Thursday, February 23, 2017
Christopher Bruner has posted Center-Left Politics and Corporate Governance: What Is the 'Progressive' Agenda? on SSRN. You can download the paper here. Here is the abstract:
For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter. This is hardly surprising given the economic and political stakes involved with control over vast and growing "corporate" resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms. In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the corporation have long been described as politically right-leaning while stakeholder-oriented conceptions have conversely been described as politically left-leaning. When the frame of reference for this normative debate shifts away from state corporate law, however, a curious reversal occurs. Notably, when the debate shifts to federal political and judicial contexts, one often finds actors associated with the political left championing expansion of shareholders' corporate governance powers, and those associated with the political right advancing more stakeholder-centric conceptions of the corporation.
The aim of this article is to explain this disconnect and explore its implications for the development of U.S. corporate governance, with particular reference to the varied and evolving corporate governance views of the political left - the side of the spectrum where, I argue, the more dramatic and illuminating shifts have occurred over recent decades, and where the state/federal divide is more difficult to explain. A widespread and fundamental reorientation of the Democratic Party toward decidedly centrist national politics fundamentally altered the role of corporate governance and related issues in the project of assembling a competitive coalition capable of appealing to working- and middle-class voters. Grappling with the legal, regulatory, and institutional frameworks - as well as the economic and cultural trends - that conditioned and incentivized this shift will prove critical to understanding the state/federal divide regarding what the "progressive" corporate governance agenda ought to be and how the situation might change as the Democratic Party formulates responses to the November 2016 election.
I begin with a brief terminological discussion, examining how various labels associated with the political left tend to be employed in relevant contexts, as well as varying ways of defining the field of "corporate governance" itself. I then provide an overview of "progressive" thinking about corporate governance in the context of state corporate law, contrasting those views with the very different perspectives associated with center-left political actors at the federal level.
Based on this descriptive account, I then examine various legal, regulatory, and institutional frameworks, as well as important economic and cultural trends, that have played consequential roles in prompting and/or exacerbating the state/federal divide. These include fundamental distinctions between state corporate law and federal securities regulation; the differing postures of lawmakers in Delaware and Washington, DC; the rise of institutional investors; the evolution of organized labor interests; certain unintended consequences of extra-corporate regulation; and the Democratic Party's sharp rightward shift since the late 1980s. The article closes with a brief discussion of the prospects for state/federal convergence, concluding that the U.S. corporate governance system will likely remain theoretically incoherent for the foreseeable future due to the extraordinary range of relevant actors and the fundamentally divergent forces at work in the very different legal and political settings they inhabit.
Thursday, February 16, 2017
This post does not concern President Trump’s own business empire. Rather, this post will be the first of a few to look at how the President retains, repeals, or replaces some of the work that President Obama put in place in December 2016 as part of the National Action Plan on Responsible Business Conduct. Many EU nations established their NAPS year ago, but the U.S. government engaged in two years of stakeholder consultations and coordinated with several federal agencies before releasing its NAP.
Secretary of State Tillerson will play a large role in enforcing or revising many of the provisions of the NAP because the State Department promotes the Plan on its page addressing corporate social responsibility. Unlike many federal government pages, this page has not changed (yet) with the new administration. As the State Department explained in December, “the NAP reflects the government's commitment to promoting human rights and fighting corruption through partnerships with domestic and international stakeholders. An important part of this commitment includes encouraging companies to embrace high standards for responsible business conduct.” Over a dozen federal agencies worked to develop the NAP.
We now have a new Treasury Secretary and will soon have a new Secretary of Labor, presumably FIU Law Dean and former US Attorney Alex Acosta, a new SEC Chair, presumably Jay Clayton, and a new Secretary of Commerce, presumably Wilbur Ross. These men, along with Attorney General Jeff Sessions and Secretary of State Tillerson will lead the key agencies enforcing or perhaps revising the country’s commitment to responsible business conduct.
The following list of priorities and initiatives comes directly from the Fact Sheet:
Strengthening laws preventing the import of goods produced by forced labor to ensure products made under exploitative conditions do not gain U.S. market access.
Updating social and environmental standards criteria for financing through the Overseas Private Investment Corporation, to promote high standards through U.S.-supported private investment.
Creating guidance on social safeguards for USAID’s development programs.
Funding efforts to promote awareness and implementation of the United Nations Guiding Principles on Business and Human Rights.
Publishing, for the first time, an annual report by the U.S. National Contact Point for the OECD Guidelines.
Identifying means through trade agreements to encourage companies to engage in RBC.
Enhancing information sharing with sub-national governments on public procurement best practices, to ensure that governments at all levels promote RBC through purchasing.
Collaboration with Stakeholders
In order to achieve shared RBC goals, it is essential for governments to work with the private sector, as well as with civil society, labor, and other stakeholders, to leverage each other’s resources and strengths. The USG’s measures to collaborate with such stakeholders include:
Establishing a formal mechanism for increased government participation in “multi-stakeholder initiatives” that promote RBC in various sectors and regions.
Convening stakeholders to develop and promote effective metrics for measuring and managing labor rights impacts in supply chains.
Facilitating a dialogue with stakeholders on implementation of the Sustainable Development Goals.
Promoting worker voice and empowerment in global supply chains via new tools that allow workers in national supply chains to directly report potential labor abuses and workplace safety violations, as well as leveraging public-private partnerships to more fully incorporate the perspectives of workers.
Facilitating RBC by Companies
The USG encourages companies to follow the best domestic and international practices and is supportive of company efforts to voluntarily report on certain aspects of their operations. The USG produces a number of reports that can be useful for companies as they seek to uphold high standards, sometimes in challenging environments. The NAP sets forth an illustrative list of USG initiatives to further that work, including the following commitments:
Creating an online database containing government reports on issues such as human rights, human trafficking including forced labor, child labor, and investment climates so that companies can more effectively make investment decisions and mitigate risk.
Providing new and increased training for USG officers and officials, including those who serve abroad, on RBC issues so that government officials are well-equipped to advise companies on considerations such as the status of labor rights, human rights and transparency, in a particular operating environment.
Training for USG officials on the Foreign Corrupt Practices Act and related issues.
Updating country-level public land governance profiles that explain land laws, land use patterns, gender concerns, land administration, and land markets within a given country. These profiles are an important tool for businesses making responsible land-based investments in a given country.
Recognizing Positive Performance
U.S. companies make tremendous contributions to communities around the world by generating economic growth, creating jobs, spurring innovation, and providing solutions to pressing challenges such as access to clean energy, healthcare, and technology. The USG recognizes and highlights when companies achieve high standards with meaningful results for workers and communities. Such items include...
Developing an online mechanism to identify, document, and publicize lessons learned and best practices related to corporate actions that promote and respect human rights.
Providing Access to Remedy
Even when governments and companies seek to act responsibly, challenges can arise. Both governments and companies should have mechanisms in place by which affected parties can raise concerns, report problems, and seek remedies, as appropriate. Through the NAP, the USG is furthering its commitment to this objective by:
Improving the performance of the U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises, including by announcing a fall 2017 peer review, organizing workshops to promote RBC, and publishing an outreach plan.
Hosting a forum for dialogue with stakeholders on opportunities and challenges regarding issues of remedy, as well as how the USG can best support effective remedy processes.
I will continue to follow up on this issue as well as how corporate compliance and governance may change under the Trump Administration.
Friday, February 10, 2017
Laureate Education recently became the first standalone publicly traded benefit corporation. They are organized under Delaware's public benefit corporation (PBC) law, are also a certified B corporation, and will be trading as LAUR on NASDAQ.
Plum Organics, also a Delaware PBC, is a wholly owned subsidiary of publicly-traded Campbell Soup Company. And Etsy is a publicly traded certified-B corporation, but is organized under traditional Delaware corporation law.
Whether the for-profit educator Laureate will hurt or help the popularity of benefit corporations remains to be seen, but some for-profit educators have not been getting good press lately.
Inside Higher Ed reports on Laureate Education's IPO as a benefit corporation below:
The largest U.S.-based for-profit college chain became the first benefit corporation to go public Wednesday morning.
Laureate Education, which has more than a million students at 71 institutions across 25 countries, had been privately traded since 2007. Several major for-profit higher education companies have over the last decade bounced back and forth between publicly and privately held status; also yesterday, by coincidence, the Apollo Group, owner of the University of Phoenix, formally went back into private hands….In its public debut, the company raised $490 million….
Becker said the move to become the first benefit corporation that is public is one way to show that Laureate is putting quality first.“There is certainly plenty of skepticism about whether for-profit companies can add value to society, and I feel strongly we can,” Becker said, adding that Laureate received certification from the nonprofit group B Lab after years of “rigorous” evaluations….
But the certification and the move to becoming a benefit corporation doesn’t prove a for-profit will not make bad decisions or commit risky actions that hurt students, said Bob Shireman, a senior fellow at the Century Foundation and for-profit critic.
"The one thing that being a benefit corporation does is reduce the likelihood that shareholders would sue the corporation for failing to operate in the shareholders' financial interest," Shireman said. "So it makes a marginal difference, and there's no evidence that benefit corporations, in the 10 or so years they've existed in the economy, cause better behavior."
Companies and investors could make better choices and decisions for their students without needing a benefit corporation model to do that, Shireman said, adding that the legal protection it provides is small.
"What's more important are what commitments are being made under the rubric of being a benefit corporation," he said. "How is that going to be measured and enforced … and how can they be changed or overruled by stockholders."
Head of Legal Policy at B Lab Rick Alexander, also authored a post on Laureate Education. For those who do not know, B Lab is the nonprofit responsible for the B Corp Certification and an important force behind the benefit corporation legislation that has passed in 30 states.
Thursday, February 9, 2017
Shortly after the election in November, I blogged about Eleven Corporate Governance and Compliance Questions for the President-Elect. Those questions (in italics) and my updates are below:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minimum, may not be out of the question.
Last week, via Executive Order, President Trump made it clear (without naming the law) that portions of Dodd-Frank are on the chopping block and asked for a 120-day review. Prior to signing the order, the President explained, “We expect to be cutting a lot out of Dodd-Frank…I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.” An executive order cannot repeal Dodd-Frank, however. That would require a vote of 60 votes in the Senate. To repeal or modify portions, the Senate only requires a majority vote.
Some portions of Dodd-Frank are already gone including the transparency provision, §1504, which NGOs had touted because it forced US issuers in the extractive industries to disclose certain payments made to foreign governments. I think this was a mistake. By the time you read this post, the controversial conflict minerals rule, which requires companies to determine and disclose whether tin, tungsten, tantalum, or gold come from the Democratic Republic of Congo or surrounding countries, may also be history. The President may issue another executive order this week that may spell the demise of the rule, especially because others in Congress have already introduced bills to repeal it. I agree with the repeal, as I have written about here, because I don’t think that the SEC is the right agency to address the devastating human rights crisis in Congo.
As for the whistleblower provisions, it is too soon to tell. See #7 below.
Based on an earlier Executive Order meant to cut regulations in general and the President’s reliance on corporate raider/activist Carl Icahn as regulation czar, we can assume that the financial sector will experience fewer and not more regulations under Trump.
- What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency? 3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
President Trump has nominated Jay Clayton, a lawyer who has represented Goldman Sachs and Alibaba to replace former prosecutor Mary Jo White. Based on his background and past representations, we may see less enforcement of the FCPA and more focus on capital formation and disclosure reform. Observers are divided on the FCPA enforcement because 2016 had some record-breaking fines. As for the other SEC vacancies, I will continue to monitor this.
- How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
The Department of Labor enforces OSHA, and the current nominee for Secretary, Andy Pudzer, is a fast food CEO with some labor issues of his own. His pro-business stance and his opposition to increases in the minimum wage and the DOL white-collar exemption changes don’t necessarily predict how he would enforce SOX, but we can assume that it won’t be as much of a priority as rolling back regulations he has already publicly opposed.
- In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
- How will a more conservative Supreme Court deal with the business cases that will appear before it?
I will comment on this after the confirmation hearings of nominee Neil Gorsuch. Others have already predicted that he will be pro-business.
- Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
Senator Jeff Sessions was confirmed yesterday after a contentious hearing. During his hearing, he indicated that he supported whistleblower provisions related to the False Claims Act, and many believe that he will retain retain the Yates Memo. Ironically, prior to that confirmation, President Trump fired Acting Attorney General Sally Yates, for refusing to defend the President’s executive order on refugees and travel.
- What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
Despite, running on a populist theme, Trump has targeted a number of institutions meant to protect consumers. Based on reports, we will likely see some major restrictions on the Consumer Financial Protection Bureau and the rules related to disclosure and interest rates. Trump will likely replace the head, Richard Cordray, whom many criticize for his perceived unfettered power and the ability to set his own budget. The Financial Stability Oversight Council, established to address large, failing firms without the need for a bailout, is also at risk. The Volker Rule, which restricts banks from certain proprietary investments and limits ownership of covered funds, may also see revisions.
- What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
I will comment on this in a separate post.
- What happens to the Public Company Accounting Board, which has had an interim director for several months?
The PCAOB is not directly covered by the February 3rd Executive Order described in #1, and many believe that the Executive Order related to paring back regulations will not affect the agency either, although the agency is already conducting its own review of regulations. In December, the agency received a budget increase.
- Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
President Trump has tapped ex-Goldman Sachs veteran Steve Mnuchin, and some believe that he will be good for both Wall Street and Main Street. More to come on this in the future.
I will continue to update this list over the coming months. I will post separately today updating last week’s post on the effects of consumer boycotts and how public sentiment has affected Superbowl commercials, litigation, and the First Daughter all in the past few days.
February 9, 2017 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Human Rights, International Business, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)
Wednesday, February 8, 2017
Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v. Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court. The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever: "By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open."
Point #1: Master Class in Persuasive Legal Writing: Framing the Issue
Reversal Framing: "This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process."
Affirmance Framing: "This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale."
Point #2: Summary of Brief Supporting Fair Market Valuation: Why the Court of Chancery should defer to the deal price in an arm's length auction
- It would reduce litigation and simply the process.
- The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that's a rough point to make).
- Appraisal does not properly incentivize the use of arm's length auctions if they are not sufficiently protected/respected.
- Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range. The inquiry should be whether the transaction price is within the range of a fair price. A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
- Appraisal process is flawed because the court discounted the market price in its final valuation. The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
- Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of "real" valuations.
- The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process. Evidence of this is the creation of appraisal closing conditions.
Point #3: Summary of Brief Supporting Appraisal Actions: Why the Court of Chancery should reject a rule that the transaction price—in an arm's length auction—is conclusive evidence of fair price in appraisal proceedings.
- Statutory interpretation requires the result. Delaware Section 262 states that judges will "take into account all factors" in determining appraisal action prices. To require the deal price to be the "fair" price, eviscerates the statutory language and renders it null.
- The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the "all factors" language.
- The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
- There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
- The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
- Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
- Any distortion of the THE market by appraisal actions is a feature, not a bug. All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts. Any affect that appraisal actions create have social benefits and are an intended benefit.
- Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.
My thinking in the area more closely aligns with the "keep appraisal action full review" camp on the theory--both policy and economic. Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!). I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow. I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome. Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief. These are all points that I invite readers to weigh in on the comments--especially those with experience litigating these cases.
I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty. This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.
For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic-- these two briefs distill the relevant case law and competing theories with considerable force.
Thursday, February 2, 2017
Donald Trump has had a busy two weeks. Even before his first official day on the job, then President-elect Trump assembled an economic advisory board. On Monday, January 23rd, President Trump held the first of his quarterly meetings with a number of CEOs to discuss economic policy. On January 27th, the President issued what some colloquially call a “Muslim ban” via Executive Order, and within days, people took to the streets in protest both here and abroad.
These protests employed the use of hashtag activism, which draws awareness to social causes via Twitter and other social media avenues. The first “campaign,” labeled #deleteuber, shamed the company because people believed (1) that the ride-sharing app took advantage of a work stoppage by protesting drivers at JFK airport, and (2) because they believed the CEO had not adequately condemned the Executive Order. Uber competitor Lyft responded via Twitter and through an email to users that it would donate $1 million to the ACLU over four years to “defend our Constitution.” Uber, which is battling its drivers in courts around the country, then established a $3 million fund for drivers affected by the Executive Order. An estimated 200,000 users also deleted their Uber accounts because of the social media campaign, and the CEO resigned today from the economic advisory board.
Other CEOs, feeling the pressure, have also issued statements against the Order. In response, some companies such as Starbucks, which pledged to hire 10,000 refugees, have faced a boycott from many Trump supporters, which in turn may lead to a “buycott” from Trump opponents and actually generate more sales. This leads to the logical question of whether these political statements are good or bad for business, and whether it's better to just stay silent unless the company has faced a social media campaign. Professor Bainbridge recently blogged about the issue, observing:
The bulk of Lyft's business is conducted in large coastal cities. In other words, Obama/Clinton country. By engaging in blatant virtue signaling, which it had to know would generate untold millions of dollars worth of free coverage when social media and the news picked the story up, Lyft is very cheaply buying "advertising" that will effectively appeal to its big city/blue state user base.
Bainbridge also asks whether “Uber's user base is more evenly distributed across red and blue states than Lyft? And, if so, will Uber take that into account?” This question resonates with me because some have argued on social media (with no evidentiary support) that Trump supporters don’t go to Starbucks anyway, and thus their boycott would fail.
All of this boycott/boycott/CEO activism over the past week has surprised me. I have posted in the past about consumer boycotts and hashtag activism/slacktivism because I am skeptical about consumers’ ability to change corporate behavior quickly or meaningfully. The rapid response from the CEOs over the past week, however, has not changed my mind about the ultimate effect of most boycotts. Financial donations to activist groups and statements condemning the President’s actions provide great publicity, but how do these companies treat their own employees and community stakeholders? Will we see shareholder proposals that ask these firms to do more in the labor and human rights field and if so, will the companies oppose them? Most important, would the failure to act or speak have actually led to any financial losses, even if they are not material? Although 200,000 Uber users deleted their accounts, would they have remained Lyft customers forever if Uber had not changed its stance? Or would they, as I suspect, eventually patronize whichever service provided more convenience and better pricing?
We may never know about the consumers, but I will be on the lookout for any statements from shareholder groups either via social media or in shareholder proposals about the use or misuse of corporate funds for these political causes.
Wednesday, January 25, 2017
Spoiler alert: wrongful refusal of demand and bad faith standards are the same in recent Delaware Court of Chancery case: Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017, Op by VC Montgomery-Reeves).
But sometimes a reminder that the law is the same and can be clearly stated is worth a blog post in its own right. Professors can use this as a hypo or case note and those in the trenches can update case citations to a 2017 (and 2016) case.
In Andersen v. Mattel, Inc., VC Montgomery-Reeves dismissed a derivative suit, holding that plaintiff did not prove wrongful refusal of pre-suit demand. The derivative action claimed that the Mattel board of directors refused to bring suit to recover up to $11.5 million paid in severance/consulting fees to the former chairman and chief executive officer who left in the wake of a falling stock price. Plaintiff challenged disclosure discrepancies over whether Stockton resigned or was terminated and the resulting entitlement to severance payments. Mattel's board of directors unanimously rejected the demand after consultation with outside counsel, 24 witness interviews and a review of approximately 12,400 documents.
The relied upon case law is unchanged, but the clear recitation of the law is worth noting:
Where, as here, a plaintiff makes demand on the board of directors, the plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand. The effect of such concession is that the decision to refuse demand is treated as any other disinterested and independent decision of the board—it is subject to the business judgment rule. Accordingly, the only issues the Court must examine in analyzing whether the board’s demand refusal was proper are “the good faith and reasonableness of its investigation. (internal citations omitted)
To successfully challenge the good faith and reasonableness of the board's investigation, Plaintiff's complaint was required to state particularized facts raising a reasonable doubt that:
(1) the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.
First, Plaintiff challenged the board's demand refusal on the grounds that they did not disclose the investigation report or the supporting documents in conjunction with the demand refusal. The Court was unpersuaded given that Plaintiff had the right to seek the report and records through a Section 220 demand, but chose not to do so.
Second, Plaintiff challenged the board's demand refusal on the grounds that it failed to form a special committee. Absent any facts that the Mattel board considering the demand was not independent, there was no requirement for the board to form a special committee.
Third, and final, Plaintiff challenged the board's good faith in rejecting the demand on the grounds that Stockton's employment was not voluntarily terminated. The court cautioned that:
[T]he question is not whether the [b]oard’s conclusion was wrong; the question is whether the [b]oard intentionally acted in disregard of [Mattel’s] best interests in deciding not to pursue the litigation the Plaintiff demanded. [T]he fact that the [b]oard’s justifications for refusing [the] demand fall within ‘the bounds of reasonable judgment’ is fatal to [the] claim that the refusal was made in bad faith. (citing to Friedman v. Maffei, (Del. Ch. Apr. 13, 2016))
Francis Pileggi at the excellent Delaware Corporate and Commercial Litigation Blog first brought this case to my attention. Practitioners and Professors alike should be certain to include his blog on your weekly round up. He is a sure source of concise and insightful summaries of the latest Delaware court developments.
Thursday, January 19, 2017
Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.
The abstract is below:
Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.
First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.
Wednesday, January 18, 2017
"The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets."
Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency. While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy. As the spring proxy season approaches-- it's like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures--these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors' corporate governance leaders are "working quietly behind the scenes to advocate for greater shareholder rights" fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.
I now how a new ambition in life: get invited to the Women in Governance lunch.
FN1: See Choi et al, Voting Through Agents: How Mutual Funds Vote on Director Elections (2011)
FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).
Friday, January 13, 2017
On Friday, I will present as part of the American Society of International Law’s two-day conference entitled Controlling Corruption: Possibilities, Practical Suggestions & Best Practices. The ASIL Conference is co-sponsored by the University of Miami School of Business Administration, the Business Ethics Program of the University of Miami School of Business Administration, UM Ethics Programs & the Arsht Initiatives, the Zicklin Center for Business Ethics Research, Wharton, University of Pennsylvania, Bentley University, and University of Richmond School of Law.
I am particularly excited for this conference because it brings law, business, and ethics professors together with practitioners from around the world. My panel includes:
Marcia Narine Weldon, St. Thomas University School of Law, “The Conflicted Gatekeeper: The Changing Role of In-House Counsel and Compliance Officers in the Age of Whistle Blowing and Anticorruption Compliance”
Todd Haugh, Kelley School of Business, Indiana University, “The Ethics of Intercorporate Behavioral Ethics”
Shirleen Chin, Institute for Environmental Security, Netherlands, “Reducing the Size of the Loopholes Caused by the Veil of Incorporation May lead to Better Transparency”
Edwin Broecker, Quarles &Brady LLP, Indiana,& Fernanda Beraldi Cummins, Inc, Indiana, “No Good Deed Goes Unpunished: Possible Unintended Consequences of Enforcing Supply Chain Transparency”
Stuart Deming, Deming PLLC, Michigan, “Internal Controls and Compliance Programs”
John W. Fanning, Kroll Compliance, “Lessons from ‘Sully’: Parallels of Flight 1549 and the Path to Compliance and Organizational Excellence”
I will discuss some of the same themes that I blogged about here last July related to how the Department of Justice Yates Memo (requiring companies to turn over culpable individuals in order to get cooperation credit) and to a lesser extent the SEC Dodd-Frank Whistleblower program may alter the delicate balance of trust in the attorney-client relationship. Additionally, I will address how President-elect Trump’s nomination of Jay Clayton may change the SEC’s FCPA enforcement priorities from pursuing companies to pursuing individuals, and how that will change corporate investigations. If you’re in Miami on Friday the 13th and Saturday the 14th, please consider attending the conference.
January 13, 2017 in Behavioral Economics, Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, International Business, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)
Wednesday, January 11, 2017
The late December announcement of Carl Icahn as a special advisor overseeing regulation piqued my professional interest and raises interesting tension points for both sides of the aisle, as well as for corporate governance folks.
Icahn's deregulatory agenda has the SEC in his sights. Deregulation, especially of business, is a relatively safe space in conservative ideology. Several groups such as the Chamber of Commerce and the Business Roundtable may be pro-deregulation in most areas, but, and this is an important caveat-- be at odds with Icahn when it comes to certain corporate governance regulations. Consider the universal proxy access rules, which the SEC proposed in October, 2016. The proposed rules would require companies to provide one proxy card with both parties' nominees--here we don't mean donkeys and elephants but incumbent management and challengers' nominees. Including both nominees on a single proxy card would allow shareholders to "vote" a split ticket---picking and choosing between the two slates. The split ticket was previously an option only available to shareholders attending the in-person meeting, which means a very limited pool of shareholders. "Universal" proxy access-- a move applauded by Icahn--is opposed by House Republicans, who passed an appropriations bill – H.R. 5485 –that would eliminate SEC funding for implementing the universal proxy system. On January 9th, both the Business Roundtable and the Chamber of Commerce submitted comment letters in opposition to the rules. The Chamber of Commerce cautions that the proposed rules "[f]avor activist investors over rank-and-file shareholders and other corporate constituencies." The Business Roundtable echos the same concerns calling the move a "disenfranchisement" of regular shareholders due to likely confusion. This is a variation of the influence of big-business narrative. Here, we have pitted big business against big business. The question is who is the bigger Goliath--the companies or the investors?
President-elect Trump's cabinet and administrative choices have generated an Olympic-level sport of hand wringing, moral shock and catastrophizing. I personally feel gorged on the feast of terribles, but realize that many may not share my view. Icahn's informal role in cabinet selections (such as Scott Pruitt for EPA which favors Icahn's investments in oil and gas companies) and formal role in a deregulatory agenda foreshadows no end in sight to this royal feast. On this particular pick, both sides of the aisle may be invited to the feast. My only question is, who's hungry?
Monday, January 9, 2017
The members of Friday's AALS discussion group about which I wrote last week came to an inescapable--if unsurprising--overall conclusion: the U.S. Supreme Court's opinion in the Salman case does little to address major unresolved questions under U.S. insider trading law. That having been said, we had a wide-ranging and sometimes exciting discussion about the Court's opinion in Salman and what might or should come next. I found the discussion very stimulating; a great way to start a new semester--especially one in which I am teaching Securities Regulation and Advanced Business Associations, both of which deal with insider trading law. I will offer brief outtakes from the proceedings here for your consideration and (as desired) comment.
John Anderson and I framed three questions around which we structured the formal part of the discussion session (which commenced after brief introductory comments from each participant).
- What, if anything, does the Court's Salman opinion say by its silence?
- What, if anything, is left of the Second Circuit opinion in the Newman case after Salman?
- Is law reform needed after Salman, and if so, should we continue to permit it to occur through further, incremental judicial developments or should reform be undertaken through legislation or regulatory rule-making or guidance?
The questions drew both divergent and overlapping responses. It would take too long to try to capture it all, but a recording of the discussion will be available, if all went well with the technology, etc., on the AALS website in the coming months.
I want to pass on here, however, two key reading recommendations that Don Langevoort made to all of us that offer a basis for responding to all three questions--and more. First, Don recommended that we all read the Solicitor General's Brief for the United States in the Salman case. From this, he suggested (among other things), we can review issues not addressed in Salman and get an idea of how the U.S. government--at least at present--is processing those issues as across the Department of Justice and the Securities and Exchange Commission. Second, he recommended reading the First Circuit opinions in the Parisian and McPhail cases--two criminal prosecutions alleging insider trading violations (tipping and trading) by members of a golf group. These opinions also address important issues not taken up by Salman--including how the "knew or should have known" language from the Court's Dirks opinion relates to both the mens rea requirement in criminal insider trading actions (which require proof of a "willful" violation under Section 32(a) of the Securities Act of 1933, as amended) and misappropriation actions--and may offer windows on future judicial decision making.
No doubt, insider trading law in the United States remains a bit of an open book in many respects after Salman. Given that, I may report on more from this AALS discussion session in future posts. But I will leave the matter here, for now, having posed a few questions for your consideration and passed on some good advice from a trusted colleague who has followed U.S. insider trading law for many years . . . .
Thursday, January 5, 2017
As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB's) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.
Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).
Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.
Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.
Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.
SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.
Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.
I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.
Monday, January 2, 2017
Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman. He invited comments. So, I sent him one! He has started posting comments in a mini-symposium. Mine is here. Andrew Verstein's is here. There may be more to come . . . . I will try to remember to come back and edit this post to add any new links. Prompt me, if you see one before I get to it . . . .
Postscript (January 5, 2017): James Park also has responded to Steve's call for comments. His responsive post is here.
Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here. And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively. Steve collects the posts here.
Tomorrow, I am headed to the Association of American Law Schools ("AALS") Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister). I want to highlight a program at the conference for you all that may be of interest. John Anderson and I have convened and are moderating a discussion group at the meeting entitled "Salman v. United States and the Future of Insider Trading Law." The program description, written after the case was granted certiorari by the SCOTUS and well before the Court's opinion was rendered, follows:
In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.
This discussion group will focus on Salman and its implications for the future of insider trading law.
Of course, we all know what happened next . . . .
The discussants include the following, each of whom have submitted a short paper or talking piece for this session:
John P. Anderson, Mississippi College School of Law
Miriam H. Baer, Brooklyn Law School
Eric C. Chaffee, University of Toledo College of Law
Jill E. Fisch, University of Pennsylvania Law School
George S. Georgiev, Emory University School of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
Gregory Gilchrist, University of Toledo College of Law
Michael D. Guttentag, Loyola Law School, Los Angeles
Joan M. Heminway, University of Tennessee College of Law
Donald C. Langevoort, Georgetown University Law Center
Donna M. Nagy, Indiana University Maurer School of Law
Ellen S. Podgor, Stetson University College of Law
Kenneth M. Rosen, The University of Alabama School of Law
David Rosenfeld, Northern Illinois University College of Law
Andrew Verstein, Wake Forest University School of Law
William K. Wang, University of California, Hastings College of the Law
The discussion session is scheduled for 8:30 am to 10:15 am on Friday, right before the Section on Securities Regulation program, in Union Square 25 on the 4th Floor of the Hilton San Francisco Union Square. The AALS has posted the following notice about discussion groups, a fairly new part of the AALS annual conference program (but something SEALS has been doing for a number of years now):
Discussion Groups provide an in-depth discussion of a topic by a small group of invited discussants selected in advance by the Annual Meeting Program Committee. In addition to the invited discussants, additional discussants were selected through a Call for Participation. There will be limited seating for audience members to observe the discussion groups on a first-come, first-served basis.
Next week, I will post some outtakes from the session. In the mean time, I hope to see many of you there. I do expect a robust and varied discussion, based on the papers John and I have received. Looking forward . . . .
Monday, December 19, 2016
In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect's tweets regarding public companies. She ends her post with the following:
So, it's all a bit unsettled. Let's just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.
Today, I take on a somewhat related topic. I briefly explore the President-Elect's conflicting interests through the lens of a corporate law advisor. For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect's role as the POTUS, public investor and leader of the United States, and his role as "The Donald," private investor and leader of the Trump corporate empire.
The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic. In a number of common situations, fiduciaries have interests in both sides of a transaction. For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation. What matters under corporate law is whether the fiduciary's participation in the transaction on both sides results in a deal made in a fully informed manner, in good faith, and in the bests interests of the corporation. Conflicting interests raise a concern that the fiduciary is or may be acting for the benefit of himself, rather than for and in the best interest of the corporation.
Corporate law generally provides several possible ways to overcome concerns that a fiduciary has breached her duty because of a conflicting interest in a particular action or transaction:
- through good faith, fully informed approval of the action or transaction (e.g., after disclosure of information about the nature and extent of the conflicts) by either the corporation's shareholders or members of the board of directors who are not interested in the transaction; and
- through approval of a transaction that is entirely fair--fair as to process and price.
See, e.g., Delaware General Corporation Law Section 144. Yet, if I believe what I read, no similar processes exist to combat concerns about actions or transactions in which the POTUS has or may have conflicting interests. In particular, to the extent one does not already exist, should a disinterested body of monitors be identified or constituted to receive information about actual and potential conflicting interests of the POTUS and approve the action or transaction involving the conflicting interests? Perhaps the Office of Government Ethics ("OGE") already has something like this in place . . . . If it does, then both the public media and I are underinformed about it. While there seems to be OGE guidance on the President-Elect's nominees for executive branch posts (see, e.g., here and here) and on overall executive branch standards of conduct (see here), I have not found or read about anything applicable to the President-Elect or POTUS.
In making these observations, I recognize that our federal government is different in important ways from the corporation. I also understand that the leadership of a country/nation is different from the leadership of a corporation. Having said that, however, conflicting interests can have similar deleterious effects in both settings. The analogy I raise here and this overall line of inquiry may be worth some more thought . . . .
Thursday, December 8, 2016
A friend of mine is considering teaching his constitutional law seminar based almost entirely on current and future decisions by the President-elect. I would love to take that class. I thought of that when I saw this article about Mr. Trump’s creative use of Delaware LLCs for real estate and aircraft. Here in South Florida, we have a number of very wealthy residents, and my Business Associations students could value from learning about this real-life entity selection/jurisdictional exercise. Alas, I probably can’t squeeze a whole course out of his business interests. However, I am sure that using some examples from the headlines related to Trump and many of his appointees for key regulatory agencies will help bring some of the material to life.
Thursday, November 10, 2016
I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.
I am serving as a panelist and a moderator at the ABA's annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect's public statements that he plans to dismantle much of President Obama's legacy, including a number of his executive orders.
President-elect Trump's plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling "every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.
Plaintiffs' lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That's probably true. However, I have the following broader business-law related questions:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
9. What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.
November 10, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Law, Legislation, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (2)
Wednesday, November 9, 2016
Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Strine further notes that "advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion."
I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that "directors must make stockholder welfare their sole end." But I also agree that "disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity." My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what"stockholder welfare" means and what ends to use in pursuit of that end. That is, I think it's wrong to say "directors generally are not under a legal obligation to maximise profits for their shareholders," but I do think directors usually get to decide what it means to "maximise profits."
I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements. Thus, if a plaintiff can show self dealing (like maybe via giving to a "pet charity" described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes). But otherwise, it's the board's call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing). Thus, companies like Tom's Shoes and Ben and Jerry's should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.
eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing -- the actions taken by Jim and Craig were impermissible not because they were working toward "purely philanthropic ends," but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).
Anyway, I am still a believer in the BJR as abstention doctrine. Show me some fraud, illegality, or self-dealing or I'm leaving the board's decision alone.
Tuesday, November 8, 2016
Each year, I rethink how I teach fiduciary duties in the corporate law context in my Business Associations course. My learning objectives for the students are both limited and involved. On the one hand, there's little room in my three-credit-hour course for a nuanced understanding of all of the contexts in which corporate fiduciary duty claims typically occur. In particular, I have determined to leave out the public company mergers and acquisitions context almost completely. On the other hand, I find myself juggling uncertain classifications of duty components, explanations of seemingly mismatched standards of conduct and liability, and judicial review standards in and outside the Delaware corporate law context. It's a handful. It's teaching complexity.
Of course, fiduciary duty is not the only complex matter that one must teach in Business Associations. But it is, for me, one of the topics I am least confident that I "get right" in my interactions with students in and outside the classroom. Accordingly, as I again head toward the end of the semester, I find myself wondering whether I could have done--or could do--more with the students in my Business Associations course this semester. This leads me to ask my fellow business law professors (that's you!) whether any of you have materials, teaching techniques, exercises (in-class or out-of-class), etc. that you find to be particularly effective in educating law students the basics and nuances of corporate fiduciary duties.
So, have at it! Share your corporate fiduciary duty teaching successes in the comments, if you would. I am all ears. I know that what you report will benefit me and others (including our students), and I hope that your comments will generate a continuing conversation . . . .