M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Thursday, June 9, 2011

Strine insights

For insights into the challenges faced by the Delaware Chancery Court and how soon to be Chancellor Strine will approach them, you should read One Fundamental Corporate Governance QuestionWe Face: Can Corporations Be Managed for theLong Term Unless Their Powerful ElectoratesAlso Act and Think Long Term?.   This paper appear in the November 2010 Business Lawyer.   It's reasonably short, but all the footnotes make it look longer.  It's definitely worth reading if you haven't already. 

He asks a lot of tough questions and isn't shy about making his opinions known.  Sometimes, the problem isn't the law.  It's us.  For example:

Although the focus of the institutional investor community over the last twenty five years on issues like takeover defense and encouraging executive compensationtied to stock price performance is understandable, what is less edifying is the absence of any similar weight given to issues that many end-user investors care more about, such as whether corporations are endangering their solvency by excessively leveraging themselves or skirting the law through financial gimmicks to improve the optics of the company’s balance sheet.

Even after the market debacle involving WorldCom and Enron, the institutional investor community remained preoccupied with issues like takeovers and executive compensation. And before the more recent market crash, important segments of the institutional investor community were demanding to know why more public companies could not operate with the high degree of leverage employed by those owned by private equity firms.

The potency of the institutional investor community is easy to see. When they want something, they tend to get it. Institutional investors demanded and largely got changes to CEO compensation so that it was primarily based on components—such as options—that were tied to raising the corporation’s stockprice. Institutional investors wanted a reduction in takeover defenses and have been highly successful in achieving that objective. In the wake of Delaware’s passage of a so-called majority voting statute in 2006, over 70 percent of the largest public companies have adopted that approach in response to stockholder demands. In response to investor sentiment, corporations levered up, took more risks, and engaged in huge stock buyback programs.

It's going to interesting.

-bjmq

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