Yearly Archives: 2007

Comment Letter of Thirty-Nine Law Professors in Favor of Placing Shareholder-Proposed Bylaw Amendments on the Corporate Ballot

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, October 5, 2007
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Editor’s Note: This post is from Lucian Bebchuk of Harvard Law School.

Thirty-nine law professors, including myself, have filed a comment letter in favor of placing shareholder-proposed bylaw amendments on the corporate ballot.

The SEC has been seeking comments on two proposals that would allow companies to exclude all or some shareholder-proposed bylaw amendments concerning shareholder nomination of directors. The comment letter opposes both proposals. It urges the SEC to avoid producing impediments to shareholders’ exercise of their right under state law to initiate bylaw amendments concerning shareholder nomination of directors.

There is substantial disagreement among the law professors submitting the comment letter regarding the substantive merits of proxy access bylaws, and thus as to whether shareholders would benefit from adopting such bylaws. We are unanimous, however, in our belief that shareholders should be allowed to make the decision on this subject for themselves, and that companies should not be allowed to make the decision for them by excluding proposed bylaw amendments from the corporate ballot.

The law professors submitting the comment letter are affiliated with twenty-four universities around the country. The full list of the professors and their affiliations is as follows:
Ian Ayres (Yale Law School);
Michal Barzuza (University of Virginia School of Law);
Lucian A. Bebchuk (Harvard Law School);
Laura N. Beny (University of Michigan Law School);
Lisa E. Bernstein (University of Chicago Law School);
Bernard S. Black (University of Texas Law School);
William W. Bratton (Georgetown University Law Center);
Richard Buxbaum (University of California at Berkeley);
William J. Carney (Emory Law School);
Stephen Choi (New York University School of Law);
John C. Coffee, Jr. (Columbia Law School);
James D. Cox (Duke Law School);
Lawrence A. Cunningham (George Washington University Law School);
George W. Dent, Jr. (Case Western Reserve University School of Law);
Einer R. Elhauge (Harvard Law School);
James A. Fanto (Brooklyn Law School);
Allen Ferrell (Harvard Law School);
Jill E. Fisch (Fordham University Law School);
Merritt B. Fox (Columbia Law School);
Tamar Frankel (Boston University School of Law);
Jesse M. Fried (University of California at Berkeley);
Jeffrey N. Gordon (Columbia Law School);
Henry Hansmann (Yale Law School);
Jon D. Hanson (Harvard Law School);
Peter H. Huang (Temple University James Beasley School of Law);
Marcel Kahan (New York University School of Law);
Vikramaditya S. Khanna (University of Michigan Law School);
Reinier H. Kraakman (Harvard Law School);
Donald C. Langevoort (Georgetown University Law Center);
Louis Lowenstein (Columbia Law School);
Steven G. Marks (Boston University School of Law);
Dale Arthur Oesterle (Moritz College of Law, Ohio State University);
Richard W. Painter (University of Minnesota Law School);
Frank Partnoy (University of San Diego School of Law);
Katharina Pistor (Columbia Law School);
Robert A. Ragazzo (University of Houston Law Center);
Kenneth E. Scott (Stanford Law School);
D. Gordon Smith (Brigham Young University); and
Guhan Subramanian (Harvard Law School).

The full text of the comment letter is available here.

Scheme Liability, Section 10(b), and Stoneridge

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Thursday, October 4, 2007
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This post comes to us from Professor Jonathan Adler of the Case Western Reserve University School of Law.  Additional posts on Stoneridge and its potential implications are available here and here.

Next Tuesday, the Supreme Court of the United States will hear oral argument in Stoneridge Investment Partners v. Scientific Atlanta, the most important securities-law case in years.  The question presented–when, if ever, shareholders may sue third parties for their participation in allegedly fraudulent transactions with a public corporation–could have profound economic and legal implications.

The case has attracted over two dozen amicus briefs, filed by everyone from the National Association of Manufacturers to the Council of Institutional Investors.  Over 30 states and divided current and former SEC Commissioners have weighed in.  The case prompted considerable internal debate within the Bush Administration before the Justice Department finally filed a brief opposing liability in the case.

This Friday, the Center for Business Law and Regulation at the Case Western Reserve University School of Law and the Federalist Society’s Corporate Law Practice Group are co-sponsoring a half-day conference analyzing the case, entitled Scheme Liability, Section 10(b), and Stoneridge Investment Partners v. Scientific Atlanta.  Two morning panels will examine the legal and policy questions at issue in the case.  Speakers will include Professors Stephen Bainbridge (of the UCLA School of Law), Barbara Black (of the University of Cincinnati College of Law), Jay Brown (of the University of Denver Sturm School of Law), and Richard Painter (of the University of Minnesota Law School), as well as Andrea Seidt (an Assistant Attorney General of Ohio) and James Copland (of the Manhattan Institute for Policy Research).  A third panel will feature a debate between Eric Isaacson (of the Coughlin Stoia firm) and Ashley Parrish (of Kirkland & Ellis) on the merits of the case.The event is free and open to the public and will be webcast live.

Further details, including registration and information on how to view the webcast, are available here.

Motivations for Public Equity Offers: An International Perspective

Posted by Michael S. Weisbach, Fisher College of Business at The Ohio State University, on
Tuesday, October 2, 2007
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This post is from Michael S. Weisbach of Fisher College of Business at The Ohio State University.

I have recently posted my article Motivations for Public Equity Offers: An International Perspective, coauthored with Woojin Kim.  The article examines the reasons that firms tap public equity markets by analyzing the ultimate uses of the funds raised through both initial public offerings (IPOs) and seasoned equity offerings (SEOs) in 38 countries between 1990 and 2003.

It seems that firms spend the money raised mostly on capital expenditures and R&D, suggesting that demand for capital to finance investments is indeed an important motivation behind public equity offers.  On the other hand, some firms seem to take advantage of mispricing in the market by hoarding more cash and offering more old shares–potentially held by insiders–when market valuation is high relative to accounting numbers.  In short, both market timing as well as investment financing seem to drive firms to engage in public offerings.

The full article is available here.

The Rise of the Statutory Business Trust

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, October 1, 2007

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This Thursday and Friday, Harvard Law Professor Robert Sitkoff, recently named one of Lawyers Weekly‘s up and coming lawyers of 2007, will travel to Delaware for a stay as a visiting scholar at Widener University School of Law.  The visit will feature a presentation of his article Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, co-authored with Jonathan Klick.  (Professor Sitkoff described that article in this post.) 

On Friday at 2:00 PM, Professor Sitkoff will deliver a talk entitled The Rise of the Statutory Business Trust as part of Widener’s visiting scholar lecture series.  Vice Chancellor Strine will also offer commentary on that subject following Professor Sitkoff’s lecture. Details on the talk, and Professor Sitkoff’s visit, are available here.

The “Tellabs Excuse” and Confidential Witnesses

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, September 28, 2007
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Editor’s Note: This post is from J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

When the Supreme Court decided Tellabs, Inc v. Makor Issues last June, holding that securities-fraud plaintiffs must plead facts giving rise to a “powerful or cogent” inference of scienter to survive a motion to dismiss under the Private Securities Litigation Reform Act, I argued on this Blog and at The Race to the Bottom that the case did little to change the law, characterizing it as a victory for shareholders.  I noted, however, that Tellabs would provide an excuse to judges predisposed to dismissing securities class actions, allowing courts to dispose of suits on the ground that the complaint did not give rise to an inference of scienter “powerful or cogent” enough for the judges’ tastes. 

The Seventh Circuit has now provided the first example of the “Tellabs Excuse” at work: Higginbotham v. Baxter International.  (Primary materials from the case can be found here.)  While I expected that the federal courts would rely on Tellabs as a frequent basis for securities-fraud dismissals, I didn’t expect judges to go so far as to invoke Tellabs to eliminate the use of confidential witnesses to meet the pleading standard for securities class actions.  Nonetheless, that is awfully close to what the Seventh Circuit has done.

Baxter is a fairly traditional securities-fraud suit, turning on whether the complaint adequately alleged scienter.  The case involved allegations of fraud in Baxter’s Brazilian subsidiary, including conduct that ultimately required the company to restate its financial results.  On the day the problem in Brazil was announced, Baxter’s shares fell by 4.6%. 

The Seventh Circuit panel included Chief Judge Easterbrook and Judges Posner and Ripple, and it was clear at oral argument that Chief Judge Easterbrook and Judge Posner were unimpressed by the complaint.  (You can listen to the oral argument here.) 

For example, Chief Judge Easterbrook commented to plaintiffs’ counsel: “You’ve got a case where there are, there’s demonstrable, lying.  You choose not to sue about the demonstrable lies but to sue about things that it’s almost impossible to show scienter about and no one had any reason to lie about.  It’s almost as if you set out to find the one kind of suit that would be blocked by the PSLRA and bring that.”  Judge Posner, too, was clearly unmoved by the complaint.  At one point he described one of the plaintiffs’ arguments as “ridiculous.”  And the panel opinion went even further, applying Tellabs virtually to exclude the use of confidential witnesses in securities suits.

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Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off

Posted by Robert Sitkoff, Harvard Law School, on
Thursday, September 27, 2007
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This post is from Robert Sitkoff of Harvard Law School.

I recently posted my new article, Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, with my co-author Jonathan Klick, here.  The article offers the first empirical analysis of the agency costs of the charitable trust form and will be published in the Columbia Law Review in Spring 2008.  The Abstract explains:

In July of 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust’s investment portfolio by selling the Trust’s controlling interest in the Hershey Company.  The Company’s stock jumped from $62.50 to $78.30 on news of the proposed sale.  But the Pennsylvania attorney general, who was then running for governor, brought suit to stop the sale on the grounds that it would harm the central Pennsylvania community.  In September 2002, after the attorney general obtained a preliminary injunction, the trustees abandoned the sale and the Company’s stock dropped to $65.00.  Using standard event study econometric analysis, we find that the sale announcement was associated with a positive abnormal return of over 25 percent and that canceling the sale was followed by a negative abnormal return of nearly 12 percent.  Our findings imply that instead of improving the welfare of the needy children who are the Trust’s main beneficiaries, the attorney general’s intervention preserved charitable trust agency costs on the order of roughly $850 million and prevented the Trust from achieving salutary portfolio diversification.  Overall, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Hershey Company.  Our findings contribute to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charitable entities by the state attorneys general.  Our findings also contribute to the literature of corporate governance by measuring the difference in firm value when the Hershey Company was subject to a takeover versus under the control of a controlling shareholder.

The full article can be downloaded here.

SEC Proposals on Shareholder Proxy Access

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on
Wednesday, September 26, 2007
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This post is from Theodore Mirvis of Wachtell, Lipton, Rosen & Katz.

Wars have many fronts.  The battle lines in the fight between the director-centric and the shareholder-centric models of the world now once again include the SEC, as it considers whether to allow shareholders to use a company’s proxy statement for director nominations.  Vigilance is required, and unmasking the true agenda is essential to get to the nub.

Here is one effort to prevent the dismantling of the system that has supported the most successful economy in the history of the world–and an argument against radical surgery for a healthy patient, driven by the “doctor’s” need for work.

Can Third Parties Be Held Liable for Securities Fraud? Gearing Up for Stoneridge

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Tuesday, September 25, 2007
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The National Law Journal recently published Securities Case Has Law Firms on Edge, an assessment of the potentially far-reaching implications of Stoneridge Investment Partners v. Scientific-Atlanta, which will be argued before the Supreme Court of the United States on October 9.  The article notes that, in Stoneridge, the Court will decide: “Who, besides the chief actor in a securities fraud, can be sued in private securities litigation?”

As the piece explains, the case has practitioners on both sides of the securities-litigation bar rather nervous.  If third parties can be held liable in private securities litigation, the article notes, the case will have major implications for law firms, investment banks, consultants, and accounting firms participating in the disclosure and compliance process.  On the other hand, plaintiffs worry that Stoneridge will curb the reach of the securities laws; as Jay Brown notes in the article, “there is fear among shareholder and investor groups that as a matter of policy, the Supreme Court will rewrite . . . Rule 10b-5 to continue to make it difficult to use.”  (Jay has posted about Stoneridge on our Blog here.)

Given its potentially far-reaching ramifications, the case has generated significant interest, with more than a dozen parties filing friend-of-the-Court briefs.  The United States has argued that, although third parties such as investment bankers can be held liable for securities fraud in some cases, to prevail plaintiffs must show that they relied on misstatements by the third party; since third-party communications with issuers are rarely made public, showing such reliance will often be difficult.  The Government’s position contradicts the views of a majority of the present members of the Securities and Exchange Commission and those of many lawmakers.

The academy has also weighed in–on both sides of the case.  Stephen Bainbridge, Robert Clark, John Coates, Allen Ferrell, and Larry Ribstein, along with several former SEC Commissioners, have filed a brief urging the Court that third-party liability in this case is inappropriate.  Several observers have argued that permitting third party liability in a case such as this would impose substantial costs on any entity doing business with issuers in the future.  On the other hand, the article explains, Jill Fisch of Fordham Law School has filed a brief urging that third-party liability will be limited by the requirement that a defendant actually engage in deceptive conduct.

As Jay Brown explained here, legal analysts are having difficulty anticipating the views of Justice Samuel Alito and Chief Justice John Roberts on the case.  Until recently it appeared that both the Chief Justice and Justice Breyer would be recused from the case; but a recent order indicates that the Chief Justice will participate.  In light of the other Justices’ votes in a previous case, Central Bank v. First Interstate Bank, it appears that the Chief Justice and Justice Alito will be decisive to the outcome in Stoneridge.  The arguments on October 9 might thus provide some insight as to what we can expect the Court to tell us about third-party liability this Term.

Does Delaware Compete?

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Monday, September 24, 2007
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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.

This Friday in Wilmington, Delaware, Professor Mark Roe (who has previously posted on our Blog here) will deliver the Francis G. Pileggi Distinguished Lecture in Law.  Professor Roe’s talk, Does Delaware Compete?, will describe the competitive setting in which Delaware sets corporate-law standards.  The Abstract of Professor Roe’s lecture follows:

After a century of academic thinking that states compete for corporate chartering revenues, a revisionist perspective has emerged in which states do not compete for chartering revenues, leaving Delaware all alone in the interstate charter market.  Firms either stay incorporated in their home state or reincorporate in Delaware, but rarely go elsewhere.  What’s more, other states don’t even try to provide the services Delaware provides.  Delaware has a monopoly, one that goes unchallenged.

I here use industrial organization concepts to better illuminate this competitive setting.  Even if no other state seriously challenges Delaware for the reincorporation business, it still must operate in three key competitive arenas.  First, it must attract firms to reincorporate away from their home state.  The dynamism of American business interacts with the corporate chartering structure to create a broad avenue of chartering competition, even if no state actively seeks to take chartering revenue away from Delaware.  Second, Delaware has reason to fear a once-and-for-all exit of corporate America to another state.  It’s a slim risk, but it would be catastrophic for Delaware’s budget and the once instance we have of serious state-to-state competition–New Jersey’s demise as the corporate capital at the beginning of the twentieth century–was just that: rapid exit and a new winner, not long-term hand-to-hand combat.  Similarly, and third, Delaware has reason to fear federalization of core elements of its corporate law even if no other state actively competes for charters.  A reputation for bad decision making (or bad decision makers) could impel Congress to displace Delaware, in whole or in part, perhaps as an excuse during an economic downturn.  While the odds of full displacement are quite low, Sarbanes-Oxley shows us that the odds of substantial partial displacement are not.

These ideas have parallels in the industrial organization, antitrust literature on contestable markets: a single producer can dominate a market, but, depending on the nature of its technology and the market, it could lose its market share overnight.  Hence, it acts like a competitor on some issues, or knows it must provide a package that overall is attractive to the primary users of corporate law.  Delaware could face this kind of catastrophic loss in two dimensions: the traditional horizontal one of a competing state, and the vertical one of federal displacement.

Further details on Professor Roe’s upcoming talk are available here.

Vintage Capital and Credit Protection

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Friday, September 21, 2007
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The fall’s inaugural Seminar in Law, Economics, and Organization this week featured a presentation by Efraim Benmelech on Vintage Capital and Credit Protection, a recent paper coauthored with Nittai Bergman.  The paper uses an extensive dataset on the age of aircraft around the world to assess whether creditor protections are linked with increased investment in newer technologies by commercial airlines.  The Abstract explains:

We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry.  Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage as well as firms with larger aircraft fleets.  Moreover, we find that more profitable airlines, airlines with lower leverage ratios, and airlines with less debt overhang are less sensitive to prevailing creditor rights in their country.  We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies, and foster productivity.

The full study is available for download here.

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