Monday, October 5, 2015
Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*
She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.
The link to Laureate Education's S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.
Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell's Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.
*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO'd recently, is currently only a certified B corporation. Even Etsy's own PR folks confused the two terms in their initial announcement of their certification.
October 5, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, CSR, Delaware, Haskell Murray, Research/Scholarhip, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Wednesday, September 9, 2015
A while back, the CLS Blue Sky Blog featured a post by Michael Peregrine on an article authored by Delaware Supreme Court Chief Justice Leo Strine (Documenting The Deal: How Quality Control and Candor Can Improve Boardroom Decision-making and Reduce the Litigation Target Zone, 70 Bus. Law. 679 (2015)) offering pragmatic advice to corporate directors in deal-oriented decision making. Michael's post summarizes points made by Justice Strine in his article, including (of particular importance to legal counsel) those set forth below.
- "Counsel can play an important role in assuring the engagement of the strongest possible independent financial advisor, and structuring the engagement to confirm the provision of the full breadth of deal-related financial advice to the board; not simply the delivery of a fairness opinion or similar document."
- "[I]n the M&A process, it is critical to be clear in the minutes themselves about what method is being used, and why."
- "Lawyers and governance support personnel should be particularly attentive to documenting in meeting minutes the advice provided by financial advisors about critical fairness considerations or other transaction terms, and the directors’ reaction to that advice."
- "[P]laintiffs’ lawyers are showing an increasing interest in seeking discovery of electronic information that may evidence the attentiveness of individual directors to materials posted on the board portal."
Michael concludes by noting the thrust of Justice Strine's points--that "a more thoughtful approach to the fundamental elements of the M&A process will enhance exercise of business judgment by disinterested board members, and their ability to rely on the advice of impartial experts." All of the points made reflect observations of the Chief Justice emanating from Delaware jurisprudence. Michael also notes that the points made by Justice Strine have application to decision making in other forms of business association as well as the corporation.
I could not agree more with the thesis of the post and the article. Maybe it's just my self-centered, egotistical, former-M&A-lawyer self talking, but good lawyering can make a difference in M&A deals and the (seemingly inevitable) litigation that accompanies them. I wrote about this in my article, A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions, commenting on Don Langevoort's article, The Behavioral Economics of Mergers and Acquisitions. We should be teaching this in the classroom as we frame the lawyer's role in M&A transactions. I use a quote from Steve Bainbridge to introduce this matter to my Business Associations, Corporate Finance, and Cross-Border M&A students:
Successful transactional lawyers build their practice by perceptibly adding value to their clients’ transactions. From this perspective, the education of a transactional lawyer is a matter of learning where the value in a given transaction comes from and how the lawyer might add even more value to the deal.
Stephen M. Bainbridge, Mergers and Acquisitions 4 (2003). Great stuff, imv. I am sure this quote or one like it is in the current version of this book somewhere, too. But I do not have that with me as I write this. Perhaps if Steve reads this he will add the current cite to the comments . . . ?
At any rate, I want to make a pitch for highlighting the role of the lawyer in guiding the client through the legal minefields--territory that only we can help clients navigate most efficaciously. As business law educators, we have a podium that enables us to do this with law students who are lawyers-in-training about to emerge from the cocoon-like academic environment into the cold, cruel world in which fiduciary duty (derivative and direct) and securities class action litigation is around every transactional corner. Let's give them some pointers on why and how to take on this task!
Wednesday, August 26, 2015
Yesterday, my husband and I celebrated our 30th wedding anniversary. I am married to the best husband and dad in the entire world. (Sorry to slight all of my many male family members and friends who are spouses or fathers, but I am knowingly and seriously playing favorites here!) My husband and I bought the anniversary memento pictured below a few years ago, and it just seems to be getting closer and closer to the reality of us as a couple (somewhat endearing, but aging) as time passes . . . .
Of course, our wedding was not the only important event in 1985. There's so much more to celebrate about that year! In fact, it was a banner year in business law. Here are a few of the significant happenings, in no particular order. Most relate to M&A doctrine and practice. I am not sure whether the list is slanted that way because I (a dyed-in-the-wool M&A/Securities lawyer) created it or whether the M&A heyday of the 1980s just spawned a lot of key activity in 1985.
- Smith v. Van Gorkom was decided. It was my 3L year at NYU Law. I remember the opinion being faxed to my Mergers & Acquisitions instructor during our class and being delivered--a big stack of those goofy curly thermal fax paper sheets--to the table in the seminar room where we met. Cool stuff. As I entered practice, business transactional lawyers were altering their advisory practices and their board scripts to take account of the decision.
- Unocal v. Mesa Petroleum was decided. The Delaware Supreme Court established its now famous two-part standard of review for takeover defenses, finding that "there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. Further, the selective stock repurchase plan chosen by Unocal is reasonable in relation to the threat that the board rationally and reasonably believed was posed." (The italics were added by me.) More changes to transactional practice . . . .
- Moran v. Household International was decided. As a result, I spent a large part of my first five years of law practice promoting and writing poison pills that innovated off the anti-takeover tool validated in this case. The firm I worked for was on the losing side of the Moran case, so we determined to build a better legal mousetrap, which then became the gold standard.
- The Revised Uniform Limited Partnership Act (RULPA) was amended by the Uniform Law Commission. Among the 1985 changes was an evolution of the rules relating to the liability of limited partners for partnership obligations. The 2001 version of the RULPA took those evolutions to their logical end point, allowing limited partners to enjoy limited liability for partnership obligations even if the limited partners exercise management authority over the partnership.
- Landreth Timber Co. v. Landreth was decided. Stock is a security under the Securities Act of 1933, as amended, unless the context otherwise requires. The Court determined that instruments labeled stock that have the essential attributes of stock should be treated as stock in an offering context, even when the stock is transferred to sell a business. Bye-bye "sale of business" doctrine . . . .
That's enough on 30th anniversaries for this post. I am sure you all will think of more 30th anniversaries in business law that we can celebrate in 2015. Feel free to leave those additional 1985 memories in the comments.
Friday, August 21, 2015
In this interview, Delaware Supreme Court Chief Justice Leo Strine singles out C & J Energy Services, Inc. v. City of Miami General Employees’ ("Nabors"), 107 A.3d 1049 (2014) as, perhaps, the most important opinion he has authored as CJ.
Given such an endorsement, I took time to read the case yesterday. The following paragraphs get to the heart of the case, which overturned the Delaware Court of Chancery's mandate to shop the company at issue.
Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, “there is no single blueprint that a board must follow to fulfill its duties,” and a court applying Revlon ‘s enhanced scrutiny must decide “whether the directors made a reasonable decision, not a perfect decision.”
In a series of decisions in the wake of Revlon, Chancellor Allen correctly read its holding as permitting a board to pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. Such a market check does not have to involve an active solicitation, so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal. The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context.
Tuesday, July 28, 2015
A lawyer representing Fordham Law School Professor (and Riverbed Technology shareholder) Sean Griffith argued in Delaware court that a class action settlement related to Riverbed Technology's $3.6 billion sale to private equity firm Thoma Bravo was bad for shareholders and good for the lawyers involved, Reuters reports.
Prof. Griffith told Reuters that "he has been buying stock of companies that have announced merger deals and intends to object to settlements if he feels the litigation is not serving stockholders." He asserts that the shareholders' attorneys "are in cahoots" to reach a settlement, without regard to value.
This raises some interesting questions of law and policy with regard to the Professor's role here. As a shareholder, Griffith has the right to object (assuming his time of ownership satisfies the applicable statute). But how should a court assess the objection of a shareholder who has admitted that he bought stock for the purpose of objecting to settlements not in the interests of shareholders, when that shareholder has expressed ideological concern about the value of all disclosure-only settlements?
Is Prof. Griffith's desire to protect shareholders a desire to enhance short- or long-term wealth of the entity from greedy lawyers and bad managers? Or is it a desire to punish those who abuse class action lawsuits to their own ends? Both would be reasonable motivations (though, for now, I reserve judgment on whether either assessment is accurate), but it seems that the law might view such motivations differently.
Take, for example, Pillsbury v. Honeywell, Inc., 191 N.W.2d 406 (1971), which strikes me as similar in concept, if not law. In that case, the court rejected Charles Pillsbury's request to access the company shareholder list and review books and records of Honeywell. The request was expressly related to Pillsbury's anti-war efforts, and Pillsbury made clear that he sought the records because he thought Honeywell's activities in weapons were immoral. The court denied access stating that
petitioner had already formed strong opinions on the immorality and the social and economic wastefulness of war long before he bought stock in Honeywell. His sole motivation was to change Honeywell's course of business because that course was incompatible with his political views. If unsuccessful, petitioner indicated that he would sell the Honeywell stock.
We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long- or short-term economic effects on Honeywell resulting from the production of war munitions. Similarly, this suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell.
If Prof. Griffith is looking to protect the long-term interests of all companies by protecting merging companies from harmful class action settlements, and his mechanism is buying shares in companies that he has reason to believe will merge, then perhaps his Robin Hood-like actions (in that the actions seek to return funds to the rightful owners) have value for shareholder wealth maximization and entity wealth maximization. The fact that he holds out the possibility that he won't object to settlements where the litigation serves the purposes of the shareholder suggests he might be in this camp.
But what if he will object to all settlement proposals? Or perhaps all disclosure-only settlement proposals, even where such settlements are allowable under the law? Does this convert his actions to more of a Charles Pillsbury-like feel in that his actions are about opposing class actions settlements, regardless of whether settlement is in the best interest of the parties?
Of course, his motivations don't necessarily matter under current law in this area, but I can't help but think the motivations will influence how a court views (and eventually decides upon) Prof. Griffith's objections. And I think they should. If, in any given case, Prof. Griffith is right that the settlement is not in the best interest of the shareholders, the court should uphold his objections. But, under current law, it's possible that a disclosure-only settlement might still be the most efficient outcome. It's the court's job to assess that in each case.
Tuesday, July 7, 2015
Note to U.K. Supreme Court: LLCs Don't Have Places of Incorporation (But You're Right on Pass-Through Taxation)
A recent unanimous decision from the Supreme Court of the United Kingdom, Anson v. Commissioners for Her Majesty’s Revenue and Customs  UKSC 44, determined that a U.S. limited liability company (LLC) formed in Delaware will be treated for U.K. tax purposes as a partnership, and not a corporation. This is a good thing, as it provides the LLC members the ability to reap more completely the benefits of the entity's choice of form.
What is not so good is that the court left unaddressed a lower court determination as follows, was quoted in para. 47:
“Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law ….” (para 71) (emphasis added)
An LLC does not have a place of incorporation! It has a place of formation. Here is the link to Delaware's Certificate of Formation, which is to be filed in accordance with the Limited Liability Company Act of the State of Delaware: https://corp.delaware.gov/llcform09.pdf. In contrast, you can find the Certificate of Incorporation, which is to be filed in accordance with the General Corporation Law of the State of Delaware, here: http://www.corp.delaware.gov/incstk.pdf.
I'm glad the high U.K. court recognized that partnership taxation status can be proper for a U.S. LLC. But, just as You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One, I wish they'd made clear that you can't incorporate an LLC.
Friday, July 3, 2015
Among the DGCL amendments this year were a number of amendments to the Delaware Public Benefit Corporation (“PBC”) Law.
I refer to the Delaware PBC amendments as “The Etsy Amendments” because I believe (without being sure) that a main motivation in passing these amendments was to make it easier for Etsy (among other companies) to become a Delaware PBC. These amendments are effective as of August 1, 2015.
As mentioned in a previous post, Etsy is a certified B corporation and a Delaware C-corporation. According to B Lab’s terms for certified B corporations, Etsy will have to convert to a Delaware PBC by August 1, 2017 or forfeit its certification. This assumes that B Lab will not change its requirements or make an exception for publicly-traded companies.
The amendments to the PBC law are summarized below:
- Eliminates requirement of "PBC" or "Public Benefit Corporation" in the entity’s formal name. This amendment makes it easier and less costly for existing entities to convert, but the amendment also makes it more difficult for researchers (and the rest of the public) to track the PBCs. In addition to the cost of changing names, Rick Alexander notes in his article below that the previous naming requirement was causing issues when PBCs registered in other states because “[s]ome jurisdictions view the term as referring to nonprofit corporations. Other jurisdictions view the phrase ‘'PBC'’ as insufficient to signal corporate identity.”
- Reduces amount of shareholders that must approve a conversion from a traditional corporation to a PBC from 90% to 2/3rds of shareholders. This amendment brings Delaware PBC law in line with most of the benefit corporation statutes and gives Etsy a more realistic shot at converting. The requirement in Delaware to convert from a PBC to a traditional corporation was already approval by 2/3rds of shareholders.
- Provides a “market out” exception to appraisal rights when a corporation becomes a PBC. This amendment brings the Delaware PBC law in line with their general appraisal provision in DGCL 262. This amendment also means that Etsy shareholders would not receive appraisal rights if Etsy converts to a PBC.
Additional posts about the amendments are available below:
- Gregory Williams (Richards, Layton & Finger)
- Rick Alexander (B Lab & Morris Nichols) (Written Prior to Amendments Passing)
Wednesday, June 24, 2015
I had the privilege of sitting in on a stimulating paper session on "Private Fiduciary Law" at the Law and Society Association conference in Seattle last month. The program featured some super work by some great scholars. My favorite piece from the session, however, is a draft book chapter written by Gordon Smith that he recently posted to SSRN. Aptly entitled The Modern Business Judgment Rule, the chapter grapples with the current state of the business judgment rule in Delaware by tracing its development and reading the disparate doctrinal tea leaves. Here is a summary of his "take," as excerpted from his abstract (spoiler alert!): "The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference."
In the mere 18 pages of text he uses to engage his description, analysis, and conclusion, Gordon gives us all a great gift. His summary is useful, his language is clear, and his analysis and conclusions are incredibly useful, imho. I am no soothsayer, but I predict that this will be a popular piece of work.
Gordon posted on his paper the other day on The Glom. He is inviting comments, and I know him to be serious in wanting to receive and incorporate them. So, have at it!
Monday, June 15, 2015
On June 11, 2015, the Delaware House of Representatives joined the Delaware Senate in passing a bill that would prohibit fee-shifting bylaws by Delaware stock corporations. The bill awaits signature by Delaware Governor Jack Markell. Nonetheless, the panel provides a nice debate, between practicing attorneys, and is available here. The information from the Chancery Daily is below.
Fordham Law School hosted a panel on Fee Shifting in Shareholder Litigation, featuring three members of the corporate law council of the Delaware State Bar Association, which submitted proposed amendments to the Delaware General Corporation Law that would preclude the adoption of fee-shifting provisions in corporate instruments, on Thursday, March 26, 2015. A webcast video of the panel is now available online here.Professor Sean J. Griffith - Fordham Law School
Panelists:Frederick Alexander - Morris Nichols Arsht & Tunnell
Chris Cernich - Institutional Shareholder Services
Kurt Heyman - Proctor Heyman Enerio
Mark Lebovitch - Bernstein Litowitz Berger & Grossman
Norman Monhait - Rosenthal Monhait & Goddess
Andrew Pincus - Mayer Brown
Wednesday, June 10, 2015
Last week, I attended the National Business Law Scholars Conference at Seton Hall University School of Law in Newark, NJ. It was a great conference, featuring (among others) BLPB co-blogger Josh Fershee (who presented a paper on the business judgment rule and moderated a panel on business entity design) and BLPB guest blogger Todd Haugh (who presented a paper on Sarbanes-Oxley and over criminalization). I presented a paper on curation in crowdfunding intermediation and moderated a panel on insider trading. It was a full two days of business law immersion.
The keynote lunch speaker the second day of the conference was Kent Greenfield. He compellingly argued for the promotion of corporate personhood, following up on comments he has made elsewhere (including here and here) in recent years. In his remarks, he causally mentioned B corporations and social enterprise more generally. I want to pick up on that thread to make a limited point here that follows up somewhat on my post on shareholder primacy and wealth maximization from last week.
June 10, 2015 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joan Heminway, Litigation, Social Enterprise | Permalink | Comments (6)
Thursday, May 21, 2015
My former research assistant Sam Moultrie and his colleague Andrea Schoch Brooks have authored a short article entitled "Defining a Proper Purpose for Books and Records Actions in Delaware."
The article unpacks two recent Delaware books and records cases: AbbVie and Citigroup. Worthwhile reading for those who wish to stay current on this area of the law.
Tuesday, May 19, 2015
Vice Chancellor Laster recently issued an opinion in In re Carlisle Etcetera, LLC (available here), that has the potential to encourage (or at least fail to punish) sloppy practices and unnecessarily expands equitable standing for judicial dissolution. In doing so, the case increases litigation risk for LLCs.
The case involves an LLC made up of two member parties that formed Carlisle Etcetera, LLC. (Carlisle): WU Parent and Tom James Co. (James). The LLC agreement called for a manager-managed board, that would serve as sole manager. WU Parent appointed two board designees, as did James. Board decisions required "unanimous approval." At some point, for tax reasons, WU Parent assigned its membership interest to WU Sub. Thereafter, Carlisle identified WU Sub as a 50% member interest in tax filings and the LLC's accountants referred to WU Sub as "an equal member" of the LLC. The parties discussed an updated LLC agreement that would have made clear that an initial member of the LLC could transfer ownership to a wholly owned affiliate that would retain membership status, though that agreement was never finalized.
[Please click below to read more.]
Wednesday, April 22, 2015
Last week the New York Times hosted a debate about the Public Corporation's Duty to Shareholders. Contributors include corporate law professors Stephen Bainbridge, Tamara Belinfante, Lynn Stout, David Yosifan and Jean Rogers, CEO of Sustainability Accounting Standards Board.
This collection of essays is not only more interesting than anything that I could write, but it is also the type of short, assessable debate that would be a great starting point for discussion in a seminar or corporations class.
Friday, April 17, 2015
On April 3, Delaware Governor Jack Markell signed the Delaware Rapid Arbitration Act (DRAA) into law. The DRAA becomes effective on May 4, 2015. The DRAA is a different take on the attempted Chancery Arbitration that the Third Circuit ruled unconstitutional in 2013.
Under the DRAA, all parties in the dispute must agree to the arbitration. The DRAA does not use sitting judges to arbitrate, as the Chancery Arbitration attempted to do, but the Delaware Court of Chancery will be “facilitating” the process under the DRAA. Among other things, the Delaware Court of Chancery can assist in appointing an arbitrator for the process, enter final judgments, and determine an arbitrator’s fees. The Delaware Supreme Court can hear appeals of awards.
The DRAA appears to be encouraging a relatively fast and cost effective dispute resolution process. The process is limited to 180 days – final award to be issued within 120 days of the arbitrator’s appointment and allowable extensions up to an additional 60 days.
Given the privacy and the apparent time and cost-savings, this may be an attractive alternative dispute resolution process for various businesses.
For more analysis see:
Tuesday, March 31, 2015
In a later footnote, he noted that he was not sure what I meant by my statement: "I believe that public companies should be able to plan like private companies . . . ." I thought I'd try to explain.
My intent there was to address my perception that there is a prevailing view that private companies and public companies must be run differently. Although there are different disclosure laws and other regulations for such entities that can impact operations, I'm speaking here about the relationship between shareholders and directors when I'm referencing how public and private companies plan.
Public companies generally have far more shareholders than private companies, so the goals and expectations of those shareholders will likely be more diverse than in a private entity. Therefore, a public entity may need to keep multiple constituencies happy in a way many private companies do not. However, that is still about shareholder wishes, and not the public or private nature of the entity itself. A private company with twenty shareholders could crate similar tensions for a board of directors.
As an example, consider Investopedia's description of Advantages of Privatization in an article called "Why Public Companies Go Private" (emphasis added):
Private-equity firms have varying exit time lines for their investments depending on what they have conveyed to their investors, but holding periods are typically between four and eight years. This horizon frees up management's prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth. Management typically lays out its business plan to the prospective shareholders and agrees on a go-forward plan.
This is often a practical reality, but I disagree (or at least believe it should not be the case) that a company must be private to "free up management's prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth."
This, I think, connects with Prof. Bainbridge's point in his footnote annotation 4, where he says, "I think too many hedge funds are pressing too many boards to pursue short-term gains at the expense of sustainable long-run shareholder wealth maximization and, accordingly, that boards need more insulation from shareholder pressure." I agree completely with his point there, and that's the kind of issue facing public companies that I was intending to address in my assertion.
Ultimately, director primacy means ensuring a large measure of director autonomy (or insulation). This works in both directions, whether it relates to short- versus long-term planning or providing workplace benefits (or not). Ensuring a robust business judgment rule as an abstention doctrine preserves director primacy, and in the long run, will benefit corporate governance and shareholder choice.
Friday, March 20, 2015
The biggest recent news in the social enterprise world is that certified B corporation Etsy is going public.
Despite confusing press releases, Etsy is not legally formed as a benefit corporation, they are only certified by B Lab. (In one of the coolest comments I have received blogging, an Etsy representative admitted that they confused the "benefit corporation" and "certified B corporation" terms and corrected their public statements). If you are new to social enterprise, the differences between a "certified B corporation" and a "benefit corporation" are explained here.
Etsy, however, will face a dilemma as noted in this article sent to me by Alicia Plerhoples (Georgetown). The B Lab terms for certified B corporations require Etsy to convert to a public benefit corporation (Delaware's version of the benefit corporation) within four years of the Delaware law becoming effective. Delaware's public benefit corporation law went effective August 1, 2013.
So, unless B Lab changes its terms, Etsy will lose its certified B corporation status if it does not convert to a public benefit corporation on or before August 1, 2017.
Given that converting to a public benefit corporation while publicly-traded would be extremely difficult--obtaining the necessary vote (currently 90% in Delaware, with a proposal being considered to move it back to the more typical 2/3), paying dissenters' rights, etc.--I imagine Etsy will need to make this decision before it goes public. Perhaps, Etsy will postpone the decision, and hope that they can just quietly lose their certification in 2017 or that B Lab will make an exception for them. Etsy's CEO is on record promising social responsibility, but we will see whether that promise includes maintaining B Lab certification and making a legal entity change.
Many interesting issues would stem from a publicly-traded benefit corporation; I have added a number of items to my article ideas list this morning.
This Etsy story is one I hope to follow, so stay tuned.
Thursday, March 19, 2015
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.
Prof. Bainbridge is with Delaware Chief Justice Strine in that profit maximization is the only role (or at least only filter) for board members. As he asserts, “The relationship between the shareholder wealth maximization norm and the business judgment rule, . . . explains why the business judgment rule is consistent with the director's "legal obligation to maximise profits for their shareholders."
Chief Justice Strine has noted that the eBay decision, which I have written about a lot, says that "the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders." I think this is right, but I remain convinced that absent self-dealing or a “pet project,” directors get to decide that what is in the shareholders' best interests.
I have been criticized in some sectors for being too pro-business for my views on corporate governance, veil piercing law, and energy policy. In contrast, I have also been said to be a “leftist commentator,” in some contexts, and I have been cited by none other than Chief Justice Strine as supporting a “liberal” view of corporate norms for my views on the freedom of director choice.
When it comes to the Business Judgment Rule, I think it might be just that I believe in a more hands-off view of director primacy more than many of both my “liberal” and “conservative” colleagues. Frankly, I don’t get too exercised by many of the corporate decisions that seem to agitate one side or the other. I thought I’d try to reconcile my views on this in a short statement. I decided to use the model from This I Believe, based on the 1950s Edward R. Murrow radio show. (Using the Crash Davis model I started with was a lot less family friendly.) Here’s what I came up with [Author's note, I have since fixed a typo that was noted by Prof. Bainbridge]:
I believe in the theory of Director Primacy. I believe in the Business Judgment Rule as an abstention doctrine, and I believe that Corporate Social Responsibility is choice, not a mandate. I believe in long-term planning over short-term profits, but I believe that directors get to choose either one to be the focus of their companies. I believe that directors can choose to pursue profit through corporate philanthropy and good works in the community or through mergers and acquisitions with a plan to slash worker benefits and sell-off a business in pieces. I believe that a corporation can make religious-based decisions—such as closing on Sundays—and that a corporation can make worker-based decisions—such as providing top-quality health care and parental leave—but I believe both such bases for decisions must be rooted in the directors’ judgment such decisions will maximize the value of the business for shareholders for the decision to get the benefit of business judgment rule protection. I believe that directors, and not shareholders or judges, should make decisions about how a company should pursue profit and stability. I believe that public companies should be able to plan like private companies, and I believe the decision to expand or change a business model is the decision of the directors and only the directors. I believe that respect for directors’ business judgment allows for coexistence of companies of multiple views—from CVS Caremark and craigslist to Wal-Mart and Hobby Lobby—without necessarily violating any shareholder wealth maximization norms. Finally, I believe that the exercise of business judgment should not be run through a liberal or conservative filter because liberal and conservative business leaders have both been responsible for massive long-term wealth creation. This, I believe.
Tuesday, March 3, 2015
The Fordham Journal of Corporate and Financial Law recently published a March 6, 2014, lecture from Former Delaware Supreme Court Chief Justice Myron T. Steele, Continuity and Change in Delaware Corporate Law Jurisprudence (available on Westlaw, but fee may apply). As an aside, I'll note that it appears to have taken a full calendar year for this to get published (at least on Westlaw), which seems crazy to me. If there's any question why legal blogs can fill such a critical role in providing timely commentary on legal issues, this is a big part of the answer.
In the lecture, Chief Justice Steele discusses three main areas: (1) multi-forum jurisdiction, (2) shareholder activism, and (3) the Nevada, Delaware, and North Dakota Debate (a "competition for charters").
As to multi-forum jurisdiction, he makes the unsurprising point that Delaware courts are of the view that first impressions of the Delaware General Corporation Law or other "internal affairs doctrine" issues should be handled in Delaware courts. Of note, he explains that the Delaware constitution (art. IV, § 11(8)) now allows federal courts, the top court from any state, the SEC, and bankruptcy courts to certify questions directly to the Delaware Supreme Court. This option is one that lawyers litigating such cases in other forums won't want to miss.
With regard to shareholder activism, Chief Justice Steele states,
In my preferred system for the world, and I think in the minds of all Delaware judges, engaged if not antagonistic stockholders add positive value as a check on director authority and are a catalyst for corrective accountability, so long as their efforts focus on improved performance and not the advancement of political or personal agendas--a major caveat in my view. Delaware courts, it seems to me, will increasingly recognize the benefits that engaged investors bring to the table.
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g., ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.
The corporate form in which [an Delaware corporation] operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. . . . Having chosen a for-profit corporate form, . . . directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
Thus, in Delaware a for-profit corporation cannot promote or practice the religious views of even a majority of directors or shareholders where such actions do not promote the value of the corporation for shareholders.
Finally, as to the Nevada, Delaware, North Dakota debate, Chief Justice Steele questions the value of Nevada allowing "charters to exculpate directors for breaches of duty of loyalty," because he thinks such a massive change in widely held views of fiduciary duty law could invite federal "meddling." I think he's exactly right on this. He notes with skepticism the North Dakota Publicly Traded Corporations Act because there are only two companies that have adopted the law, but the law's failure in the competition for charter does not raise the same concerns of a race to the bottom (my words) that Nevada's law provides.
I think Chief Justice Steele's article provides interesting and useful insight into the workings of the Delaware court system, and I recommend the sort read. I just wish I had seen it about nine months ago.
Monday, February 23, 2015
The Chancery Daily reports that Governor Markell has nominated Collins "C.J." Seitz, Jr. to the Delaware Supreme Court. The January 31, 2015 retirement of Justice Henry duPont Ridgely created the vacancy.
C.J. Seitz, Jr. has over thirty years of corporate/commercial/IP litigation experience and is a respected, influential member of the Delaware bar. He has also served as mediator, arbitrator, or special master in numerous cases. He currently serves as a founding partner of Seitz Ross Aronstam & Moritz LLP.
Friday, February 20, 2015
Joan Heminway and I must be thinking similar thoughts because before I even saw her helpful post on business law jobs, I asked my former research assistant Samuel Moultrie to share his thoughts and advice on finding legal employment in this economic environment.
Sam is one of the hardest workers I know and took his job search seriously. He also took a big risk by going beyond the typical employers we had recruiting on campus when we were at Regent Law – mostly non-profits, government agencies, and a few VA and NC law firms. Sam wanted to practice in the state that has the greatest influence on U.S. corporate law and has made it happen. His journey was not and is not easy, but I thought his story might be inspiring. Recently, Sam was also selected as a 2015 Leadership Delaware Fellow. Sam’s thoughts on finding legal employment are reproduced below.
By: Samuel L. Moultrie
The job market for recent law school graduates is, without a doubt, miserable. While the statistics seem to vary, I think it is safe to say that the supply of new law school graduates exceeds the number of legal job openings. Nevertheless, graduates should not lose all hope. Any law school graduate can find a job, if they are motivated, willing to work hard, and take steps to distinguish themselves.
[More after the break]