Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post relates to a paper by Commissioner Daniel M. Gallagher and Professor Joseph A. Grundfest, Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors, described on the Forum in a post by Professor Grundfest here. Earlier posts by Professor Macey on the Gallagher/Grundfest paper appear on the Forum here, here, and here, with responses by Professor Grundfest here and here. A joint statement by thirty-four senior corporate and securities law professors from seventeen leading law schools, opining that the allegations in the Gallagher/Grundfest paper are meritless and urging the paper’s co-authors to withdraw these allegations, is available on the Forum here.

Earlier this month, at a University of Pennsylvania Law School’s Institute for Law & Economics Corporate Roundtable, Professor Joseph Grundfest presented to a audience of practitioners and academics the same accusations against Harvard and the Shareholder Rights Project (SRP) that he advanced in his paper (co-authored with soon-to-be departing SEC Commissioner Daniel Gallagher), “Did Harvard Violate the Federal Securities laws? The Campaign Against Classified Boards of Directors” (available here and described on the Forum here). Given Grundfest’s persistence in making these accusations, which have been widely viewed as meritless by corporate and securities law academics (see the statement by 34 senior law professors here ), readers might find of interest a new paper I just posted on SSRN, Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project, available here.

My analysis, which builds on a series of posts I published on the Forum (available here, here, and here), offers a detailed critique of the Gallagher/Grundfest. As many readers of the Forum know, the Gallagher/Grundfest paper (described on the Forum here) claims that declassification proposals submitted by institutional investors assisted by the SRP violated the federal securities laws by not including sufficient references to studies supporting staggered boards. My analysis shows that Gallagher/Grundfest wrongfully accused the SRP.

The analysis in my paper proceeds as follows. Part II provides brief background information about the SRP and the Gallagher/Grundfest attack and then proceeds to make a “big-picture” observation about the attack’s goal. Gallagher/Grundfest encourage boards to try to invalidate past declassifications and to avoid bringing the subject ever again to a shareholder vote, warning boards shareholders would likely vote again in favor of declassification even if the references Gallagher/Grundfest favor are included. It is thus clear that Gallagher/Grundfest’s real goal is not to make shareholder voting more informed but rather to allow more boards to enjoy the protection provided by classified boards and to ignore shareholder support for board declassification. To paraphrase Mark Antony, Gallagher/Grundfest are coming to bury shareholder voting on board declassification, not to inform it.

Parts III-V leave aside Gallagher/Grundfest’s motivation and focus on whether their accusations have any merit. I show that they do not. I explain that the proposals submitted by investors working with the SRP (the “SRP Proposals”) were consistent with the SEC’s long-standing rules, policies and practices; that the weakness of Gallagher/Grundfest’s claims is reflected in the fact, out of more than one hundred companies receiving SRP proposals, none chose to raise claims of such an omission; that Gallagher/Grundfest are calling for actions against the SRP that are without any precedent; and that Gallagher/Grundfest inconsistently call for action against shareholder proposals that fail to do include references while fully accepting issuers’ not including references. I also show that responses issued by Professor Grundfest to my criticism further reinforce my conclusion that the authors wrongfully accused the SRP.

Part VI discusses the support that my conclusions receive from a joint statement issued by thirty-four professors from seventeen leading law schools. In this statement, which referenced my series of posts, the thirty-four professors expressed their view that Gallagher/Grundfest’s accusations against the SRP are meritless, and urged Gallagher/Grundfest to withdraw them. Part VII concludes that, having wrongfully accused the SRP, Gallagher/Grundfest should withdraw their allegations.

My paper is available here.

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