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 http://www.oecd.org/dataoecd/47/27/38672168.pdf ).
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.