Yearly Archives: 2008

‘Law and Finance’ Revisited

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 21, 2008
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This post is from Holger Spamann of Harvard Law School.

I have just released a working paper on the measurement of shareholder protection around the world, entitled “’Law and Finance’ Revisited” and available on SSRN here. The abstract is as follows:

The “Antidirector Rights Index” from La Porta et al.’s “Law and Finance” (1998) has been used as a measure of shareholder protection in almost 100 published studies. With articles by legal scholars questioning the accuracy of index values for several countries, I undertake a systematic study to verify these values for 46 countries with the help of local lawyers. My emphasis is on accuracy of the data; I do not change the original variable definitions. The study leads to a substantial revision: 33 of the 46 observations need to be corrected, and the correlation of corrected and original values is only .53. With accurate values, the well-known results of La Porta et al. (1997, 1998) no longer hold: accurate index values are neither distributed with significant differences between Common and Civil Law countries nor correlated with stock market size and ownership dispersion. All of the many results derived with the index will have to be revisited.

(NB: This paper is a revision of Spamann (2006).

By way of background, the cited article “Law and Finance” by La Porta, Lopez-de-Silanes, and Vishny (1998) started an entire literature of the same name. I have recently described the current state of this literature on this blog here.

Blog and Program Members Included in the “500 Leading Lawyers” List

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 20, 2008

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Lawdragon magazine presented its third annual list of the “500 Leading Lawyers in America,” and the list includes eight individuals who are affiliated with the Harvard Law School Program on Corporate Governance and/or the Harvard Law School Corporate Governance Blog.

The 500 Leading Lawyers list includes professor Lucian Bebchuk (Harvard Law School), who serves as director of the Program, as well as four members of the Program’s advisory board: Peter Atkins (Skadden, Arps, Slate, Meagher & Flom), Theodore Mirvis (Wachtell, Lipton, Rosen & Katz), James Morphy (Sullivan & Cromwell), and Eileen Nugent (Skadden, Arps, Slate, Meagher & Flom).

In addition, the 500 Leading Lawyers list includes three guest contributors of the Blog: Jay Eisenhofer (Grant & Eisenhofer), Mark Morton (Potter, Anderson & Corroon), and Charles Nathan (Latham & Watkins).

Lawdragon’s list includes attorneys from private practice, in-house counsel, law professors, judges, government attorneys, and public interest lawyers. Lawdragon bases its selection of the leading lawyers through a combination of online balloting and independent research. Lawdragon’s announcement appears here.

SEC Advisory Committee Interim Report on Improvements to Financial Reporting

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, February 19, 2008
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On February 14, the SEC Advisory Committee on Improvements to Financial Reporting presented its interim report to the Securities and Exchange Commission. The report includes 12 developed proposals, conceptual approaches representing the Committee’s initial views on matters, and currently identified matters for further consideration. The key themes of the report are the following: increasing emphasis on the investor perspective in the financial reporting system; consolidating the process of setting and interpreting accounting standards; promoting the design of more uniform and principles-based accounting standards; creating a disciplined framework for the increased use of professional judgment; and taking steps to coordinate Generally Accepted Accounting Principles (GAAP) in the US with International Financial Reporting Standards (IFRS).

Formed by the SEC in July 2007, the Committee was tasked to examine the US financial reporting system and to recommend changes to increase the usefulness of financial information to investors, while reducing the financial reporting system’s complexity. The Committee’s final report is some months away. The Committee includes representatives from the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.

The interim report is available here.

Shareholder-Centric vs. Director-Centric Corporate Governance

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Thursday, February 14, 2008
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This post is from John F. Olson of Gibson, Dunn & Crutcher LLP.

I’ve been giving some thought to the dust up last year between Marty Lipton and other governance experts as to whether Pfizer’s initiative of having several of its independent directors meet with its largest institutional investors represented a landmark in the decline of director-centric corporate governance, and have also been thinking about what we mean when we talk about director-centric vs. shareholder-centric governance. The working text of a talk I gave on the subject last week at the Corporate Governance Center at the University of Tennessee in Knoxville, at the invitation of Joe Carcello and Joan Heminway, is available here. I plan to do some more work on this and turn it into an article later this year. In the meantime, I’d greatly appreciate comments.

Does a Director Qua Director Have Standing to Sue Derivatively?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 13, 2008
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Editor’s Note: This post is from Steven M. Haas of Hunton & Williams 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.

Does a Director Qua Director Have Standing to Sue Derivatively? No, so said the Delaware Supreme Court yesterday in Schoon v. Smith. The Supreme Court affirmed the Court of Chancery’s little-noticed ruling last year that dismissed a derivative claim brought by a director against the company’s other directors, including its controlling stockholder. The plaintiff-director, who was not a stockholder of the company, charged his fellow directors with, among other things, breach of fiduciary duty and unjust enrichment. The court held that, notwithstanding the equitable origins of derivative suits, the issue of director standing today is best left to the legislature. “Although the Delaware General Assembly has the prerogative to confer standing upon directors by statute,” the court wrote, “it has not chosen to do so.” Rejecting the American Law Institute Principles that give individual directors standing to sue on behalf of their corporations, the court continued that, “[b]ecause a stockholder derivative action is available to redress any breach of fiduciary duty, we decline to extend the doctrine of equitable standing to allow a director to bring a similar action.” The court concluded, however, by leaving itself a little room to permit directors to bring derivative suits, but only where the failure to do so would result in a “complete failure of justice”—a seemingly high standard.

As a practical matter, the decision is unlikely to have much significance because most directors are also stockholders. But the decision is still significant and may draw criticism with respect to its implications for corporate governance and director duties. In particular, the court noted that the concept of being an “independent director” does not mandate “a duty to sue on behalf of the corporation.”

The opinion is available here.

Say-on-Pay in the UK and Australia – and now in the US?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, February 12, 2008
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The post below comes to us from Peter Moon of Universities Superannuation Scheme, Phil Spathis of the Australia Council of Super Investors, and Keith Johnson of Reinhart Institutional Investor Services.

Verizon, Par Pharmaceutical and Aflac became the first US companies over the last year to adopt policies requiring an advisory vote of shareholders on company executive compensation practices. A network of over 70 institutional and individual investors lead by AFSCME and Walden Asset Management announced in January that adoption of this ‘say on pay’ policy is expected to be put on proxies at more than 90 US companies this year. With majority shareholder votes having been cast for similar resolutions at seven companies during 2007, say on pay will be one of the hottest issues in the upcoming US proxy season. In their article, Global Investors Laud Shareholder Votes on Executive Compensation, Peter Moon from the $65 billion Universities Superannuation Scheme pension fund in Britain, Phil Spathis from the $200 billion Australia Council of Super Investors and Keith Johnson from the University of Wisconsin Law School’s International Corporate Governance Initiative describe the impact that say on pay has had in other markets and discuss the benefits it could produce for both companies and shareholders in the United States.

On Being a Corporate Lawyer

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, February 11, 2008

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On Monday February 4, HLS Professor John C. Coates IV delivered his inaugural lecture “On Being a Corporate Lawyer” on the occasion of his appointment as the John F. Cogan, Jr. Professor of Law and Economics.

Coates’ lecture surveyed recent trends in corporate law practice—the field, he said, which continues to draw the majority of graduates of top schools. He noted that the leading corporate law firms have remained relatively stable and free from the kind of volatility seen in the investment banking sector over the past several decades, citing major banks that have vanished or been displaced. But, he said, some important changes are nevertheless on the way. Among them:

  • market forces will drive up the price for top-end corporate legal work;
  • law firms will increasingly develop new ways to structure their compensation for corporate deals, and they will rely less on the billable hour method, which does not accurately reflect the value that lawyers bring to major transactions;
  • law firm demand for top-quality entry-level corporate lawyers will intensify; one of the effects will be a corresponding spike in competition among law schools for corporate law professors, especially through lateral hiring.

    • Click here for a webcast of this event.

    CVS Caremark Adopts My Proposal and Amends its By-laws

    Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
    Thursday, February 7, 2008
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    Editor’s Note: This post is from Lucian Bebchuk of Harvard Law School.

    CVS Caremark and I have reached an agreement under which the company adopted a by-law provision limiting the adoption of poison pills. The adopted by-law is based on a shareholder proposal to amend the company’s by-laws that I submitted for the company’s upcoming annual meeting. Following the agreement that the company and I reached, the company’s board adopted the new by-law earlier this week, and I withdrew my shareholder proposal. The amended by-laws of CVS, including the new section 8 of Article VI, were filed yesterday and are available here.

    Under the new by-law provision, any extension of a poison pill plan not ratified by the shareholders must be approved by at least 75% of the members of the board of directors, and a pill not so extended will expire one year after its adoption or last such extension.

    My shareholder proposal and the by-law adopted by CVS are based on a model by-law that was the subject of litigation and a court decision in the CA case, which led CA to abandon its attempt to exclude my proposal from the corporate ballot. An article about the litigation and my model by-law is available here.

    CVS is the third company to adopt a by-law provision based on this model by-law. The adoption by CVS was preceded by an adoption by Disney, which adopted a version of my proposal after the proposal won 57% of the votes in Disney’s annual meeting, as well as an adoption by Bristol-Myers Squibb.

    I commend the board of CVS for its adoption of the pill-limiting by-law. I hope that boards of other public companies will follow the example set by the boards of CVS, Disney, and Bristol-Myers and adopt similar by-law provisions.

    I would like to thank the law firm of Grant & Eisenhofer for its valuable legal advice and legal representation in connection with my shareholder proposals in general and the pill by-law proposals in particular. I also wish to thank Spotlight Capital Management for advising me on engagement with companies.

    The Significance of Mercier v. Inter-Tel

    Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
    Wednesday, February 6, 2008
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    Editor’s Note: This post is from Steven M. Haas of Hunton & Williams 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.

    I posted previously here on Vice Chancellor Strine’s decision in Mercier v. Inter-Tel (Delaware), Inc., and I continue to believe that it was probably the most important decision issued by the Delaware Court of Chancery in 2007. I recently wrote an article for the Securities Litigation Report discussing Inter-Tel and explaining its potential significance. In particular, Vice Chancellor Strine’s reasonableness standard in reviewing a decision to move a stockholders meeting date — if endorsed by the Delaware Supreme Court — would provide much clarity to practitioners and boards of directors. The decision is also notable for, among other things, its discussion of the roles of ISS and arbitrageurs in influencing merger votes.

    The article, which originally appeared in the November 2007 issue of the Securities Litigation Report, is available here and is being reproduced with the permission of Thomson West.

    A Practitioner’s Guide to Electronic Shareholder Forums

    Posted by Charles Nathan and Nicholas O'Keefe of Latham & Watkins LL, on
    Tuesday, February 5, 2008
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    This post is from Charles Nathan and Nicholas O’Keefe of Latham & Watkins LLP.

    Our firm has recently released a Corporate Governance Commentary providing an overview of the recent proxy rule amendments designed to encourage the use of electronic shareholder forums (for convenience, referred to as “e-forums”). The amendments were hastily adopted at a time when most of the attention was on proxy access. While the amendments were intended to benefit both companies and shareholders, it is activist investors who may be the most significant beneficiaries.

    The Commentary, entitled “A Practitioner’s Guide to Electronic Shareholder Forums“, explains how the amendments facilitate the use of e-forums, and what the potential risks and benefits to companies are. It explains that for a lot of companies, e-forums may serve as an additional channel of communication with shareholders for which the companies do not have a pressing need. For companies that do decide to construct or participate in e-forums, the companies will have to be careful that the e-forums are functionally useful and are not used for launching tirades against management. Perhaps more troubling for companies, e-forums will improve the ability of hedge funds and other activist investors to mobilize.

    The full Commentary is available online here.

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