Liberating the Market for Corporate Control

In a new article, Liberating the Market for Corporate Control, we recommend that state corporate law statutes be amended to include a safe harbor for hostile bidders who make all-cash, all-shares tender offers that include a guarantee of the same or higher price if a back-end or squeeze-out merger occurs. Thus, in the face of a non-coercive hostile bid, a board cannot use takeover defenses, such as a poison pill or other statutory defense, unless specifically provided for in the corporate charter. In this way, if the board and shareholders agree, a company can always use private ordering to … Read more

Discretionary Decision-Making and the S&P 500 Index

Discretion is an integral part of how indices, including stock market indices, are constituted, according to professors Rauterberg and Verstein and Robertson (here and here), and the S&P 500 index is no exception.

The S&P 500 is a market-weighted compilation of the share prices of common stock issued by 500 companies that are considered to represent blue-chip America. It is governed by the S&P’s U.S. Index Committee (“Committee”), which has almost total discretion in determining the companies that constitute the S&P 500.

In our new article, we find that the Committee’s discretionary decision-making has resulted in the … Read more

The Conflict Between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties

BlackRock, an investment adviser that primarily markets and manages index funds to millions of passive investors around the globe, has become a leading shareholder activist. Based on the extremely large amount of assets it has under management ($7.3 trillion), its importance as a shareholder activist cannot be overstated. BlackRock’s shareholder activism is reflected in its rhetoric disclosing the objectives of its activism, shareholder voting, and engagement (direct or indirect communication) with portfolio companies.

The issue that I address in a recent paper is whether the fiduciary duties of a manager of an “employee pension benefit plan” under the Employee Retirement … Read more

The Risks and Rewards of Shareholder Voting

[Editor’s Note: This and the following piece offer a point/counterpoint on shareholder voting.] The SEC’s recently proposed rules on proxy advisers and shareholder proposals have made shareholder voting one of the most prominently debated corporate governance issues ever.  In a new article, “The Risks and Rewards of Shareholder Voting,” I seek to shed more light on the role of shareholder voting in the governance of public companies.

Shareholders Are Notoriously Uninformed

Shareholder voting allows shareholders to participate in corporate decisions, but very few public company decisions are based on it.  This is understandable, because shareholder voting suffers from a collective … Read more

Why the SEC’s Proposed Rules on Proxy Advisors Are Necessary

The Securities and Exchange Commission’s (SEC’s) recently proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice are an efficient and necessary response to the “collective action” problem that is imbedded in the shareholder voting of public companies and the deficiencies that this problem creates in the voting recommendations of proxy advisors.  The amendments will enhance the value of voting recommendations by requiring proxy advisors to make much needed investments in a few key areas of the voting recommendation process.

The Collective Action Problem Imbedded in Shareholder Voting

Shareholder voting suffers from a significant “collective action” problem. According … Read more

How to Enhance the Value of Shareholder Voting Recommendations

In a new article, I discuss how investment advisers like Blackrock, State Street, and Vanguard, can become adequately informed prior to voting their proxies without having to read massive amounts of information about the hundreds or thousands of companies they manage for their clients. The issue has major significance for corporate governance because investment advisers to mutual funds, exchange-traded funds, and professional money managers of separately managed accounts are typically delegated the authority to vote their clients’ securities.  Most commonly, these voting rights are associated with a company’s common stock.  Investment advisers manage well over 30 percent of all Read more

The Demonization of Dual Class Shares

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

Proposed New Disclosures for Mutual Fund Advisers

According to the Securities and Exchange Commission (SEC) release establishing the Proxy Voting Rule, an investment adviser “is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client’s behalf, including proxy voting.”[1] This was the rationale behind the rule,[2] which requires investment advisers, including mutual fund advisers, to create and disclose their proxy voting policies and procedures.  However, the SEC and its staff have yet to clarify what these fiduciary duties mean for the largest mutual fund advisers now that they control an extraordinary amount of … Read more

Another Reason Why Companies Avoid IPOs

In a recent New York Times article, Steven Davidoff Solomon listed several possible explanations for a significant decline in the number of initial public offerings (IPOs). Among the most interesting was that there are many large and successful high-tech acquirers such as Facebook, Google, and Microsoft that are willing to pay top dollar for high flying unicorns (private companies with equity values greater than $1 billion) before they become public companies. The ability of the private markets to provide financing may have matured to the point where the advantages of financing through the public markets are no longer as … Read more

A Simple Plan to Liberate the Market for Corporate Control

It’s time to exempt a certain type of hostile bid – an all-cash, all-shares tender offer – from a poison pill defense.  In essence, I propose a statutory rule requiring a board to remain neutral in the face of such an offer unless the company’s certificate of incorporation allows otherwise.  This would be similar to but less general than Rule 21 of the UK’s Takeover Code.

Argument for Change

In Unocal Corp. v. Mesa Petroleum, the Delaware Supreme Court created the so-called Unocal test, a standard of review for board actions aimed at warding off a hostile bidder … Read more

How Dual Class Shares in IPOs Can Create Value

The shareholder empowerment movement (the “movement”), driven primarily by public pension funds and union-related funds with over $3 billion in assets, has renewed its effort to eliminate, restrict, or at least discourage companies from creating dual class share structures in initial public offerings (IPOs).  The impetus was the issuance of non-voting stock in the recent Snap Inc. IPO.  Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

The movement’s vigorous response to Snap Inc.’s hugely successful IPO … Read more

Mutual Fund Advisors’ “Empty Voting” Raises New Governance Issues

The creation of the mutual fund will go down as one of the greatest innovations in financial history. It has provided tens if not hundreds of millions of unsophisticated and uninformed stock market investors with easy access to low cost portfolio diversification. Moreover, for those investors who do not want to spend time and money searching for portfolio managers who can earn excess risk-adjusted returns, passively managed index funds provide tremendous value.

But mutual funds also have their downside. They generate what Ronald Gilson and Jeffrey Gordon would call the “agency costs of agency capitalism.” Mutual funds generate these costs … Read more

The Recommendations of Activist Hedge Funds

A major criticism of activist hedge funds, and one that allegedly supports the argument that they suffer from short-termism, is that their recommendations almost always focus on disinvestment. For example, they will typically recommend raising the dividend, cutting costs, spinning off divisions or subsidiaries or preparing the company for sale.[1] Since we should expect activist hedge funds to be indifferent to the types of recommendations they make as long as they believe the recommendations will result in the highest possible stock price, then why do these recommendations seem to be so heavily biased in the direction of disinvestment?

One … Read more

The Implications for Shareholder Voting when an Activist Hedge Fund Interacts with an Independent Board

In a recent post, Some Lessons from DuPont-Trian, Martin Lipton identified shareholder voting in a proxy contest as a problem with hedge fund activism. According to Mr. Lipton, “ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.”[1] My interpretation of this statement is that voting for a slate of hedge fund nominees that goes against the recommendations of a well functioning board of directors (Board) is the wrong vote … Read more

Shareholder Wealth Maximization and its Implementation under Corporate Law

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

When should courts participate in determining if a corporate decision maximizes shareholder wealth? That is the question at the heart of my article, Shareholder Wealth Maximization and its Implementation under Corporate Law (forthcoming, Florida Law Review). This article takes a very traditional approach to answering that question.  It notes with approval that courts have historically been very hesitant to participate in the process of determining if a corporate decision is wealth maximizing.  The most obvious example of this … Read more

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Editor's Tweet: Bernie Sharfman on Shareholder Wealth Maximization and its Implementation under Corporate Law

Finding Value in Shareholder Activism

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

In this era of shareholder activism, there are still many attorneys and academics who believe that the traditional authority model of corporate governance (the “traditional model”) leads to optimal corporate decision-making and shareholder wealth maximization for large organizations.  This model favors the views of management over those of outside shareholders like institutional investors.  In the words of Professor Stephen Bainbridge, it is an approach to corporate governance where the “preservation of managerial discretion should always be the null … Read more