Editor’s Note: This and the following two pieces are responses to our January 2, 2019, symposium on dual class shares.
I welcome the opportunity to share a few observations on Professor Coffee’s two CLS Blue Sky Blog posts (here and here) on dual class common stock, and those of professors Gordon, Goshen, and Mitts written in response, from the perspective of a practicing IPO lawyer.
I think it would be helpful for us all to consider the proposition that two private parties might rationally agree that one party will acquire the majority of the cash flow … Read more
I would like to make two points in response to Professor Coffee’s piece on dual class common stock.
First, American dual class companies should be obliged to include a “coattail” provision, as is the case in Canada. This provision, imposed since 1987 by the Toronto Stock Exchange, ensures the controlling shareholder cannot sell control without all shareholders being offered the same price and conditions for their shares. This provision removes an important source of potential “private benefits” of control.
Second, In the coming years, a battle will rage about sunset clauses, particularly of the time-based sort. An organized effort is … Read more
Why have some corporate governance scholars (here, here, and here) advocated for imposing various sunset provisions on dual class shares? After all, dual class share structures are simply the result of private ordering, that wonderful freedom provided by corporate law that, in the words of former SEC Commissioner Troy Paredes, “allows the internal affairs of each corporation to be tailored to its own attributes and qualities, including its personnel, culture, maturity as a business, and governance practices.” In effect, as several scholars have noted, “observed governance choices are the result of value maximizing contracts between shareholders … Read more
Activist campaigns are on the rise on both sides of the Atlantic. Even large-cap companies are increasingly targeted by activists—particularly hedge funds—with remarkable success. A big reason for that success is the support that activist proposals attract from traditional institutions, such as actively managed mutual funds, pension funds, and passive index-tracking investors. Hence, hedge funds primarily seek targets whose shareholder base features a significant proportion of institutional investors. This does not mean, however, that activists only focus on companies with widely dispersed ownership; they also target controlled companies. Minority-empowering shareholder tools, such as the right to nominate and elect some … Read more
Debate continues to rage among politicians, professors, senior lawyers, and members of the media over the regulation of hedge fund activism. The primary criticism is that, in the absence of merger and acquisition activity, such activism does not create value for the target company’s shareholders in the long-term. Furthermore, even in the event of a hedge fund activist-initiated merger, studies have indicated that value-creation is limited to short-term stock price boosts and takeover premia.
With the objective of examining whether hedge fund activists are indeed “wolves,” as described by critics whose goal is to extract short-term profits, we recently wrote … Read more
Judges, legislators, corporate practitioners, and scholars of business law all conduct their work, within their respective professional spheres, based on some working conception of what “corporate law” is. Strangely, however, the question of what this conceptual vessel actually contains is seldom asked, let alone answered with any specificity. In a recent paper, I investigate the domain of corporate law – that is, the scope, content, and boundaries of the field. In so doing, I aim to illuminate why it is that defining the field with any precision has been so difficult, and what such insights have to tell us … Read more
As the world greets the New Year, investors and companies may take a moment to reflect on key corporate governance priorities in light of a potentially more challenging business environment in the year ahead. The prospect of slower global economic growth, combined with a higher cost of borrowing, and continued uncertainty regarding global trade will demand watchful management of a new set of risks in both developed and developing markets. Macroeconomic trends will likely have an impact on firm performance and companies’ balance sheets, raising greater awareness of audit quality concerns and executive compensation practices. Meanwhile, many governance topics that … Read more
Board Was Required to Disclose the Chairman’s Reasons for Abstaining From a Board Vote on the Sale of the Company
On February 20, 2018, the Delaware Supreme Court reversed dismissal of a shareholder action alleging that the board of directors failed to disclose the reasons why the chairman of the board, who was also the company’s founder, abstained from a board vote on the sale of the company. Appel v. Berkman, 180 A.3d 1055 (Del. 2018) (Strine, C. J.). The court rejected defendants’ contention that “the reasons for a dissenting or abstaining board member’s vote can never be material.” … Read more
A number of recent news stories have recounted the quick and dramatic changes that activist hedge funds trigger in the companies they target. In the Atlantic magazine, for example, a 2016 article describes DuPont’s decision to cut 10 percent of its workforce in response to an activist campaign by investor Nelson Peltz and his company Trian Fund Management. The recent saga involving David Loeb’s Third Point hedge fund and Campbell Soup illustrates the typical pattern where activist investors take a small but meaningful stake in a target company and demand significant say over the strategic and financial policies of the … Read more
Just as the Mamas & the Papas pioneered the folk-rock scene of the 1960s as one of the first truly gender diverse music group, their native state of California is breaking ground for increased board gender diversity in the United States. Unlike a growing number of countries in Europe and around the globe that have instituted comply-or-explain policies and/or gender diversity quotas, the U.S. has not implemented regulatory requirements in relation to board gender diversity. The record-breaking influx of female board members observed in the past two years is primarily driven by private ordering through company-shareholder engagement, shareholder proposals, and … Read more
On December 19, 2018, the Delaware Court of Chancery held that forum selection provisions contained in the certificate of incorporation of Delaware corporations are invalid to the extent that they require any claim under the Securities Act of 1933 to be filed only in federal court.
Congress enacted the Securities Act of 1933 (the 1933 Act) after the stock market crash of 1929. The 1933 Act requires a company offering securities to the public “to make full and fair disclosure of relevant information” by filing a registration statement with the Securities and Exchange Commission. In order to ensure compliance with … Read more
As we noted in early 2018, the threat of activism continues to be high, and has become a global phenomenon. The conclusion of a volatile and dynamic 2018 prompts a brief update of the state of play.
- Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions. These trends have been highlighted in several recent media reports, including in The Wall Street Journal and Bloomberg.
- While the robust
… Read more
In his December 17 piece, “Dual Class Stock: What Is a Fair Compromise?,” Professor John Coffee asked readers to suggest alternatives to his proposal for limiting dual class shares. We are posting below three insightful responses from Columbia Law School professors Jeffrey Gordon, Zohar Goshen, and Joshua Mitts, followed by a brief counter-response from Professor Coffee. We would like to keep the conversation going, however, and would welcome further proposals on this issue—with explanations—especially from practicing lawyers. Please email pieces of no more than 400 words to me at firstname.lastname@example.org. Thanks much.… Read more
Professor Coffee’s two CLS Blue Sky Blog pieces on dual class common stock (here and here) provide a welcome stimulus for further reflection.
The debate over dual class common arises at the hinge of public law vs. private law conceptions of corporate governance. In the early 20th century, dual class common stock was used by financiers to retain control of the companies that they shepherded to public stock markets. You could certainly spin a private law story that the bankers used their control to minimize managerial agency costs and to provide reputational services at a time of … Read more
The debate over dual class firms has morphed from an objection to their very legitimacy to a demand to subject them to a mandatory sunset provision. My colleague and friend, Professor John Coffee, believes that dual class firms are undesirable and should be restricted, but, to his credit, he exposes the problems with mandating the sunset and suggests ways for improvement. Here, I wish to explain why restricting dual class firms might be costly to the economy.
The objection to dual class firms is familiar. In dual class firms, managers hold incontestable control through high voting shares, with a much … Read more
Professor Coffee makes the insightful point that if founders receive a lower price for their stock when they retain voting control, it does not seem fair to allow other shareholders to take away that control without compensation. But, Professor Coffee argues, if shareholders can take away founders’ control without compensation, then founders should not receive less when they retain voting control, because such control is largely “illusory” in his words. Of course, this argument may bring back memories of the economist’s admonition not to pick up the (obviously fake) $100 bill on the floor. Clearly, markets can get out of … Read more
Forever is a long time — indeed, too long. That is the essence of my answer to my two friends and colleagues — professors Zohar Goshen and Joshua Mitts — who each argue against mandatory sunset provisions on super-voting stock (Professor Gordon provides an overview with which I largely concur). Even if one accepts the Goshen/Mitts premise that the other shareholders want the founder to have total control (in order to pursue his “idiosyncratic vision” for the company), the probability is high that, at some point, the majority of the shareholders will want to limit or end that total control. … Read more
The role of anti-takeover provisions (ATPs) in the corporate charters of firms has recently become a matter of considerable debate in the academic literature. On the one hand, earlier studies have argued that ATPs entrench firm management and therefore depress firm performance by mitigating the disciplining effect of the market for corporate control on firm management (Field and Karpoff (2002)). On the other hand, more recent papers have argued that ATPs in fact improve firm performance post-IPO. Chemmanur, Paeglis, and Simonyan (2011) argue that ATPs allow higher quality top management teams to create long-run value for the firm post-IPO and … Read more
In recent years, it has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract. The exponential widening of income inequality, the increasing sense of urgency around climate change, and the widespread socioeconomic upheaval resulting from the displacement of human capital by technology have all been filtering into the debate about the role and governance of the corporate ecosystem. Persuasive academic and empirical evidence has established the causal link … Read more
Prices convey information. Hayek (1945) put it this way: Prices “coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” Stock prices, in particular, matter a great deal in corporate and securities law. Event studies, which measure statistically significant changes in stock prices, are widely used by investors and courts to infer the effect of an event on the value of a firm (Bhaghat & Romano, 2002b).
In my recent article, I ask a basic question: What can we learn from stock prices? It is a … Read more