Securities Regulation

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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…

According to Paul Volcker, the “financial system is broken.”  Furthermore, with regard to limits on the abilities of regulators, he says: “Relying on judgment all the time makes for a very heavy burden whether you are regulating an individual institution or whether you are regulating the whole market.” 

He’s right on that.  If we like markets (and I think we do), then we need to recognize we can’t always regulate (or, for that matter, buy) our way out of some of these messes.  I am now firmly of the mind that we should have a five-year moratorium (minimum) on financial regulation.  This goes both ways — nothing can be repealed and nothing can be added. 

I am of a mixed mind on the new financial regulations, but since they already passed, I say leave them alone and let the market adjust. Similarly, with regard to Sarbanes-Oxley, regardless of whether one likes it, it’s part of the current market, and companies have adjusted to it.  So – leave it all alone. Regulators need to work with what they have, and businesses have to work with what is there.

I happen to think that we have a fairly solid system in place, but there…

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…