In our paper, The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption, which was recently made publicly available on SSRN, we show how the ownership patterns of early business corporations shaped their peculiar governance structure. While the nineteenth century saw the standardization and rapid spread of the modern business corporation around the world, those early corporations differed from their contemporary counterparts in important ways. Most obviously, they commonly deviated from the one-share-one-vote rule that is customary today, instead adopting regressive voting schemes that favored small over large shareholders. In recent years, both legal scholars and economists have … Read more
The following post comes to us from Trevor Norwitz, a partner at Wachtell, Lipton, Rosen & Katz in New York and a lecturer-in-law at Columbia Law School:
In the upcoming proxy season, shareholders at several major corporations will be asked to vote on proposals submitted by shareholder activists requesting that the board of directors facilitate the ability of shareholders to act by written consent. This means that, rather than the most important decisions being made at an annual or specially called shareholders meeting, such fundamental changes as replacing the board or even selling the company could be made, in many … Read more
In a 2010 article in the Texas Law Review entitled “Embattled CEOs”, Professors Marcel Kahan and Ed Rock argued that, over the past decade or so, CEOs of US public companies have gradually been losing power to their boards and their shareholders. In their view, the days of the “imperial CEO” are now numbered. In early 2013, the growing tension they identified between CEO and board power was on display at two major corporations in different continents – J.P. Morgan Chase & Co in the United States and Rio Tinto in Australia.
At J.P. Morgan on January 15, 2013, Jamie … Read more
In Kallick v. SandRidge Energy, Inc., the Delaware Court of Chancery, in an opinion by Chancellor Strine, enjoined the incumbent board of SandRidge Energy, which faced a consent solicitation initiated by a large stockholder seeking to de-stagger and replace the board, from, among other things, soliciting against or otherwise impeding the consent solicitation until the board approved the rival slate for purposes of a “proxy put” provision in SandRidge’s credit agreements. The Kallick decision, along with the Court of Chancery’s earlier decision in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, confirm that corporations, as a … Read more
In three relatively low profile decisions issued by the Delaware Court of Chancery in February 2013, the court reached seemingly atypical results given the issued involved and the procedural postures of the respective cases. The first decision was on February 6 in In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (TRANSCRIPT). There, Chancellor Strine denied from the bench a motion to dismiss a claim alleging that the defendant directors had breached their duty of loyalty by failing to monitor the company’s officers. This result is noteworthy in that such so-called Caremark claims have been characterized by the … Read more
With the recent increase in activism, some on Wall Street are blaming shareholders for the short-term mentality of corporate boards.
But many of these activists represent a small subset of investors in publicly held companies. As a result, corporate boards around the country should re-examine their priorities and figure out to whom they owe their fiduciary duties.
One of the major problems of this newfound activism is the focus on short-term results. That is not to say that our economy isn’t gripped by a short-term mentality, whether it’s individuals saving less and seeking immediate satisfaction or corporations forgoing long-term sustainable … Read more
Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.
Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.
But a firm today may choose Delaware law … Read more
My new Essay Should Angel-Backed Start-ups Reject Venture Capital? challenges the conventional wisdom that venture capital is a necessary – and even desirable – source of financing for all start-ups. In particular, this Essay argues that some start-ups that attract angel investors should stop there, rejecting proffers of venture capital that may follow. The Essay challenges the notion that venture capital is a necessary condition for start-up success, and argues the counterintuitive proposition that venture capital may actually be harmful to entrepreneurs and angel investors in some situations.
At the outset, I observe that angels are now able to fund … Read more
My draft article, Blocking the Ax: Shielding Corporate Counsel from Retaliation as an Alternative to White Collar Hypercriminalization, recommends that the NYSE and Nasdaq amend their corporate governance listing standards to require that termination of a public company’s general counsel and lead outside corporate transactional and securities regulatory counsel be approved in advance by the company’s independent audit committee.
The article is written from the perspective of one who worked for many years in private practice as full equity partner at two major AmLaw 100 firms and during 2005-2006 served in a senior capacity with the Securities and Exchange … Read more
More and more companies appear with strange abbreviations behind their business name. Consider Chrysler Group LLC (instead of Inc.) or LVMH Montres & Joaillerie France SAS. Some even speak about the “endangered corporate form” and point to the rise of the uncorporation. In the paper, “A Primer on the Uncorporation, ” Erik Vermeulen, Priyanka Priydershini and I examine how the uncorporation has evolved in the United States and, more recently, in other economies around the world. The growth in non-listed business forms in Europe, Latin America and Asia has been shaped by a mixture of learning and professional advice arising … Read more
A shareholder typically brings a derivative suit on behalf of a corporation against the company’s current or former officers or directors in one of two contexts: either after the shareholder has demanded that the board cause the company to bring suit on its own and the board refuses, or when the shareholder brings the suit directly on the basis that demand on the board would have been futile because a majority of the board is not sufficiently disinterested to make the decision as to whether to sue. In either case, the company’s board (or board committee, such as a special … Read more
With the 2013 proxy season now well underway, two recent decisions emphasize the potential litigation risks public companies face under federal and state disclosure law. These decisions highlight the need for companies to focus on disclosure requirements as they prepare their proxy statements.
In a highly anticipated opinion issued this past Friday, the federal court for the Southern District of New York has enjoined a vote on a management-sponsored proposal at Apple’s upcoming annual shareholder meeting. Greenlight Capital, L.P. v. Apple, Inc., No. 13 Civ. 900 (RJS) (S.D.N.Y. Feb. 22, 2013). Two of Apple’s shareholders (including an activist shareholder … Read more
In the next few months, thousands of public companies will hold their annual shareholder meetings. I would like to take this opportunity to emphasize the importance of robust proxy disclosure to shareholders and to highlight areas in which the disclosure can be substantially improved. I share the desire expressed by many investors for additional information that would enhance their ability to make informed voting and investment decisions.1
The accepted wisdom is that a lawyer who represents herself—by acting as both a lawyer and a director—has a fool for a client. In our working paper, Lawyers and Fools: Lawyer-Directors in Public Corporations, my co-authors, Lubomir Litov and Simone Sepe, and I explain why the accepted wisdom is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. On average, a lawyer-director increases firm value by 9.5 percent, and when the lawyer is also a company executive, … Read more
My forthcoming article, Interbank Discipline, draws attention to the important role that banks play monitoring and disciplining other banks. To understand the significance of interbank discipline, the Article proposes a new way of thinking about market discipline more generally. In the first wave, advocates of market discipline viewed it as a basis for deregulation. Why expend government resources duplicating the efforts of market participants, the rationale went, particularly considering that regulation can discourage market discipline and markets are often more effective than regulators? The 2007-2009 financial crisis, and numerous scandals preceding it, largely brought an end to such reasoning. … Read more
Poor corporate governance is a pervasive problem in the charitable nonprofit sector. Prominent examples of mismanagement and abuse include instances of intentional misconduct, such as embezzlement and unauthorized self-dealing, and negligent conduct, such as failure to diversify the organization’s investment assets. In numerous cases, the lack of good corporate governance has led to the financial distress or failure of a charitable nonprofit firm. A rich literature on nonprofit law has considered the need for better corporate governance and enforcement of fiduciary duties, but the scholarship has yet to address the implications of financial distress and insolvency on corporate governance.
My … Read more
Last week, Professor Robert J. Jackson, Jr. sat down with Bloomberg Law’s Lee Pacchia to discuss his SEC petition to require public companies to disclose their political spending. The SEC has received more than 300,000 comments on the petition, more than any other rulemaking proposal in the Commission’s history. SEC staff members have suggested that they plan to propose rules by April. Jackson tells Pacchia that, because “this is investors’ money,” shareholders have a right to know when the companies they own spend money on politics.
When a business enterprise is confronted with a situation that suggests that there has been a violation of law, the judgments made at the outset may well be critical to the ultimate outcome. Indeed, poor choices concerning how the matter should be handled— perhaps made in a rush and almost certainly without full facts—may prove even more prejudicial and damaging to the enterprise than the underlying conduct. As has often been said, corporations get into real trouble more often due to “flunking the investigation” than due to the conduct being investigated.
Commissioner Daniel M. Gallagher delivered the below remarks before the Corporate Directors Forum at the University of San Diego, San Diego, California, on January 29, 2013:
Thank you Anne [Sheehan] for your very kind introduction. I am honored to be here today. Conferences like this are critically important, and all too rare, opportunities for directors, executives, shareholders, and regulators to interact.
Before I go any further, I need to provide the standard disclaimer that my remarks today are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.
Today I would like to talk … Read more
A committee of law professors that I co-chair with Lucian Bebchuk has petitioned the SEC to develop rules requiring public companies to disclose the use of shareholder money on politics. The petition has received unprecedented support, including comments from more than 300,000 individuals, institutional investors, and members of the U.S. Senate and House of Representatives. The SEC’s Division of Corporation Finance recently confirmed that the SEC is actively considering the petition, and the SEC’s entry in the Administration’s Unified Regulatory Agenda indicates that the SEC plans to propose rules by April.
In response, opponents of such rules are … Read more