The North Dakota Publicly Traded Corporations Act is getting some play here at the AALS Conference on Business Associations. In a previous post about the statute, I wrote about the value of the statute to shareholder activists:

Now Josh Fershee of the University of North Dakota School of Law weighs in with a new paper on the statute to be published a symposium sponsored by the North Dakota Law Review. Josh's paper contains a useful history of the passage of the statute, plus some analysis of the current uses of the Act. While I was evaluating the effect of the Act from the standpoint of shareholder activists (who seem to be using North Dakota), Josh is understandably interested in whether the Act inures to North Dakota's benefit. His take:

If you find this legislation interesting, Josh's paper is worth a look.

Permalink | Corporate Law | Comments (1) | TrackBack (0) | Bookmark

Today Exxon Mobil is holding its annual meeting, which is generally accompanied by significant shareholder activism.   Last year featured picketers, seventeen shareholder proposals, and a spirited debate among shareholders about the company’s renewable energy and global warming policies.   According to the Dallas Morning News, this kind of activism prompts Exxon to make its annual meeting “an orchestrated affair, with assigned seating areas and speaker time limits.  A red light alerts shareholders when their speaking time is up.” 

This year promises to be more of the same.  This year there are 11 shareholder proposals on the proxy statement including a say on pay proposal, proposals requesting that the company set greenhouse gas emission goals and focus more heavily on renewable energy, and even one calling for the company to reincorporate in North Dakota.   There is also a proposal seeking to separate the roles of chairman and CEO.   It will be the eighth time that shareholders seek a vote on such a proposal.  Last year, spurred by support from members of the Rockefeller family, the proposal received almost forty percent of the shareholder vote.  This year there are two differences with respect to the proposal.  First, the resolution is a binding by-law proposal rather than the precatory resolutions submitted in prior years.   Second, proponents of the proposal have attempted to sway mutual funds by reaching out to mutual fund shareholders.  Thus, proponents created a Web site where mutual fund shareholders can send messages to twenty-five different mutual funds asking fund managers to vote in favor of 4 proposals: one focused on separation of the chair and CEO function as well as three others focused on climate change, greenhouse gas emissions and renewable energy.    The message being sent to mutual funds opens as follows: “I am an investor in one or more of your mutual funds.   Since I have entrusted you to buy and sell the shares in which I invest indirectly, I am taking this opportunity to encourage you to vote in support of four resolutions now before you at ExxonMobil.”   The site indicates that shareholders have sent nearly 500 messages. 

This Internet mobilization effort underscores the fact that shareholders have remained active despite the economic crisis, and that they are willing to use new tools to motivate other shareholders and the company to focus on issues they believe to be important.   Of course it will be interesting to see if such an effort will have an impact on voting outcomes.   

Permalink | Corporate Law | Comments (0) | TrackBack (0) | Bookmark

In this second Conglomerate interview with a distinguished Delaware jurist, I am honored to welcome Supreme Court Justice Jack Jacobs to talk with us today.  For our last interview with Chief Justice Steele, see here.  Also, for more on how Delaware judges interact with the bar and the public, see my article with Chief Justice Steele here.

If you've taken or practice corporate law, you may recognize Justice Jacobs' many opinions from his service on the Court of Chancery and the Supreme Court.  To offer a few examples, he was the author of the recent AFSCME opinion on election bylaw legality and the Supreme Court's Disney opinion.  He was also one of the first judges to invalidate a poison pill in the Quickturn and Toll Brothers cases when he served as a Vice Chancellor. 

He has spoken and been published in forums around the world, including Tokyo, Hong Kong, and Stockholm.  The conventional wisdom among the Delaware bar is that his opinions are some of the deepest works of intellectual rigor in the corporate jurisprudence.

Verret: Welcome to the Conglomerate, Justice Jacobs.

Justice Jacobs: Thanks for the invitation.  It's a pleasure to be here.

Verret: What did you do before you became a Judge?

Justice Jacobs: From 1968-1985 I was in private practice at Young, Conaway, Stargatt & Taylor in Wilmington, Delaware, where I specialized in corporate, securities, and commercial litigation.

Verret: When did you first become interested in corporate law?

Justice Jacobs: Ironically, that subject bored me to death when I was a law student. At that time I vividly recall promising myself that I would have nothing to do with that area of the law. That attitude abruptly changed when, after graduating from law school, I became a law clerk for the Delaware Court of Chancery (and also Delaware’s Superior Court). That role afforded me the rare opportunity to see corporate cases actually tried, which brought otherwise dry appellate opinions to life.  I found them fascinating on both a human, and an intellectual, level. Moreover, these cases were usually presented and tried by exceptional lawyers from major city law firms. For these reasons I soon decided that litigating corporate cases was the area in which I wanted to specialize.

Verret: What made you decide to serve on the bench?

Justice Jacobs: My clerkship in the Delaware courts also enabled me to observe first hand what dedicated, excellent judges do, and afforded me the privilege to get to know many of them personally. It was that experience which formed my ambition to be (someday) a Delaware judge, if ever I were so fortunate as to be offered that opportunity.

Verret: How many former law clerks do you have?

Justice Jacobs: Because I have been a judge for almost 24 years, I have 23 former law clerks.

Verret: You first joined the bench in 1985, which seems to have been a watershed period for takeover law in Delaware.  It must have been an exciting time to be on the Court of Chancery?

Justice Jacobs: It was a very exciting time, for many reasons. First, the takeover cases were at the very cutting edge of Delaware corporate law. Although we could not know it at the time, they ultimately transformed Delaware corporate jurisprudence and made merger and acquisitions law a new and important sub-specialty. It was very heady to be at the center of many of these widely publicized cases. Second, those cases presented unique intellectual challenges, not only because each new takeover dispute pushed the envelope of corporate law doctrine out one more notch, but also because it forced the judges to do their best to reconcile the rulings in each new case consistently with the doctrine developed up to that point. That was more easily said than done, and in many cases the process took years to complete. This new doctrine was a moving target that was being developed at warp speed, rather than at the tortoise’s pace which characterized corporate doctrinal development during decades before. Third, and relatedly, these cases forced the judiciary to examine several of the basic premises and underpinnings of corporate law.

Our need to shape this law into a fabric that was coherent led the Court of Chancery judges to become a very collegial group. Although each trial judge is free to decide a case as he or she deems appropriate, unencumbered by the views of colleagues, nonetheless, we found it institutionally useful and beneficial to attempt to puzzle out collectively (where possible) the difficult issues that we confronted individually, in circumstances where the decision of one judge in any particular takeover case could bind other judges in future cases. This practice also helped to avoid inconsistent adjudications and to strengthen that court as an institution.
   
Verret: What is so unique about Delaware's approach to corporate law?

Justice Jacobs: That is a subject to which corporate law academics have devoted much time and law review space. In my opinion, the quality that is most unique is its effort to reconcile, in each specific case, the requirements of law (specifically, transactional predictability and giving practical guidance to corporate fiduciaries) with the commands of equity (to arrive at results that are fair and make sense in the business world). That is often more easily said than done, but over time I believe we have been successful in doing that.

Verret: How has the Delaware bar changed since you first started practice?

Justice Jacobs: When I became a Delaware lawyer, only about 500 lawyers were “enrolled” (admitted to practice) in Delaware, a state whose population was only about 700,000. That period was the high water mark of professional opportunities for lawyers. Also, the smallness of our Delaware bar enabled it to maintain somewhat effortlessly a high standard of professionalism based on informal constraints. In that legal world everyone knew everyone else, and if any lawyer cut corners, the word got out fast. The result was a culture where social, rather than formal controls, created strong incentives for lawyers to treat each other courteously and professionally. In addition, the small size of our bar made it easier for lawyers in both large and small firms to be mentored by more experienced lawyers, thus easing the transition from law school graduate to competent practitioner.

The situation is now different. Today, over 4000 lawyers are enrolled in the Delaware Bar--an 800 percent increase for a statewide population that has increased only about 25% during that same period. Those demographics are typical of what has occurred in other states—an overproduction of lawyers in relation to the opportunities for law-related jobs. That demographic has also changed the “face to face” quality that characterized the Delaware Bar four decades ago. One unavoidable result has been to weaken somewhat the social control-based legal culture possible only in a small size bar. To be sure, Delaware still remains a more personal, less anonymous place to practice than many major metropolitan centers. The increase in lawyer population has not reduced the quality or professionalism of those segments of the Delaware Bar that practice corporate, bankruptcy intellectual property, and many other specialty areas. But, it has made professional life more difficult for practitioners in solo or small firm practice who do not have the mentoring opportunities that were available to lawyers of the preceding generations. The organized bar, both in Delaware and elsewhere, needs to develop creative ways to address this problem.

Verret:  I understand you are working on a comparative work examining international governance issues, tell us more about that.

Justice Jacobs:  Last year I had the privilege of participating in a comparative mergers and acquisitions academic symposium in Tokyo, Japan, to which I was invited by Columbia Law Professor Curtis A. Milhaupt. Curtis and I found that we shared a common interest in trying to predict the future course of M&A regulation in Japan. That subject is new and relatively uncharted, because Japan has experienced hostile corporate takeovers only since 2000, and not until 2005 did Japan attempt to develop, in a systematic way, an institutional and substantive law framework to address this issue. That common interest has led us to collaborate on an article that would trace and compare the M&A regulatory institutional development in the United States and Japan, with a view to developing a framework that would enable scholars to predict the future course of Japanese legal regulation in this area. It soon became apparent that any such study would have to include the UK City Code as well, since the Japanese system has elements of both the City Code and the Delaware approaches. As a result, we were able to persuade Professor John Armour of Oxford University to join in our project, which is now only in its beginning stages.

Verret:  I understand you teach courses at NYU, Columbia, and Widener.  Do you find your experience as a jurist useful in the classroom?

Justice Jacobs:  Yes, I do find it useful, since my personal experience of having presided over several of the takeover and other complex corporate litigations, adds a somewhat unique perspective. That perspective enables me to communicate the meaning of the case materials on a “war story,” as well as a legal doctrinal level. That gives my students a reason to listen to what I am trying to say with real (as opposed to sometimes feigned) interest. Incidentally, I also find my experience as a teacher useful to my role as a judge, because it is a constant reminder of the burden of lawyers whose stock in trade is communicating their client’s position to judges. That requires them to give the judge reasons to give special attention to their presentation. A judge who takes on the role of a law professor now finds himself in the same position as the lawyers who appear before him—the judge-teacher must give his students a reason to listen to him, since, quite frankly,  the students could care less that their teacher’s day job is judging. All the students care about is whether what is coming out of their teacher’s mouth is worthy of their attention. It’s a humbling experience.

Verret:  Which of your opinions, either from serving on the Court of Chancery or the Supreme Court, do you think would be most useful in the classroom?

Justice Jacobs: There is no single right answer to that question, because the answer depends on the nature of the course being taught. For example, in a basic corporations class, appellate opinions may often be of more use, because the emphasis is more on doctrine than strategy or procedure, and appellate opinions are often clearer distillations of pure doctrine. On the other hand, where the course emphasizes procedure, litigation tactics and strategy, the trial court opinions are often more useful (or at least as useful) as the appellate opinions, since those dimensions of the litigation are often more apparent from the trial court opinion. I have taught both types of courses. This past semester, I taught (together with Professor John Coffee) a seminar at Columbia Law School that focused on litigation tactics and strategy in so-called “major” corporate litigation (not limited to pure corporate law, but including related areas, including bankruptcy and antitrust). In that course, the reading materials consisted more of trial court, than appellate court, opinions.

Verret:  Your recent AFSCME v. CA opinion has been in the news recently.  How was the Court able to turn the opinion around so quickly?

Justice Jacobs:  In that case, there was a need for expedition because there was a fixed date for the shareholders meeting to take place, which created a short-fuse deadline for the preparation and mailing of proxy materials. The form and content of the proxy materials would depend on how the issues in AFSCME v. CA were decided.  In cases where an expedited decision is required, it has long been the practice and the professional culture of both the Delaware Court of Chancery and the Supreme Court to respond quickly, by moving the expedited case to “the front of the line.” That is what happened here. And although I happened to be the judge who authored the AFSCME opinion for our court, the opinion it was a collaborative effort by all five Justices, who gave it the same high priority. That is what made it possible to expedite the matter as rapidly as we did.

Verret:  How do you see Delaware's role as a source of corporate law evolving into the 21st century?

Justice Jacobs:  In normal circumstances I would be better able to offer an informed opinion on this subject. In today’s political environment, however, legislation is being proposed that, if it became law, could federalize several different aspects of what has traditionally been the subject of state corporation law. Without knowing whether this will happen, and specifically what areas (if any) would be affected, any opinion that I proffered would be pure speculation.

Verret: Thanks so much for taking time out of your busy docket to join us today Your Honor, we sincerely appreciate it.

Justice Jacobs:  It was my pleasure.

Permalink | Corporate Law| Delaware | Comments (3) | TrackBack (0) | Bookmark

While I was trying to write my final exam for Corporate Law this semester I found a new way to procrastinate.  Richard Epstein told me once that teaching is a species of performance art, so I tried my hand at writing up a few limericks for my class based on cases in the textbook.  (For more, check out some good ones from Jeremy Telman here.)

In Re Oracle (on challenges to the independance of a Special Litigation Committee)

Some Stanford connections are fine,
But too many bother VC Strine.
SLC's, like Ceasar's wife,
must be without strife,
Otherwise dismissal is in a bind

Omnicare (challenge to deal protection measures)

Fiduciary-outs are required,
And Unocal/Revlon rewired.
Though, the test is unbent!
For heed the dissent,
In which Orman v. Cullman is sired.

In Re Disney

For Eisner, the Mouse House has only one king.
Ovitz is fired, but leaves with much bling.
But these suits win seldom,
Good Faith is a spectrum.
102(b)7 is a powerful thing!

AFSCME v. CA (on the legality of election bylaws)

SEC seeks Delaware advice on this bylaw,
Yet it suffers from a heroically fatal flaw.
Darn fiduciary out!
The contest is a route.
Yet, reimbursement otherwise allowed by law!

SEC v. O'Hagan (on the misappropriation theory of insider trading)

After I lost it all,
Thought I'd recoup trading calls.
But then, damnation,
Forgot mis'prop'riation!
Tender info was my downfall.

Permalink | Corporate Law | Comments (2) | TrackBack (0) | Bookmark

One of the hottest topics in corporate law scholarship over the past five years has been the relationship between good faith and loyalty, a topic we have discussed frequently on this blog. In our second week of discussions "Exploring the Connection between Religious Faith and Corporate Law," I thought a discussion of this topic might be in order, especially since Lyman Johnson has written an important piece on the subject entitled, "Faith and Faithfulness in Corporate Theory."

I hope that I can be excused for a gross oversimplification of Lyman's argument, but the essence of his position, it seems to me, is that directors and officers of corporations have sufficient discretion to "draw on and express themselves in ways influenced by faith." As a result, some corporate managers might discharge their legal obligation to be “faithful” fiduciaries by using biblical ideas:

This is a much more expansive notion of loyalty than generally assumed to be required of corporate managers, but it is not inconsistent with much of the recent rhetoric on loyalty in the Delaware courts. While Lyman is arguing merely for a "more prominent religious voice within corporate discourse," Andrew Gold has written an excellent new paper on "The New Concept of Loyalty in Corporate Law," 43 U.C. Davis. L. Rev. __ (2009) (not yet now available on SSRN) contending that a more expansive notion of loyalty is required to make sense of Disney + Stone. Andrew argues:

Permalink | Corporate Law| Delaware| Forum: Faith | Comments (0) | TrackBack (0) | Bookmark

Beginning tomorrow, The Conglomerate will be hosting an online symposium of scholars who will address the topic, "Exploring the Connection between Religious Faith and Corporate Law." This online symposium was prompted by a live Roundtable held in April at the Holloran Center for Ethical Leadership in the Professions, University of St. Thomas. Lyman Johnson organized that Roundtable, and he will kick off our discussion tomorrow. I hope you will feel inspired to participate.

Permalink | Corporate Law| Forum: Faith| Religion | Comments (0) | TrackBack (1) | Bookmark

Adam Massoff has a fascinating post at Volokh Conspiracy, describing a piece of his new paper, A Stitch in Time: The Rise and Fall of the Sewing Machine Patent Thicket. I was especially intrigued by this passage:

Adam's case study is another fine piece of work in the legal literature on private ordering. We still have a shortage of such work, but I am optimistic about the number of young legal scholars who are entering this area of scholarship.

UPDATE: Speaking of private ordering, Michael Risch has a new piece ("Patent Challenges and Royalty Inflation") about the inalienability of patent challenge rights. This world with constrained private ordering results in a "patent challenge tax" that, according to Michael, leads to "royalty inflation ..., trickle-down costs to consumers and disincentives to create and license patented technology." Sometimes I wish I were writing about patents. It seems like these folks are having a lot of fun.

Permalink | Contracts| Corporate Law | Comments (0) | TrackBack (0) | Bookmark

North Dakota adopted a new "shareholder friendly" corporations statute in 2007, which ginned up enough attention to attract the W$J. At last month's Notre Dame conference, Chief Justice Myron Steele of the Delaware Supreme Court mentioned the North Dakota statute, but he didn't seem worried, given that less than a handful of public companies use North Dakota as their state of incorporation.

Despite the big yawn from most corporations scholars, the new statute is attracting some attention from shareholders (prompted by John Chevedden). According to Michelle Leder, the number of companies with reincorporation proposals on the ballot has now reached 11: Southwest Airlines, Exxon Mobil, Lowes, Marsh & McLennan, Amgen, Sempra Energy, and Qwest Communications, Oshkosh Corp., Hain Celestial, Whole Foods, and PG&E. These are precatory proposals, so even if they passed, which is highly unlikely, the corporations would not be required to reincorporate.

Steve Bainbridge has has written, "North Dakota is doomed to failure" in the race for corporate charters:

Steve's paper is a contribution to a symposium sponsored by the North Dakota Law Review. For a description of the program, see here.

Steve is right that North Dakota will not overtake Delaware with this new statute, but how should we think about "success" and "failure" with regard to this new statute? While North Dakota won't reap any financial benefits without actual reincorporations, my view is that the statute is already a success with shareholder activists. They have managed to place the statute on the ballots of 11 major corporations with more to follow. The North Dakota venture seems designed as a symbolic gesture, rather than as a real threat to Delaware, and it seems to me that it has already served that function.

Permalink | Corporate Law| Delaware | Comments (0) | TrackBack (0) | Bookmark

On Friday, Delaware's governor signed legislation enacting several changes to the Delaware General Corporation Law.  Among those changes is a new Section 112 entitled "access to proxy solicitation materials."  Section 112 authorizes (but does not require) corporations to adopt bylaws that require the corporation to include shareholder-nominated candidates for director on the corporation's proxy statement, subject to procedures and conditions that may be set forth in the bylaws.  Section 112 then includes a list of non-exhaustive potential procedures and conditions including a provision requiring a minimum level of ownership, and one conditioning eligibility upon the number or proportion of directors nominated by stockholders.  This latter condition appears to enable corporations to prevent shareholders' access to the proxy statement when it could result in a control contest.  The new Section 112 will be effective on August 1, 2009.

This is certainly an interesting development for Delaware corporate law and shareholder activists.  Although the bylaw provision is voluntary, it may give shareholder activists greater leverage in demanding proxy access, while giving corporations the ability to shape the conditions under which such access will be granted.  Importantly for Delaware, given the new SEC chair's seeming support of proxy access, this new law may ensure that it continues to have some voice in the proxy access debate.

Permalink | Corporate Law | Comments (0) | TrackBack (0) | Bookmark

Even though the Supreme Court has already agreed to decide in Jones v. Harris whether the market for mutual fund advisory fees is competitive (most likely early next Term), other mutual fund cases continue to percolate up through the federal courts of appeals.  This morning, the Eighth Circuit handed down the latest major ruling on this subject with its decision in Gallus v. Ameriprise, in which it reversed a trial court's grant of summary judgment in favor of an investment adviser on the question whether the adviser had violated its Section 36(b) fiduciary duty by charging excessive fees.  This ruling -- in tone and analysis -- could hardly be more different from the Seventh Circuit's decision in Jones and suggests growing judicial skepticism of the competitiveness of advisory fees.

Unlike Easterbrook's panel opinion in Jones -- but very much like Posner's dissent from denial of rehearing en banc in Jones -- the Eighth Circuit focused on the discrepancy between the rates advisers charge institutional investors and the rates they charge ordinary investors.  The traditional Gartenberg analysis does not require much consideration of such discrepancies, and advisers have long objected to any comparisons either on the grounds that the investments are not apposite or because discrepancies are justified by the higher costs of advising retail investors.  Here, the court dismissed both of those objections by pointing out that the retail and institutional funds at issue here "had identical investment objectives" and "very similar stock holdings" and that the adviser admitted in internal emails that it didn't have good reasons for justifying the disparity: "we should have a reply," wrote an Ameriprise employee, "though it may or may not be convincing."  Ameriprise ultimately produced its reply in the form of a report, but the court questioned the document's "veracity and completeness."  (If that report becomes publicly available, it should make for very interesting reading.)

The only remaining defense by the adviser, observed the court, was the contention that "an adviser cannot be liable for a breach of fiduciary duty as long as its fees are roughly in line with industry norms."  Such a standard is endorsed by Easterbrook in Jones and up for review by the Supreme Court.  But the Eighth Circuit rejected it, noting that "[t]o apply Gartenberg in this fashion across the entire mutual fund market would be  to eviscerate Section 36(b)."

So, is this decision a harbinger of future rulings or perhaps even a template for the Supreme Court?  Possibly.  Certainly the Eighth Circuit's evaluation of the competing claims of competitiveness in the industry is notable, being the first judicial ruling on the issue since the public dispute between Easterbrook and Posner in Jones -- this court comes down firmly in line with Posner's skepticism.  Interestingly, the court chose not to stay its decision pending the Supreme Court's resolution of Jones.  Perhaps it hoped to influence the Court with another opinion similar to Posner's dissent.  Or perhaps it believed that this is how the Supreme Court is going to rule.  If accurate, that's not very good news for investment advisers.

Permalink | Corporate Law | Comments (0) | TrackBack (0) | Bookmark

Notre Dame Law School is hosting a conference today on "The Future of Fiduciary Duties in Corporate Law." Julian Velasco has assembled a wonderful lineup of longtime friends, including fellow Glommer Lisa Fairfax, my co-author Bob Thompson, and Ideoblogger Larry Ribstein, as well as Chief Justice Myron Steele of the Delaware Supreme Court.

I will be presenting a new paper entitled "Unlimited Shareholder Power," which I hope to post on SSRN soon. Here is a glimpse:

By the way, this is my fourth trip to South Bend, twice on business and twice for football games. Every time I come here, I am more impressed with the University of Notre Dame.

Permalink | Corporate Governance| Corporate Law| Delaware | Comments (0) | TrackBack (0) | Bookmark

The Delaware Supreme Court finally issued its long-awaited opinion in Lyondell Chemical Company v. Ryan today. Remember, this is the case in which the directors of Lyondell Chemical Company were accused to breaching their fiduciary duties in connection with a sale of the company. The directors were admittedly independent and disinterested, but the plaintiff shareholders accused the directors of breaching their fiduciary duty of good faith by knowingly shirking their duties under Revlon. Vice-Chancellor Noble refused to grant the directors summary judgment because he wanted to know more facts about whether "the directors may have consciously disregarded their known fiduciary obligations in a sale scenario." (Ryan v. Lyondell Chemical Co., 2008 WL 2923427 (Del. Ch. 2008)).

In reference to that earlier decision, I expressed my frustration with the current state of Delaware law:

The problem with the decision is that [the defendants] can't get a lawsuit like this dismissed. But I don't see how you can pin that on Vice-Chancellor Noble. He is just taking direction from the Delaware Supreme Court.

Others, like Jeff Lipshaw, thought VC Noble was simply bootstrapping a duty of care claim into a non-exculpable duty of good faith claim. (Glom guest blogger Andrew Lund has written a paper about this possibility and how Delaware could more easily avoid it.) In its opinion today, the Delaware Supreme Court agreed with Jeff's assessment of the facts of this case: "At most, this record creates a triable issue of fact on the question of whether the directors exercised due care." (For Jeff's reaction to the opinion, see here.)

Importantly, this conclusion depends on a strikingly narrow understanding of "bad faith" in Delaware fiduciary law. In my first post on this case last August, I observed, "Disney and Stone now have defined 'bad faith' in a manner that does not require illegality or fraud (the traditional meanings of 'bad faith'), or disloyalty -- at least in the traditional sense of self-dealing. 'Bad faith' now has a more expansive meaning, that might include actions by directors who are admittedly independent and disinterested." While all of this remains true, it appears that the Delaware courts still have an extremely narrow view of bad faith. Steve Bainbridge described it this way earlier today: "Ryan ... goes a long way towards constricting the scope of bad faith claims to egregious and highly unusual sets of facts."

To understand how narrow "bad faith" has become, consider VC Noble's initial decision to deny summary judgment. That decision was motivated by a desire to gather more facts before determining that the directors here had not acted in bad faith. VC Noble was under the impression that directors could do something to fulfill their Revlon duties, but still knowingly fall short of doing enough. This is not an unreasonable view, though it would require a fair amount of precision to determine the difference between a care claim and a good faith claim. Chancellor Chandler made a similar point in a recent opinion in In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106 (Del.Ch. 2009):

The Delaware Supreme Court wants to draw a brighter line in its opinion issued today:

And again:

The influence of Caremark is apparent here, and we know from experience that Caremark liability is almost unheard of in Delaware. Of course, Vice-Chancellor Strine recently found support for Caremark claims with respect to the former senior vice chairman of general insurance and former vice chairman of investments and financial services of AIG. See In re American Intern. Group, Inc., 2009 WL 366613 (Del.Ch.2009). In denying a motion to dismiss on this issue, VC Strine observed:

This sort of behavior, if proved at trial, would easily support a finding of "bad faith" under the traditional standards. In other words, the Caremark version of bad faith would be unnecessary. And if the Delaware courts are serious about the standards articulated in Lyondell, I suspect plaintiffs will need facts like these to prevail on a claim of bad faith. So while boosters of the fiduciary duty of good faith had reason to rejoice after VC Noble's initial opinion, they will not be pleased with this latest directive from the Delaware Supreme Court.

Permalink | Corporate Governance| Corporate Law| Delaware| Disney | Comments (3) | TrackBack (0) | Bookmark

As we saw last week, the Supreme Court will be reviewing the Seventh's Circuit decision in Jones v. Harris in a few months.  (Chief Judge Easterbrook held in Jones that an investment adviser did not violate its fiduciary duty under the Investment Company Act by charging excessive fees because the market for investment advisory fees is sufficiently competitive to ensure reasonable fees; and Judge Posner dissented vigorously from the denial of rehearing Jones en banc, arguing that the market is not sufficiently competitive.)  Now, in a timely coincidence, the Seventh Circuit finds itself with an immediate opportunity to revisit this question en banc before the Supreme Court will review their work in Jones.

In a new case called Hecker v. Deere, employees of Deere & Company charged their employer with violating its fiduciary duty under ERISA by failing to provide a prudent array of investment options in the company's 401(k) menu.  The Deere plan featured a number of Fidelity plans with higher-than-average fees plus a portal through which employees could access 2,500 publicly available funds.  About a month ago, Judge Diane Wood writing for unanimous panel of the Seventh Circuit ruled in favor of the defendants, Deere and Fidelity, holding that no fiduciary duty was violated because the portal allowed employees to enjoy the public market for investment advisory fees which, as Easterbrook argued in Jones, is sufficiently competitive to ensure reasonable fees. 

That means two Seventh Circuit panels have in the past year concluded that the mutual fund market is competitive, while five of the ten (or eleven, depending on when you count) active judges on the same court during the same period signed Judge Posner's dissent arguing exactly the opposite.  So a number of mutual fund and ERISA scholars and I filed an amicus brief in Hecker yesterday arguing that the Seventh Circuit should rehear the panel's decision to settle this intracircuit split.

Will the Seventh Circuit agree to rehear?  That's always a rarity, but this issue has already attracted an unusually high degree of judicial attention.  The grant of certiorari in Jones may be a sufficiently remarkable and relevant event to change the minds of some of those who voted against rehearing in Jones to vote in favor of rehearing in Hecker.  Plus, President Obama has just nominated a new Seventh Circuit judge, David Hamilton, who could provide a crucial vote for or against if he is confirmed soon enough.  (Hamilton, if confirmed, will replace Judge Ripple, who recused himself in Jones and has since taken senior status.)

If the court does agree to rehear the case, Judge Posner will have the en banc rehearing he wanted so much in Jones, and the Seventh Circuit will have the rare opportunity of reconsidering the same issue that the Supreme Court will soon be reviewing.  If the court declines to rehear the case, the plaintiffs will be able to file a petition for certiorari asking the Supreme Court to join their case to Jones, given the similarity of underlying issues.  In a sense, the Seventh Circuit has the chance either to double down by sending two similar cases to the Supreme Court or to try to defuse things by explaining and consolidating its position before its next performance review. 

We should see a ruling on the Hecker petition for rehearing within the next several weeks.

Permalink | Corporate Law | Comments (1) | TrackBack (0) | Bookmark

And now, to conclude, a few thoughts on the theoretical implications of a Supreme Court ruling in Jones v. Harris.

While this case is sure to become a seminal mutual fund case, it’s also likely to shed a great deal of light on the Court’s disposition towards classical versus behavioral economic theory, the broader question of excessive compensation, and the ability of courts to evaluate dueling econometric analyses of market competition.

The first -- and perhaps the broadest and most interesting -- ramification of Jones v. Harris is the prominence of Posner’s reevaluation of his earlier views on law and economics.  As Brian Tamanaha has noted, the current financial situation appears to have prompted Posner, Gary Becker, and others (though perhaps not Easterbrook) to reconsider the efficacy of a law-and-economics orthodoxy.  In its ruling, the Court may reveal to what extent it, too, will adopt a more behavioral strain of economic theory in this and other contexts.

Second, although claims of excessive executive compensation are the typical province of Delaware courts, this case presents an opportunity for the Supreme Court to expound upon the issue, since the fees to advisers here are similar to executive remuneration in typical operating companies.  Indeed, Posner emphasized this point in his dissent, declaring that the panel’s economic analysis “is ripe for reexamination on the basis of growing indications that executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation.”

Third, this case should demonstrate the comfort and skill with which the Supreme Court can evaluate dueling econometric analyses of market competitiveness, since the Coates & Hubbard paper and contradictory studies are central to the issues here.  If even the Supreme Court has difficulty with these methodologies, lower courts may be seriously challenged.

Congress first revisited the Company Act in 1970, thirty years after its original enactment.  Now that another forty years have passed, perhaps the current economic situation will prompt another set of legislative revisions, especially if the Court struggles with Jones v. Harris.

Permalink | Corporate Law | Comments (2) | TrackBack (0) | Bookmark

In a pair of final segments to my series of posts on Jones v. Harris, I will speculate separately on the practical and theoretical implications of a Supreme Court ruling.  So, let’s start with the practical.

First, a liminal question: why did the Supreme Court take the case?

Just because of a circuit split?  Unlikely.  The respondents argued in their brief in opposition to certiorari that there is, in fact, no circuit split here because the established Gartenberg precedent and the new Easterbrook standard are “substantively identical” and that therefore the petition raises merely “academic issues.”  While it’s true that under both standards plaintiffs are probably doomed, it’s difficult to argue that any discrepancies are merely illusory when both Easterbrook and Posner openly discussed the circuit split.  It’s even harder when the respondents’ own lawyers issued a “litigation alert” immediately after Easterbrook’s ruling heralding this “new standard” in the title.  Also, attempting to dismiss issues as “academic” may not be a terribly effective pejorative when describing the work of two academics, Easterbrook and Posner, to a Supreme Court comprising several former law professors.

Perhaps the more likely reason for granting certiorari was the vigor and prominence of Posner’s dissent.  Indeed, the public disagreement between Easterbrook and Posner did a great deal to ensure that the Court would take a case heavily implicating economic analysis.

So, how will the Court rule? 

Perhaps the Roberts Court will rule in favor of Easterbrook’s call for judicial restraint.  But to many experts in this field, Easterbrook’s opinion is anything but restrained: his disregard for the congressional enactment of a fiduciary duty strikes them as an intensely activist overruling of legitimate legislation.  Also, denying certiorari would have had the same effect as affirming Easterbrook.

Perhaps the Court will reaffirm and universalize Gartenberg.  But since that case is still in force in three circuits where large numbers of fund advisers are based (Second, Third, and Fourth), that project also seems an unnecessary use of the Court’s time.

The most likely outcome might therefore be for the Court to follow Posner’s prescription by enacting a “Gartenberg-plus” standard that adds additional factors to the Gartenberg analysis.  For example, the Court might require advisers to provide explanations and data justifying the discrepancy in prices they charge to institutional versus individual investors.  Advisers have long argued – and lower courts have long agreed – that advisers have good reasons for charging different fees to different investors in the same fund: e.g., individual investors cost more to serve since they need websites, individual statements, customer support, &c.  But in his dissent, Posner argued that it's a mistake not to compare these two fees since their relationship can reveal whether the entire industry is tacitly colluding to keep individual fees artificially high.  The Court might agree, ruling that if advisers have good reasons for charging different prices, they should disclose those reasons so that investors, trustees, and courts can evaluate how compelling they are.

What effect would such a ruling have?

If the Court were to issue a Gartenberg-plus ruling, it might be hoping to encourage two changes: fund advisers immediately lowering the fees they charge individual investors (since trying to raise fees on institutional clients seems far more difficult) and/or advisers producing internal data that attempt to justify any fee differentials.  Of course, to the extent that the data are unpersuasive, lower courts would be empowered to rule against fund advisers, a prospect that could also exert a downward pressure on fees.  (If there weren’t a profit cushion for advisers to give up, requiring more data could in fact lead to higher fees, but this industry is famously profitable.)

But would the Roberts Court ever decide against business and make it easier for plaintiffs to sue?

Many preconceptions about the Court may have been challenged with last week’s ruling in Wyeth v. Levine, when the Court upheld a patient's right to sue a drug manufacturer in the face of the manufacturer's arguments of federal preemption.  Jones v. Harris arguably presents an even more populist opportunity for the Court to protect individual investors from Bernie Madoffs at a time of economic calamity, if the justices are so inclined.

So individual shareholders will live happily ever after?

With 38 years of defeats under Gartenberg, plaintiffs may need more than just a little tweaking of the standard to mount credible litigation in future, so some commentators would like to see an even more comprehensive overhaul of the standard here.  One of the recurring challenges to plaintiffs is that lawyers like to take cases that will pay their expenses; to do so in this area, the defendants must manage large funds with deep pockets; but the highest fees are typically charged by small funds.  So the facts aren’t always great for plaintiffs.

Perhaps another solution lies outside the judicial system.  If a plaintiff with large legal resources and little economic motivation – i.e., the Securities and Exchange Commission – mounted a case on the strength of egregious facts, things might change.  But the SEC has never litigated excessive fees . . . prior to the Obama administration.

Permalink | Corporate Law | Comments (3) | TrackBack (0) | Bookmark