Evolving Standards of Judicial Review of Procedural Defenses in Proxy Contests
Irwin H. Warren and Kevin G. Abrams, 47(2): 647–70 (Feb. 1992)
Recent attempts by insurgents to acquire control over a board of directors often have centered around a proxy contest or a consent solicitation. Predictably, incumbents have reacted with various defensive measures affecting the stockholders' franchise, including the postponement of a stockholder meeting, using a rights plan to frustrate a joint solicitation, and relying upon advance notice bylaws. This Article reviews recent decisions in which the courts have applied a reformulation of the Unocal standard of judicial review to adjudicate conflicts arising when procedural defenses involving a stockholder solicitation interfere with the right of the stockholders to exercise their voting powers.
The Fiduciary Duties of Insurgent Boards
John M. Olson, 47(3): 1011–29 (May 1992)
Many recent corporate takeover attempts have employed the combination of a tender offer and a proxy contest. This Article analyzes the fiduciary duties of directors elected through the efforts of tender offerors and suggests that there may be problems in combining the two takeover methods.
Defensive Tactics in Consent Solicitations
Eric S. Robinson, 51(3): 677–701 (May 1996)
Consent solicitations are increasingly being used by hostile bidders to facilitate takeovers and by stockholder activists to challenge corporate strategies. This Article discusses some of the principle defensive tactics that can be employed by a Delaware corporation facing a consent solicitation, including setting the record date, establishing a deadline for delivery of consents, and contesting dual consent solicitation/proxy fights. The Article also examines the legal principles and practices involved in tabulating consents, including their application in hypothetical cases.
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.
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)
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)
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)
Preemption as Micromanagement
Larry Ribstein, 65(3): 789–798 (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)
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.
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.