Yearly Archives: 2007

The 100 Most Influential Players in Corporate Governance

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, September 20, 2007
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Directorship magazine has recently published The Directorship 100, a list of the 100 most influential players in corporate governance.  The list and the reasons for the inclusion of each member appear in the September issue of the magazine.

One of those included on the list is Lucian Bebchuk, Director of our Program on Corporate Governance.  In describing the reason for selecting him, the magazine notes his work on executive pay, including his book Pay without Performance; his advocacy for “Say on Pay”; and his initiation of bylaw amendments adopted by several large public companies.

The magazine’s goal is to recognize those who are driving corporate governance inside America’s boardrooms.  The list of influential players includes business leaders Warren Buffett and Jack Welch; “poison pill” inventor Martin Lipton; Congressman Barney Frank; and CalPERS, the giant public pension fund.  The list also includes two legal academics other than Bebchuk: Columbia Professor John Coffee and Stanford professor and former SEC commissioner Joseph Grundfest.

The full article is available for download here.

Before You Join the Board: The Post-SARBOX Director

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, September 19, 2007
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Editor’s Note: This post comes to us from Gwendolyn Alexis of Monmouth University‘s Management Department.

Even in the post Sarbanes-Oxley era, being tapped to sit on the board of a publicly traded company is a nice line to add to one’s resume; and the broad-based mandate for more diverse boards means that this gem of a lifetime achievement is becoming possible for increasing numbers in previously excluded groups–such as women and minorities.  Nonetheless, before adding “director” to one’s list of accomplishments, it is wise to asses the risks and responsibilities that have become part and parcel of serving on the post-SARBOX board. 

In an article appearing in the New York State Bar Journal, I set forth the corporate-governance safeguards that a publicly traded corporation should have in place before a prospective candidate for its board agrees to accept an appointment.  The full article is available for download here.

The 10b-5 Loss Causation Requirement: The Implications of Dura

Posted by Allen Ferrell, Harvard Law School, on
Tuesday, September 18, 2007
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This post is from Allen Ferrell of Harvard Law School.

Atanu Saha and I have just released a new paper entitled The Loss Causation Requirement for Rule 10b-5 Causes-of-Action: The Implications of Dura Pharmaceuticals v. Broudo.  The article explores the broad range of important issues concerning the loss causation requirement raised by the Supreme Court in the Dura decision.  The Abstract explains:

In order to have recoverable damages in a Rule 10b-5 action, plaintiffs must establish loss causation, i.e., that the actionable misconduct was the cause of economic losses to the plaintiffs.  The requirement of loss causation has come to the fore as the result of the Supreme Court’s landmark decision in Dura Pharmaceuticals v. Broudo.  We address in this paper a number of loss causation issues in light of the Dura decision, including issues surrounding the proper use of event studies to establish recoverable damages, the requirement that there be a corrective disclosure, what types of disclosure should count as a corrective disclosure, post-corrective disclosure stock price movements, the distinction between the class period and the damage period, collateral damage caused by a corrective disclosure, and forward-casting estimates of recoverable damages.

The full Article is available for download here.

The SEC, Corporate Governance, and the Non-Access Proposal

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, September 17, 2007
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Editor’s Note: This post is from J. Robert Brown, Jr. of the University of Denver .

The October 2nd deadline is quickly approaching for comments on the SEC’s two proposals on proxy access for bylaw proposals related to shareholder nominations to the board.  One proposal would deny shareholder access to the proxy altogether; the other would permit access on a limited basis, extending it only to those shareholders holding more than 5% of the company’s voting shares. 

Both proposals were approved by a 3-2 vote, with Chairman Cox the deciding vote in each case.  Those votes was taken before Commissioner Campos resigned.  In my view, his resignation increases the likelihood that the non-access proposal will be adopted.  As I explain below, this would be an unfortunate development both for the SEC and for shareholders.

The non-access proposal would amend Rule 14a-8(i)(8), which currently allows for the exclusion of proposals that “relate[] to an election” to the board.  The amended Rule would permit issuers to exclude any proposal that relates “to a nomination or an election for membership on the company’s board of directors.”  In other words, issuers could exclude not only proposals that affect the election process, but also proposals that relate to director nominations and the procedures used to nominate or elect directors.  This proposal is a bad idea for a number of reasons.

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ABA Study on Private Equity Deal Points

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Friday, September 14, 2007

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This post on a recent study of the characteristics of private equity acquisitions of public companies comes to us from Keith Flaum of Cooley Godward Kronish.

Earlier this month, the Committee on Negotiated Acquisitions of the American Bar Association’s Section of Business Law released the 2007 Private Equity Buyer/Public Target M&A Deal Points Study.  I am the Chair of the Committee’s Market Trends Subcommittee which, in association with the Private Equity M&A Subcommittee, compiled the Study.

The Study examines key deal points in financial sponsor-backed acquisitions of publicly traded companies announced in 2005 and 2006.  Among the many interesting findings of the Study is that, for transactions announced in 2006, more than three-fourths of the acquisition agreements in the Study did not contain a financing condition.

My colleague Rick Climan, former Chair of the Committee on Negotiated Acquisitions, acted as special advisor on this project.  Wilson Chu and Larry Glasgow, the former co-chairs of the M&A Market Trends Subcommittee–and more than 15 M&A lawyers from major law firms across North America–assisted in its compilation.

Later this year, the Committee on Negotiated Acquisitions will be releasing a Strategic Buyer/Public Target Deal Points Study.  That Study will analyze more than 200 agreements in the 2005 to 2006 timeframe involving acquisitions of publicly traded companies by strategic (i.e., non-financial) buyers.  It will be very interesting to compare the results of these two studies.

The full Study is available here.

Delaware’s Judges on Good Faith After Disney

Posted by Andrea Unterberger, Corporation Service Company, on
Thursday, September 13, 2007
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This post is from Andrea Unterberger of Corporation Service Company. 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.

Last year the Delaware State Bar Association sponsored a symposium entitled Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities.  The Judicial Panel of the symposium featured Chief Justice Steele and Justice Jack Jacobs of the Delaware Supreme Court, as well as Chancellor Chandler of the Delaware Court of Chancery.  The panel was moderated by Judge Thomas Ambro of the United States Court of Appeals for the Third Circuit.  Professor Anne Conaway of the Widener University School of Law introduced the group.

This compelling panel included reflections from all four judges on a wide range of subjects, including the differences between trial judging and the work of appellate courts, the specifics of the Disney case itself, and practitioners’ and academics’ reactions to recent developments in the evolution of good-faith doctrine in Delaware.  (Since Justice Jacobs authored the Supreme Court’s opinion in Disney, and Chancellor Chandler authored the trial-court decision, the audience had the benefit of a number of perspectives on the case.)

The question that the audience might have been most curious about, however, was whether an independent duty of good faith–if such a duty was indeed recognized in Disney–can or should serve as a “gap filler” to establish liability in cases not reached by traditional fiduciary duties under Delaware law.  Judge Ambro thus starts the discussion with the following question: “What gaps are people perceiving that need to be filled between loyalty and care?”

The judges’ fascinating analysis–as well as a complete transcript of their remarks–is available for download here.

Weisbach on Pay without Performance

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Wednesday, September 12, 2007
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The most recent issue of the Journal of Economic Literature contains an essay in which Michael Weisbach, who recently joined us as a Guest Contributor, reviews Lucian Bebchuk’s and Jesse Fried’s Pay without Performance.  Weisbach reviews and evaluates in detail Bebchuk’s and Fried’s normative and positive claims on executive pay.  He concludes that the positive claims–Bebchuk’s and Fried’s account of the executive compensation landscape–are fairly persuasive.  However, with respect to their normative claims, Weisbach expresses doubts as to how effective their proposed reforms are going to be in practice in achieving the improvements Bebchuk and Fried seek.  The full review is available here.

More than thirty academic reviews of–and responses to–Pay without Performance have now been published, including pieces by Stephen Bainbridge; John Bogle; William Bratton; John Core, Wayne Guay, and Randall Thomas; Jeff Gordon; Bengt Holmstrom; Glenn Hubbard; Ira Kay; Arthur Levitt; and Bevis Longstreth.  A collection of those reviews is available here.

Nonprofits Scramble Under New Scrutiny

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, September 11, 2007
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The National Law Journal recently published Nonprofits Scramble Under New Scrutiny, an article describing nonprofits’ search for meaningful guidance on corporate governance standards in the wake of recent scandals at several nonprofits.  Congressional investigations, regulatory attention, and media scrutiny of loose financial controls at nonprofits have prompted several, including the American Red Cross, to undertake detailed reviews of their governance practices.

This is a difficult task in light of the absence of substantive statutory or regulatory guidance as to what is expected of nonprofit boards.  Directors of public companies who have experienced governance overhauls in the wake of Sarbanes-Oxley, however, are apparently using SOX standards for guidance as they reform governance at the nonprofits they serve.  The Article explains: 

Congressional committees, state attorneys general and now the Internal Revenue Service (IRS) are placing nonprofit organizations under scrutiny and sending them scrambling for legal advice on sound governance practices. . . .

Nonprofit board members who are also public company executives have lived through their corporation’s governance overhauls, and they are realizing that the organizations they volunteer for need to make changes.

The full Article is available here.

How Judges Talk to Lawyers: The Role of Informal Guidance in Business Law

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Monday, September 10, 2007

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This post comes to us from J.W. Verret, a recent Harvard Law graduate and Olin Fellow in Law and Economics who has written extensively on corporate governance matters.  Jay previously posted on our Blog here. 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.

Chief Justice Myron Steele of the Delaware Supreme Court recently delivered the keynote address to the American Bar Association’s Section of Business Law this year, entitled How Court Judges Talk to Lawyers: The Role of Informal Guidance in Business Law.  In that talk, the Chief Justice presented a thesis that he and I have elaborated on in an article called Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot, forthcoming this fall in the Virginia Law and Business Review.

Delaware’s status as the belle of the ball for corporate chartering has befuddled corporate academics for over three decades.  The various theories for why and how Delaware emerged as the leader in chartering continue to spring eternal–with skepticism about Delaware’s role a popular theme.

Two commentators, Jonathan Macey and Ehud Kamar, have emphasized what they call the “indeterminacy” of Delaware’s corporate jurisprudence.  They argue that vagueness in Delaware’s corporate common law functions as a litigation boon for the Delaware bar and keeps other states from plagiarizing Delaware’s General Corporation Law.  Our Article takes a dim view of this notion.

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Diffuse Ownership in the United States: A Myth?

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 7, 2007

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Ever since Berle and Means published The Modern Corporation and Private Property in 1932, diffuse ownership has been considered the norm for U.S. public corporations.  And at least since La Porta et al.’s Law and Finance (1998) and Corporate Ownership around the World (1999), this aspect of US corporate governance has been considered exceptional from a global perspective–with only the U.K. and some other developed, common-law countries showing similarly low levels of ownership concentration.

In The Myth of Diffuse Ownership in the United States, Clifford Holderness challenges this view.  Using a more representative sample of U.S. firms than have previous studies, Holderness finds that ownership concentration in the US is about the same as the world average.  Moreover, in Holderness’s data, U.S. blockholding does not look qualitatively different from the world average in terms of blockholders type (as demonstrated in Table 5) and board representation (Table 6).  These results are robust to controlling for certain firm attributes relevant to ownership concentration, such as firm size. Given the amount of research that has been based on the assumptions that Holderness challenges, his article is bound to have considerable impact.  Here’s his abstract:

This paper offers evidence on the ownership concentration at a representative sample of U.S. public firms. 96% of these firms have blockholders; these blockholders in aggregate own an average 39% of the common stock. The ownership of U.S. firms is similar to and by some measures more concentrated than the ownership of firms in other countries. These findings challenge current thinking on a number of issues, ranging from the nature of the agency conflict in domestic corporations to the relationship between ownership concentration and legal protections for investors around the world.

The full paper is available here.

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