Corporate Governance

Subscribe to Corporate Governance via RSS

Dodd-Frank requires the SEC to issue rules barring national exchanges
from listing any company that has not implemented a clawback policy that does
not include recoupment of incentive-based compensation for current and former
executives for a three-year period.  Unlike the Sarbanes-Oxley clawback rule,  Dodd-Frank requires companies to recover compensation,
including options, based on materially inaccurate financial information,
regardless of misconduct or fault.

Although the SEC has not yet issued rules on this provision,
a number of companies have already disclosed their clawback policies, likely
because proxy advisory firms Glass Lewis and Institutional Shareholder Services
have taken clawback policies into consideration when making Say on Pay voting
recommendations. Equilar has reviewed the proxy statements for Fortune 100
companies filed in calendar year 2013 for compensation events for fiscal year
2012. The organization released a report
summarizing its findings, which are instructive. 

Of the 94 publicly-traded companies analyzed by Equilar, 89.4%
publicly disclosed their policies; 71.8% included provisions that contained
both financial restatement and ethical misconduct triggers; 29.1% included
non-compete violations as triggers and 27.2% had other forms of triggers.  68% of the policies applied to key executives
and employees including named executive officers, while only 14.6% applied to
all employees. 7.8%…

Fernan Restrepo has posted “Do Different Standards of
Judicial Review Affect the Gains of Minority Shareholders in Freeze-Out
Transactions? A Re-Examination of Siliconix” on SSRN.  Here is the abstract:

Freeze-out transactions have been subject to different
standards of judicial review in Delaware since 2001, when the chancery court,
in In re Siliconix Inc. Shareholders Litigation, held that, unlike merger
freeze-outs, tender offer freeze-outs were not subject to “entire fairness
review”. This dichotomy, in turn, gave rise to a tension in the literature
regarding the potential impact of Siliconix, as well as the treatment that
freeze-outs should receive. While some defended the regime established by
Siliconix, others argued for doctrinal convergence through a universal
application of entire fairness, and still others proposed alternative
variations of convergence based on how the negotiation process is conducted.
The Delaware Chancery Court itself, in fact, subsequently made a partial step
toward convergence by narrowing the scope of its precedent, as reflected in In
re CNX Gas Corporation Shareholders Litigation. The empirical evidence on the
effect of Siliconix (and, therefore, on the practical relevance of different
standards of judicial review), however, is limited. In particular, in
“Post-Siliconix freeze-outs:

…

Professor Haskell Murray is presenting on
Delaware’s new Public Benefit Corporation Act on October 5th at the
Southeastern Law Scholars Conference.  Delaware is the 19th state to
pass such legislation and given the influence that the state has on others in the area of
corporate law, it may prompt the many states that are considering it to pass their
own pending legislation.  Many question
the need for benefit corporations in general given the constituency statutes that are already in
place in many states and the debate about the shareholder wealth maximization norm. Others worry about unintended consequences (see
here for example).  

Haskell has
probably written more extensively on these entities than almost anyone else (see here).
Although his latest article is not yet on SSRN, the abstract is below.  I look forward to reading his article and to
seeing how many Delaware corporations jump on the benefit corporation
bandwagon.

“Systems should exist to serve
society.  Right now our capitalist system is not serving society; it’s
serving shareholders.  And we can’t run around expecting different
outcomes until we change the rules of the game.”   -Jay Coen Gilbert
(Co-founder, B-Lab)

“Delaware, the leading incorporation state…

So the government shutdown has me troubled.  I think it’s reasonable for the House not
like Obamacare and to do everything they can to repeal the law.  However, it strikes me as different to force a
government shutdown because that’s the only way they can get leverage to make a
change the voters, at least at the last election, did not agree with.  

As Sen. John McCain explained last week:

Many of those who are in opposition right now were not here
at the time and did not take part in that debate. The record is very clear of
one of the most hard fought, fair, in my view, debates that has taken place on
the floor of the Senate. That doesn’t mean that we give up our efforts to try to
replace and repair Obamacare, but it does mean that elections have
consequences. Those elections were clear in a significant majority that a
majority of the American people supported the president of the United States
and renewed his stewardship of this country.

The actions of the House right now remind me a lot of the
arguments put forth against shareholder activism.  That is, the complaints about rent-seeking actions…

Interesting news today that North Dakota may not actually be a proper state.  It seems that the state’s constitution lacks a requirement that the state’s executive officers uphold the U.S. Constitution, thus violating Article VI.  

If the state is not really a state, then would that mean that corporations under “state” law are not really formed either? Would the fictional corporate person suddenly become a fictional, fictional person? Heady stuff.  

Add to this the fact that most of the state is violating North Dakota law by reporting that the flooding in Minot (the western part of the state) is caused by the Souris River, using the French (and Canadian) name, rather than the English (and state-mandated) name, the Mouse River.

Even if most people are getting name of the river that is causing the flooding wrong, the flooding is very, very real. Please help if you can. Here are a couple places:  http://minotfloodshirts.myminto.com/ and http://minotredcross.org/.

–JPF

Lewis Lazarus recently posted Directors Designated By Investors Owe Fiduciary Duties to the Company as a Whole and Not to the Designating Investor at the Delaware Business Litigation Report.  In his article, he explained

[The Delaware] cases teach that directors designated by particular stockholders or investors owe duties generally to the company and all of its stockholders.  Where the interests of the investor and the company and its common stockholders potentially diverge, the directors cannot favor the interests of the investor over those of the company and its common stockholders.

Professor Bainbridge weighs in (here), agreeing that the above is the general rule, but that in some cases that may not be best.  He gives a few examples, such as a struggling company granting a union nominee a board position or a time when preferred shareholders can elect a board majority because no dividends were paid for a sufficient period of time. He then notes that a director’s “sponsor might reasonably expect the directors not just to ‘advocate’ for the shareholder’s position, but to vote for it and take other action.”  Professor Bainbridge concludes that he still doesn’t “think the sponsor should be able to punish…

Chancellor Chandler issued his ruling yesterday upholding the poison pill Airgas, Inc.’s board of directors adopted in response to Air Products and Chemicals, Inc.’s $5.8 billion hostile takeover ($70/share, all cash). Chancellor Chandler determined that the Airgas board of directors “acted in good faith and in the honest belief that the Air Products offer, at $70 per share, is inadequate.”  (PDF of the case here, thanks to Francis G.X. Pileggi.)

One reason this decision bugs me is that I suspect a good number of people who don’t like insider trading restrictions would be supportive of this decision.  To me, it’s the same question:  What does the shareholder want for his or her shares?  Period.  

For some who don’t like insider trading restrictions, they argue that, at least in non-face-to-face insider trading transactions, the sharedholder did not suffer harm. (See, e.g., Henry Manne.) Sharedholders were offered a price they deemed acceptable, and sold.  Who cares who was on the other side of the transaction?  I find parts of this rationale compelling, although I also find the property rights concerns related to insider trading even more compelling. (See, e.g., Professor Bainbridge.)

For me, the anti-insider-trading rationale…

I continue thinking about Chancellor Chandler’s opinion in eBay v. Newmark, and I still find myself troubled by the determination that, by embracing it’s “community service mission,” craigslist was being run improperly as corporate entity (see my prior post here).  To recap, Chancellor Chandler explained that by choosing “a for-profit corporate form, the craigslist 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.”

As I mentioned before, in apparent contrast to Chancellor Chandler, I don’t think it necessarily follows that embracing a “community service mission” is inconsistent with “promot[ing] the value of a corporation for the benefit of its stockholders.”  In fact, it may be that the community service mission is the precise reason that stockholders are gaining the benefit.  Take, for example, Ben and Jerry’s Ice Cream. Ben and Jerry’s began as a small start-up looking to expand its business.  Over time, the company began to grow, and along with this growth, embraced environmental causes and created a foundation giving 7.5% of pretax profits for distribution to worthy causes.  (See Ben & Jerry’s History here.)  Of course, the company would…

At The Conglomerate, Gordon Smith notes some comparisons between Dodge v. Ford (pdf here) and eBay v. Newmark (pdf here). I certainly see the comparison (and I think his post here on the case and Christine Hurt’s earlier post here are great).  Still, I think I am a little more critical of the Dodge v. Ford analogy than Professor Smith. Here’s why:

In Dodge v. Ford, Henry Ford stated clearly that he was operating the business as he saw fit and that he was changing toward supporting philanthropic purposes. As the Dodge v. Ford opinion notes:

‘My ambition,’ declared Mr. Ford, ‘is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business.”

. . . .

The record, and especially the testimony of Mr. Ford, convinces that he has to some extent the attitude towards shareholders of one who has dispensed and distributed to them large gains and that they should be content to take what he chooses to give. His testimony creates the

…

Back in 2007, North Dakota passed the North Dakota Publicly Traded Corporations Act (ND Act), which became Chapter 10-35 (Publicly Traded Corporations) of the North Dakota Century Code.  The ND Act provided a shareholder friendly alternative to the state’s Business Corporations Act, Chapter 10-19.1 for companies that were so inclined.  (Find the referenced North Dakota laws here.)

Before the state could pass the law, the state constitution needed be amended, and voters approved the necessary changes in 2006 (for more on the history of the ND Act, see pdf here). A North Dakota-based publicly traded corporation is not subject to the ND Act unless it opts-in, essentially by reincorporating in the state. None of the state’s public corporations existing before the ND Act was passed have done so.  

One of the main provisions of the ND Act gave proxy access for purposes of nominating candidates for election to the board of directors for a “qualified shareholder” of the publicly held corporation subject to the law. N.D. Cent. Code 10-35-08.  A qualified shareholder is a person or group of persons holding 5% of the company’s shares authorized to vote for directors, and each person or member of the group must…