theory of the modern public corporation with dispersed ownership. This power, however, is largely a myth. I document in this paper that the incidence of electoral challenges during the 1996–2005 decade was very low. After presenting this evidence, the paper analyzes why electoral challenges to directors are so rare, and then makes the case for arrangements that would provide shareholders with a viable power to remove directors. Under the proposed default arrangements, companies will have, at least every two years, elections with shareholder access to the corporate ballot, reimbursement of campaign expenses for candidates who receive a sufficiently significant number of votes (for example, one-third of the votes cast), and the opportunity to replace all the directors; companies will also have secret ballot and majority voting in all directors elections. Furthermore, opting out of default election arrangements through share-holder-approved bylaws should be facilitated, but boards should be constrained from adopting without shareholder approval bylaws that make director removal more difficult. Finally, I examine a wide range of possible objections to the pro-posed reform of corporate elections, and I conclude that they do not undermine the case for such a reform.

The article is a work that has been long in the making. It is based on the Raben Lecture in Corporate Law I delivered at Yale Law School in October 2005 and the Uri and Caroline Bauer Lecture I delivered at Cardozo in September 2005. The paper continues my work on invigorating corporate elections in The Case for Shareholder Access to the Ballot and my work on increasing shareholder power in The Case for Increasing Shareholder Power and in Letting Shareholders Set the Rules. This is a subject on which I continue to work so comments would be most welcome.

The North Dakota Experiment

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, April 23, 2007
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Editor’s Note: This post is by Larry Ribstein of the University of Illinois College of Law.

Last week the North Dakota Legislature adopted the North Dakota Publicly Traded Corporations Act.  To quote the Act’s sponsor, the North Dakota Corporate Governance Council, the Act “provides a governance structure for publicly traded corporations that gives shareholders greater rights than they currently have under other state laws.  It has been designed to reflect the best thinking of institutional investors and governance experts and addresses each of the current hot topics in corporate governance.”  A director of the Council, and the law’s drafter, is William H. Clark, Jr., from Delaware’s neighbor, Pennsylvania.

In brief, the law permits firms incorporated under North Dakota law after July 1, 2007 to elect to include a provision in their articles that they elect to be subject to the new statute.  Shareholders then get a set of provisions that looks like a shareholder rights advocate’s wish list, including majority voting for directors, advisory shareholder votes on executive compensation committee reports, a right for certain shareholders to propose board nominees on the company’s proxy statement; reimbursement of proxy expenses to shareholders to the extent they are successful in getting nominees elected; a requirement of a non-executive board chair; and restrictions on poison pills and other takeover devices.  The Economist recently applauded the Flickertail State‘s plan “to poach company incorporations from Delaware” as “injecting some much-needed competition into the field of corporate law and governance.” 

As a longtime champion of state corporate competition, I suppose I should be happy to see this development.  Isn’t it an example of what Roberta Romano has called The Genius of American Corporate Law? Isn’t it, after all, an answer to those who say that we need to federalize corporate law to get reform?  Doesn’t it provide a natural experiment to see whether corporations really want the reforms that have been proposed?  Well, sort of.

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Receiving Emailed Updates on Our Posts

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, April 23, 2007

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Several readers have inquired as to whether we could arrange to notify you by email when one of our contributors has added something new. We’ve now arranged for FeedBlitz to update our readers by email each time we’ve added a new post.

The service is simple, free, and easy to use. If you’d like to sign up for email notifications each time a contributor adds something new to the Corporate Governance Blog, please click here.

An Inconvenient Location for the Annual Shareholders’ Meeting

Posted by Broc Romanek, TheCorporateCounsel.net, on
Thursday, April 19, 2007
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This post is by Broc Romanek of TheCorporateCounsel.net.

As most proxy season observers know, one of the oldest tricks in the book for defusing angry shareholders is to hold the annual stockholders’ meeting in some far-flung location, as noted in this recent Wall Street Journal article.  I’ve blogged about this topic once in a blue moon (or left comments on other blogs).

With the growing importance of annual shareholder meetings–due to the majority-vote movement and the potential elimination of broker non-votes in director elections–I believe it’s simply too risky from an investor relations perspective for any company to hold their meeting at an inconvenient location.  It’s only a matter of time before some bright journalist starts an annual “Top Ten Inconvenient Locations” list.  Trust me: no company wants to experience the heat that Home Depot did for its various annual meeting snafus last year…

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