Business Law Prof Blog

Utah's Legislation on Short Selling

Utah has just passed a statute the penalizes "failure to deliver" transactions in the stock of Utah companies.  The legislation has been sold a bill of goods.  It is convinced that the legislation will attract high-tech companies to Utah because such companies are the most hurt by "naked shorting," the selling of stock that is not owned or borrowed.  The rules will, of course, encourage broker-dealers country wide to not do any business in Utah company stocks in order to avoid the Utah rules.  "Failure to deliver" transactions are not always due to naked shorting; many stock transactions do not close for a variety of reasons.  It will hurt, not help Utah companies.

More significantly the legislation will force a new look at the old commerce clause and supremacy clause cases that carve out an exception for state blue sky laws and for state corporate laws that apply only to domestic corporations.  The exceptions have hidden state anti-takeover legislation for fifteen years or more.  The Utah legislation attempts to take advantage of the old exceptions.  The pre-emption line of cases as applies to state legislation on corporations with a multi-state presence has needed to be refined and rethought for a long time.

Atkins on the Billing case

Commissioner of the SEC, Paul Atkins, is alarmed about the Second Circuit opinion in Billing v Credit Suisse First Boston and has asked, on the editorial pages of the Wall Street Journal today ("A Serious Threat to Our Capital Markets"), that the Supreme Court of the United States take the case and reverse it.  The SEC has, of course, also made the argument officially in briefs filed in the case.  His argument is twofold:  First, the case will unleash  "costly, frivolous" class action lawyers under the antitrust laws, a group that Congress reined in "painfully passed" 1995 legislation.  Second, the case will allow courts, using antitrust law to "disable the ...finely tuned [SEC] regulatory framework." 

The SEC has long enjoyed a considerable freedom of action from antitrust principles given by a line of Supreme Court opinions that "imply" an antitrust exemption for matters covered under federal securities legislation.  Congress, not the Supreme Court, ought to resolve the conflict and Atkins would be better served to call for Congressional hearings on the question.

On the merits, I am in sympathy with those who believe the SEC has not given anti-trust issues greater weight in its rules.  The SEC, in theory, is supposed to takes anti-trust matters into account when it fashions its rules.  In practice the SEC has often allowed its desire to "fine tune" (aka micro structure) the securities markets to prevail over anti-trust concerns.  The SEC is getting better, but for years it has structured "competition" in our securities markets to the point of stifling competition and it has not escaped the tendency.  The IPO process is a case in point:  In the Internet age the SEC is hanging on to rules, designed in the age of paper, that protect the underwriting practice of the nation's large investment bank operations.  Every change in underwriting procedure (auctions?) is fought by the old guard, buoyed up by the old rules.  What the SEC is seeing in Billing, is, in essence, a serious questioning of its old rules on modern competitive principles.  If may be coming in the wrong form but it is a warning nevertheless.

More on the Disney Case

One reading the 89 page opinion from the Delaware Supreme Court on the Disney shareholders litigation over the severance payment for Michael Orvitz has to be struck by what is missing.  There is no guidance in the opinion on compensation limits.  Shoddy compensation practice is accepted with a note that it is "not best practice" and we do not know how shoddy it can be before it is out of bounds.  Moreover, after labeling the Disney procedures as less than satisfying, the court goes to great lengths to justify its result on the facts.  In essence, a promised severance payment of $130 million is in the ballpark of what is reasonable we are told because Disney needed to match a $200 million position Orvitz held and would forfeit at the company he would have to leave for Disney.  There is more: Orvitz wanted a salary of $25 million a year and a guarantee of $50 million from options; they could not guarantee the $50 million for tax reasons so a vesting plan than netted him $90 million from options on severance is reasonable.  The compensation committee accepted the severance pay because, even though some of its members never physically made a single meeting (they got phone calls) and its chief consultant missed the critical meeting (he was close to a phone for questions) and there were no spread sheets on severance results and no good minutes on what the committee did, the committee understood the Orvitz severance plan because it knew of the severance plans of the CEO, Disney, and Orvitz's plan was not to fair from Disney's.  and my favorit:  A footnote explaining the Orvitz did a few good things for the company (he got Tim Allen to return to the set) and therefore deserved his money???  Folks we are talking about $130 million for 14 months time in which he did very limited work.  $130 million. He would be 184 on the list of countries', countries', total GDP for 2004, ahead of 30 countries. 

The court is working very hard here to set out the facts in their very best light to support the decision of the Disney compensation committee to accept such a severance plan.  We would have been better served by a simple remark:  "We will not let this go again....A compensation committee in the future, to approve a complex severance package,  will need to have one, three, and five year scenarios on the table for their consideration."  Pity.             

Disney Case Affirmed

The Delaware Supreme Court affirmed Chancellor Chandler ruling in the Disney compensation case.  The award of $130 million or so severance to ex-president Michael S. Ovitz for 14 months of work (during  which he did nothing but irritate colleagues and decorate his office) is "protected by the business judgment rule."  The shareholder plaintiffs had argued that the Disney board of directors did not discuss nor understand the compensation package of Ovitz when it hired him.  I had hoped that the Court would use the case to set some limits on extraordinary executive compensation since it would hard to find a more outrageous case but, silly me, the Delaware Court knows how its bread is buttered.  I should have known better that to lead with my heart rather than my head.  Executive compensation is incendiary stuff for those who decide where a corporation will incorporate.  Virginia would have been very happy to accept those corporations fleeing from Delaware in response to any legal rule that affects the compensation of CEOs.  Indeed, had the Court attempted to set some limits, the Delaware legislature, who also knows how its bread is buttered, would have quickly responded with legislation.  The Delaware courts are limited in what they can do on the matter.           

Broker Voting

The NYSE is considered an end to "broker voting," the voting of shares held by brokerage customers when those customers do not choose to vote.  This change would give "majority vote" bylaws, bylaws that seat directors only if they receive a majority vote of those voting, some teeth.  With broker voting, it is very rare than any management supported director does not receive a majority vote.   I suspect, however, that the NYSE has underestimated the opposition it will get to its proposal form listed companies.  Where is the support for the proposal coming from inside the exchange??  Could be interesting...

Options Pricing

We get periodic reminders of how hard it is to change the practices of the securities markets even though changes are demanded by clients.  Today's comes with SEC Chairman Cox's request, again, to the options exchanges to price in pennies rather than nickels and dimes.  Stock exchanges have been pricing in pennies for some time (and that change came hard, they had been pricing in 1/16ths and 1/8ths).

GM Shareholder Resolutions

GM shareholders passed two resolutions.  The first requires a majority vote of those voting to seat a director.  The majority vote requirement resolution has been a popular daring of activist shareholders for several years.  It will affect very few director's elections, however.  All but a very few directors already get such a vote.  The big news at the GM meeting was the second resolution that passed, for cumulative voting.  Cumulative voting, the ability to marshall all of one's votes for directors seats behind a single preferred candidate (or otherwise distribution them among preferred candidates), was popular at the turn of the 20Th century.  Ohio still has cumulative voting as its default voting system for Ohio corporations.  The voting system  may be on the comeback trail. It would clearly benefit activist hedge funds.  (See the Wendy's posts).