I’m helplessly drawn to soccer and have been for nearly sixteen years. The sport has shown me countless moments of transcendent genius, like that goal by Arsenal’s Thierry Henry, and it continues to inform my thoughts on issues ranging from globalization to personal fashion.
One of the biggest stories in the footballing world this week comes out of the German Bundesliga, Germany’s top professional league. Sunday’s match between Werder Bremen and Nürnberg saw Bremen’s captain Aaron Hunt deny his team a penalty—and a near-certain goal—by admitting to the referee that he had not been fouled after seeming to “trip” over an opponent’s foot. Werder was leading at the time and eventually won the game 2-0. Afterwards, Hunt told the media that he had tried to provoke the penalty “out of instinct” but then thought that doing so “was wrong.”
Most are treating this as an example of good sportsmanship. My reaction is slightly different. I see Hunt’s conduct as a potential teaching tool for discussing social enterprise.
When I first started looking into social enterprise, it felt like the movement’s supporters saw it principally as a response to concerns about shareholder wealth maximization. Their worry was that an undue corporate emphasis on profit making was to blame for the financial crisis, climate change, and other problems. Social enterprise was seen as the antidote, since it captures firms that seek to go beyond profits in order to do “well” (financially) while doing “good” (socially).
I’m a fan of social enterprise, and I think social enterprise law can add real value. Yet I’d caution against placing it in direct opposition to traditional corporate behavior. Social enterprise is growing at a time when notions of shareholder prioritization continue to evolve. While it is true that courts generally hold that directors must act for the benefit of the “corporation,” what this means as a practical matter is open to debate. Some managers probably do see the singular pursuit of wealth as their obligation, but many others now see a strong relationship between a firm’s social footprint and its impact on shareholder value.
This brings me back to Mr. Hunt. I like to imagine that something similar to his phantom foul situation plays out in corporate decision-making. Even if traditional corporate managers often start with a view toward maximizing profits “out of instinct,” I’m not ready to concede that many won’t still pull back to consider the wider social effects of their decisions. The difference between corporate managers and professional footballers is that not every ethical quandary in the C-suite happens in front of a live worldwide audience. But that’s not to say that every manager needs or wants to check her ethical sensibilities at the door, or that existing corporate law is not already flexible enough to permit most social/economic tradeoffs.
Whatever the justifications are for supporting social enterprise—and I believe there are many—they should not include a wholesale rejection of the traditional corporate model. Generating meaningful social impact is always going to be less about form and more about management’s sense of purpose, virtue, and ideals. So where does that leave the role of social enterprise and social enterprise law? That’ll be the subject of my next few posts.
Over the past few weeks, a handful of attorneys and academics have asked me exactly how specific the specific public benefit purpose(s) required by §362(a) of the DGCL for Delaware public benefit corporations (“PBCs”) must be. Section 362(a) reads, in pertinent part:
- “In the certificate of incorporation, a public benefit corporation shall. . . Identify within its statement of business or purpose . .1 or more specific public benefits to be promoted by the corporation”
Some of the early Delaware PBCs have used the general public benefit language from the benefit corporation’s Model Legislation to describe their specific public benefit purpose(s). (See, e.g., Farmingo, PBC; Ian Martin, PBC; Method Products, PBC; New Leaf Paper, Public Benefit Corporation; and RSF Capital Management, PBC). For those who are unfamiliar, the general public benefit language from the Model Legislation reads:
- “A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
At least one early Delaware PBC has added the following to the general public benefit language:
- “specific public benefit . . .may be further specified from time to time in the Bylaws of the Corporation . . . or a resolution or resolutions of the Board of Directors of the Corporation.” (Socratic Labs, PBC).
- “for the specific public benefit of furthering universal access to the Internet” (Unifi Communications, PBC)
- "giving people access to, and the benefit of, health knowledge that is as complete and unbiased as possible." (Profile Health Systems, PBC)
In my personal opinion, using only the Model Act’s general public benefit purpose as a Delaware PBC’s specific public purpose is a bit risky and possibly conflicts with the drafters' intent. To be clear, I have not yet spoken with the drafters on this issue, and will update this post if I do. However, if the drafters had intended to allow the general public benefit language to suffice, then I think they would have simply followed the lead of the Model Legislation and would have defined and used the term "general public benefit".
Further, the FAQ about Public Benefit Corporations circulated by the drafters contained the following question and answer.
- Q: “Why does the statute require both the identification of a specific benefit or benefits and that the corporation be managed for the best interests of all those materially affected by the corporations conduct?” (emphasis in original)
- A: “….The requirement of a specific public
benefit is intended to provide focus to the directors in managing toward
responsibility and sustainability, and giving investors notice of, and some
control over, specific public purposes the corporation serves.”
That said, the Model Legislation’s general public benefit language
is more specific than “any lawful purpose” and Section 362(a) has no limit
on the number of specific purposes that can be listed, so a Delaware PBC could
conceivably list all of the specific interests the Model Legislation requires
directors to consider and achieve the same lack of focus as listing the Model Legislation’s
general public benefit language.
I have spoken to a few people in the Delaware Secretary of State’s office in an attempt to understand their stance on the specific public benefit issue. The main take-aways from those conversations were:
- they are aware of the controversy surrounding whether the Model Legislation’s general public benefit purpose suffices as a specific public benefit under the statute;
- they are currently accepting the Model Legislation’s general public benefit language as a valid specific public benefit, until it is formally challenged or they are told to do otherwise;
- they will not accept “any lawful purpose” language as a specific public benefit.
Also, for those who are interested, there were 49 public benefit corporations formed in Delaware between the August 1, 2013 effective date and October 16, 2013.
Thanks to Boston attorney Bruce Landay for excellent, in-depth conversation on this topic and for some of the certificates of incorporation cited in this post. As an academic, it is always nice to connect with attorneys who practice in my areas of interest. Thanks to Alicia Plerhoples at Georgetown Law who also provided some of the certificates of incorporation cited in this post.
Bainbridge has a take on the merits of activist shareholders for other investors here. His recommendation? He
"proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable."
It is the topic of the moment; in addition to the Bebchuk/Lipton debate, Penn just had in Dionysia Katelouzou, who had an interesting (and I think not yet published) paper arguing that, assuming shareholder activism is welfare-enhancing, it takes a shareholder-protective legal system for them to be able to perform their magic, meaning that campaigns were more likely to work in Japan, Canada, and the UK, than they might in continental Europe.
We've got a nice donnybrook going between Lucian Bebchuk and Marty Lipton on the positive long term returns to companies subjected to campaigns by activist shareholders. Lipton believes they do not exist, Bebchuk believes they do.
Our study empirically disproves the myopic activists claim that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders. This post responds to the main criticisms of our work in Wachtell’s memos. Below we proceed as follows:
- First, we discuss the background of how our study meets a challenge that Wachtell issued several months ago;
- Second, we highlight how Wachtell’s critiques of our study fail to raise any questions concerning the validity of our findings concerning long-term returns, which by themselves are sufficient to undermine the myopic activists claim that Wachtell has long been putting forward;
- Third, we explain that the methodological criticisms Wachtell directs at our findings concerning long-term operating performance are unwarranted;
- Fourth, we show that Wachtell’s causality claim cannot provide it with a substitute basis for its opposition to hedge fund activism;
- Finally, we explain why Wachtell’s expressed preference for favoring anecdotal evidence and reports of experience over empirical evidence should be rejected.
It is all getting quite tasty indeed, and Bebchuk's memo is pretty compelling stuff. He's of course not alone, either. To name but one paper I've seen recently, Paul Rose and Bernie Sharfman have a new paper that also reviews the economic literature, and concluding that "Empirical studies have repeatedly shown that certain types of offensive shareholder activism lead to an increase in shareholder wealth."
The empirical question, it seems to me, is not a straightforward one - it is difficult to compare firms that activists do target with firms that they do not, and difficult of course to know what would have happened had a firm not been targeted. I take it that the case against activist shareholders is unimpeachably logical, and very Chicago. In efficient markets it should not be possible to realize long terms gains through management changes, for the companies targeted would be making said changes anyway. And for examples of studies along these lines, you can look at this or this case.
But this is not meant as a critique, rather as a scene setter - if you want critique, you'll have to read the papers themselves. As long as we see more tasty memos in this fight, you can expect to see them on this here blog.
Today's WSJ brings news of behind-the-scenes drama at the Dish Network, and it sounds way fishy to me. Dish's founder and controlling stockholder, Charlie Ergen, bought up the debt of competitor LightSquared on the cheap while the company was in bankruptcy. Then Dish cast its acquisitive eye on LightSquared. Prudently, it formed a special committee consisting of Stephen Goodbarn and Gary Howard, two of Dish's independent directors, because of the conflict of interest the situation posed. A Dish bid could net Ergen millions, after all. (The WSJ describes these 2 as the only independent directors out of the 8 member board, but that seems unlikely, given that the audit committee is required to be composed of 3 independents. The company's last proxy lists Tom A. Ortolf as the last audit committee member; presumably he is independent). Then things get interesting...
So here's the basic timeline: Ergen buys up LightSquared debt (unclear when). In July, a special committee consisting of Goodbarn and Howard is formed to consider a Dish bid for LightSquared. The special committee recommends a bid. But the members "expected the committee to have an ongoing role in the deal discussions." July 21, in a surprise move, the board disbands the committee. July 23, Dish bids $2.2 billion for LightSquared. July 25, independent director (and late special committee member) Howard resigns, without citing any specific reason for his departure.
What's left out of this account is what else was going on at Dish at the time. In June the company was fighting with Sprint to acquire Clearwire, and bowed out June 26th. And in June Dish also gave up on a bid for Sprint to SoftBank.
So, to review, Dish gives up on two major acquisitions in June. The next month it decides to buy a company Ergen owns a significant interest in. The acquisitions are of vastly different orders of magnitude, admittedly, but one possible inference is that Ergen wanted to have cash on hand to buy out a company that would enrich him personally. These negative inferences are just why it is wise to employ a special committee in these types of negotiations.
So why disband the special committee so quickly? One of the WSJ's sources explains "Mr Ergen stood to profit even if another company ended up buying LightSquared, which meant he wasn't motivated to force a Dish bid for personal gain." Um, yeah, that doesn't make any sense at all. There's no evidence that there were or are other companies sniffing around LightSquared, or at least willing to pay this much, so Ergen's motive for forcing a bid seems pretty potent. Even if the only effect of the Dish bid is to scare up a competing, higher bid, that's still good for Ergen. Particularly in light of the June happenings, these events just seem questionable.
Situations like these highlight how important the role of the board is and should be in conflict situations. The board shouldn't have the power to dissolve a committee; indeed, the role of the whole board should be to focus on these conflict-of-interest type situations.
If you haven't seen it, Bebchuk, Brav, and Jiang have a paper out basically arguing that every argument made against activist investors is wrong. The paper is here, and the summary is here. If the paper is correct, then a lot of people have been conducting mistaken empirical analyses; perhaps the authors will next turn to the showing how the mistakes got made.
From the abstract:
We study the universe of about 2,000 interventions by activist hedge funds during the period 1994-2007, examining a long time window of five years following the intervention. We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.
We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis.
So says Friend of Glom Lyman Johnson over at CLS Blue Sky. That's a title that's going to get the attention of some corporate types!
Lyman first objects to Chancellor Leo Strine's recent decision In re MFW S’holders Litig. to give bjr protection to a controlling shareholder in a self-dealing transaction when there's an independent committee and majority-of-the-minority shareholder approval (for more see here and here), calling this move "incoherent" because shareholders don't exercise business judgment in the way directors do.
But then, he says, let's call the whole thing off:
As just one law professor who has grappled with teaching this material to law students for almost thirty years, I can say that presenting students with a coherent and cogent understanding of fiduciary duties is made more difficult by Delaware’s current business judgment rule construct. Students – having studied the concept of legal duty in diverse curricular offerings such as torts, trusts and estates, agency and partnership law, and professional responsibility – understand the importance of legal duties, including the scope of duty and situations of no-duty. The concepts of care and loyalty, in all their manifestations, are relatively easy to grasp, if of somewhat surprising contours.
Analytically and doctrinally, the teaching could stop there – with fiduciary duties and their breach – and students would have a solid and workable understanding. Little but unnecessary complexity in the law and pedagogy is added by then filtering all of the above through the threshold of the business judgment rule construct as a standard of review, particularly with the Cede breach of duty/burden shift feature.
Go read the whole thing.
One of the reasons I got interested in the business section of the paper, lo these many years ago, was because of stories like this:
Martha Stewart has claimed to sleep about four hours a night, as has Indra Nooyi, the CEO of PepsiCo (PEP). Her predecessor, Steve Reinemund, has gotten up around 5 a.m. to run 4 miles most mornings of his life after going to bed around 11. "I sleep normally between five, six hours," he said in an interview. "I've never gotten more." But it seems to be enough: "Most of the time I don't wake up with an alarm."
Is not needing much sleep a secret to success -- giving people a chance to work long hours and still have a life?
It was almost as if the world recounted in the business pages covered stories about the world real people lived in - and you can't say that about the other sections of the paper. I have to think a lot more about sleep than I do about cloture.
But CEOs-don't-sleep, while still a meme, is no longer the meme on sleep. The meme is now this: people who don't sleep or eight more hours per night are crazy, lying to you, and/or cheating themselves and others of their best waking efforts.
Think you do just fine on five or six hours of shut-eye? Chances are, you are among the many millions who unwittingly shortchange themselves on sleep.
Research shows that most people require seven or eight hours of sleep to function optimally. Failing to get enough sleep night after night can compromise your health and may even shorten your life. From infancy to old age, the effects of inadequate sleep can profoundly affect memory, learning, creativity, productivity and emotional stability, as well as your physical health.
According to sleep specialists at the University of Pittsburgh School of Medicine and Western Psychiatric Institute and Clinic, among others, a number of bodily systems are negatively affected by inadequate sleep: the heart, lungs and kidneys; appetite, metabolism and weight control; immune function and disease resistance; sensitivity to pain; reaction time; mood; and brain function.
Yikes! I'm still waiting for the new bien pensant thinking to be reconciled with the hard charging CEO who had to claim he got by on 3.5 hours at night and a ten minute catnap during the day.
I also want to know how to reconcile the new meme with new parents, who don't just stop producing/obtaining resources for their children/etc, or Skadden associates, who I don't think are getting outcompeted by associates who make sure they get in their 8 squares per night.
But what do I know? I had to dispense with sleep entirely long ago. Can't let the other guy read more law review articles than you.....
Over at HBR, Mayer, the former dean of the Said Business School at Oxford, decries British best-in-breed corporate governance. A taste:
The form of capitalism that has emerged in Britain is the textbook description of how to organize capital markets and corporate sectors. It features dispersed shareholders with powers to elect directors and remove them with or without cause, large stock markets, active markets for corporate control, a good legal system, strong investor protection, a rigorous anti-trust authority — the list goes on.
The downside, though, is that exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one. It is a transactional island in which you are as good as your last deal, as farsighted as the next deal, admired for what you can get away with, and condemned for what you confess.
While incentives and control are center-stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy, and regulation are the toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana.
Last month I blogged about DealProf Steven Davidoff's piece on a few cases of hedge funds paying bonuses to their successful board candidates. Controversy has since swirled in the law prof blogosphere. Lawrence Cunningham of ConOp summarizes the action thusly:
A hot debate rages among corporate law professors amid one of the largest proxy battles in a decade: Hess Corp., the $20 billion oil giant, is the focus of a contest between its longstanding incumbent management and the activist shareholder Elliott Associates. Ahead of Hess’s annual meeting on May 16, where 1/3 of the seats on Hess’s staggered board are up, antagonists offer dueling business visions. They battle bitterly over such fundamentals as sectors to pursue, degrees of integration to have and cash dividend policy.
The professorial debate, more civil, is about a novel pay plan Elliott proposes for its director nominees, which Hess’s incumbents condemn and Elliott defends as suited to shareholders. On one side, all quoted inElliott’s investor materials circulated April 16, are me, Larry Hammermesh (Widener), Todd Henderson (Chicago), Yair Listoken (Yale) and Randall Thomas (Vanderbilt); on the other Steve Bainbridge (UCLA), Jack Coffee (Columbia) and Usha Rodriques (Georgia), all of whom have blogged since the matter was first reported by Steven Davidoff (Ohio State) in the New York Times April 2 (for which he connected with me for comment).
As in all such cases, Elliott proposes to pay nominees a flat fee of $50,000 each for their troubles and to indemnify them for legal liability. The novelty is that Elliott will provide incentive compensation to the group: if any Elliott nominee is elected as a result of this year’s contest, all nominees receive a bonus at the end of three years if Hess’s stock performs better than a group of industry peers. Elliott, not Hess, pays all bonuses.
Steve has since offered a response to Lawrence. My original post was pretty cursory, and given the subsequent debate, I've been thinking more about the issues. I have two points that are really more questions than answers:
First, Lawrence argues that the bonuses are "surgically tailored to tie the payoff to Hess’s stock price performance compared to competitors." But directors are supposed to act "in the best interests of the firm." Doesn't Elliott's scheme predispose the directors in question to a certain version of "the best interests of the firm" in an impermissible way? I.e., even if (and it is an "if" in some circles, at least) we're all agreed shareholder wealth maximization is the goal, these schemes enshrine one particular version for these directors. That may not be kosher.
Second, Jack Coffee suggested that, if successful, these directors should not be considered independent:
In the new world of hedge fund activism, we need to look to whether individual directors are tied too closely by special compensation to those sponsoring and nominating them. Once we recognize that compensation can give rise to a conflict of interest that induces a director to subordinate his or her own judgment to that of the institution paying the director, our definition of independence needs to be updated. Although not all directors must be independent, only independent directors may today serve on the audit, nominating, or compensation committees.
Director independence has interested me for a long time. In the Fetishization of Independence I distinguished between Delaware's situational notion of independence and securities law's static conception of independence meaning independence from management. SOX 301, unlike the exchanges, takes into account bare share ownership when assessing independence, since affiliates of the issuer are not independent. The question whether successful Elliott directors would be deemed affiliates would turn on the extent of Elliott's control of Hess. Coffee suggests that, even if Elliott is not an affiliate, its bonus program should be enough to render its nominees nonindependent.
This notion has intuitive appeal for me, but I'm having some trouble squaring it with how the logic of independent committees. Take compensation. It's clear why we want compensation committee members to be independent of management--managers have a conflict of interest when setting their own pay. But it's not clear that the Elliott nominated directors, even with their juiced incentives, have any particular disqualifying bias when it comes to setting executive compensation. Or maybe the concern is that they could wield their comp-setting powers in order to extort private benefits from management?
Currently under Dodd-Frank factors to consider in evaluating independence of comp committee members include the sources of the director's compensation and whether the director is affiliated with the issuer. So I have a hunch we're at the start of a long conversation about director compensation and independence.
Update: for even more from Steve and Lawrence, see here (including the comments).
Cross-posted at SocEntLaw.
One of my main criticisms of the Model Benefit Corporation Legislation (the “Model”) has been (and still is) the lack of guidance for directors. (See, e.g., here and here). The Model requires directors to “consider” seven different stakeholder groups (§301(a)), and directs them to pursue “general public benefit” but does not provide any priorities to guide directors. (§§102, 201(a)). The Model allows companies to choose one of more “specific public benefit purposes,” in addition to the “general public benefit purpose,” but does not require that any specific public benefit purpose be chosen. (§201(b)).
In contrast, Delaware’s proposal does require public benefit corporations (“PBCs”) to choose one or more specific public benefits (§362(a)), though the statute is not crystal clear on priorities and requires directors to “manage or direct the business and affairs of the public benefit corporation in a manner that balances  the pecuniary interests of the stockholders,  the best interests of those materially affected by the corporation’s conduct, and  the specific public benefit or public benefits identified in its certificate of incorporation.” (§365(a)) (emphasis added). (As a side note, the PBC's requirement to “balance” the stakeholder interests seems more onerous than the Model’s requirement to “consider” the interests.)
Even if directors' duties are owed to the corporation as a whole, I suggest that clear priorities are important. I attempted to explain the importance of priorities in my response to Professor Lynn Stout’s thought-provoking recent book: The Shareholder Value Myth:
- Professor Lynn Stout and others reject the need for a single metric and have argued that directors, like other human beings, balance the interest of various stakeholders. Among other examples of balancing by human beings, Professor Stout points to the ability of people to balance work and family. This article admits that directors do and should balance various stakeholder interests and does not argue for myopic focus on a single metric, but rather posits that clear corporate priorities can make that difficult balancing job easier.
- Using Professor Stout’s work/family example of balancing can help illustrate the point. Clearly defined priorities can help an individual make difficult decisions in the constant work/family balance. If an individual prioritizes family over work, that obviously does not mean that every decision leads to direct, short-term benefits for the family. For example, on occasion, that family-primacy individual will rightly choose to stay late at work and miss dinner. While that individual decision may have seemed to prioritize work over family, viewed in the long-term, the family may benefit from the resultant career security. Even if the long-term benefits do not actually come to fruition, most would agree that the individual should not be judged for her well-intentioned decision.
- The fact that humans certainly balance interests of various constituents, however, does not mean that priorities are unimportant. Priorities can help guide and can also provide weightings for the costs and benefits of any decision. Also, priorities most clearly help in critical situations. To continue with the work/family example, in a zero-sum game, how does one decide between work and family when the outcome of that decision is of critical importance to both? If an individual has clearly stated that family is a higher priority than work, this critical decision is more easily answered. Even if the priorities are not clearly stated, priorities will still drive the decision. Transparency as to the priorities makes things clearer to all involved and makes it less likely that the individual will drift from his or her true priorities. Similarly, directors would benefit from a clear corporate objective that includes specific corporate priorities.
While I would have preferred the proposed Delaware amendments to have made clear that the PBC’s top priority is its specific public benefit purpose, I think requiring PBCs to identify a specific public benefit purpose is a move in the right direction and likely to aid directors in decision making.
In my third and final post, on Delaware’s proposed amendments involving the PBC, I will talk about the social enterprise statutes and branding.
Cross-posted at SocEntLaw.
This is the first of three posts analyzing the proposed Delaware Public Benefit Corporation (“PBC”) amendments. The posts will compare the proposed PBC amendments to the Model Benefit Corporation Legislation (the “Model”).
In a few key areas, the PBC allows more private ordering that the Model. Perhaps the most striking difference is that the PBC does not require a third party standard for measuring public benefit (a cornerstone requirement of the Model) unless the requirement is included in the PBC’s certificate of incorporation or bylaws (§366(c)). In some ways, Delaware’s approach in the benefit corporation debate reminds me of how it handled the proxy access debate: expressly allow, but leave most of the details to the individual corporations.
That said, the PBC is not as flexible as the Flexible Purpose Corporation (“FPC”) (California) or the Social Purpose Corporation (“SPC”) (Washington); the PBC requires that the PBC be operated in a “responsible and sustainable manner” (§362(a)). That broad general statement in the proposed PBC amendments, which is not present in the FPC or SPC statutes, seems to be one of the main reasons B Lab, the primary force behind the benefit corporation movement, has expressed public support for the PBC. Whether B Lab is completely supportive of the PBC and all its deviations from the Model is not entirely clear.
Below, I compare and contrast some of the key provisions of the Delaware’s PBC and the Model.
- Benefit Director. PBC – not mentioned. Model – required for public companies. (§302(a)).
- Benefit Officer. PBC – not mentioned. Model – optional (§304(a)).
- Benefit Report (Preparing). PBC – no less than biennially (§366(b) & (c)). Model – annually (§401(c)).
- Benefit Report (Public Posting). PBC - optional (§366(c)). Model - required to post benefit report on company website; if no website must provide the benefit report for free to anyone who asks for a copy (§402).
- Identification of Specific Public Benefit Purpose(s). PBC – required (§362(a)). Model – optional (§201(b)).
- Minimum Ownership for Shareholder Standing in Derivative Lawsuits. PBC – 2%; or if the PBC is publicly traded then the lesser of 2% and $2 million in market value (§367). Model – 2% (§305(b)(2)(i)).
- Third Party Standard. PBC – optional (§366(c)). Model – mandatory (§§102 & 402).
- Third Party Certification. PBC – optional (§366(c)). Model – optional (§401(c)).
The only area above where the PBC is less flexible than the Model is in requiring the identification of specific public benefit purpose(s), which will be discussed in the next post on director guidance.
A little Friday reading:
Via CLS Blue Sky Blog, Lawrence Cunningham on the wily Oracle of O vs. Modern Finance Theory:
Threatened by Buffett’s performance, stubborn devotees of modern finance theory resorted to strange explanations for his success. Maybe he is just lucky—the monkey who typed out Hamlet— or maybe he has inside access to information that other investors do not. In dismissing Buffett, modern finance enthusiasts still insist that an investor’s best strategy is to diversify based on betas or dart throwing, and constantly reconfigure one’s portfolio of investments.
Buffett responds with a quip and some advice: the quip is that devotees of his investment philosophy should probably endow chaired professorships at colleges and universities to ensure the perpetual teaching of efficient market dogma; the advice is to ignore modern finance theory and other quasi-sophisticated views of the market and stick to investment knitting. That can best be done for many people through long-term investment in an index fund. Or it can be done by conducting hard-headed analyses of businesses within an investor’s competence to evaluate. In that kind of thinking, the risk that matters is not beta or volatility, but the possibility of loss or injury from an investment.
And NYT's Deal Professor, Steven Davidoff, tells a gripping tale of hedge fund vs family hegemony playing out in Maryland's courts. CommonWealth REIT is controlled by the Portnoy family, which has made a pretty penny in the process, and 2 hedge funds are trying to get it to change its ways.
First, the story has implications for the future of shareholder arbitration provisions. I knew the SEC objects to these puppies at IPO, but didn't think that a board might turn around post-IPO and and adopt amend the bylaws to require arbitration to resolve disputes with shareholders. Shady. But apparently that's what happened at CommonWealth REIT.
And there's more to the story.
On March 1, CommonWealth’s board passed a bylaw amendment that purports to require that any shareholder wishing to undertake a consent solicitation must, among other things, own 3 percent of the company’s shares for three years. This is an extremely aggressive position that if upheld would stop Corvex and Related in their tracks.
Not satisfied with this attempted knockout blow, CommonWealth appears to have lobbied the Maryland Legislature to amend the Maryland Unsolicited Takeover Act. This law allows companies to have a mandatory staggered board.
CommonWealth already has such a board, but the company has also reportedly lobbied the legislature to make a change that companies opting into this statute would now be unable to have their directors removed by written consent. Again, this would kill Corvex and Related’s campaign. When the two funds got wind of this, they fought back, and the Maryland legislature adjourned without adopting CommonWealth’s proposal.
CommonWealth still announced this week that it had opted into the act. The REIT is claiming that even though the Maryland Legislature did not adopt any amendment, the law still implicitly has this requirement. The funds will now have to sue CommonWealth to force them to change their interpretation.
Go read the whole thing. Some wacky shenanigans from my home state. If it does come down to arbitration I'd love to see CommonWealth's arbitrator, allegedly a friend of its controlling family, go toe to toe with the hedge funds' choice-- former Delaware Chancellor Bill Chandler.
Thanks to Usha for asking me to guest blog about the proposed Public Benefit Corporation amendments to Delaware’s General Corporation Law. This summer one of my planned projects is writing an article tentatively entitled Governing Public Benefit Corporations, and I will be floating some of my early ideas here. Comments will be appreciated.
On March 20, I mentioned the proposed Delaware Public Benefit Corporation (“PBC”) amendments on the Social Enterprise Law Blog (“SocEntLaw”)* shortly after I received word from Professor Brian Quinn and some of my friends in Delaware. Last week, both Usha and Stephen Bainbridge added thoughtful posts about the PBC.
For this guest blogging stint, I plan on authoring three additional posts, starting next week. Each post will compare and contrast the proposed PBC amendments with the model benefit corporation legislation. The twelve states that currently have benefit corporation statutes follow the structure and main provisions of the model legislation without too much variation. (The variations can be seen in my chart that Usha mentioned). Delaware, however, cuts its own path. In the three posts, I will focus on private ordering, director guidance, and brand strength.
* I will cross-post my guest posts on the Conglomerate at my permanent blogging home over at SocEntLaw. Last year, Cass Brewer (Georgia State), Deborah Burand (Michigan), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), a handful of practicing attorneys, and I (Regent) joined social enterprise lawyer Kyle Westaway (who is a Regent Law alum and a Lecturer on Law at Harvard Law School) at his blog. We welcome any and all readers.
From yesterday's Deal Professor comes Steven Davidoff on the "newest trend in activist investing": hedge funds incentivizing their directors by paying them extra if they win a seat and the company takes off. For example, Elliott Management has nominated 5 directors for the Hess Corporation. If any win a seat and Hess stock outperforms a peer group, the directors could make $9 million over 3 years. Jana Partners is offering its nominees a similar deal for serving on Agrium's board, again for a potential of millions if it profits. Plus both funds offer a $50,000 retainer, over and above whatever the directors collect from the companies themselves, likely a six-figure director fee.
In John Steinbeck's East of Eden (Go out and read it if you haven't already. Now. Go), one character says "You can't make a race horse of a pig." "No," replies another, "but you can make a very fast pig." For my money, these hedge funds are trying to make a faster pig. I know this is activist hedge fund's m.o.: get seats on the board, make quick changes, see stock rise, sell. But today's public company board, composed of independents who are by definition part-timers, shouldn't be making managerial calls at all. They should only take action when there's a conflict with management. Or so I argue in A Conflict Primacy Model of the Public Board.
Allowing boards to manage gives hedge funds an in, and creates problems like, in Davidoff's words:
this kind of pay arrangement sets up two classes of directors doing the same job but being paid very different amounts. It could not only create resentment, but disagreement over the path of the company.
Creating a subclass of directors focused on the short term doesn't sound like a particularly good way to run a company, at least to me.