Business Law Prof Blog

Another Bankruptcy Filing: Is it Good for America?

As anticipated, Delphi, north America's biggest automotive parts maker and  No. 63 on the 2005 Fortune 500 list, today filed for bankrutcy under Chapter 11.  Click here for more details.  Delphia claims that its wages are way our of wack -- the average worker makes $65 a hour in salary and benefits and the company says it can only pay on $25 a hour.  This is a huge disparity and one wonders how it developed so quickly.  The most interesting feature of the current public posturing is the statement of the CEO of Delphi, Robert S. Miller, that Delphi will continue to fund the company's pension plan as long as the UAW agrees to substantial pay cuts: 

If the union says, "no, I don't want to give on wages and benefits" and we come to some kind of compromise where we are break-even instead of profitable, then you can kiss the pension plan goodbye.

In the background is a GM guarantee to pay selected Delphi benefits if Delphi files for Chapter 11.  GM, which owened Delphi until 1999, offered the guarantees to smooth the way for the 1999 spin-off.

Based on the recent Fortune article "Three Cheers for Bankruptcy," the filing is apparently good for America.  As the article puts it:

Yes, corporate bankruptcies pad the pockets of lawyers, executives, and vulture investors like Ross. Yes, they keep alive companies that might be better off dead. Yes, they are enabling the sometimes shameful dismantling of the corporate pension system. But the silver lining shines bright: Chapter 11 encourages risk taking, helps the economy adapt to changing times, and helps companies rebound from past mistakes. American business wouldn’t be where it is today without it.

Interesting take, but debatable.

Hedge Fund Regulation: The nose of the camel under the tent

   Beginning in February, the Securities and Exchange Commission will require those who advise hedge funds to register o a Form ADV.  The form asks for the advisers address and his or her professional history.  The SEC has the discretion to audit any registered fund.  I have written the this is the proverbial "camel nose under the edge of the tent." Post  When any registered hedge fund is in trouble, political pressure will mount on the SEC, questioning why, for example, the SEC did not audit the fund, and the SEC will be forced to adopt more detailed registration requirements in response to the pressure.  The inevitable result is more hedge fund regulation, growing over time after each new hedge fund collapse or scandal. 

In a sense, I was wrong in the earlier post, however:  I assumed the pressure would attach after registration next February, but the political pressure to augument registration requirements has started already, even before the registration rules have taken effect!   

Jenny Anderson, In "Insider: A Modest Proposal to Prevent Hedge Fund Fraud", in today's NYT Business Section at C6, reflecting on the collapse of Bayou Group, writes that that SEC should, in reaction to the scandal, ask for more hedge fund information, the name of the fund's auditor and the name of the fund's broker/dealer.  Her argument is circular:  With these new disclosure requirements the SEC could protect itself form politicians who want greater disclosure requirements.   In other words, increase the regulations to fend off demands to increase the regulations.  The SEC will no doubt comply:  Asking the SEC to regulate more is like asking a barber whether you need a haircut.   With each crisis, the push on the SEC to increase registration requirements, coupled with the SEC's self-confidence that it can regulate in the public's increase will inevitably increase the intrusiveness of hedge fund regulations.  Within five years will we will have in place a full Regulation HF (Hedge Fund).   

The Function of Auditors

   Floyd Norris, the fine commentator for the NYT Business Section, writes today about the draft of a new "White Paper" from the American Institute of Certified Public Accountants (AMICPA).  According to Norris, the White Paper instructs auditors to refuse to answer questions from underwriters on whether the auditors had uncovered "instances of fraud or illegal acts."  Auditors are told to refer the underwriters to company management.  The White Paper is yet another illustration of the uncertain role of auditors, something one would assume we had well worked out by now. 

If auditors had their way they would describe their role this way:  We are under contract with a company to check their books for compliance with GAAP and report to the company our results.  The company passes our report out to others.  We do not owe any duty to investors or the market in general, we owe a duty solely to the company to do our job in accordance with the contract, which incorporates trade association standards of auditing (GAAS).  If our report is incorrect, it is the company alone that should sue us for breach of our obligations.  If anyone asks about the reports contents, we refer them to management for it is management that can choose whether or not to disclose the contents of the report, subject to their obligations under the federal securities acts.

Investors, however, if they had their way would describe auditors role this way:  Our company hires auditors to verify company accounts and to report to shareholders (and other interested market participants) that company management is properly disclosing the use of investor funds.  An auditors report is a public seal of approval on which the pubic expects to rely.  If a report is false, the public is aggrieved and has the right to sue for damages.  Any investor, or investor representative, should have free access to the report.

The law vacillates in a narrow range mid-way between the two extremes, never fully embracing one extreme or the other.  Auditors harbor and defend their view and investors (who are not lawyers) hold theirs.  Ironically, the investor view, although false to auditors, makes audits more valuable than they would otherwise be and enable auditors to enjoy the value in fees charged.

The overriding problem with audits is the inherent conflict-of-interest that no amount of federal regulation can solve:  Auditors are chosen and paid by the people they are policing, firm managers.  It is analogous to the home team choosing and paying the referee for home football games based on past performance.  Federal regulation cannot negate the inherent conflict of interest; it can only stop the more outrageous instances of favoritism (and even here some would disagree).   The best reform proposal would have each group get its way:  firms could hire auditors, if they choose to do so, with limited contractual duties and shareholders also could choose to hire auditors will duties to report directly to them.  Any company could have one or the other system of auditors or both.       

News Corp. Sued over Poison Pill

This year’s hot item for corporate activists clearly is majority voting for the election of directors. In past years it has been the removal of poison pills. Both of these agendas have typically been pursued through the shareholder proposal mechanism of Exchange Act rule 14a-8. Under this rule, it is possible for a shareholder to get a proposal on a company’s proxy (and thereby get it voted on by the shareholders) provided the shareholder complies with the strict procedural and content restrictions of the rule, typically in the face of arguments by the company’s lawyers that the proposal does not comply. It is well established that the content restrictions do not allow a straight-forward binding shareholder proposal adopting majority voting or removing a poison pill to be placed on the ballot. Instead, the proposal has to be stated as a non-binding recommendation to the board that it adopt majority voting, remove the pill, etc. (it may be possible to get a binding proposal on the proxy by structuring it as a bylaw amendment, but that maneuver is beyond the scope of this post).

The reason I bring this up, is that Reuters reports a different tactic initiated by some institutional shareholders against New Corp. concerning the extentsion of its pill. These shareholders are suing. The article caught my eye because it is well established that a board has the power to put a poison pill in place without shareholder approval, so I’m curious as to the legal basis for the suit (the article does not say). I’ll see if I can find out more details.

[Bill Sjostrom]

UPDATE:  The Reuters article referenced above has been revised.  It now says that the shareholders are suing News Corp. "for reneging on a promise to seek shareholder approval before extending a poison pill provision."  Sounds like a contract law claim.

Utility Sector Consolidation

Click here for an interesting Corporate Counsel article predicting a massive consolidation in the utility industry with the recent repeal of the Public Utility Holding Company Act. PUHCA placed geographic limitations on utility ownership and prevented non-energy companies from investing. Now that these restrictions are gone, the article speculates that energy companies will expand geographically and that both non-energy strategic buyers and financial buyers will get in the game.

Greenspan Critic

Bill Fleckenstein has written a thoughtful, but scathing, criticism of Alan Greenspan.  He argues that Greenspan is the "Worst Fed Chief Ever" and is sowing the seeds of a mess that his successor will face.  His argument that the Fed could ask for specific tools (which the office once had) to deal specifically with housing problems while not damaging the general market is intriguing.

Voting Requirements cont.

The CorporateCounsel.net maintains a majority voting chart of the companies that have adopted something in this area.  Of the 11 companies on the chart, it looks to me that only Automatice Data Processing has adopted a standard with any teeth.  ADP's standard provides:

The directors shall be elected by the vote of the majority of the shares represented in person or by proxy at any meeting for the election of directors at which a quorum is present, provided that if the number of nominees exceeds the number of directors to be elected, the directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting.

This I think is a positive development for ADP shareholders and does strengthen ADP's corporate governance.  But that's not true for the remaining 10 companies on the chart--they all have adopted Pfizer type standards.  Call me a cynic if you want, but I do think it is a sham.

I do agree with Dale's post that the true breakthrough would be a company voluntarily allowing a large shareholder to put a canidate on its proxy so that elections would be contested.  The SEC, of course, floated the idea of forcing companies to do this, but only in fairly limited circumstances.  The effort faced stiff opposition from big business and apparently died with Chairman Donaldson's departure.

[Bill Sjostrom]

[BTW, I came across the ABA press release referenced below and the majority voting chart referenced above at Broc Romanek's blog (www.thecorporatecounsel.net/blog/index.html).  If you're not aware of this blog, I would check it out.  It is very informative, especially on developments at the SEC.] 

Voting Requirements

   Bill, you have indicated that not all the resolutions are alike.  The shareholder voting bylaws some shareholders seek that have teeth require an absolute majority vote (a majority of the outstanding shares) to seat a director.  Such proposals are usually defeated.  Some bylaw proposals only require a majority of those represented at the meeting to seat a director as long as there is a voting quorum.  A few firm's have voluntarily adopted these.  99.99 percent of the time directors get these kinds of relative majorities at meetings anyway.  The resolutions you dislike, which seem to represent a majority of those voluntarily adopted by firms, enable a board to overrule, at the board's discretion, a shareholder vote that does not meet the relative majority threshold; the board can choose to seat the director anyway even though a director recieves a relative majority of "withhold" votes.  Such cases are very, very rare (even Eisner at Disney got a relative affirmative majority vote).  The weaker resolutions, therefore, do not change practice much or change the results often do but change the public attitude and commitment to the shareholder franchise in corporations that adopt them.  The cynical may claim that it is only a sham.  I view it as a small first step to absolute majority requirements or contested elections.

Contested elections, or the potential of contested elections, on the firm's proxy are really the way to go.  Then a corporation does not have to worry about absolute majorities.  Open the frim's proxy to another director nomination by one of the firm's ten largest shareholders (asked in order of holdings).  If none step up, then a majority of those represented is enough;  if on steps up the person with the most votes wins.  There are other versions that also would work.  Firms that voluntary adopt these systems would empower their shareholders and, if I am correct, find a bonus in their stock price.  Have any firms tried this yet??    

More on Voluntary Adoption of Majority Voting

In a recent press release concerning director voting, the ABA Committee on Corporate Laws states:  "One positive development is the growing trend of voluntary adoption by certain corporations of corporate governance guidelines that address the failure of nominees to satisfy a minimum vote requirement."  It then cites what Pfizer, Inc. did as an example.  I discussed Pfizer's adoption in my earlier post on the issue.  As that post indicates, I just don't see how this "growing trend" is a positive development.  At best, it is a neutral development; at worst, it is a negative development because a corporation can hold up its voluntary adoption "as a step in further stregthening corporate governance," to paraphrase Disney, when in reality the adoption of a Pfizer type so-called majority voting standard does nothing for corporate governance.  Am I missing something here?

[Bill Sjostrom]

The Miers Question: Why Is Her Appointment So Critical?

  When one reads the cascade of opinion pieces on the appointment of Harriet Miers to the Supreme Court of the United States one should remember that most who are writing do so under a distinct conflict of interest.  The journalists, law professors, lobbyists, and political and religious leaders that write and opine about Ms. Miers, neutral of whether they are supporters or attackers, have a stake in the importance of the event.  When the event is made to be important, these folks get public air time and sell advertising or raise money or accumulate prestige.  The public gets caught up in it all because, after all, many of us like a good spectacle now and again.  Much of the writing then will quite naturally exaggerate the importance of the appointment.

The exaggeration comes with costs as it affects the debate.  Is she the best credentialed, the most adroit thinker, the most deft legal philosopher, and so on?  I would rather that the Supreme Court as an institution not require the very best thinkers in order to operate successfully.  We put too much pressure on it.  A Court that imposes such demands on its Justices is going to have a high rate of failure.  Rather the Court ought to be able to operate adequately with decent people -- conscientious, clear minded, able to use logic.  If the Court cannot function with able, decent people as opposed to unique mental giants, then the Court's function has been miscast.  Simply put, we ask too much of the Court and we depend too much on the Court. 

This is another illustration of a misplaced belief in what government can do--get the right people in government and government will be perfect and make social life in America perfect.  If government fails it is because we have the wrong people in place.  No -- it may be because government is inherently limited in what it can do for us -- if we expect too much we will inevitably be disappointed and disadvantage ourselves to boot.  It will stifle our personal self-sufficiency and initiative. 

 

Viacom Files S-4 for Split into Two Companies

Yesterday Viacom filed an S-4 registration statement with the SEC to register securities to be issued in a planned split of the company.  Click here for the registration statement.  The company will be split  into two publicly traded companies.  One will retain the Viacom name and include Viacom's advertising-supported Cable Networks business (MTV, BET, etc.) and its Paramount Pictures business. The other will be called CBS Corporation, and will consist of the CBS, UPN and Showtime networks; the CBS television stations group; Infinity Broadcasting; the CBS, Paramount and King World television production and syndication operations; Viacom Outdoor; Paramount Parks and Simon & Schuster.  Click here for an AP story on the split.  Will the sum of the parts be greater than the whole?  We'll have to wait and see.  For the day, Viacom Class A common stock closed down $0.59 at $32.21 per share.

 

Greenspan's Replacement

With the Supreme Court nominations behind Bush (assuming Miers is confirmed),  his next big nomination is the successor to Fed Chairman Alan Greenspan.  Greenspan's last day at the Fed is expected to be 1/31/06.  Click here for an AP article on the subject.

Voluntary Adoption of Majority Voting

The voluntary adoption by publicly-held companies like Walt Disney Co. and Pfizer Inc. of majority voting standards for the election of directors has been heralded as a “breakthrough” in corporate governance. In reality, I think it is nothing more than a public relations maneuver.

As explained in Dale’s earlier post, under the prevailing plurality system, a director can win while only receiving a single affirmative vote. With a majority voting standard, a candidate is not elected unless he or she receives a majority of votes cast. Or a company could set the standard even higher and require a majority of shares outstanding. 

Although trumpeted in the press as having done so, neither Disney nor Pfizer has adopted a majority voting standard.  What they have done is amended their corporate governance guidelines to provide that any director who receives "withhold" votes representing a majority of the votes cast for the director's election is required to submit his or her resignation to the nominating committee which would then advise the full board whether it thinks the resignation should be accepted. The director would still be elected even if only one vote was cast in the director’s favor (assuming a quorum at the meeting), and the board could choose not to accept the resignation. If the board did accept the resignation, the board would be entitled to simply appoint whomever it chooses to fill the vacancy.

Office Depot waters things down even more. Under its so-called majority voting standard, a director is only required to tender his or her resignation if a majority of outstanding shares withholds votes or votes against the director (presumably, Office Depot’s ballot will include an “against” box). 

Obviously, these so-called majority voting standards are farces. They do not even give shareholders a veto power over a director as some have characterized them since the board is not obligated to accept the resignation. It really amounts to nothing more than a shareholder recommendation to the board that a certain director be ousted. I do not see how this is any different from the prevailing system where someone like CalPERS launches a withhold vote campaign against a director. Yes, the board does not have the legal power to oust the director even if a supermajority of outstanding shares withholds votes. But do you honestly think a director who does not have the confidence of the shareholders and is therefore asked to resign by the rest of the board would refuse to resign? 

[Bill Sjostrom]

Westlaw Drops Wall Street Journal Database

Have you noticed that Westlaw no longer has a database of full-text Wall Street Journal articles? Neither does Lexis. I am very annoyed by this as I frequently used the database for research. I called West looking for an explanation, but the person I talked to had none, although she did point out that Westlaw does have a WSJ abstract database. Whoopity doo! 

If you have a print WSJ subscription, as I do, you can do a free full-text search at wsj.com. But to access an article over 90 days old you have to pay $2.95, the search engine is not as sophisticated, and I do not think the database goes back as far. I suspect WSJ figured it could make more money through its own website than what Westlaw was paying, and Westlaw balked at paying more. Please complain to your Westlaw rep about this.

[Bill Sjostrom]

Director Compensation is on the Rise

CFO.com reports that the average total compensation for directors at the 200 largest U.S. companies stands at $195,000, an 11% increase from last year.  Note that this amount includes both cash and the value of option and stock grants.  Click here for more details.

NYSE Officials Get Wells Notices

The SEC has issued "Wells notices" to several current and former NYSE officials.  The notices indicate that the agency may be pursuing civil charges against the officials.  The individual sanctions are the last stage of an SEC investigation into specialist trading firm abuses.  In the first step the SEC issued a tough report on the NYSE floor-trading system that chronicled trading abuses.  In the second step the SEC sought civil fines against five specialist trading firms and settled to $240 million.  Now the SEC is going after NYSE officials, although charged with SRO (Self Regulatory Organization) policing duties, who let the abuses happen.  Folks it is the entire SRO, self-policing system that needs to be scrapped.  Rather than scrap the system the SEC is empowering the NYSE with its new Regulation NMS.

Sarbanes-Oxley Back in the News

Some are bothered by the SEC's delay on applying Section 404's internal controls requirements to small publicly-traded firms, under $75 million capitalization ("smaller firms are the most likely to defraud");  other are bothered by the SEC slow distribution of SOX "fair funds" to investors (SEC has collected $4.8 billion and distributed only $60 million).  WSJ (today) at pp. C1 and D2. 

Miers: Friendly to Business? Could Be an Illusion

  Many leaders in the business community assume that Harriet Miers is pro-business.  Indeed, some political commentators even go so far as to argue that Bush sacrificed conservative values for a pro-business judge.  These views are shaky.  The proponents base their conclusion on her high-profile business clientele when she was a practicing lawyer.  This is not definitive.  I have known many business lawyers who were not pro-business, they were pro-client;  when given a public forum with no impact on their clients they were distinctly anti-business because they "knew the tricks."  Someone who is pro-business (or is at least not anti-business) must have an underlying philosophy that embraces the economic and political benefits of capitalism.  I do not see evidence of this kind of depth of understanding in her sketchy and obscure public record.  Who knows?.   

For my discussion on whether Chief Justice Roberts will be pro-business, see my post entitled: Will John Roberts Be Pro-Business?

Miers: Confirmation by Rumor Has Begun

  Yesterday I wrote of the effect on the confirmation process of appointing an unknown to the Supreme Court, "Confirmation by Rumor." Post It has begun.  We now hear from a Texas judge and, apparently ex-boyfriend, that she goes to a conservative church in Dallas, implying she has conservative views on family values. This is only the beginning folks.  "I hear she...."

The Legal Quagmire That Is Shareholder Voting

  John Bogle has an editorial in today's WSJ on the "Individual Stockholder, RIP."  He makes the point that only 30 percent of today's shareholders are individual shareholders. The rest of the 70 per cent are institutional intermediaries -- mutual funds and pension plans.  The institutional intermediaries are passive; that is, they vote with incumbent management.  The picture is worse than he paints. (I have discussed the matter in my post: SEC Controls on Shareholder Voting: An archaic, cumbersome system.)  The 30 percent "individual shareholdings" that he notes are largely held in street name by brokerage firms.  The brokerage firms vote much of the stock by defaul, when the beneficial owners, the individuals, do not return the vote solicitation materials.

His editorial supplements the wonderful piece by Gretchen Morgenson in Sunday's New York Times.  Ms. Morgenson is a national treasure; she is my favorite business commentator in the media, period.  In any event, she chronicles the failure of shareholder resolutions that would have directors win their elections by a majority vote.  At present, directors can win election in most publicly-traded firms with a single affirmative vote (as long as a quorum of voters is represented, usually only one-third of the outstanding voters) even though all the other voters have "withheld" their votes.  There is no option to vote "no."  In theory, a firm with 1,000 outstanding voting shares could have 333 shares represented at a meeting (in person or in proxy) and a director could win a seat with a vote of 1 "for" and 332 "withheld."  In practice, we have seen examples of, in the terms of our example, votes of 300 "for" and 200 "withheld" with the rest of the shareholders (500) not voting.  The shareholder resolutions would stop such nonsense.  The reslutions recommend firms put in buylaws that require an absolute majority, in our example 500 "for" votes, for a valid election. 

Yet, many of our largest institutional investors (Fidelity Magellan, Vanguard 500 Index Fund) voted against the proposals.  Why?  Their public reasons are makeshift. (What happens if no-one gets elected???? Answer -- the old board member holds over until the vacancy is filled by shareholders or, in some cases, by the remaining board members.)  The real reason they voted against the resolutions?  They knew that managers are vehemently opposed and the institutional investors did not have the spine to stand up to them.  Appropriate shareholder control in United States corporations will not be adequate until the institutional investors do not pull stunts like this.

I some cases the shareholder proposals passed by a majority shareholder vote, over the no votes of the institutional investors (!).  The firms, however, do not have to comply (the proposals are "recommendations from the shareholders").  Some firms adopted the proposal's recommendation to amend their bylaws and some did not.  I hope the market will punish those who do not, but there is significant noise in stock price and it will be hard to see it if the market does.