Delaware, like most states, has a provision in its corporate statutes allowing corporations to limit directors’ liability for breaches of fiduciary duty. Delaware section 102(b)(7) allows corporations to include in their charter “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages” for certain breaches of fiduciary duty.

A recent Delaware case plows a huge hole through the protection provided by a section 102(b)(7) charter provision. In the Rural Metro case [In Re Rural Metro Corp. Stockholders Litigation, 2014 WL 971718 (Del. Ch. Mar. 7, 2014)], the Delaware Court of Chancery held that a 102(b)(7) provision does not protect against claims that non-directors aided and abetted a duty-of-care violation by directors, even when the directors themselves are protected.

The Chancery Court’s reasoning is sound. Section 102(b)(7), and the associated charter provision, don’t say there’s no breach of fiduciary duty, just that directors aren’t personally liable for damages. The underlying conduct by the directors is still a breach of fiduciary duty, and injunctive relief is still available, just no money damages.Since there’s still a breach of duty, and the statute says nothing about the liability of aiders and abettors, the court concluded that aiders and abettors can still be liable if: (1) the directors breached their fiduciary duties; (2) the third party knew the directors were breaching their fiduciary duties; and (3) the third party participated in the breach.

The court ultimately held that RBC Capital Markets, LLC was liable for aiding and abetting. I can’t do justice to the facts in the space available here; I highly recommend a reading of this important opinion.

The real question is whether the Delaware legislature will let this holding stand. The Chancery Court’s statutory reasoning is sound, but that doesn’t mean the result is necessarily good policy. Investment bankers, brokers, accounting firms, and other third party providers, perhaps even lawyers in some cases, are exposed to the risk of liability under this holding. Even if they ultimately win on the merits, as I suspect many will, the litigation itself will be costly. That cost will, of course, be passed on to the corporations using the services of those third parties.

There’s a possible gain associated with that cost, of course: the possible increased deterrence of breaches of fiduciary duty by corporate directors. But the Delaware legislature, in adopting section 102(b)(7), has already decided that other considerations outweigh the deterrent effect of imposing liability on the directors themselves.

Two Legislative Options

Plugging the Rural Metro hole is easy. A simple amendment to 102(b)(7) would do the trick. But how the Delaware legislature chooses to amend the statute (if it does) is important.

One way would be to authorize corporations to include provisions in their charters protecting not only directors, but also people who aid and abet violations by the directors. If that’s all the Delaware legislature did, the protection from liability would not be automatic. Companies with 102(b)(7) exculpation provisions would have to amend their charters to protect aiders and abettors.

A simpler, neater solution would make the protection of aiders and abettors automatic. The legislature could just add a sentence at the end of 102(b)(7) providing that aiders and abettors are not liable when the directors themselves are protected from liability. Something like the following would work: “Unless otherwise specified in the certificate of incorporation, no person shall be liable for money damages for aiding and abetting an action protected by such a provision.”  If the legislature did this, no further corporate action would be needed to make this protection effective. Only companies that did not want aiders and abettors protected would have to amend their charters.

Stay tuned to see what, if anything, the Delaware legislature does.

My Akron colleague Bernadette Bollas Genetin recently posted “The Supreme Court’s New Approach to Personal Jurisdiction” on SSRN, and I believe it may be of interest to readers of this blog.  Here is the abstract:     

This article provides an analysis of the Court’s two recent personal jurisdiction opinions, Daimler AG v. Bauman, 134 S. Ct. 746 (2014), and Walden v. Fiore, 134 S. Ct. 1115 (2014), and concludes that these cases suggest a new doctrinal approach to personal jurisdiction.

In Daimler AG v. Bauman, the Supreme Court narrowed the scope of general jurisdiction, making it available primarily in a corporation’s states of incorporation and principal place of business and rejecting, in most instances, the prior approach of permitting general jurisdiction based on a defendant’s “continuous and systematic” forum contacts. In Walden v. Fiore, the Court used an interest balancing approach to resolve the specific jurisdiction question at issue, turning away from its longstanding purposeful availment approach.

Together, these cases can be interpreted to reinvigorate the reasonableness analysis of International Shoe, in which the Court focused on the “relation among the defendant, the forum, and the litigation.” The Supreme Court has, famously, reversed course several times on its analysis of personal jurisdiction. The article concludes that the Court should, in the full range of specific jurisdiction cases, return to an analysis that considers all relevant interests, including the interests of the defendant, the plaintiff, and the state.

Well, it’s almost exam time at most law schools, and by the end of this week, I have to turn in my first exam to the registrar.  I’m teaching Securities Litigation, and it’s mostly a lecture course – the first time I’ve ever taught.  I knew writing an exam would be difficult, but I didn’t anticipate all of the types of issues I would experience. 

Mostly, I’m trying to develop one or two solid issue-spotter-type questions for them to examine. 

The first and most obvious concern is making sure that it has varying levels of difficulty, so that it distinguishes between students who are better and less-well prepared.

Additionally, since I haven’t done this before, I need to make sure that it takes the right amount of time to complete – it’s an 8 hour take home; I’m guessing that erring on the shorter side is preferable to longer, since I’m likely to underestimate the difficulty of the material.

I also find, as I develop the fact pattern, that it really forces me to confront which areas we did not cover extensively, and which areas we did (thus perhaps offering a guide for edits to the syllabus in the future) – for example, I keep discarding potential scenarios because I realize they would implicate too many issues we only touched on tangentially.

Part of the difficulty, I think, is that because the course is Securities Litigation, it includes both substantive securities doctrine, and a some civil procedure issues as they arise in the securities context.  It’s difficult to develop a realistic fact pattern that directs them toward precisely the topics we’ve covered without implicating the topics – particularly civil procedure topics – we have not covered. 

Ultimately, I think I will have to sacrifice some degree of realism in order to make sure that the students’ attention is directed in the right place, and I don’t inadvertently end up testing them on how well they remember Civil Procedure topics they covered in other classes, but we did not discuss in my class.

Also, I have to just accept that there will be some parts of the course that simply won’t be on the exam.  So be it.

 

On March 24, the petition for certiorari was denied in the Strine v. Delaware Coalition For Open Government, Inc. case, ending the Delaware Court of Chancery’s experiment with arbitration by their sitting judges.  (H/T Brian Quinn). 

As far as I know, however, sitting judges on the Delaware Court of Chancery still conduct mediation.  A Chancellor or Vice Chancellor does not mediate his own cases, but rather mediates the cases assigned to one of the other four judges on the court (if the parties agree to submit to mediation). 

More information about the Delaware Court of Chancery’s mediation process is here.  The benefits of the mediation include:

  • Expertise.  You would be hard pressed to find someone more knowledgable about Delaware corporate law and the merits of a Delaware Court of Chancery case than a sitting Delaware Chancellor or Vice Chancellor. 
  • Relatively Inexpensive.  The fee is only $5,000 a day, for cases that are already on the Chancery docket, which is a decent amount of money, but is dwafted by the legal fees spent in almost all of these cases.  For mediation only cases (cases not already on the docket), there is a $10,000 initial fee and a $5,000 for each additional day.  
  • Confidential.  All mediation proceedings are strictly confidential.

These are many of the same main benefits as the Delaware Court of Chancery arbitration, but, of course, in mediation, the judge is not making a decision, but rather assisting the parties in reaching a voluntary settlement.  

According to Steven Davidoff, in the Strine case, “the federal court found that the arbitration proceedings were effectively a civil trial, with no difference in judges, place or proceeding except the secrecy and the arbitral nature.” 

Mediation, however, is quite a bit different than a civil trial.  While the comments of a sitting Chancellor may carry a lot weight with the parties, a mediator does not come to a determination for the party and the parties are able to walk away from the mediation at any time.

In short, judicial mediation carries many of the benefits of judicial arbitration, but the practice of judicial mediation seems to be more difficult to challenge. 

Washburn University has posted an opening for an Assistant Professor of Legal Studies.

I know not everyone can move to Kansas, but when I was first on the market, I even applied to jobs like this one in Kuwait.  If you really want to be a professor, you can’t let location get in your way.  Granted, I know I would have had to use my best negotiating skills to convince my wife to move to Kuwait (or Kansas).

The details of the Washburn University position can be found after the break. 

Continue Reading Legal Studies Professor Position: Washburn University

[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. –Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).

When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.” 

Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission.  Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission.  Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997.  The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.

Why is this important? The petition includes the following enlightening statistics:

1)  The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.

2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.

3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).

4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.

5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.

6)  The website shareholderactivist.com calls shareholder activism a “participatory sport” where investor activists submit similar proposals to multiple companies so that they can “advance a larger agenda.”

The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.

As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final?  Must be the end of the semester.

 

Earlier this spring, I posted about transactional resources  (the current source list is available here: Download Transactional Law Resources).

Continuing with the theme, I want to highlight a new hybrid resource, JURIFY, which is a mostly-free, online transactional law resource. 

“Jurify provides instant access to high-credibility, high-relevance legal content, including forms and precedent in Microsoft Word® format written by the world’s best lawyers, white papers and webinars from top-tier law firms, articles in prestigious law journals, reliable blog posts and current versions of statutory, regulatory and case law, all organized by legal issue.”

Here are the stats:  Jurify, launched in 2012, covers 5 broad transactional areas:  General Corporate, Governance, Mergers & Acquisitions, Securities and Startup Companies.  The 11,000+ sources that the website currently contains have been verified by transactional attorneys and generated from free on-line platforms or submitted by private attorneys who are voluntarily sharing their work.  Documents are organized according to 586 tags.  Three transactional attorneys started this website (husband/wife duo and their former law-firm colleague); none take compensation from editors, publishers or law firms. 

Jurify is a unique transactional law resource for the following reasons: 

  • FREE (mostly). Website contents including primary law, secondary sources and template agreements and forms.  All content is searchable; most is free; some templates/forms, available in Microsoft word version, require either a fee or a paid membership. In the future, Jurify founders hope to generate revenue by providing performance metrics and career services components. 
  • Emphasis on Primary Sources—collecting the most current and complete versions of governing statutes, and here is the important part—putting relevant sources together.  Want to find out registration obligations?  A search on Jurify will pull from several different sources to give you a comprehensive look at the governing law.
  • Organization.  The website resources are organized in a consumer-friendly, vertically integrated platform (like the searching functions on YouTube).  If you search for one term of art, (the example used was break-up fees), the search results pull all related terms of art (i.e., termination fees, reverse break-up fees, etc.).  The data base has been encoded with 1600 corporate law synonyms in the platform to facilitate more robust natural language searches.
  • Multiple search modes (i.e., accessible for the novice).  Non-experts can search for information using tags and drop down boxes to sort information by source type (news articles, videos, journals, statutes and regs, etc.).   The site also includes a glossary of terms, and those terms serve as searchable categories that have documents associated with them. 
  • Narrowing the field.  You don’t need every document- you just need the right document.  Researchers can narrow search results through subcategories, which include definitions on all of the subcategories to assist the non-expert (i.e., students, generalist attorneys like some in-house teams). Within general categories, researchers can also conduct granular searches within a topic and can narrow by specific fields (i.e., M&A).
  • Sorting the results.  Search results are displayed in order of relevance.  Relevance, in Jurify, is determined by the tags assigned by Jurify attorneys reviewing and labeling each document in the database.  While a document may have 15 tags, 2 or 3 tags will be the primary tag, and the document will be flagged as “noteworthy” for that particular topic.  The idea is that you review the most relevant documents first not just any document that contains any reference to your search fields.
  • Networking Component.  Some of the documents are voluntarily provided by practicing attorneys and their names remain associated with the document(s). If an attorney wants to establish herself as an expert in an area, she may do so in part, by contributing high-quality documents on that topic.  Top contributors are highlighted on the website, using in part, a Credibility Score. In the future, a ranking/review feature will be added so that users can provide feedback on the quality/relevance of a document as well.

Erik Lopez, co-founder of Jurify, contacted the BLPB editors earlier this spring.  As a result, I test drove the site with Erik a few weeks ago, which formed the basis of my comments above.  Thanks Erik!  (Note: Neither BLPB nor I, individually, received any compensation as a result of this post. I am passing it along because I genuinely am intrigued by the platform, business model, and potential for the website to be a valuable transactional resource.)

If anyone currently uses Jurify, or test drives the site after reading this post, please share your experience in the comments.

-Anne Tucker

On March 27th, SEC commissioner Daniel M. Gallagher’s delivered the keynote address at the 26th Annual Corporate Law Institute  at Tulane University Law School.  Addressing the intersection of governance and securities disclosure, Commissioner’s Gallagher’s remarks (available here) are summarized below:

Dodd Frank increased the federalization of corporate law.

“This mandated intrusion into corporate governance will impose substantial compliance costs on companies, along with a one-size-fits-all approach that will likely result in a one-size-fits-none model instead.”

Shareholder proposals are costly, problematic and used by only a small group of shareholders with particular interests and agendas that may not be alligned with other shareholders. Citing first to the 41% increase in shareholder proposals post Dodd-Frank, and the meager 7% passage rate, Commission Gallagher outlined which shareholders use the proposal process and the punch line is that only 1% are brought by ordinary institutional investors.

  • 34% are from organized labor;
  • 25% are from social, policy or religious institutions; and
  • 24% of the proposals were brought by just two individuals whom the Commissioner described as “corporate gadflies.”

The shareholder proposal process should be reformed by narrowing the scope of those eligible to bring proposals and the subject matter of the proposals.

  • Increase holding amounts and time (specifics not provided);
  • Clarify the application guidelines for the “ordinary business operations” exclusion and the “significant policy issue” exception to the exclusion;
  • Have commissioners vote on exclusions, not leave it to the staff;
  • Create greater authority to exclude misstatements; and
  • Substantially strengthen resubmission thresholds (suggesting a three strikes you are out rule).

While not a heading of the remarks, another clear take away is the Commissioner’s stance against viewing climate change as a serious policy issue and that conflict mineral reports do not “provide investors with the information they need to make informed investment decisions.” To further this point, he discredited third parties, like the Sustainability Accounting Standards Board, as having no role in shaping disclosure requirements.

You should read the full remarks, if nothing else, for this line: “Mike D. of the Beastie Boys—who, by helping to bring the proposal to a vote, at least succeeded in his fight for the right to proxy.”

 

So, I am the fourth of our bloggers (here, here, and here), among others, to write on FOMO (fear of missing out), and I almost didn’t write this post for fear that my FOMO on the topic was the motivation:  FOMO of FOMO.  I decided that wasn’t the reason and that it was worth writing (at least for me).

FOMO has always been an issue for me.  I have always been a researcher, and I don’t mean just in the scholarly sense.  When I look for a car (and I really like cars), everything is on the table. Few people know more about the various options and configurations of vehicles on the market than I do.  It shows when I shop; I have never bought a car from someone who knows more about the product than I do.  (They know more about selling cars than I do, but not about the cars themselves.)

 This need to try to get it right (a common cause of FOMO) has mixed returns.  I never blow the budget on the car, which means I always know what I am missing.  Thus, my FOMO ensures in some instances that I will, in fact, miss out. When it comes to cars, this is not really that important in the big scheme of things. But for other personal and professional decisions, it can have an impact.

 This concept has been explained well by Psychologist Barry Schwartz.  I read his book, The Paradox of Choice: Why More is Less in 2010, and it helped explain a number of things to me.  (You can also see  Schwart’z TED Talk here.) I can’t say Schwartz helped me get rid of my FOMO, but it did help understand what’s going on. He explains:

Part of the downside of abundant choice is that each new option adds to the list of trade-offs, and trade-offs have psychological consequences.   The necessity of making trade-offs alters how we feel about the decisions we face; more important, it affects the level of satisfaction we experience from the decisions we ultimately make.

I think such decisions can be especially hard for academics, though I appreciate what good fortune I have to have this “problem.”  One of the reasons I wanted to become a law professor was so I could make the choices I face so regularly. I have great latitude, if not full freedom to choose what I research, what I write about, and what I teach.  In practice, I did not have that kind of freedom, most of the time, and one of the many things I love about my job is that freedom. Still, as Schwartz explains, such options come with psychological consequences.

I also have flexibility in my job that I never had before.  It’s easier, though not always possible, for me to participate in my children’s lives at school.  I want this, and I often have the option to write or prepare for class in off hours so I can participate in their activities. Many people don’t have that flexibility, and I know I am lucky.  I appreciate that flexibility, but it still points out more clearly when I have prioritized either work or family, and that’s not always pleasant in either direction.  My wife and I are both on the faculty, too, so there are times when one of us must miss out on something professionally because of family obligations, at least when we aren’t able to make other arrangements.

I try to keep in mind that the whole FOMO concept, while real, is also in many ways a problem of relative affulence.  We are fortunate to be healthy, and have healthcare. I don’t have to worry about whether we have food, clothes, or shelter. I get to worry about whether I should do another edit, write another chapter, revamp my lesson plan, or go to my son or daughter’s read aloud.  I am now trying to remember how fortunate I am to have such choices in the first place rather than worry about the choice itself. As a friend and colleague likes to say, Good Enough is the New Perfect. 

In closing, I’ll go back to some advice Barry Schwartz gives on avoiding social comparisons in assessing ourselves.  He says:

1. Remember that “He who dies with the most toys wins” is a bumper sticker, not wisdom.

 2. Focus on what makes you happy, and what gives meaning to your life. 

My co-bloggers Haskell Murray and Anne Tucker recently posted their views on FOMO (“fear of missing out”) and family. See here and here. As an old guy, I didn’t know what FOMO meant until Haskell defined it, but I think the issues Haskell and Anne raise about balancing work and personal time are important.

My youngest child is almost 24 years old, so it’s been a while since I had to face the conflict between my professional life and raising a family. But it was a tough struggle. I decided to leave my job as a corporate litigator and enter legal education after I missed two consecutive Easters with my children due to hostile takeover cases. I loved the work, but I loved the time with my family more.

When I began teaching, I had three young children (4 months to 4 years old), and a fourth child was born three years later. I decided to pack as much work as I could into an 8:00-5:00 workday, and spend as much of the the rest of my time as I could with my kids.

It wasn’t always easy. I sometimes had to remind myself that my job was just a job and my children were my life.

Did I miss out on some professional opportunities? Absolutely. Would my scholarship and teaching have been better if I had devoted 70 hours a week to them? Probably.

But, in the final analysis, the most important thing is whether you can look your children in the eyes and say, “I tried to do my best for you.” Career is secondary. As I look back, it’s not the brilliant articles or the insightful analyses I remember. It’s the precious moments with my family. I wouldn’t trade any of those moments for professional acclaim.

As an aside, I think Haskell and Anne have their priorities clear, or they wouldn’t be think about these issues at all. In my experience, the people who get it wrong often don’t even realize they’re making a tradeoff.