Verret on Shareholder Access

October 22, 2007

I invited Jay Verret to respond to comments from Professor Stephen Bainbridge on his recent posting over at Harvard Corporate Governance Blog.  Verret’s HLS blog posting is here.  Professor Bainbridge’s comments on his blog are here and here.

What follows is Jay Verret’s response:

I appreciate Professor Bainbridge’s response on his blog to my posting on the HLS corporate governance blog. Perhaps my characterization of his “ignoring” the Delaware legal implications of his position should be retracted, but I would note that it still seems that he has understated the implications of Delaware’s decision to justify it’s craftsmanship of the business judgment rule on the shareholder franchise.  That a few subsequent decisions seem to have ignored it is not enough. Delaware corporate law has won the franchise race.  And, I think he would agree with me that the corporate world is enriched by its expertise.  That doesn’t mean we should rest its jurisprudence on mere myth.

Bainbridge also noted two counterarguments to my position on hedge fund activism.  First, he argues that hedge funds seek control rather than change. I would cite the anecdotal experiences of the Peltz challenges, through his firm Trian Investment partners.  The latest OECD report provides economic data that the Trian anecdote is a representative story of the activist hedge fund world, showing that hedge funds typically take 5-10% positions in firms. (available here ). 

In addition, Bainbridge cites the Kahan and Rock article for the proposition that the corporate proxy mechanism is not adequately equipped for serious proxy contests.  Granted.  Ed Rock and Marcel Kahan are right.  I saw them present this paper, and was honored to offer some minor comments.  I think that, perhaps, Professor Bainbridge has missed the objective of their analysis.  Rock and Kahan call for reform of the proxy solicitation process as an antecedent to reform of the corporate ballot.  I concede that reform of the problems they highlight should precede my own reform proposal. That does not mean that neither reform should occur.  Additionally, I would join Professors Black and Hu in arguing for regulation of the issue of empty voting, as some hedge funds engage in that activity.  That is largely irrelevant to this analysis, as they are not properly characterized as activist funds, despite the fact that many lump the two groups together.

In Search of . . . Corporate Democracy

October 22, 2007

An interesting debate is brewing in the corporate blogosphere as academics line up on opposite sides in the debate about increasing the shareholder franchise.  Competing SEC proposals on so-called “shareholder access” form the backdrop for the debate.

On one hand are opponents of expanding shareholder voting rights,  notably Stephen Bainbridge, Jonathan Macey and Lynn Stout.  On the other hand are advocates for increasing shareholder power led most fervently by Lucian Bebchuk.  The recent Virginia Law Review colloquy on the question was discussed earlier on this blog.

The current round of volleys seems to have started with Lynn Stout’s op-ed  in the Wall Street Journal entitled “Corporations Should Not Be Democracies” and her blog posting on Harvard’s Corporate Governance Blog.  The Harvard blog posted responses to Stout from Jay Brown of Race to the Bottom and Jay Verret, who recently published a Business Lawyer article on the topic.

Verret’s comments then prompted a response from Professor Bainbridge who took exception to Verret’s characterizations of his views.  To keep the conversation going, I invited Jay Verret to respond to Professor Bainbridge.  His response follows in a separate post.

Law Students Grade Law Firms on Diversity

October 17, 2007

An enterprising group of Stanford Law School students have compiled a report that analyzes the demographic composition of law firms across the country and graded the firms for their level of achievement in creating a diverse workforce.  The rankings are informative because the show that some firms are much more successful than others in hiring, promoting and retaining attorneys from a variety of backgrounds. 

Law students deciding on jobs and corporations selecting firms to work with should find the data assembled by the group enlightening.  More information on the report and rankings for law firms sorted by city are available here:  Law Students Building a Better Legal Profession.

With a touch of chagrin I note that my hometown, Boston,  has the worst record of all major cities on law firm diversity.  According to the Stanford group’s faculty adviser:  “Boston is the absolute worst in the country on diversity. Your’re Number 1!   Seriously, the total absolute worst on racial diversity.”  Yikes!!

Should Law Professors Stop Teaching Dodge v. Ford?

October 12, 2007

Yes, says UCLA Law professor Lynn Stout in an essay recently posted on SSRN:  Why We Should Stop Teaching Dodge v. Ford.  Stout argues that the principle the case is supposed to stand for:  that of a singular obligation of the board to maximize shareholder wealth has long been dispensed with, and that the 1919 case does not accurately reflect the current state of corporate law.  Stout asserts that Dodge v. Ford remains a popular teaching case due to its simplicity.  Simplicity, says Stout, is not always a virtue especially when it helps perpetuate a misleading conception of the law.

Here is the abstract:

Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court’s 1919 opinion in Dodge v. Ford Motor Co.

This Essay argues that Dodge v. Ford is bad law, at least when cited for the proposition that maximizing shareholder wealth is the proper corporate purpose. As a positive matter, U.S. corporate law does not and never has imposed a legal obligation on directors to maximize shareholder wealth. From a normative perspective, options theory, team production theory, the problem of external costs, and differences in shareholder interests all suggest why a rule of shareholder wealth maximization would be bad policy and lead to inefficient results.

Courts accordingly treat Dodge v. Ford as a dead letter. (In the past three decades the Delaware courts have cited the case only once, and then on controlling shareholders’ duties to minority shareholders). Nevertheless, legal scholars continue to teach and cite it. This Essay suggests that Dodge v. Ford has achieved a privileged position in the legal canon not because it accurately captures the law – it does not – or because it provides good normative guidance – it does not – but because it serves professors’ need for a simple answer to the question, “What do corporations do?” Simplicity is not a virtue when it leads to misunderstanding, however. Law professors should mend their collective ways, and stop teaching Dodge v. Ford as anything more than an example of how courts can go astray.

SEC Roundtable to Debate Policy on Shareholder Suits

October 3, 2007

BNAs Corporate Counsel Weekly (subscription required) reports that the SEC has planned a roundtable discussion on the status of shareholder securities litigation to be held in January 2008.  According to the BNA report, the roundtable was prompted by a letter from six law professors, including Professor Donald Langevoort of Georgetown, raising concerns that the current system does not work as well it could.  Among the concerns the professors raised in their letter are:

  •  securities fraud settlements typically are funded by the shareholders, directly or indirectly;
  • compensation to defrauded investors comes at a “relatively high cost” in lawyers’ fees and related expenses; and
  •  “the current system does a bad job at deterrence because … settlements almost never come out of the pockets of the managers who allegedly executed the fraud.”

All of these are valid and serious concerns.  Hopefully, the SEC and roundtable participants will brainstorm to devise ways to address these problems with a more creative approach than further dismantling the securities fraud liability regime. My view (which I present in this article  in Iowa Law Review) is that the D&O liability insurance system and the issue of personal liability for individual wrongdoing are the areas most deserving of careful attention for reform.