Martin Lipton

Milton Friedman’s Essay and the True Purpose of the Business Corporation

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From a practical standpoint, the most significant part of the 1970 Milton Friedman essay in the New York Times was the headline: “The Social Responsibility Of Business Is to Increase its Profits.”  For a half-century, that phrase has been used to summarize the essay, and alongside Friedman’s similar views in a 1962 treatise, also used in support of “shareholder primacy” as the bedrock of American capitalism.  “Shareholder primacy” and “Friedman doctrine” became interchangeable.  The Friedman doctrine was a precursor to, and became a doctrinal foundation for an era of short-termism, hostile takeovers, extortion by corporate raiders, junk bond … Read more

Wachtell Lipton Puts a Spotlight on Boards

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The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  The coronavirus pandemic and resulting recession, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset … Read more

Wachtell Lipton Pushes Back Against Attack on Stakeholder Governance

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In an article posted yesterday [March 2] on the Harvard Law School Forum on Corporate Governance blog, Professor Lucian Bebchuk rejects stakeholder governance and, in so doing, attacks the committed positions of influential institutions as varied as the Business Roundtable, the World Economic Forum, BlackRock, State Street, Vanguard, the UK Financial Reporting Council, and the European Union High-Level Expert Group on Sustainable Finance.

Professor Bebchuk summarizes his article as follows:

“Following the publication of the [Business Roundtable] statement, in December 2019 the World Economic Forum took the unusual step of publishing a manifesto that urged companies to move from the … Read more

Wachtell Lipton Shines a Spotlight on Boards

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The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  The wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset managers is another inflection point in the responsibilities … Read more

Wachtell Lipton Discusses Purpose, Stakeholders, ESG, and Sustainable Long-Term Investment

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This year, each of the major index fund managers, the Business Roundtable, the British Academy, the UK Financial Reporting Council, the World Economic Forum and a number of other organizations (both governmental and nongovernmental) announced that they did not support shareholder primacy and do support sustainable long-term investment and considering ESG matters.  However, the initial reaction of the Council of Institutional Investors in denouncing the BRT position from both an economic and legal standpoint, although quickly moderated, has continued to echo in Wall Street trading rooms, at activist hedge funds and in corporate boardrooms.  I continue to hear that the … Read more

Wachtell Lipton Discusses Shareholder Activism in France as Model for U.S.

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In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists.  The key recommendations are:

  1. “[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance.  An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer,

… Read more

Wachtell Lipton Discusses Stakeholder Governance: Issues and Answers

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The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.

Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance.  Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain.  Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by … Read more

Wachtell Lipton Discusses Stakeholder Governance and the Fiduciary Duties of Directors

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There has recently been much debate and some confusion about a bedrock principle of corporate law – namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can or should or must consider the interests of other stakeholders besides shareholders.

For several decades, there has been a prevailing assumption among many CEOs, directors, scholars, investors, asset managers and others that the sole purpose of corporations is to maximize value for shareholders and, accordingly, that corporate decision-makers should be very closely tethered to the views and preferences of shareholders.  This has created an opportunity for … Read more

Wachtell Lipton Discusses Stakeholder Corporate Governance: Business Roundtable and CII

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The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided.  The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake.  It would lead to state corporatism or socialism.

The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability … Read more

Wachtell Lipton Puts a Spotlight on Boards

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The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a major public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  So too, legislation like the Accountable Capitalism Act introduced by Senator Elizabeth Warren in 2018, and the position paper on the problems of shareholder capitalism and the merits of industrial policy by Senator Marco Rubio in 2019.

A very … Read more

Wachtell Lipton Discusses Capitalism at an Inflection Point

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Dissatisfaction with corporations is near the top of the political agenda for both the left and for the right.

The Accountable Capitalism Act, a bill that would make all corporations with $1 billion or more of annual revenue subject to a federal corporate governance regime (by requiring them to be chartered as a United States corporation), was introduced this past August by Senator Elizabeth Warren.  Among other things, this regime would mandate that not less than 40% of the directors of a United States corporation be elected by employees, and that directors must consider the interests of all corporate stakeholders—including … Read more

Wachtell Lipton on the State of Play of Activism at Year-End 2018

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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

Wachtell Lipton Puts a Spotlight on Boards

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The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
  • Determine the board’s response to proposed legislation like Senator Elizabeth

… Read more

Wachtell Lipton Discusses the State of Play in Activism

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As we approach the 2019 proxy season, developments since September 2017 prompt a brief updated review of the state of play.

  • The threat of activism remains high, and has become increasingly global.
  • Activist assets under management remain at elevated levels, encouraging continued attacks on many large successful companies in the U.S. and abroad.
  • In the current robust M&A environment, deal-related activism is prevalent, with activists instigating deal activity, challenging announced transactions (g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
  • “Short”

… Read more

Corporate Governance—The New Paradigm—A Better Way Than Federalization

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While “The Accountable Capitalism Act” introduced on August 15 by Senator Elizabeth Warren contains several very worthwhile provisions, it is premised on the federalization of all public corporations with revenues in excess of $1 billion. Mandatory federal incorporation and the creation of a federal office to make regulations and supervise compliance would be a major incursion into state corporation law. It is reminiscent of proposals by Ralph Nader some half-century ago to achieve control of major corporations by mandatory federal incorporation. Warren’s proposal should not receive any more support than Nader’s. However, like Nader’s proposal led to significant changes in … Read more