Corporate Governance

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I was recently asked to evaluate a corporation’s obligation to indemnify a director named in a derivative suit initiated by the corporation alleging that the director usurped corporate opportunities. The MBCA establishes a standard framework for optional and mandatory indemnification of directors and officers, sets the appropriate boundary of indemnification obligations (i.e,. no reimbursement of derivative suit settlements or intentional misconduct), establishes the procedures for indemnification and advancement of expenses, and provides mechanisms for directors to enforce their indemnification rights through court orders.  The standard procedures for indemnification require the corporation to authorize the indemnification and make a determination that the conduct at issue qualifies for indemnification.

MBCA § 8.55 Determination and Authorization of Indemnification

(a) A corporation may not indemnify a director ….[until after] a determination has been made that indemnification is permissible ..[and].. director has met the relevant standard of conduct ….

(b) The determination shall be made:

(1)…. a majority vote of all the qualified directors…., or by a majority of the members of a committee;

(2) by special legal counsel ….or

(3) by the shareholders, but shares owned by or voted under the control of a director who at the time is not a qualified director may not

…

A quick review of the top 10 Papers for Corporate, Securities & Finance Law eJournals on SSRN for the period of September 18, 2013 to November 17, 2013 (here), led me to Utpal Bhattacharya’s paper “Insider Trading Controversies: A Literature Review.”  Here is the abstract:

Using the artifice of a hypothetical trial, this paper presents the case for and against insider trading. Both sides in the trial produce as evidence the salient points made in more than 100 years of literature on insider trading. The early days of the trial focus on the issues raised in the law literature like fiduciary responsibility, the misappropriation theory and the fairness and integrity of markets, but the trial soon focuses on issues like Pareto-optimality, efficient contracting, market efficiency, and predictability raised in the financial economics literature. Open issues are brought up. A jury finally hands out its verdict.

I have posted an updated draft of my latest paper Rehabilitating Concession Theory, which is forthcoming in the Oklahoma Law Review, on SSRN.  I have made only minor changes to the the prior draft, but I thought I’d post the abstract and link to the paper here in case any blog readers haven’t seen the paper before and might be interested in the content.

In Citizens United v. FEC, a 5-4 majority of the Supreme Court ruled that, “the Government cannot restrict political speech based on the speaker’s corporate identity.” The decision remains controversial, with many arguing that the Court effectively overturned over 100 years of precedent. I have previously argued that this decision turned on competing conceptions of the corporation, with the majority adopting a contractarian view while the dissent advanced a state concession view. However, the majority was silent on the issue of corporate theory, and the dissent went so far as to expressly disavow any role for corporate theory at all. At least as far as the dissent is concerned, this avoidance of corporate theory may have been motivated at least in part by the fact that concession theory has been marginalized to the point

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“Man grows used to everything, the scoundrel!” 
― Fyodor Dostoyevsky, Crime and Punishment

This week two articles caught my eye.  The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.

Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the…

Martin Gelter & Geneviève Helleringer posted “Constituency
Directors and Corporate Fiduciary Duties” on SSRN a few weeks ago, and I’m
finally getting around to passing on the abstract:

In this chapter, we identify a fundamental contradiction in
the law of fiduciary duty of corporate directors across jurisdictions, namely
the tension between the uniformity of directors’ duties and the heterogeneity
of directors themselves. Directors are often formally or informally selected by
specific shareholders (such as a venture capitalist or an important
shareholder) or other stakeholders of the corporation (such as creditors or
employees), or they are elected to represent specific types of shareholders
(e.g. minority investors). In many jurisdictions, the law thus requires or
facilitates the nomination of what has been called “constituency” directors.
Legal rules tend nevertheless to treat directors as a homogeneous group that is
expected to pursue a uniform goal. We explore this tension and suggest that it
almost seems to rise to the level of hypocrisy: Why do some jurisdictions
require employee representatives that are then seemingly not allowed to
strongly advocate employee interests? Looking at US, UK, German and French law,
our chapter explores this tension from the perspective of economic and
behavioral theory.

As Marc O. DeGirolami notes here: “In an extensive
decision, a divided panel of the U.S. Court of Appeals for the Seventh Circuit
has enjoined the enforcement of the HHS contraception mandate against several
for-profit corporations as well as the individual owners of those corporations.”  I have not had a chance to read the entire
decision (which you can find here), but I did do a quick search for “corporation” and pass on the
following excerpts I found interesting.

The plaintiffs are two Catholic families and their closely
held corporations—one a construction company in Illinois and the other a
manufacturing firm in Indiana. The businesses are secular and for profit, but
they operate in conformity with the faith commitments of the families that own
and manage them…. These cases—two among many currently pending in courts around
the country—raise important questions about whether business owners and their
closely held corporations may assert a religious objection to the contraception
mandate and whether forcing them to provide this coverage substantially burdens
their religious-exercise rights. We hold that the plaintiffs—the business
owners and their companies—may challenge the mandate. We further hold that
compelling them to cover these services substantially burdens their

…

The Economist has an interesting piece on how “[a] mutation in the way companies are financed and managed will change the distribution of the wealth they create.”  You can read the entire article here.  A brief excerpt follows.

The new popularity of the [Master Limited Partnership] is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works…. Collectively, distorporations such as the MLPs have a valuation on American markets in excess of $1 trillion. They represent 9% of the number of listed companies and in 2012 they paid out 10% of the dividends; but they took in 28% of the equity raised…. [The] beneficiaries, though, are a select class. Quirks in various investment and tax laws block or limit investing in pass-through structures by ordinary mutual funds, including the benchmark broad index funds, and by many institutions. The result is confusion and the exclusion of a large swathe of Americans from owning the companies hungriest for the capital the markets can provide, and thus from getting the best returns on offer….

Another booming pass-through structure is that of the “business development company” (BDC). These firms raise public equity and…

In 2011, I met with members of the SEC and Congressional staffers as part of a coalition of business people and lawyers raising concerns about the proposed Dodd-Frank whistleblower provision. Ten days after leaving my compliance officer position and prior to joining academia, I testified before a Congressional committee about the potential unintended consequences of the law. The so-called “bounty-hunter” law establishes that whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act are eligible for ten to thirty percent of the amount of the recovery in any action in which the SEC levies sanctions in excess of $1 million dollars. The legislation also contains an anti-retaliation clause that expands the reach of Sarbanes-Oxley. Congress enacted the legislation to respond to the Bernard Madoff scandal. The SEC recently awarded $14 million dollars to one whistleblower. To learn more about the program, click here.

I argued, among other things, that the legislation assumed that all companies operate at the lowest levels of ethical behavior and instead provided incentives to bypass existing compliance programs when there are effective incentive structures within the existing Federal Sentencing Guidelines for Organizations.  Although they…

Yesterday was election
day!  Elections hold a special place
in my heart, and I remain interested in the interplay of corporations and campaigns,
especially in a post-Citizens United
world.  The races, candidates, and
results, however, received significantly less attention without a federal
election (mid-term or general) to garner the spotlight.  The 2014 election season, which officially
begins today, has several unknowns. While Citizens
United facilitated unlimited independent expenditures (distinguishable from
direct campaign contributions) for individuals and corporations alike,
corporations remain unable to donate directly to campaigns.  Individual campaign contributions are
currently capped at $2,500 per candidate/election and are subject to aggregate
caps as well.  McCutcheon
v. FEC, which was argued
before the US Supreme Court on October 8, 2013, challenges the individual
campaign contribution cap.  If McCutcheon removes individual caps, the foundation
will be laid to challenge corporate campaign contribution bans as well.  See this pre-mortem
on McCutcheon by Columbia University law professor Richard Briffault.  As for current corporate/campaign finance
issues, the focus remains on corporate disclosures of campaign expenditures in
the form of shareholder
resolutions (118 have been successful) and company-initiated
disclosure policies, possible
SEC disclosure requirements for corporate political expenditures, and the
threat…

As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, “Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf),  in which a study considered the impact CEO divorces have on the CEO’s corporation.  The report indicates that recent events “suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions.” 

The study found that a CEO’s divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact “the productivity, concentration, and energy levels of the CEO” or even result in premature retirement.  Third, the sudden change in wealth because of the divorce could lead to a change in the CEO’s appetite for risk, making the CEO either more risk averse or more willing to take risks.  

The report argues that this matters because:

1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value.

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