Travel last week kept me from blogging about the death of Mike Dooley (see here for tributes from Steve Bainbridge, Henry Manne and Gordon). I wasn't lucky enough to take a class with Mike while at Virginia Law, but he was a valued supporter of mine and, I know, of many other Virginia grads in academia, both within and outside of corporate law. In every one of our interactions he was generous, warm, and thoughtful, always asking after my family as well as my professional life.
A Virginia gentleman in the finest sense of the word, he will be missed.
We just received word that Professor Mike Dooley of the University of Virginia Law School died last night from complications from his long battle with cancer. Among his other professional accomplishments, Mike was the Official Reporter for the Model Business Corporation Act for nearly 30 years. I did not know him well, but we met a few times, and he was unfailingly engaging and kind.
Many of us have cited his influential article (with John Hetherington) entitled Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem, 63 Va. L. Rev. 1 (1977). That article was the basis for a reform of the MBCA, providing for a buyout remedy in cases of oppression.
He also wrote an oft-cited artilce with Norm Veasey entitled The Role of the Board in Derivative Litigation: Delaware Law and the Current ALI Proposals Compared, 44 Bus. Law. 503, 522 (1989), which contains this well-known defense of the business judgment rule:
The power to hold to account is the power to interfere and, ultimately, the power to decide. If stockholders are given too easy access to courts, the effect is to transfer decisionmaking power from the board to the stockholders or, more realistically, to one or few stockholders whose interests may not coincide with those of the larger body of stockholders. By limiting judicial review of board decisions, the business judgment rule preserves the statutory scheme of centralizing authority in the board of directors. In doing so, it also preserves the value of centralized decisionmaking for the stockholders and protects them against unwarranted interference in that process by one of their number. Although it is customary to think of the business judgment rule as protecting directors from stockholders, it ultimately serves the more important function of protecting stockholders from themselves.
Nicely written. You will be missed, Professor Dooley.
Harvard Business School Dean Nitin Nohria issued a public apology to women on behalf of HBS:
Nohria conceded there were times when women at Harvard felt "disrespected, left out, and unloved by the school. I'm sorry on behalf of the business school," he told a hushed room. "The school owed you better, and I promise it will be better."
As for the future ...
Among other things, Nohria pledged to more than double the percentage of women who are protagonists in Harvard case studies over the next five years, to 20%. Currently, about 9% of Harvard case studies -- which account for 80% of the cases studied at business schools around the world -- have women as protagonists.
Now that you mention it, women are not prominent in corporate law cases, either. Sandy Lerner of Cisco fame plays a leading (and unflattering) role in Urban Decay, but that is not a famous case, except to those students who use my casebook. Probably the most famous leading role for a woman goes to Martha Stewart for the litigation in connection with insider trading charges.
I am sure there are other examples, but what occurred to me again going through this exercise was how different business schools and law schools are in their basic orientation to the world. Business cases usually focus on success stories, but law cases are, almost by definition, failure stories. So if you want to make up to any group in a law school, you would never think to feature them in more cases!
After over four years of work, my book Law, Bubbles, and Financial Regulation came out at the end of 2013. You can read a longer description of the book at the Harvard Corporate Governance blog. Blurbs from Liaquat Ahamed, Michael Barr, Margaret Blair, Frank Partnoy, and Nouriel Roubini are on the Routledge’s web site and the book's Amazon page. The introductory chapter is available for free on ssrn.
Look for a Conglomerate book club on the book on the first week of February!
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Kyle Compton is amazing. He produces an entertaining and useful email service called "Chancery Daily," which was first recommended to me by a member of the Delaware judiciary. The purpose of the service is to summarize proceedings pending in the Delaware Court of Chancery. The writing is insightful and accessible and sometimes even funny. I read every issue.
You can subscribe here. For members of the judiciary -- including court staff and law clerks, in Delaware and elsewhere -- and academic subscribers, the service is free (judicial subscribers should register using a government email address, and professors and current law students should register using a law school email address).
Leo Strine. Congratulations!
The WSJ: "a widely expected promotion for one of corporate law's biggest personalities." Indeed.
I have mixed feelings about this. I will miss reading Leo's solo opinions as Chancellor -- we can assume some moderation in Leo's opinions as a result of the unanimity norm that prevails on the Supreme Court -- but I assume he will help bring more coherence to corporate law issues in Supreme Court opinions.
So who is the next Chancellor? No inside information here, but it's hard to imagine a better choice than Larry Hamermesh.
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.
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.
Hot off the presses comes a stimulating way to start the summer for corporate law professors. Cambridge recently published Christopher Bruner’s new book Corporate Governance in the Common-Law World. The book builds on his earlier law review work, including Power and Purpose in the “Anglo-American” Corporation and Corporate Governance Reform in a Time of Crisis.
Bruner lays patient, meticulous siege to functionalist accounts that have occupied center stage in comparative corporate law scholarship. The key moves in his gambit:
¶ Disaggregating the idea of “Anglo-American” corporate law by arguing that British, Australian, and Canadian systems give far more power to shareholders than does the U.S. approach;
¶ Arguing that a functional approach (which has led to predictions that differing social welfare and social democracy concerns explains a divergence between continental European systems and Anglo-American systems) fails to account for the differing approaches among these four common-law countries;
¶ Articulating the further differences among the U.K., Canadian, and Australian approaches; and
¶ Providing evidence that politics, not functional concerns, provides a better explanation for the diverging paths within the common-law world.
Bruner also looks at how the crisis has affected these four common-law countries to different degrees. Harder hit, the U.K. and United States have moved to increase shareholder power within corporations. Although in the introduction Bruner sets out to navigate middle course between “functionalism” and “contextualism,” the book hews much closer to the latter. In doing so, he stages a serious challenge to comparative scholarship that poses grander economic arguments to explain differences and similarities among corporate law regimes.
To my mind, the book also raises a challenge of whether a similar political approach might explain divergences within continental Europe. Moreover, might a politics focus provide an explanation for divergences and convergences well before the latter half of the 20th Century?
Bruner’s Introduction is available on ssrn.
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.
One of my colleagues said that my latest article (written with one of my excellent students, Jordan Lee) sounds like an R-rated movie. The title is Discretion, and here is the abstract:
Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often define these boundaries by reference to industry customs and social norms. We also defend this as the most sensible and coherent approach to boundary enforcement.
I wrote an article about a decade ago called "The Critical Resource Theory of Fiduciary Duty" that still gets downloaded and cited a fair amount, at least for a fiduciary duty article. It is about the structure of fiduciary relationships, and I wanted to do a follow on article about how courts know when someone has breached a fiduciary duty. I actually had a fairly long draft of an article that was just horrible, and I never published it, but I kept thinking about and teaching about this problem. Earlier this year, I had a brainstorm about the subject, and the result is this new article.
By the way, interest in fiduciary law seems to have exploded in the past decade. Some of that interest stems from Tamar Frankel's book and the accompanying conference at Boston University. Some of the interest stems from the fact that fiduciary law is interesting in many countries outside the United States, where much of the best writing on this subject is found (see Paul Miller, for example). I look forward to a new surge in interest this summer, as Andrew Gold and Paul Miller have organized an excellent conference on The Philosophical Foundations of Fiduciary Law, to be held in Chicago. I am writing a paper entitled "True Loyalty" for that conference and very much looking forward to reading the other contributions.
Jesse Fried, Brian Broughman, and Darian Ibrahim have an excellent paper on Delaware's dominance in the market for corporate charters, arguing "that firms often choose Delaware corporate law because it is the only law 'spoken' by both in-state and out-of-state investors." Jesse described the paper in a recent blog post, and you can download it on SSRN. Jesse's summary of the evidence:
To test for a lingua-franca effect, we exploit a database of 1,850 VC-backed firms that provides precise information on the firm’s location, the identity and location of its investors, and changes in the firm’s domicile as its investor base evolves over time. We find, consistent with the lingua-franca effect, that the presence of out-of-state investors in each round of financing significantly increases the likelihood of Delaware incorporation or reincorporation. We also find that a startup is less likely to incorporate in Delaware if its out-of-state VC investors have already invested in firms incorporated in the startup’s home state, and thus have greater familiarity with home-state corporate law.