April 28, 2011
Berkshire report on Sokol trades
These are not good facts for Sokol. From the Berkshire board's report on Sokol's trading:
Mr. Buffett was initially unimpressed with Lubrizol as apotential acquisition, but told Mr. Sokol to let him know what he learned at the meeting. He also told Mr. Sokol that he was unfamiliar with the lubricants and additives part of the chemicals industry. During the conversation, Mr. Buffett asked Mr. Sokol how he had become familiar with Lubrizol. Mr. Sokol mentioned that he owned the stock. He did not disclose:
the amounts and timing of his purchases;
the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;
the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) hadasked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and
the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.
It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol’s comment about owning the shares was inresponse to Mr. Buffett’s question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of itsshares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition.
As I have noted before this looks more like a loyalty claim than a federal insider trading case. And it doesn't look good for Sokol on that level. The report concludes that even if Sokol was not in the possession of material information required to make a federal case, he was in possession of confidential information, Berkshire's confidential information. And by trading on Berkshire's confidential information, he was usurping a corporate opportunity.
It's worth noting that there is a derivative suit already pending - no surprise ( Download Kirby v Sokol complaint). In that complaint, the directors are named as defendants in addition to Sokol. Prof Bainbridge notes that there is no case against the directors. And he's right. I suspect that what going on here is that the plaintiffs are just looking for a way to argue that demand would be futile - based on the argument that directors would be personally liable in the event plaintiffs were to win. I don't think this is really going to be a winning argument - mostly because the plaintiffs allege no actual facts to back that up.
Anyway, this new report from the directors of Berkshire provides more evidence to use against Sokol in a Kirby's case against him. Though, if I were counsel to Berkshire, my next step would be to try to take over the case from the shareholder plaintiffs and have the board pursue it on behalf of the company themselves.
Update: Yikes! This is starting to get ugly! Sokol's attorney responds with a statement:
am profoundly disappointed that the Audit Committee of Berkshire Hathaway would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol. Mr. Sokol had been associated with the Berkshire Hathaway companies for 11 years. During this time, his indefatigable efforts helped create enormous value for the Berkshire shareholders. He deserved better. While I take issue with much of the Committee's report, I briefly make the following points. If the Audit Committee had asked, it would have learned that:
Mr. Sokol had been studying Lubrizol for personal investment since the summer of 2010; such investments are specifically allowed by his employment agreement.
Mr. Buffett was told twice, not once, about Mr. Sokol's ownership of Lubrizol stock before Mr. Buffett engaged in any discussions with Lubrizol.
Contrary to the Audit Committee's statement, Mr. Sokol's Lubrizol shares were not acquired pursuant to a "100,000 limit order." Rather, they were purchased as a result of several limit orders, over a period of days, at specified prices, for the day only, in order to acquire the stock at low prices. At that time, Mr. Sokol had no reason to anticipate that Mr. Buffett would have any interest whatsoever in Lubrizol.
I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s. I know him to be a man of uncommon rectitude and probity. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.
April 27, 2011
Help wanted: One Chancellor
Here's the job announcement as posted on the employment section of the Delaware Courts' website.
There are requirements of political balance under the Delaware Constitution Art. IV § 3 and, in this case, the appointee must be either a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Vice Chancellor or Supreme Court Justice. There also is a requirement that the appointee be a resident of the State of Delaware. There are no other geographical requirements for this office. The position provides a current annual salary of $185,750. The Commission solicits candidates for this office.
Candidates for Chancellor also will be simultaneously considered by the Commission for a potential derivative vacancy in the office of Vice Chancellor if a sitting Vice Chancellor is nominated to be Chancellor. In the event a sitting Vice Chancellor is nominated to be Chancellor, the Commission may not solicit further applications for the office of Vice Chancellor. Applicants for Vice Chancellor must be a resident of the State of Delaware and a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Supreme Court Justice. There are no other geographical requirements for the office of Vice Chancellor. The position provides a current annual salary of $174,950.
In the event a sitting member of a court other than the Court of Chancery is appointed to the office of Chancellor or to a derivative vacancy in the office of Vice Chancellor, the Commission will provide a separate notice soliciting candidates for the vacancy caused thereby.
Delaware residents only!
April 26, 2011
Chandler, Good Faith, and Delaware's Edge
My colleague, Renee Jones, recently posted her paper The Role of Good Faith in Delaware: How Open-Ended Standards Help Delaware Preserve Its Edge that is now appearing in the NY Law School Law Review. Given the current interest in Chancellor Chandler's tenure on the court, the paper's treatment of Disney and the good faith doctrine is worth reading.
Abstract: This Article traces the development of the good faith doctrine in Delaware and links shifts in the doctrine to events occurring in the national economy and in Washington. It shows that in 2003 Delaware judges seemed open to the possibility of imposing liability on directors in a case (Disney) where facts suggested that the directors were overly passive in approving the terms of an employment contract for a senior corporate executive. After the 2001-2002 corporate governance scandals faded, however, the courts abandoned this course. A trio of decisions in Disney, Stone v. Ritter, and Lyondell reiterated what had long been clear prior to 2003, that directors will not face personal liability for the breach of the duty of care. Instead, such liability is limited to situations where directors’ actions or omissions evidence intent to harm the corporation.
The Article also assesses Delaware’s response to the 2008 financial crisis. Thus far, Delaware courts have avoided staking out territory with respect to financial oversight. However, on central governance issues such as shareholder voting the legislature and courts are making an effort to preserve state primacy. The legislature, led by Delaware’s bar, moved quickly in 2009 to try to blunt progress on federal proxy access. In spring 2009 the legislature amended Delaware’s corporate statute to affirm shareholders’ rights to gain access to a corporation’s proxy machinery through binding bylaw amendment. In addition, the Delaware Bar Association formally opposed the Securities and Exchange Commission’s more comprehensive proxy access proposal.
In contrast, the judiciary’s renewed commitment to shield corporate directors from personal liability tied the courts’ hands in ways that made it difficult to respond doctrinally to the financial crisis. Thus, in Citigroup the court declined to break new ground on directors’ obligations to monitor corporate risk, but on the core issue of executive compensation the court reopened a path for recovery that had seemed until then to be firmly shut. The survival of the plaintiffs’ waste claim in Citigroup seems part of Delaware courts’ efforts appear engaged on compensation issues.
April 25, 2011
DE Chancellor Chandler announces his retirement
According to Delaware online:
In a surprise announcement, Chancellor William B. Chandler III, one of the most influential business court judges in the world, has announced he will leave the bench.
Chandler has been speaking his mind recently about the Airgas opinion and the steady erosion of Unocal over time. He'll be hard to replace.