August 17, 2020

Directors and Officers (2003—2020)

Directors and Officers (2003—2020)

Managing Closely Held Corporations: A Legal Guidebook
      Committee on Corporate Laws, ABA Section of Business Law, 58(3): 1073—1126 (May 2003)
This Guidebook, prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association, provides a concise, practical overview of important legal principles governing directors, officers and shareholders of closely held corporations. It is intended primarily for nonlawyers. There are other excellent books and articles for corporate directors, officers and shareholders as well as for owners and managers of businesses organized in noncorporate forms, such as limited liability companies (LLCs). A bibliography at the end of this Guidebook lists some of the materials most relevant to the closely held corporation.

The Case for Shareholder Access to the Ballot
      Lucian Arye Bebchuk, 59(1): 43—66 (Nov. 2003)
The SEC is now considering a proposal to require some public companies to include in their proxy materials candidates for the board nominated by shareholders. Providing such shareholder access to the corporate ballot, I argue, would improve corporate governance. Analyzing each of the objections that have been raised against such shareholder access, I conclude that none of them provides a good basis for opposing shareholder access. The case for shareholder access is strong.

Election Contests In the Company's Proxy: An Idea Whose Time Has Not Come
      Martin Lipton and Steven A. Rosenblum, 59(1): 67—94 (Nov. 2003)
The SEC has proposed rules that, under specified circumstances, would permit shareholders to run an election contest using a company's own proxy statement. The authors argue that the potential harm from this proposal far outweighs any potential benefit. The proposed rules would increase the frequency of election contests, causing significant disruption and diversion of corporate resources every year. The shareholders most likely to seek to nominate directors, such as public pension funds and labor unions, have political agendas and interests beyond the business performance of the company. To the extent dissident directors are elected to boards, these boards are likely to become balkanized and less functional. An increase in the number of election contests is also likely to exacerbate the current difficulties in recruiting qualified new director candidates, and make existing directors more risk averse. Proponents of the proposed rules seem to rest their support on the model of the shareholder as the ''owner'' of a company, just as an individual owns a piece of property. The relationship of shareholders to a public company, however, is far more complex. This relationship does not support the argument that shareholders have an intrinsic right to use a company's proxy statement to nominate directors. Finally, the authors point out that the last two years have already seen the adoption of the most far-reaching corporate governance reforms since the 1930s. These reforms should be given the chance to work before the SEC pursues a whole new set of rules that will likely do far more harm than good.

Institutional Perspective on Shareholder Nominations of Corporate Directors
      Robert C. Pozen, 59(1): 95—108 (Nov. 2003)
This paper applies the cost-benefit framework for shareholder activism, utilized by most institutional investors, to the five alternative approaches to shareholder participation in director elections suggested by the ABA Task Force on this subject. I show that none of them would likely generate benefits exceeding its costs, although there are worthwhile components of several alternatives suggested by the ABA. I argue that some of the problems involved in the alternatives under consideration could be avoided by allowing institutional investors to cumulate their votes for one director nominee. However, cumulative voting is not permitted by most company charters, which may be changed only if the company's directors put forward a charter amendment for a vote by its shareholders.

Report on Proposed Changes in Proxy Rules and Regulations Regarding Procedures for the Election of Corporate Directors
      Task Force on Shareholder Proposals of the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, 59(1): 109—43 (Nov. 2003)

Fund Director's Guidebook
      Task Force on Fund Director's Guidebook of the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, 59(1): 201—76 (Nov. 2003)

SEC Debarment of Officers and Directors After Sarbanes-Oxley
      Jayne W. Barnard, 59(2): 391—419 (Feb. 2004)
The Sarbanes-Oxley Act provides that a securities law violator may be suspended or barred from serving as an officer or director of a public company, provided the violator is found to be "unfit." Suspension and bar orders may be entered by a federal district court at the conclusion of a litigated proceeding. Under Sarbanes-Oxley, a suspension or bar order may now also be issued by the Commission at the conclusion of a cease-and-desist proceeding. In either case, the standard is the same-"unfitness." This Article examines the new suspension and bar regime established under the Act. It suggests some arguments that might be made in opposition to the threat of a suspension or bar order, and also proposes some procedural guidelines to govern suspension and bar cases.

Composing a Balanced and Effective Board to Meet New Governance Mandates
      John F. Olson and Michael T. Adams, 59(2): 421—52 (Feb. 2004)
The enactment of the Sarbanes-Oxley Act of 2002 and the recent adoption of new corporate governance listing standards by the major American securities markets have resulted in a number of prescriptions that influence the selection of directors of U.S. public companies. These requirements are in some respects inconsistent with the traditional agency role of the monitoring board and, more important, may conflict with optimal functioning of the board as a group. The authors survey the literature on the role of the board and board dynamics, examine the new constraints and their impact on director qualification and selection, and offer ten practical suggestions for director selection that will help nominating and governance committees of public companies to assemble boards of directors that will effectively perform their critical monitoring functions in the new regulatory environment.

Report of the Task Force on Exchange Act Section 21(a) Written Statements
      Committee on Federal Regulation of Securities, ABA Section of Business Law, 59(2): 531—68 (Feb. 2004)

A New Player in the Boardroom: The Emergence of the Independent Directors' Counsel
      Geoffrey C. Hazard, Jr. and Edward B. Rock, 59(4): 1389—1412 (Aug. 2004)
When should a secondary actor to a securities fraud—like an accountant or a lawyer—be liable to the same degree as the primary culprit? Ever since the Supreme Court abolished aider and abettor liability for violations of section 10(b) of the Securities Exchange Act of 1934, courts have struggled to answer that question, and the struggle has led to competing standards. In the case of misrepresentations in connection with the purchase or sale of securities, the Courts of Appeal have split between those imposing liability on secondary actors who ''substantially participate'' in making a misrepresentation, and those who also require, as a ''bright line'' test, that the misrepresentation be publicly attributed to the secondary actor before the plaintiff makes his or her investment decision. The court hearing the cases arising from the Enron debacle adopted yet a third alternative, the so-called ''creation'' test, imposing liability on a secondary actor who, alone or with others, ''creates'' a misrepresentation. This Article explores the problem of misrepresentations by secondary actors in securities frauds, analyzes the competing standards of liability, traces the roots of the creation test, and argues ultimately that the creation test and the substantial participation test share deficiencies that the bright line test avoids.

Separate and Continuing Counsel for Independent Directors: An Idea Whose Time Has Not Come as a General Practice
      E. Norman Veasey, 59(4): 1413—18 (Aug. 2004)
In their accompanying piece in this issue, Professors Hazard and Rock present a thesis that "independent directors, especially those on the Audit Committee increasingly will be represented on a continuing basis by independent legal counsel." Thus, it is their argument that, as a general practice, there "will emerge a new figure in the boardroom: the Independent Directors' Counsel." Their contention is part prediction/part justification. Either way, it is not likely as a prediction and it is not a good model that can be justified as a general matter. In short, that is my opinion largely because (a) such a general practice is not necessary or desirable; (b) such a general practice may often be disruptive overkill; and (c) the notion that "one size fits all" is not a good model of corporate governance.

Counseling Directors in the New Corporate Culture
      E. Norman Veasey, 59(4): 1447—58 (Aug. 2004)
In his March 2004 Tulane speech, former Chief Justice Veasey argues that the business judgment rule is alive and well. Recent Delaware decisions demonstrate that the expectations of director conduct are evolving. This is partly a function of the dynamics of the times and partly because improved pleadings in stockholder complaints have focused more intently on the need for careful, loyal and good faith processes in the boardroom. The quest for best practices of corporate governance is the best prophylactic to avoid liability and to comply with new federal standards.

Should a Duty to the Corporation Be Imposed on Institutional Shareholders?
      Roberta S. Karmel, 60(1): 1—21 (Nov. 2004)
The common law principle that directors owe a primary duty to their corporation and a secondary duty to the shareholders of that corporation has been gradually eroded by the federal securities laws so that directors are charged with owing duties to shareholders, with the corporation and other corporate constituents relegated to a lower status. Further, the shareholder primacy model has become the dominant model in scholarship theories with regard to the firm, although other models have been proposed and debated. Under the shareholder primacy model, shareholders are considered the "owners" of the corporation and therefore given rights at the expense of other corporation constituents. Although modern institutional investors do not behave like owners of corporate property, the shareholder primacy norm has been strengthened and reinforced by the Sarbanes-Oxley Act of 2002. Further, in the wake of recent corporate scandals, institutions have been demanding more rights, specifically more rights with respect to the nomination of corporate directors. In view of these demands, this article inquires as to whether large shareholders should obtain any such rights without also acquiring duties to the corporations in which they invest and to other shareholders.

Can a Board Say No When Shareholders Say Yes? Responding to Majority Vote Resolutions
      Andrew R. Brownstein & Igor Kirman, 60(1): 23—77 (Nov. 2004)
The past 20 years have witnessed a significant increase in the number of shareholder proposals submitted to American public corporations and in the number of such proposals that have received majority support during shareholder meetings. While some companies have responded to majority vote resolutions by implementing the proposals or reaching settlement with the proponents, a significant number of companies have not adopted the changes suggested by these resolutions. The refusal of companies to adopt such suggested changes, even when doing so after careful consideration by the board of directors, has in turn led some activist shareholders to employ pressure tactics against such companies. After canvassing these changes, this article examines what companies and their directors should do in response to shareholder resolutions that obtain majority shareholder votes. The article concludes that directors retain the ultimate responsibility to act in what they believe to be the best interest of all shareholders, even if that means not adopting majority vote resolutions. At the same time, it also notes that the changed corporate governance climate makes it essential for companies and their directors to treat majority vote resolutions seriously and recommends possible enhanced procedures for considering and acting on such resolutions.

Fiduciary Duties of Directors of a Corporation in the Vicinity of Insolvency and After Initiation of a Bankruptcy Case
      Myron M. Sheinfeld & Judy L. Harris, 60(1): 79—107 (Nov. 2004)
This article discusses the general fiduciary duties of directors of corporations and how those duties are altered when a corporation is in the zone or vicinity of insolvency and when the corporation is insolvent. The different tests for determining a corporation's insolvency are outlined. The article also analyzes the fiduciary duties of directors in a Chapter 11 bankruptcy case. In particular, the article discusses directors' duties in managing the bankruptcy estate, directors' responsibilities under Sarbanes-Oxley, and the exculpations of directors that are permitted in Chapter 11 plans of reorganization. The article provides directors with practical guidelines for properly exercising their fiduciary duties in Chapter 11.

Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
     Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.

In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.

This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Independent Directors as Securities Monitors
     Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.

The Uncertain Efficacy of Executive Sessions Under the NYSE's Revised Listing Standards
     Robert V. Hale II, 61(4):1413-1426 (August 2006)
This article briefly explores key issues relating to the use of non-management executive sessions under Section 303A.03 of the NYSE's revised listing standards, including the authority of the SEC to enforce such a requirement, the status of board actions taken at such meetings, and whether such sessions may result in altering the principal roles of the board and management. In this respect, the Disney derivative litigation affords an opportunity to consider the use of executive sessions in relation to these issues, as well as the business judgment rule. Moreover, Disney raises the question whether mandatory non-management executive sessions might have created a different outcome under the circumstances in the case. The article concludes with a discussion of some practical considerations for attorneys and corporate secretaries in complying with the requirement.

The Tensions, Stresses, and Professional Responsibilities of the Lawyer for the Corporation
     E. Norman Veasey and Christine T. Di Guglielmo, 62(1): 1–36 (Nov. 2006)
The lawyer for the corporation—whether general counsel, subordinate in-house counsel, or outside counsel—faces tensions, stresses, and professional responsibilities that often differ from those of lawyers who represent individuals. The primary reality that must be faced is that this lawyer's client is—or should be—only the corporate entity.

This article is an attempt to highlight some of the issues that corporate counsel, directors, and managers should seek to recognize and understand. The various challenges faced by both in-house and outside lawyers representing corporations include the maintenance of professional independence, dealing with "up-the-ladder" reporting obligations, seeking to serve the client's best interests through persuasive counseling, the separation of legal and business advice, and dealing with internal investigations, to name a few.

Moreover, in the case of general counsel, special tensions arise because he or she has only one client (the general counsel's employer) and answers both to the CEO and to the board of directors. When these two "bosses" have potential differences or conflicts, the tensions placed on the general counsel may be palpable and difficult to manage consistently with the lawyer's ethical duties, advancement of corporate interests, and job security. Most general counsel are up to the task and do not take the difficulties of their challenges for granted. It is also important, in our view, that directors understand corporate counsel's roles and challenges, as well as the value that counsel brings to the board's responsibilities.

We attempt to address questions of how to establish and fulfill counsel's obligation to be independent, when to advise the corporate actors to seek outside counsel, when to go up the ladder and to summon up the courage to do the right thing. Although we have tried to survey as much of the practical learning and the literature as is reasonable for an article, we believe we have only scratched the surface.

Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era
     Robert S. Bennett, Alan Kriegel, Carl S. Rauh, and Charles F. Walker, 62(1): 55–88 (Nov. 2006)
Internal investigations long have been an integral part of the successful defense of corporations against charges of misconduct, as well as an important board and management tool for assessing questionable practices. With the heightened standards of conduct and increased exposure created by Sarbanes-Oxley, this essential instrument for safeguarding corporate interests has become even more crucial in identifying and managing risk in the enforcement arena. This article examines from a practitioner's standpoint when and how internal investigations should be conducted in order to protect the corporation in criminal, civil and administrative proceedings. Particular attention is paid to the issues created by a concurrent government investigation and in dealing with employees and former employees in the course of an investigation. The article also addresses the role of the Audit Committee under Sarbanes-Oxley, and the important issue of reporting the findings of the investigation to appropriate corporate officials. The subject of self-reporting by the Company to enforcement authorities is considered as well. In this context, the article explores the SEC's position on crediting self-reporting and cooperation as set forth in the Seaboard report; Department of Justice policy as embodied in the Thompson Memorandum; and the impact of the Federal Sentencing Guidelines for Organizations.

Having the Fiduciary Duty Talk: Model Advice for Corporate Officers (and Other Senior Agents)
      Lyman Johnson, 63(1): 147–162 (November 2007)
Countless legal materials address the fiduciary duties of corporate directors. These include extensive decisional law, numerous institutes and continuing legal education seminars, several treatises and casebooks, and the well–known Corporate Director's Guidebook, recently released in its fifth edition. By contrast, legal materials on the fiduciary duties of corporate officers—key actors and agents in any company—are quite sparse. Case law is meager and undeveloped, with even such a baseline issue as the applicability of the business judgment rule lacking resolution. Treatises, institutes, and other legal materials frequently lump officer fiduciary duties with those of directors or treat them as an afterthought or, in many instances, overlook the subject altogether. There is no preeminent, standard reference serving as the "Corporate Officer's Guidebook."

This Article seeks to begin rectifying this glaring gap in legal literature and professional practice. Fiduciary duties as a vital component of an effective corporate governance system work on an ex ante basis—i.e., officers must be advised of such duties beforehand if such duties are to influence conduct. This Article describes the sources of legal material for deriving a succinct exposition of officer fiduciary duties and then provides suggested "model" fiduciary duty advice for lawyers to use in counseling corporate officers and other senior managers.

How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors
     E. Norman Veasey and Christine T. Di Guglielmo, 63(3): 761–776 (May 2008)
As business trends change and capital markets evolve, directors may face factual situations that raise new questions about the contours of directors' fiduciary duties. One increasingly common situation that presents tensions for a growing number of directors is the allegiances by individuals elected to the board by, and who may seemingly "represent," particular constituencies of the public corporation. Such "constituency directors" or "representative directors" may include, for example, directors designated by creditors, venture capitalists, labor unions, controlling or other substantial stockholders, or preferred stockholders; directors elected by a particular class of stockholders; or directors placed on the board by or at the behest of other constituencies.

We raise several questions. When a particular constituency causes one or more directors to be elected to the board, to whom or to what is that director loyal or beholden? The corporation? All the stockholders? If "yes" as to the corporation and all the stockholders, may the director give some "priority" to the views of the constituency that caused him or her to be placed on the board? Since the board must act collectively and the majority might not favor the outcome desired by the particular constituency, are these questions largely academic?

In this Article, we suggest that the existing standards of liability for breach of fiduciary duty should not change in order to account for changing circumstances. The existing standards of conduct and liability incorporate the necessary flexibility to balance the potentially competing duties of constituency directors with protection of the interests of various corporate constituencies. And if the fiduciary duty standards in corporation law are not sufficiently flexible to accommodate particular circumstances, constituents may wish to invest in an alternative entity (such as a limited liability company) governed by other law that will accommodate their needs. Or perhaps the investor may be able to effect a legally authorized change in the certificate of incorporation of the corporation to permit it to be governed more to the investor's liking.

Corporate Governance of Troubled Companies and the Role of Restructuring Counsel
     D.J. (Jan) Baker, John Wm. (Jack) Butler, Jr., and Mark A. McDermott, 63(3): 855–880 (May 2008)
Officers and directors of a troubled corporate enterprise can expect to face a host of complex decisions as they attempt to restructure the corporation's affairs. These decisions may be made more difficult because officers' and directors' fiduciary duties extend to all stakeholders, including creditors, when the corporation is in the zone of insolvency. The role of corporate restructuring counsel is critical in this uncertain environment. This Article provides a comprehensive overview of recent court decisions and statutory changes relating to the fiduciary duties of officers and directors of troubled companies. It also provides practical applications of these principles to common situations that directors and officers face as they attempt to guide a troubled business toward a successful restructuring.

Consumer Arbitration: If the FAA "Ain't Broke," Don't Fix It
     Alan S. Kaplinsky and Mark J. Levin, 63(3): 907–920 (May 2008)
During 2007, Congress showed significant interest in mandatory pre–dispute consumer arbitration agreements. Some in Congress focused on whether to prohibit them altogether. This Article argues that such legislation is unnecessary because the current system of consumer arbitration works well and needs no fix. The authors review case law and empirical studies showing that the current system of checks and balances in the area of consumer arbitration law is sufficiently protective of consumers' rights. These protections emanate from: (1) the Federal Arbitration Act ("FAA") itself, (2) the careful drafting of arbitration agreements, (3) the use of third–party arbitration administrators, and (4) the rigorous enforcement of the FAA by state and federal courts.

Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward
     Leo E. Strine, Jr., 63(4): 1079–1108 (August 2008)

Void or Voidable?—Curing Defects in Stock Issuances Under Delaware Law
     C. Stephen Bigler and Seth Barrett Tillman, 63(4): 1109-1152 (August 2008)
It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through board and, if necessary, stockholder ratification. However, in a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and the court has determined that failure to comply with such formalities renders the stock in question void, i.e., not curable by ratification. Unfortunately, the decisions issued by the Delaware courts have not afforded the necessary certainty to allow practitioners to decide whether a particular defect in stock issuance is a substantive defect that renders stock void or a mere technical defect that renders stock voidable. This Article analyzes the cases giving rise to this lack of clarity and proposes that the Delaware courts apply the policy underlying Article 8 of the Delaware Uniform Commercial Code to validate stock in the hands of innocent purchasers for value in determining whether stock is void or voidable.

Backdating
     Jeffrey L. Kwall and Stuart Duhl, 63(4): 1153–1186(August 2008)
Backdating is a much misunderstood and largely unexplored subject. It involves a wide range of conduct, some of which is an integral part of everyday law practice. To the layperson, backdating connotes wrongdoing. The propriety of backdating, however, depends upon its purpose and effect. Every lawyer should be capable of distinguishing legitimate backdating from improper backdating. Unfortunately, the dividing line is often far from clear. Little guidance exists on backdating, notwithstanding its pervasiveness, the complexity of determining its propriety, and the serious consequences of a misjudgment. An in-depth examination of the day-to-day backdating issues that most business lawyers face cannot be found in the literature. This Article begins to fill that void.

This Article explains the different meanings of backdating, explores the reasons why it is difficult to distinguish legitimate backdating from improper backdating, examines the impact of disclosure on the propriety of backdating, and develops an analytical approach to assist business lawyers in wrestling with the difficult situations most will confront in their daily practices. By illuminating the subject, it is hoped that this Article will begin a much-needed dialogue about backdating.

The Unreasonable Burden of Proving the Reasonable Care Defense Under the Uniform Securities Act
      Mark B. Barnes and Matthew R. St. Louis, 63(4): 1223#151;1242 (August 2008)
Under the Uniform Securities Act (a version of which has been enacted by most states), an entity that sells securities in violation of the Act is potentially liable to investors under the Act's civil remedy provisions. Directors, officers, partners, controlling persons, and others associated with the entity at the time of the sale are also potentially liable, jointly and severally with each other and the entity, solely on account of their affiliation with the entity. While the Act entitles these "derivative liability" defendants to assert an affirmative defense of reasonable care, the affirmative defense is narrowly drafted, and courts have interpreted the defense strictly. This Article examines the decisions in which courts have interpreted the "reasonable care" defense, in particular the November 2007 opinion of the Indiana Supreme Court in Lean v. Reed, and ends by recommending securities law compliance policies and procedures that entities selling securities in Uniform Securities Act states might consider adopting to assist their associated and affiliated persons in managing the risk of potential personal liability.

The Clawback Provision of Sarbanes-Oxley: An Underutilized Incentive to Keep the Corporate House Clean
      Rachael E. Schwartz, 64(1): 1-36 (November 2008)
The Sarbanes-Oxley Act of 2002, passed in the wake of corporate scandals involving misstated financial reports, included a provision for certain compensation and profits from the sale of company stock to be "clawed back" from chief executive officers and chief financial officers of companies that are required to restate their financials, due to material non-compliance with any financial reporting requirement of the securities laws as a result of misconduct. Courts have determined that only the Securities and Exchange Commission may sue to enforce this clawback provision. In the six years following passage of the law, there have been Sarbanes-Oxley clawbacks in only a small number of cases, each one an options backdating case involving allegations that the officer affected personally committed fraud. This Article takes the position that the clawback provision has no scienter requirement and its application should not be limited to officers who have personally engaged in misconduct. Rather, the wording of Sarbanes-Oxley, its legislative history, and the policies it serves call for the clawback to be applied to the chief executive officers and chief financial officers of companies that are required to restate their financials due to material non-compliance with any financial reporting requirement of the securities laws as a result of misconduct, regardless of whether those officers actively participated in the wrongdoing, knew of and failed to correct the wrongdoing, or were oblivious to wrongdoing by employees subject to their control. This general rule can be made subject to an exemption for circumstances involving certain misconduct by non-management employees.

Revisiting Consolidated Edison—A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers

      Ryan D. Thomas and Russell E. Stair, 64(2): 329-358 (February 2009)
In October 2005, the U.S. Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities ("Con Ed") ruled that electric utility company Northeast Utilities ("NU") and its shareholders were not entitled to recover the $1.2 billion merger premium as damages after NU's suitor, Consolidated Edison, refused to complete an acquisition of NU. This case surprised many M&A practitioners who believed that the shareholder premium (or at least some measure of shareholder damages) would be recoverable in a suit against a buyer that wrongfully terminated or breached a merger agreement. If Con Ed proves to have established a general rule precluding the recovery of shareholder damages for a buyer's breach of a merger agreement, the potential consequences to targets in merger transactions would be substantial—shifting the balance of leverage in any MAC, renegotiation, or settlement discussions decidedly to the buyer and effectively making every deal an "option" deal. This ruling, therefore, has left some target counsel struggling to find a way to ensure that the merger agreement allows for the possibility of shareholder damages while also avoiding the adverse consequences of giving shareholders individual enforcement rights as express third-party beneficiaries of the agreement.

The Con Ed case, however, merits a second look. This Article revisits the Con Ed decision and challenges the conclusion of some observers that the court in Con Ed established a general precedent denying the availability of shareholder damages. This Article also discusses how the holding of Con Ed may very well be confined to the facts and the specific language of the merger agreement at issue in the case. Notwithstanding, the uncertainty surrounding how any particular court may approach the issues raised in Con Ed, this Article proposes model contract language that a target might employ to avoid creating a " Con Ed issue" and to minimize the risk of a result that was not intended by the parties.

Gheewalla and the Director's Dilemma
      Sabin Willett, 64(4): 1087–1104 (August 2009)
Did North American Catholic Education Programming Foundation, Inc. v. Gheewalla change anything? The Delaware Supreme Court ruled in 2007 that corporate directors owe no direct fiduciary duty to creditors in insolvency, but the bar seems to have met the case with a collective shrug, concluding that the preservation of a creditor's right to pursue derivatively on behalf of a distressed corporation a claim for breach of fiduciary duty leaves intact the "fiduciary duty to the corporate enterprise" theory that informed pre-Gheewalla advice.

This Article posits that this general view is wrong. In the vicinity of insolvency, two oft-cited principles—that a board should strive to maximize enterprise value, and that it should protect the shareholders—sometimes are in conflict. In a period where insolvency deepens, a discounted sale may maximize enterprise value, even as it cuts off a less likely, but real prospect of an equity-preserving restructure.

This Article argues that "duty to the enterprise" theory is incoherent and ignores the reality of business valuation, which is that all prospects are uncertain. The necessary consequence of Gheewalla, construed in light of other relevant authorities, is that where any business strategy may generate a return for equity holders, the board must favor that strategy and reject alternatives, even if in the board's business judgment the strategy is unlikely to succeed, and alternatives, on a risk-adjusted basis, would maximize the enterprise value.

Are Corporate Officers Advised About Fiduciary Duties?
      Lyman Johnson and Dennis Garvis, 64(4): 1105–1128 (August 2009)
This Article reports the results of an empirical study of whether and how in-house corporate counsel advise corporate officers about fiduciary duties. The fiduciary duties of officers long have been neglected by courts, scholars, and lawyers, even though executives play a central role in corporate success and failure. The study's findings, organized by type of company (public or private), size, and attorney position, show several interesting patterns in advice-giving practices. For example, fewer than half of all respondents provided advice to officers below the senior-most rank. The results raise the possibility that, unlike directors who may overestimate their liability exposure, certain shortcomings in giving advice to officers may cause them to underestimate personal liability exposure and engage in more risky behavior than is desirable for the company itself. The Article also offers recommendations for improved practices in advising officers about their duties.

Did Corporate Governance "Fail" During the 2008 Stock Market Meltdown? The Case of the S&P 500
      Brian R. Cheffins, 65(1): 1–66 (November 2009)
In 2008, share prices on U.S. stock markets fell further than they had during any one year since the 1930s. Does this mean corporate governance "failed?" This Article argues generally "no," based on a study of a sample of companies at "ground zero" of the stock market meltdown, namely the thirty-seven firms removed from the iconic S&P 500 index during 2008. The study, based primarily on searches of the Factiva news database, reveals that institutional shareholders were largely mute as share prices fell and that boardroom practices and executive pay policies at various financial firms were problematic. On the other hand, there apparently were no Enron-style frauds, there was little criticism of the corporate governance of companies that were not under severe financial stress, and directors of troubled firms were far from passive, as they orchestrated CEO turnover at a rate far exceeding the norm in public companies. Given that corporate governance functioned tolerably well in companies removed from the S&P 500 and that a combination of regulation and market forces will likely prompt financial firms to scale back the free-wheeling business activities that arguably helped to precipitate the stock market meltdown, the case is not yet made for fundamental reform of current corporate governance arrangements.

Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on Delineation of Governance Roles & Responsibilities
      Task Force of the ABA Section of Business Law Corporate Governance Committee on Delineation of Governance Roles & Responsibilities, 65(1): 107–152 (November 2009)

Private Ordering and the Proxy Access Debate
      Lucian A. Bebchuk and Scott Hirst, 65(2): 329–360 (February 2010)
This Article examines two "meta" issues raised by opponents of the SEC's proposal to provide shareholders with rights to place director candidates on the company's proxy materials. First, opponents argue that, even assuming proxy access is desirable in many circumstances, the existing no-access default should be retained and the adoption of proxy access arrangements should be left to opting out of this default on a company-by-company basis. This Article, however, identifies strong reasons against retaining no-access as the default. There is substantial empirical evidence indicating that director insulation from removal is associated with lower firm value and worse performance. Furthermore, when opting out from a default arrangement serves shareholder interests, a switch is more likely to occur when it is favored by the board than when disfavored by the board. We analyze the impediments to shareholders' obtaining opt-outs that they favor but the board does not, and we present evidence indicating that such impediments are substantial. The asymmetry in the reversibility of defaults highlighted in this Article should play an important role in default selection.

Second, opponents of the SEC's proposed reforms argue that, if the SEC adopts a proxy access regime, shareholders should be free to opt out of this regime. We point out the tensions between advocating such opting out and the past positions of many of the opponents, as well as tensions between opting out and the general approach of the proxy rules. Nonetheless, we support allowing shareholders to opt out of a federal proxy access regime, provided that the opt-out process includes necessary safeguards. Opting out should require majority approval by shareholders in a vote where the benefits to shareholders of proxy access are adequately disclosed, and shareholders should be able to reverse past opt-out decisions by a majority vote at any time.

The implications of our analysis extend beyond proxy access to the choice of default rules for corporate elections, and to the ways in which shareholders should be able to opt out of election defaults. In particular, the current plurality voting default should be replaced with a majority voting default, and existing impediments to the ability of shareholders to opt out of arrangements that make it difficult to replace directors should be re-examined.

The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law
      Joseph A. Grundfest, 65(2): 361–394 (February 2010)
The U.S. Securities and Exchange Commission has proposed proxy rules that would mandate shareholder access under conditions that could be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedure Act. In contrast, a fully enabling opt-in proxy access rule is consistent with the administrative record developed to date and can be implemented with little delay.

From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate benefits for constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal corporate governance, but instead reflect a traditional contest for economic rent common to political brawls in Washington, D.C.

From an economic perspective, if the Commission decides to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule. The administrative record, however, currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission could conduct a stratified random sample of the shareholder base, and rely on the survey's results to set appropriate default proxy access rules. The Commission's powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency's authority.

Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988–2008
      Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 685–752 (May 2010)
Delaware's antitakeover statute, codified in Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. The question has become more important in recent years because Section 203's substantive bite has increased, as Exelon's recent hostile bid for NRG illustrates. Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 and were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid. While it remains possible that courts would nevertheless uphold Section 203's constitutionality on different grounds, the evidence would seem to suggest that the constitutionality of Section 203 is up for grabs. This Article offers specific changes to the Delaware statute that would preempt the constitutional challenge. If instead Section 203 were to fall on constitutional grounds, as Delaware's prior antitakeover statute did in 1987, it would also have implications for similar antitakeover statutes in thirty-two other U.S. states, which along with Delaware collectively cover 92% of all U.S. corporations

A Timely Look at DGCL Section 203
      Eileen T. Nugent, 65(3): 753–760 (May 2010) 

 

After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success
     
A. Gilchrist Sparks, III and Helen Bowers, 65(3): 761–770 (May 2010)

A Practical Response to a Hypothetical Analysis of Section 203's Constitutionality
      Stephen P. Lamb and Jeffrey M. Gorris , 65(3): 771–778 (May 2010)

A Trip Down Memory Lane: Reflections on Section 203 and Subramanian, Herscovici, and Barbetta
      Gregg A. Jarrell, 65(3): 779–788 (May 2010)

Is Delaware's Antitakeover Statute Unconstitutional? Further Analysis and a Reply to Symposium Participants
      Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 799–808 (May 2010)

Reinterpreting Section 141(e) of Delaware's General Corporation Law: Why Interested Directors Should Be "Fully Protected" in Relying on Expert Advice
     Thomas A. Uebler, 65(4): 1023–1054 (August 2010)
Directors of Delaware corporations often rely on lawyers, economists, investment bankers, professors, and many other experts in order to exercise their managerial power consistently with their fiduciary duties. Such reliance is encouraged by section 141(e) of the General Corporation Law of the State of Delaware, which states in part that directors "shall . . . be fully protected" in reasonably relying in good faith on expert advice. Section 141(e) should provide all directors of Delaware corporations a defense to liability if, in their capacity as directors, they reasonably relied in good faith on expert advice but nevertheless produced a transaction that is found to be unfair to the corporation or its stockholders, as long as the unfair aspect of the transaction arose from the expert advice. The Delaware Court of Chancery, however, has limited the full protection of section 141(e) by confining it to disinterested directors in duty of care cases. That limitation, which is not expressed in the statute, unfairly punishes interested directors who act with an honesty of purpose and reasonably rely in good faith on expert advice because it requires them to serve as guarantors of potentially flawed expert advice. This Article concludes that Delaware courts should reconsider the application and effect of section 141(e) and allow directors, regardless of their interest in a challenged transaction, to assert section 141(e) as a defense to liability in duty of care and duty of loyalty cases if they reasonably relied in good faith on expert advice.

The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions
      Corporation Law Committee of the Association of the Bar of the City of New York, 65(4): 1153–1204 (August 2010)

One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?
      Leo E. Strine, Jr., 66(1): 1–26 (November 2010)
This essay poses the question of how corporations can be managed to promote long–term growth if their stockholders do not act and think with the long term in mind. To that end, the essay highlights the underlying facts regarding how short a time most stockholders, including institutional investors, hold their shares, the tension between the institutional investors' incentive to think short term and the best interests of not only the corporations in which these investors buy stock, but also with the best interests of the institutional investors' own clients, who are saving to pay for college for their kids and for their own retirement. Although the primary purpose of the essay is to highlight this fundamental and too long ignored tension in current corporate governance, the essay also identifies some modest moves to better align the incentives of institutional investors with those of the people whose money they manage, in an effort to better focus all those with power within the corporation—i.e., the directors, the managers, and the stockholders—on the creation of durable, long–term wealth through the sale of useful products and services.

Restoring the Balance of Power in Corporate Management: Enforcing an Officer's Duty of Obedience
      Megan Wischmeier Shaner, 66(1): 27–60 (November 2010)
The issue of corporate officers' fiduciary duties has been a neglected area of Delaware law for over seventy years. This is surprising given the power and authority that these individuals wield over a corporation's business and affairs. The transgressions that took place at large public corporations such as Enron and WorldCom serve as reminders, even after all these years, of how officer misconduct can dramatically affect a corporation's fortunes. Following the scandals that occurred in corporate America in the beginning of the twenty–first century, as well as those that emerged in the recent financial crisis, there has been a renewed focus in certain quarters on rethinking the officer–centric model of corporate management that has come to exist.

Viewed as an effective means of achieving good corporate governance, much of the discussions surrounding increasing officer accountability pertain to the appropriate model for officer fiduciary duties and the standard of liability for such duties. This article discusses the application to officers of the duty of obedience that exists in agency law and asserts that emphasizing this duty of officers would be an effective step toward restoring the proper balance of power in corporate management. Based on the concept that certain persons are not only subject to the authority and direction of others in an organization's hierarchy, but have an affirmative duty to implement those directions, the duty of obedience exemplifies the relationship between directors and officers contemplated by corporate statutes and case law. Accordingly, this article asserts that focusing on enforcing the fiduciary duty of obedience would advance efforts to distinguish more clearly the governance responsibilities of officers from those of directors as well as increase officer accountability.  

 

 

After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success
      A. Gilchrist Sparks, III and Helen Bowers, 65(3): 761–770 (May 2010)

A Practical Response to a Hypothetical Analysis of Section 203's Constitutionality
      Stephen P. Lamb and Jeffrey M. Gorris , 65(3): 771–778 (May 2010)

A Trip Down Memory Lane: Reflections on Section 203 and Subramanian, Herscovici, and Barbetta
      Gregg A. Jarrell, 65(3): 779–788 (May 2010)

Is Delaware's Antitakeover Statute Unconstitutional? Further Analysis and a Reply to Symposium Participants
      Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 799–808 (May 2010)

Reinterpreting Section 141(e) of Delaware's General Corporation Law: Why Interested Directors Should Be "Fully Protected" in Relying on Expert Advice
     Thomas A. Uebler, 65(4): 1023–1054 (August 2010)
Directors of Delaware corporations often rely on lawyers, economists, investment bankers, professors, and many other experts in order to exercise their managerial power consistently with their fiduciary duties. Such reliance is encouraged by section 141(e) of the General Corporation Law of the State of Delaware, which states in part that directors "shall . . . be fully protected" in reasonably relying in good faith on expert advice. Section 141(e) should provide all directors of Delaware corporations a defense to liability if, in their capacity as directors, they reasonably relied in good faith on expert advice but nevertheless produced a transaction that is found to be unfair to the corporation or its stockholders, as long as the unfair aspect of the transaction arose from the expert advice. The Delaware Court of Chancery, however, has limited the full protection of section 141(e) by confining it to disinterested directors in duty of care cases. That limitation, which is not expressed in the statute, unfairly punishes interested directors who act with an honesty of purpose and reasonably rely in good faith on expert advice because it requires them to serve as guarantors of potentially flawed expert advice. This Article concludes that Delaware courts should reconsider the application and effect of section 141(e) and allow directors, regardless of their interest in a challenged transaction, to assert section 141(e) as a defense to liability in duty of care and duty of loyalty cases if they reasonably relied in good faith on expert advice.

The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions
      Corporation Law Committee of the Association of the Bar of the City of New York, 65(4): 1153–1204 (August 2010)

One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?
      Leo E. Strine, Jr., 66(1): 1–26 (November 2010)
This essay poses the question of how corporations can be managed to promote long–term growth if their stockholders do not act and think with the long term in mind. To that end, the essay highlights the underlying facts regarding how short a time most stockholders, including institutional investors, hold their shares, the tension between the institutional investors' incentive to think short term and the best interests of not only the corporations in which these investors buy stock, but also with the best interests of the institutional investors' own clients, who are saving to pay for college for their kids and for their own retirement. Although the primary purpose of the essay is to highlight this fundamental and too long ignored tension in current corporate governance, the essay also identifies some modest moves to better align the incentives of institutional investors with those of the people whose money they manage, in an effort to better focus all those with power within the corporation—i.e., the directors, the managers, and the stockholders—on the creation of durable, long–term wealth through the sale of useful products and services.

Restoring the Balance of Power in Corporate Management: Enforcing an Officer's Duty of Obedience
      Megan Wischmeier Shaner, 66(1): 27–60 (November 2010)
The issue of corporate officers' fiduciary duties has been a neglected area of Delaware law for over seventy years. This is surprising given the power and authority that these individuals wield over a corporation's business and affairs. The transgressions that took place at large public corporations such as Enron and WorldCom serve as reminders, even after all these years, of how officer misconduct can dramatically affect a corporation's fortunes. Following the scandals that occurred in corporate America in the beginning of the twenty–first century, as well as those that emerged in the recent financial crisis, there has been a renewed focus in certain quarters on rethinking the officer–centric model of corporate management that has come to exist.

Viewed as an effective means of achieving good corporate governance, much of the discussions surrounding increasing officer accountability pertain to the appropriate model for officer fiduciary duties and the standard of liability for such duties. This article discusses the application to officers of the duty of obedience that exists in agency law and asserts that emphasizing this duty of officers would be an effective step toward restoring the proper balance of power in corporate management. Based on the concept that certain persons are not only subject to the authority and direction of others in an organization's hierarchy, but have an affirmative duty to implement those directions, the duty of obedience exemplifies the relationship between directors and officers contemplated by corporate statutes and case law. Accordingly, this article asserts that focusing on enforcing the fiduciary duty of obedience would advance efforts to distinguish more clearly the governance responsibilities of officers from those of directors as well as increase officer accountability.

General Counsel Buffeted by Compliance Demands and Client Pressures May Face Personal Peril
     E. Norman Veasey and Christine T. Di Guglielmo,68(1): 57 - 80 (November 2012)
In the "New Reality" of the world of corporate general counsel, the challenges and tensions thrust upon one holding that office have intensified exponentially. Not only does the general counsel uniquely straddle the world of business and law in giving advice to the management and directors of her client (the corporation) but also she may find herself personally in the crosshairs of regulators, prosecutors, and litigants. So, as the rhetoric and real pressures increase to target the general counsel, she must have and use the skills, balance, independence, and courage to be simultaneously the persuasive counselor for her corporate client while being attuned to the need for self-preservation. The lessons from the past targeting of general counsel and other in-house lawyers are ominous. But the quintessential general counsel, acting as both persuasive counselor and a leader in setting the corporation's ethical tone, will do the right thing and thus be prepared to deal with these challenges and tensions.

Corporate Short-Termism—In the Boardroom and in the Courtroom
     Mark J. Roe, 68(4): 977-1006 (August 2013)
A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying more judicial measures that shield managers and boards from shareholder influence, so that boards and managers are more free to pursue sensible long-term strategies in their investment and management policies. In this piece, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further: several under-analyzed aspects of the American economy and corporate structure are in play, each of which alone could trump a prescription for more board autonomy. The American economy has alternative institutions that mitigate, or reverse, much of any short-term tendencies in public markets; the evidence that the stock market is, net, short-termist is inconclusive; inside-the-corporation labor market difficulties would be exacerbated by further judicial insulation of boards from markets; other institutions are better positioned to deal with any short-term horizons in business than corporate law courts; and the widely held view that short-term trading has increased dramatically in recent decades may over-interpret the data, as the holding duration for major stockholders, such as mutual funds like Fidelity and Vanguard, and major pension funds, does not seem to have shortened and there is unnoticed evidence that the pay duration of the CEO and other executives is shorter than the average stockholders’ duration, calling into question where the structural sources of potential short-termism lie. Overall, system-wide short-termism in public firms is something to watch, but not something that today should affect corporate lawmaking.

Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions
     S. Michael Sirkin; 69(2): 429-474 (February 2014)
This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders xi of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.

The Evolving Role of Special Committees in M&A Transactions: Seeking Business Judgment Rule Protection in the Context of Controlling Shareholder Transactions and Other Corporate Transactions Involving Conflicts of Interest
      Scott V. Simpson and Katherine Brody, 69(4): 1117-1146 (August 2014)
Special committees of independent, disinterested directors have been widely used by corporate boards to address conflicts of interests and reinforce directors’ satisfaction of their fiduciary duties in corporate transactions since the wave of increased M&A activity in the 1980’s. In 1988, The Business Lawyer published an article titled The Emerging Role of the Special Committee by one of this article’s co-authors, examining the emerging use of special committees of independent directors in transactions involving conflicts of interest. At that time, the Delaware courts had already begun to embrace the emergent and innovative mechanism for addressing corporate conflicts. Now, after over thirty years of scrutiny by the Delaware courts, it is clear that the special committee is a judicially recognized (and encouraged) way to address director conflicts of interest and mitigate litigation risk. This article will examine the role of the special committee in the context of conflict of interest transactions, with a particular focus on transactions involving a change of control or a controlling stockholder, from a U.S. perspective (in particular, under the laws of the State of Delaware), and will briefly consider international applications of the concepts discussed. To this end, this article will examine recent case law developments and compare the special committee processes at the heart of two high-profile Delaware decisions, and, finally, provide guidance to corporate practitioners on the successful implementation of a special committee process.

The Rights and Duties of Blockholder Directors
      J. Travis Laster and John Mark Zeberkiewicz, 70(1): 33-60 (Winter 2014/2015)
Delaware corporate law embraces a “board-centric” model of governance contemplating that, as a general matter, all directors will participate in a collective and deliberative decision-making process. Rather than serving as a justification for a board majority to disempower directors elected or appointed by or at the direction of a particular class or series of stock or an insurgent group—which we refer to as “blockholder” directors—this system recognizes the need for a balancing of both majority and minority rights. In this article, we review the rights and duties of all directors and highlight cases where both board majorities and blockholder directors have overstepped their bounds. We caution that board majorities should deliberate carefully before taking action that limits a blockholder director’s rights or excludes the blockholder director from participation in fundamental corporate matters. At the same time, we caution that blockholder directors should take care when exercising their rights, given that their affiliation with investors may make them vulnerable to duty of loyalty claims. We urge both sides to proceed with a sense of empathy toward the other and seek to make reasonable accommodations, and we emphasize the role that experienced corporate counsel can play in mediating disputes, resolving tensions, and striking the appropriate balance in the boardroom.

Consent in Corporate Law
     Lawrence A. Hamermesh; 70(1): 161-174 (Winter 2014/2015)
Recent Delaware case law explores and extends what the author describes as the “doctrine of corporate consent,” under which a stockholder is deemed to consent to changes in the corporate relationship that are adopted pursuant to statutory authority (such as by directors adopting bylaws). This essay examines whether and to what extent there may be limits on the application of the doctrine of corporate consent and whether fee-shifting bylaws exceed those limits.

Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
     70(2): 319-320 (Spring 2015)

Harmony or Dissonance? The Good Governance Ideas of Academics and Worldly Players
     Robert C. Clark; 70(2): 321-346 (Spring 2015)
This lecture asks questions concerning ideas about what constitutes good corporate governance that are espoused by academics, such as financial economists and law professors, and by more worldly players such as legislators, rule makers, governance rating firms, large institutional investors, law firms that represent corporate clients, and courts. Are there discernible trends and patterns in the views espoused by these different categories of actors, despite all the differences among individual actors within each category? I propose that there are such patterns, offer some initial thoughts about the characteristic themes and differences, and hypothesize about the reasons for the differences. At the end I reflect on what a benign policy maker interested in increasing overall social welfare might do with these observations.

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.

Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations
     Eric S. Klinger-Wilensky and Nathan P. Emeritz, 71(1): 53-86 (Winter 2015/2016)
The liability of RBC in last year’s In re Rural/Metro decision was derivative of several breaches of fiduciary duty by the Rural/Metro directors, including those directors’ failing “to provide active and direct oversight of RBC.” In discussing that failure, the Court of Chancery stated that a “part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management and their advisors.” In the year since Rural/Metro, there has been an ongoing discussion—in scholarly and trade journals, courtrooms and the marketplace—regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve. In this article, we set out our belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor. We then discuss four contractual provisions that, we believe, are helpful in providing the active and direct oversight that was found lacking in Rural/Metro.

Anti-Primacy: Sharing Power in American Corporations
     Robert B. Thompson, 71(2): 381-426 (Spring 2016)
Prominent theories of corporate governance frequently adopt primacy as an organizing theme. Shareholder primacy is the oldest and most used of this genre. Director primacy has grown dramatically, presenting in at least two distinct versions. A variety of alternatives have followed—primacy for CEOs, employees, creditors. All of these theories cannot be right. This article asserts that none of them are. The alternative developed here is one of shared power among the three actors named in corporations statutes with judges tasked to keep all players in the game. The debunking part of the article demonstrates how the suggested parties lack legal or economic characteristics necessary for primacy. The prescriptive part of the article suggests that we can better understand the multiple uses of primacy if we recognize that law is not prescribing first principles for governance of firms, but rather providing a structure that works given the economic and business environment in place for modern corporations where separation of function and efficiencies of managers provide the starting point. Thus, the familiar statutory language putting all power in the board must be read against the reality of the discontinuous nature of board (and shareholder) involvement in governance. Corporate governance documents of the largest American corporations, as discussed in the article, are consistent with this reality, assigning management to officers and using verbs like oversee, review, and counsel as the director functions. The last part examines dispute resolution and the role of judges in such a world, with a particular focus on the shareholder/director boundary. At this boundary there are two distinct judicial roles, the traditional role focusing on use of fiduciary duty to check conflict and other director incapacity and the less-recognized role of protecting shareholder self-help. In this more modern context shareholders, because of market and economic developments, are able to effectively participate in governance in a way that was not practical three decades ago, when the key Delaware legal doctrines were taking root. What is particularly interesting here is how courts, commentators, and institutional investors act in a way that is consistent with a shared approach to power, as opposed to the primacy of any of the theories initially suggested.

Public Company Virtual-Only Annual Meetings
     Lisa A. Fontenot, 73(1): 35-52 (Winter 2017/2018)
Public companies traditionally hold annual shareholder meetings using a formal in-person format. Some companies have more recently supplemented the meeting with audio or video streaming and are now adding an electronic component to a physical meeting to allow for remote participation, commonly referred to as a “hybrid meeting.” A relatively small but fast-growing number of companies are holding their annual shareholder meetings on an electronic-only basis with no physical meeting, known as a “virtual-only meeting.” This article discusses the legal landscape for virtual-only meetings, briefly reviews the history of the practice, and explores the controversy they present with certain institutional investors and activists. Its objective is to provide an initial roadmap of legal and practical considerations for companies considering virtualonly shareholders meetings.

In Defense of E. Merrick Dodd: Corporate Social Responsibility in Modern Corporate Law and Investment Strategy
     Michael J. Vargas, 73(2): 337-374 (Spring 2018)
This response to E. Merrick Dodd and the Rise and Fall of Corporate Stakeholder Theory by Charles Elson and Nicholas Goossen argues that stakeholder theory has not failed, but rather has been incorporated into standard business practice through the widely accepted principles of corporate social responsibility (“CSR”). Forty years of research demonstrates that CSR contributes or may even be essential to profitability, which may explain why investments in ESG funds have grown dramatically in recent years, even among institutional investors. This response also examines many of the legal and economic theories that Elson and Goossen employ in their attack on stakeholder theory, and argues that they are, at best, debatable.

Reconsidering Stockholder Primacy in an Era of Corporate Purpose
      David J. Berger, 74(3) 659-676 (Summer 2019)
Ideology matters. Since the 1980s stockholder primacy has been the dominant ideology shaping corporate law. As a result, case law, director conduct, and our understanding of “best governance practices” have all been viewed under a single prism: how do these rules impact stockholder value? Even the recent debate over corporate purpose has largely been limited to stockholders, directors, and (of course) academics. Excluded from the debate are the vast majority of the population that owns little or no stock, as well as other corporate stakeholders such as employees and communities. This article considers how the discussion of corporate purpose is limited by stockholder primacy, and how a true debate over corporate purpose may require a reconsideration of the dominant ideology over stockholder purpose.

The Shifting Sands of Conflict of Interest Standards: The Duty of Loyalty Meets the Real World with Questions of Process and Fairness
     Stuart R. Cohn, 74(4): 1077-1104 (Fall 2019)
Standards governing the validity of conflict-of-interest transactions by corporate directors or others in dominant positions have significantly evolved from the early days of strict judicial condemnation to the current statutory provisions. These provisions place great faith in and emphasis on the judgment of disinterested directors or shareholders. This evolution has not been consistent among states, given that substantial variations exist regarding both statutory provisions and judicial interpretations. To illustrate the variations, this article examines and compares the Delaware and Model Business Corporation Act standards. The variations reflect the concerns that arise when a director’s fiduciary duty of loyalty conflicts with the realities and demands of the commercial world. This article examines the evolution of conflict-of-interest standards and existing variations in light of two fundamental issues: (i) whether the combination of statutory and fiduciary standards obligates directors to obtain advance approval of conflict transactions and (ii) the capacity of shareholders to challenge conflict transactions on the grounds of fairness to the corporation, even after board or shareholder approval. The article concludes that statutory and fiduciary standards obligate directors to obtain advance approval of conflict transactions and provides recommendations for addressing these two issues in a manner consistent with statutory provisions and fiduciary standards.

Interview with Marty Lipton
      Jessica C. Pearlman; 75(2): 1709-1724 (Spring 2020)
In September of 2019, after wrapping up meetings of the Mergers and Acquisitions (“M&A”) Committee of the Business Law Section of the American Bar Association (“ABA”), I took the train from Washington, D.C. to New York City to meet with Marty Lipton—the well-known founder of Wachtell, Lipton, Rosen & Katz—in a conference room at his firm. It was perfect timing to have this conversation with Mr. Lipton, given recent developments relating to corporate views on the constituencies corporations may take into account in their decision-making.

Dodge v. Ford Motor Co. at 100: The Enduring Legacy of Corporate Law’s Most Controversial Case
     Michael J. Vargas, 75(3): 2103-2122 (Summer 2020)
This article examines Dodge v. Ford on its 100th anniversary. In Dodge v. Ford, the Michigan Supreme Court held that a business corporation is organized for the profit of its shareholders, and the directors must operate it in service to that end. Despite the fact that Dodge v. Ford is rarely cited in judicial opinions, the case continues to spark controversy in legal scholarship. There is little justification for this scholarly attention because the factual basis is little more than a caricature of Henry Ford, and subsequent developments in corporate law have all but eviscerated the precedential value of the case. Rather, the legacy of Dodge v. Ford may simply be that it serves as a convenient talisman, standing for the one sentence anyone actually cares about and rolled out with each new battle in the war between shareholder profit maximization and corporate social responsibility.