Thursday, October 11, 2012
Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52). I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being. Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is. In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly:
What are benefit corporations?
Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.
Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals.
Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.
I've written on this before in the context of state anti-takeover laws. Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers. Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever. Here's 156D, Sec. 8.30:
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees. It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role. But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.
I'll have more to say on Benefit Corporations later. For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in? I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses.
Wednesday, October 10, 2012
Thanks to a motion by the NY Times, a shareholder lawsuit against a number of private equity firms is back in the headlines. "Clubbing" is the alleged practice of competitor private equity firms colluding rather than competing to take companies private at price lower than they might have gone private had their been vigorous competition. The DOJ gave it a look a while ago and walked away from their investigation. Shareholders from firms sold to private equity bidders have been a little more patient.
Now, the largely unredacted 220 page amended complaint in Dahl v Bain Capital, et al is available. And does it make for some good reading. Here's a taste:
6. The $31 billion buyout of HCA illustrates how the operation of Defendants' conspiracy. On July 24, 2006, at the height of the conspiracy, a consortium comprised of Defendants KKR and Bain, along with co-conspirator Merrill Lynch, announced their plan to acquire HCA. To ensure the deal was consummated, KKR expressly requested "the industry to step down On HCA."9
7. The other private equity firms followed KKR's directive and agreed not to bid for HCA. Immediately after the announcement and during the 50-day "'go shop"' period when other Defendants had the opportunity to submit competing bids for HCA, James Attwood, a managing director at Carlyle, informed Alexander N avab, a managing director at KKR, that Carlyle would not compete for HCA.10 Likewise, Defendants Blackstone, TPG and Goldman Sachs informed KKR that they would not compete for HCA. Defendants adhered to their conspiracy not to compete on large LBOs, even though they all viewed HCA as an attractive asset. Blackstone went so far as to state that KKR and Bain's purchase was "highway robbery."11 Nevertheless, it did not compete for HCA.
8. HCA illustrates that Defendants would forego competing for a potentially lucrative deal- even one where the purchase price was "highway robbery"- to reap the long term financial gains from collusion. Two TPG senior executives discussing TPG' s decision not to compete against KKR and Bain for HCA admit this fact: "All we can do is do [u]nto others as we want them to do unto us . .. it will pay off in the long run even though it feels bad in the short run. "12
Hmm. Kind of takes the wind out of the sails of a go-shop provision when you ask everyone else in the industry not to make a bid. I'm going to take some time to work through the rest of this, but it certainly promises to be full of dirty laundry.
We must all be desparate for business. What else explains the email I received this morning that somehow made it throw my spam filter:
We have communicated with the company whom is customers of ours in your state
in regards to merging, we like to merge with the company to increase revenue,
market share, and cross-selling opportunities.
We would like to retain you to help us in the process to review proposed transactions
for acquisitions or purchase of businesses, and creation of contracts for acquisition (merger),
if you are interested please advise us on your initial retainer fee and agreement and
we shall forward you the company informationand letter of intent. if this is not
your practice please pass it on to the appropriate attorney
Chairman and ceo Rohto Pharmaceutical Co., Ltd.
1-8-1 Tasumi-nishi, ikuno-ku,
I guess this must work with someone somewhere. I suppose we lawyers, particularly M&A lawyers, are vulnerable to this kind of thing. But how exactly is this supposed to work? What? The Chairman and CEO of Rohto is writing emails to random law professors on his Yahoo account? Doesn't Rohto have its own email system? Also, you'd think a big international company like his would have their own lawyers? Why does he write e-mails without punctuation?
I find it interesting that lawyers now seem to be getting this kind of specific attention from spammers. It used to just be Nigerian princes... Must be something about us.
Anyway, Rao and Reiley have a good paper on the Economics of Spam for those of you who, like me, are fascinated by this.
UPDATE: Oh! We lawyers are suckers! See here. Word to the wise. (h/t JLL)