Saturday, March 21, 2015

Not exactly about the firm's wealth maximization

The UAW Retiree Medical Benefits Trust recently won a battle with Gilead and Vertex to have those companies include on their proxy statements proposals to require them to explain to shareholders the risks of their drug pricing decisions.

Basically, both Gilead and Vertex have come under fire recently for charging extremely high prices for new drugs.  There's an argument, of course, that this is simply a bad business decision - if your customers can't afford your drugs, they won't buy them.  And that's the official basis for the Trust's proposal.  The Trust describes, for example, how Sanofi was once forced to dramatically cut drug prices because the initial prices were set unrealistically high.

But I find it very hard to believe that the UAW Retiree Medical Benefits Trust is genuinely concerned about drug pricing in its capacity as a shareholder seeking maximum returns.  Instead, it seems far more likely that the Trust's concern is, you know, drug prices.  That it has to pay.  For its beneficiaries.  And it's using its status as shareholder of several pharmaceutical companies to try to influence policy in that regard.  The fact that the SEC is allowing the proposal to be included on the companies' proxies suggests that the SEC is not terribly concerned about that possibility (unlike Delaware, which does not want shareholders to pursue their own idiosyncratic agendas).

It reminds me of the AFL-CIO's earlier objection to Wall Street banks' practice of paying deferred compensation to executives to leave to go to government.  From a wealth max perspective, you'd think this would be an awesome thing for shareholders - which means the AFL-CIO's objections were not really rooted in concern about the banks' financial performance, but in its broader political concerns about the practice.   But the SEC didn't have a problem with that - it refused to allow Goldman to exclude the proposal.

http://lawprofessors.typepad.com/business_law/2015/03/not-exactly-about-the-firm.html

Ann Lipton | Permalink

Comments

Do shareholders have an obligation to maximize firm wealth?

Posted by: Steve Diamond | Mar 21, 2015 4:31:53 PM

Well, that's exactly the question, isn't it? It's what I find so intriguing. Because you can find these statements from Delaware judges - Myron Steele made a speech that Joshua linked - basically saying "we should give shareholder power to vote their preferences except they should only seek wealth maximization." And then you have decisions like Business Roundtable that say the same thing. But the SEC doesn't seem to be thinking along those lines in its proxy decisions.

Anyway, I'm posting about it because I think its a real tension in the law.

Posted by: Ann Lipton | Mar 21, 2015 4:35:57 PM

The Trust's business conflict of interest is easy to spot and criticize. On the other hand, the legal tension between profit maximization and political and social agendas points leads to a complex issue of practical and theoretical politics, which is the use by the Federal government of laws and regulations to conscript corporations in pursuit of political and social agendas.

Posted by: Christopher J. Bonner | Mar 24, 2015 8:04:29 AM

I wouldn't have thought shareholders have any obligation in this field.

Posted by: Patterson | Mar 25, 2015 5:41:44 AM

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