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E-MailThis post is from David A. Katz of Wachtell, Lipton, Rosen & Katz.
My colleague Laura A. McIntosh and I have written an article entitled Corporate Governance Update: Advice for Directors in Complicated Times: The Fundamentals Still Apply. The article considers directors’ oversight responsibility in a volatile business environment, including directors’ obligations as a company approaches the zone of insolvency and the extent to which directors are entitled to rely on management’s and experts reports, advice and decisions. The article also discusses directors’ exposure to potential liability, including the degree of vigilance required to discharge fiduciary obligations and how active directors should be in seeking information from management.
One Comment
The Noble Tradition of the Harvard Law School
As far as eating your own words with respect to appropriate Corporate Governance in troubled times and the Bear Stearns affair as an appropriate test case is concerned, rest assured that my friends and beloved teachers Professors Louis Jaffe, Paul Freund, Archibald Cox, John Ely for administrative practice and constitutional principles and process, and Louis Loss for best practices and disclosure in a proxy statement would have trembled with anger (though some of them were too kind to ever show such emotion) and would have thrown the book at your partners.
They would have had little sympathy for the lack of sophistication and flaws revealed in legal process marred by unequal treatment and federal bullying, at the expense of prudent crisis management and virtually all of our noblest professional conventions (courtesy and fair parameters for due diligence and bid proposals, separation of powers, least intrusive Governmental intervention, Delaware law sovereignty, fair and accurate disclosure). The April 11 S-4 Proxy and Registration Statement fails to mention that a major foreign bank prepared to solve the crisis by bidding competitively was arrogantly put down by some Federal Reserve mensch to come up with a US $100 billion (!) overdraft and guaranty facility before asking for a seat at the table. In light of such ill measured proposal the foreign bank withdrew on Saturday. They got away with the impression that they were unwelcome. Call that equal treatment of a potential bidder, when next door a major private equity house that intended to pay fourteen (14x!) times the initial share purchase price of JPMorgan Chase (about the share price at NYSE closing on Friday March 14) was likewise asked to take a hike (“You will not get any support for your bid construction, Bear will not get access to that Fed discount window over my dead body”).
I guess that bank had a flaw. It was foreign. Such parochialism in this age of globalization just comes to show which daunting tasks Bear directors faced with regard to the fulfilment of their fiduciary duties in the zone of insolvency. Business Judgment? Revlon? Entire Fairness? Or bullying, conniving and intimidation? Well, this material fact somehow did not make it into the proxy statement. With demeanor that ill-mannered and a process this coercive on part of the Government not only sitting at the table or making certain statements of withdrawing support, unless “……” in unequivocal terms through the speakerphone, but dictating the terms – all material facts themselves that were presumably concealed from Congressional testimony as much as left out of the proxy statement – how on earth were the Bear Board members ever supposed to arrive diligently at a prudent and balanced decision in troubled times? What was Bruce Wasserstein to do who has the reputation of a deep sense of fairness? Where was the Staff?
This is not all: If you read through the transcript of the March 31 preliminary hearing before Vice-Chancellor Parsons, another one of your Harvard-trained partners is engaged in the type of petty, formalist insistence on “prior filing” (of a NY class action between people who never met and are connected only by the fact that they represent different sets of frightened Bear Stearns employees/ shareholders) that belies the kind of fact and doctrine scepticism that Lon Fuller inculcated in our legal reasoning. That Delaware hearing was premised, and ultimately deferral to Judge Cahn in New York predicated, on the astonishing assumption that the Bear Stearns facts were so unique and no other house on Wall Street could fail so that no important Delaware precedent would be set. Maybe such insinuation was clever lawyering. Maybe it was all very clever investment banking. But what other broker-dealers have done to the Bear certainly didn’t comport with the Golden Rule not to do onto another that which you don’t wish to be done to yourself. Neither have Jamie Dimon’s lawyers given him an equally important piece of non-doctrinal advice: When you make a man who fell on hard times eat the dust, you don’t just make an opponent out of him: you’ve got yourself an enemy for life. What a way of winning the hearts and minds of the world’s toughest and simply best trading desk.