Access Denied

November 28, 2007

The Associated Press reports that the SEC has approved the new proxy rules denying shareholders access to the management proxy for the nomination of corporate directors.  The so-called no-access rule was adopted by a 3-1 vote, with Annette Nazareth, the sole remaining Democratic Commissioner voting against it. Here is the New York Times story: S.E.C Allows Firms to Deny Investors Access to Ballots.

My guess is that the struggle over proxy access will continue for some time.  Some shareholder groups threatened litigation if the proposed rule was adopted.  In addition, Congressional Democrats are opposed to the rule adopted, and are likely to be perturbed that the SEC acted without a full complement of Commissioners.  Despite their dismay, it seems unlikely that Democrats in Congress will muster the initiative to legislatively overrule the Commission


“oPtion$” — the Book Club

November 28, 2007

OptionsTune in next week to PrawfsBlawg for a lively discussion of the new satiric novel oPtion$, by Fake Steve Jobs (aka Forbes reporter, Dan Lyons). 

I will be joining Matt Bodie of PrawfsBlawg who is hosting the book club on Tuesday December 4.  Also posting will be law professors David Zaring, Darian Ibrahim, and Michael Dorff.  Dan Lyons, the real Fake Steve Jobs will respond and answer questions to wrap up the discussion.  Here is the announcement: PrawfsBlawg: Book Club on “oPtion$” by Fake Steve Jobs.

For now, I will only say that oPtion$ is a fun read.  It is a satirical account of Steve Jobs’s excellent adventures as Apple comes under federal investigation for its stock option backdating practices.  It also has a nice shiny cover, a tribute to the  iPod.

New Commissioners Proposed for the SEC

November 19, 2007

BNA is reporting that Senate Majority Leader Harry Reid has sent forward the names of two individuals to be considered as Democratic representatives to the Securities and Exchange Commission.  According to the report, Reid has proposed Atlanta lawyer, Luis Aguilar and FINRA official, Elisse Walter to serve as new members of the Commission.  The Commission has been down one Commissioner since August when Democrat Roel Campos resigned.  Democrat Ann Nazareth has also announced her resignation, but continues to serve as a Commissioner.  By law, no more than three Commissioners can be members of the same political party.  The resignations, when effective, would leave the Commission with three Republican Commissioners and no Democrats.

The current vacancies on the Commission are a sore spot between Chairman Christopher Cox and the SEC’s Congressional overseeers, as Cox maintains that the Commission will move forward on controversial proxy access proposals despite the absence of a full complement of Commissioners.  Congressional leaders on the other hand have urged Cox to postpone action on proxy access until the existing and prospective vacancies are filled.

Here is the BNA story (subscription required): Securities Regulation & Law Rpt – FINRA Official, Atlanta Lawyer Said Dems Picks for Slots on SEC

Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

November 9, 2007

Steven Ramirez has posted the The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top , 24 Yale Journal on Regulation (2007) on SSRN.  The article calls for the creation of a new federal agency modeled after the Federal Reserve Board to oversee corporate governance rules for corporations.  Ramirez envisions the new federal regime as an “opt in” regime that that shareholders could choose as an alternative to state corporate law.  He argues that his alternative regime would offer benefits when compared to current federal law and state law, because the agency he envisions would be more impartial and politically independent than the agencies and officials who contribute to the current hodgepodge of corporate governance rules. 

Ramirez’s analysis seems sensible, but his prescription leaves me with two queries:  (1) In what way would the Fed-modeled structure he proposes be superior to the SEC which is ostensibly an independent, bipartisan commission; (2) How could shareholders meaningfully be empowered to opt in to the regulatory scheme he proposes?

Here is the abstract:

The pernicious influence of politics continues to pollute corporate governance applicable to public corporations in the United States. In particular, the political process has yielded a corporate governance regime that simultaneously imposes excessive regulatory costs and impairs investor confidence. CEOs continue to enjoy too much autonomy over the public corporation. Increasingly, empirical evidence shows that corporate governance standards in the U.S. are sub-optimal. This Article proposes to change the legal structure by which corporate governance standards are articulated. Using the Federal Reserve Board as a model, this Article urges the creation of a depoliticized federal agency with authority over an optional federal regime selected by shareholders. As such, corporate governance would be based upon market verdicts and the best corporate governance science rather than institutions (legislatures, courts, and the SEC), which are poorly equipped to impose standards based upon science instead of political caprice.

Suja Thomas, Why the Motion to Dismiss is Now Unconstitutional

November 2, 2007

Suja Thomas of University of Cincinatti College of Law recently posted Why the Motion to Dismiss is Now Unconstitutional, which is forthcoming in Minnesota Law Review.  In her article, Thomas argues that the Supreme Court’s decisions last term in Bell Atlantic Corp. v. Twombly and Tellabs, Inc. v. Makor Issues & Rights impermissibly impose on a plaintiff’s constititional rights to a jury trial.  Here is the abstract:

This Article is the first to address the issue of the constitutionality of the motion to dismiss. Until now, motions to dismiss have not been the subject of much academic commentary, in part because courts have rarely dismissed cases upon motions to dismiss. However, decisions by the Court this past term in Bell Atlantic Corp. v. Twombly and Tellabs, Inc. v. Makor Issues & Rights, Ltd. changed the civil procedure landscape tremendously. In these decisions, the Court “retire[d]” the fifty-year-old rule of Conley v. Gibson under which a complaint could not be dismissed unless there was “no set of facts” upon which relief could be granted. The Court cast this rule away in favor of a standard under which courts critically assess whether the claim is plausible and at times, examine inferences that favor both the plaintiff and the defendant. In setting up this new standard, the Court emphasized the concern that companies should not be subject to discovery and forced settlements in unmeritorious cases and also stressed that Congress and the rule-makers possessed the authority to establish pleading procedures. Under the new standards, courts will dismiss cases much more often using the motion to dismiss. This impending phenomenon of increased dismissals by judges before the fact-finder hears any evidence is noteworthy. It will compound a significant decline in the number of jury trials due to dismissals upon summary judgment, and this will occur in the presence of the Seventh Amendment that, by its text and history, strongly protects the right to a jury trial. Under established Supreme Court case law interpreting the Seventh Amendment, the “common law” governs the power of constitutional actors such as the courts and Congress to interfere with the jury trial. Under this case law, a modern procedure must satisfy the substance of the English common law jury trial in 1791 to be constitutional under the Seventh Amendment. This Article argues that Twombly and Tellabs did not adequately follow the Supreme Court jurisprudence on the Seventh Amendment. In Twombly, albeit not raised, the Court failed to recognize the Seventh Amendment issue that overlay its decision despite the significant effect of the decision on the right to a jury trial. In Tellabs, where it did recognize a Seventh Amendment question, the Court ignored the governing common law. These cases open up a new constitutional discussion that tests the limits of the Seventh Amendment. The Article shows that the new motion to dismiss standards do not adequately comport with the substance of the common law jury trial and thus are unconstitutional. Contrary to the common law, these standards permit courts to improperly assess the plausibility of facts and corresponding inferences pled by plaintiffs and weigh those inferences against inferences that favor defendants. The Article concludes that while Twombly and Tellabs were in the limited areas of antitrust and securities fraud, the standards set forth in those cases will be used to dismiss a variety of fact-intensive cases including those frequently dismissed upon summary judgment such as employment discrimination and other civil rights cases.

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.