Stockholders and Shareholders
Consents to Trouble
Leo Herzel, Scott J. Davis, and Daniel Harris, 42(1): 135–44 (Nov. 1986)
This Article discusses the ambiguities and difficulties encountered by public companies under the Delaware statute governing action by stockholder consent. The Article criticizes the statute as a well-intentioned mistake and suggests some simple amendments to solve the problem.
Action by Written Consent: A Reply to Messrs. Herzel, Davis, and Harris
Jesse A. Finkelstein and Gregory V. Varallo, 42(4): 1075–86 (Aug. 1987)
Stockholder action by written consent is often an expedient alternative to action at a stockholders' meeting. The authors respond to Consents to Trouble and discuss a pending bill that would amend the Delaware written consent procedure. See Leo Herzel et al., Consents to Trouble , 42 BUS. LAW. 135 (1986).
New Jersey Shareholders Protection Act: Validity Questioned in Light of CTS Corp. v. Dynamics Corp. of America
Michael H. Hurwitz, 44(1): 141–57 (Nov. 1988)
On August 5, 1986, the New Jersey legislature enacted into law one of the most stringent antitakeover statutes to be adopted in the United States since the Supreme Court invalidated the Illinois statute in Edgar v. MITE Corp ., 457 U.S. 624 (1982). This Article discusses the scope of the New Jersey legislation and discusses its constitutionality in light of recent Supreme Court and lower court decisions interpreting similar legislation adopted in other states.
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.
Virginia Bankshares, Inc. v. Sandberg: The Golden Rule of Section 14(a)
Eric G. Orlinsky, 47(2): 837–62 (Feb. 1992)
In Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), the Supreme Court held that false or misleading statements of opinion or belief by corporate directors may be actionable under rule 14a-9. Nevertheless, the Court rejected the respondents' claim by holding that minority shareholders, whose votes are not required to approve a transaction, cannot prove causation of injury in a section 14(a) implied private right of action. This Note concurs in the former conclusion but criticizes the latter causation holding as an insupportable attempt to constrict the implied private right of action under section 14(a). It concludes that courts may use the Sandberg decision to restrict unjustifiably other implied private rights under the federal securities laws.
The Shareholder's Cause of Action for Oppression
Robert B. Thompson, 48(2): 699–745 (Feb. 1993)
This Article addresses the extent to which investors in close corporations can expect judicial relief from the usual corporate norms of entity permanence and centralized control. The author traces two lines of cases that have evolved in recent years: a shareholder's action for oppression under dissolution or related statutes and a shareholder's direct individual cause of action for a majority shareholder's breach of fiduciary duty in a close corporation. Although these doctrines overlap, they are not completely interchangeable. The author suggests that they should be seen as two manifestations of a minority shareholder's cause of action for oppression.
Exxon Revisited: The SEC Allows Pennzoil to Exclude Both Mandatory and Precatory Proposals Seeking to Create a Shareholder Advisory Committee
Charles F. Richards, Jr. and Anne C. Foster, 48(4): 1509–19 (Aug. 1993)
The SEC changed its position with respect to shareholder advisory committees from last year's requirement that Exxon include a shareholder proposal for a bylaw amendment to this year's decision to permit Pennzoil to exclude a similar proposal. This Article summarizes the legal argument involved and the procedural history of the Pennzoil decisions.
Shareholder Activism and Insurgency Under the New Proxy Rules
Thomas W. Briggs, 50(1): 99–149 (Nov. 1994)
This Article addresses what the SEC's new proxy rules mean for shareholder activists and insurgents, particularly those ready and able to conduct a proxy contest for corporate control. The Article focuses on tactical and legal issues under the proxy rules and the rules under section 13(d) of the Exchange Act.
Changes in the Model Business Corporation Act–Amendments Pertaining to Shareholder Meetings & Voting
Committee on Corporate Laws, 51(1): 209–21 (Nov. 1995)
The Committee has proposed amendments governing procedures for shareholder participation in corporate affairs, which include authorizing electronic transmission of proxies, establishing procedures for the conduct of shareholder meetings, requiring inspectors of election and specifying their duties, and revising procedures for calling a special shareholders' meeting and acting by unanimous consent.
The Puzzling Paradox of Preferred Stock (And Why We Should Care About It)
Lawrence E. Mitchell, 51(2): 443–77 (Feb. 1996)
Preferred stock is an important source of business capital but has largely been ignored in legal scholarship. This Article explores the peculiar place held by preferred stock in the corporation's financial structure, with a careful look at the interplay between contractual and fiduciary duties owed by the corporation and its management to the preferred stockholders. It concludes that preferred stockholders are perhaps the most legally disadvantaged of the corporation's financial constituents and suggests a contractual provision to remedy that situation.
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.
Stockholders, Stakeholders, and Bagholders (or How Investor Diversification Affects Fiduciary Duty)
Richard A. Booth, 53(2): 429–78 (Feb. 1998)
The most basic question in corporation law is: To whom does management owe its fiduciary duty, and what does that duty entail? The traditional wisdom is that management should serve the interests of the corporation and the stockholders who own it by maximizing stockholder wealth. A significant number of legal scholars argue, however, that management duty should be more broadly construed to include other constituencies ("stakeholders"), such as employees, creditors, customers, suppliers, and the community at large. The distinction makes a difference. The broader view of management duty means that management has more discretion and that stockholders will seldom have recourse if management fails to maximize profits. Nevertheless, many states have adopted so-called "other constituency'' statutes permitting–and in some cases arguably requiring–management to consider such other interests. Ironically, management is the one constituency that identifies most with the fortunes of the corporation as an entity. A diversified stockholder can afford to win some and lose some. Management cannot. Management stands to lose the most if the corporation fails. Thus, management is not likely to pursue high-risk, high-return strategies, even in the absence of another constituency statute. After all, if such strategies lead to the ruin of the company, it is management that is left holding the bag.
Shareholder By-Laws Requiring Boards of Directors to Dismantle Rights Plans Are Unlikely to Survive Scrutiny Under Delaware Law
Charles F. Richards, Jr. and Robert J. Stearn, Jr., 54(2): 607–35 (Feb. 1999)
Shareholder proposals touching upon issues of corporate governance have proliferated in the 1990s. Recent proposals include the "shareholder rights by-law," which purports to require a board of directors to "pull the pill" when faced with a hostile acquisition offer. Although the Delaware courts have not yet ruled on the validity of the shareholder rights by-law, the by-law is not likely to survive under Delaware Law.
The Core Institutions that Support Strong Securities Markets
Bernard Black, 55(4): 1565–1607 (Aug. 2000)
A strong securities market rests upon a complex network of supporting institutions that ensure that minority shareholders (i) receive good information about the value of a company's business and (ii) can have confidence that a company's managers and controlling shareholders will not cheat them out of most or all of the value of their investment. A country whose laws and related institutions fail on either count cannot develop a strong stock market, forcing firms to rely on internal financing or bank financing– both of which have important shortcomings. This Article explains why these two investor protection issues are critical, related, and hard to solve and discusses which laws and institutions are most important for each.
The Overlooked Corporate Finance Problems of a Microsoft Breakup
Lucian Arye Bebchuk and David I. Walker, 56(2): 459 (Feb 2001)
This Article identifies problems with the ordered breakup of Microsoft that appear to have been completely overlooked by the government, the judge, and the commentators. The breakup order prohibits Bill Gates and other large Microsoft shareholders from owning shares in both of the companies that would result from the separation. Given this prohibition, this Article shows dividing the securities in the resultant companies among the shareholders is not as straightforward as the government has suggested. Any method of distributing the securities that would comply with this mandate would either (i) impose a significant financial penalty on Microsoft's large shareholders that is not contemplated by the order or (ii) create a risk of a substantial transfer of value between Microsoft's shareholders. In addition to identifying the difficulties and costs involved in the two distribution methods that would comply with the cross-shareholding prohibition, this Article examines how the breakup order could be refined to reduce these difficulties and costs. The problems identified should be addressed if a breakup is ultimately to be pursued and should be taken into account in making the basic decision of whether to break up Microsoft at all.
Second-Generation Shareholder Bylaws: Post-Quickturn Alternatives
John C. Coates IV & Bradley C. Faris, 56(4): 1323 (Aug. 2001)
Practitioners believe shareholder-initiated bylaws that specifically eliminate poison pills will turn out to be illegal in Delaware. The authors assume that consensus is correct and ask: What next? Threat or opportunity, bylaws remain a potent weapon. Shareholder activists may use other types of bylaws to facilitate high-premium hostile takeovers or to pursue a more durable form of collective power, or both. The authors analyze three "second-generation" bylaws that (i) are likely to be upheld by Delaware courts, (ii) would shift power from boards to shareholders, but (iii) are not so dramatic as to insure a manager- induced legislative backlash. Boards can expect to see proposals for these or similar bylaws in the future; courts and the Securities and Exchange Commission can expect to see challenges to their legality; and legislatures can expect corporate lobbies to seek legislation to reign in this new form of shareholder voice. Analysis of these bylaws also casts light on the latent tension between shareholder authority and manager power in American corporate law.
Minority Discounts and Control Premiums in Appraisal Proceedings
Richard A. Booth, 57(1): 127 (Nov. 2001)
In a merger, a stockholder often has a statutory right of dissent and appraisal under which the stockholder may demand to be paid fair value exclusive of any gain or loss that may arise from the merger itself. Most courts and commentators agree that a dissenting stockholder should ordinarily receive a pro rata share of the fair value of the corporation without any discount simply because minority shares lack control. In several recent cases, the courts have indicated that a minority stockholder is thus entitled to a share of the control value of the corporation even though the merger does not constitute a sale of control (as in a going private transaction) and even though control of the subject corporation is not contestable (as where a single stockholder owns an outright majority of shares). In a similar vein, several courts have ruled that reliance on market prices for purposes of appraisal results in an inherent minority discount, thus requiring that a premium for control be added. In short, the emerging rule appears to be that fair value is the price at which a controlling stockholder could sell control, because failure to do so amounts to imposition of a minority discount. It is the thesis here that the routine addition of a control premium is inconsistent with settled corporation law and good policy, because (among other reasons) it is based on the unwarranted assumption that the source of a control premium must be a minority discount. To be sure, the courts should adjust for a minority discount if one is found. But the routine addition of a control premium as part of fair value creates a windfall for dissenting stockholders and infringes the legitimate rights of majority stockholders.
Modeling the Conversion Decisions of Preferred Stock
Timothy J. Harris, 58(2): 587 (Feb. 2003)
Regardless of the complexity of the capital structure of a company, the decision of a venture capital investor as to whether to convert its preferred stock to common stock in the event of an acquisition is driven by comparing the amount of acquisition proceeds that the venture capital investor would receive as a preferred shareholder to the amount of acquisition proceeds that the venture capital investor would receive as a common shareholder. In the case of participating preferred stock subject to a cap, the amount of acquisition proceeds that a venture capital investor would receive depends in part upon the conversion decisions of other preferred shareholders. This Article outlines the methodology for modeling conversion decisions using any of the widely available spreadsheet software programs. From these models, companies and venture capital investors can predict the acquisition prices at which preferred shareholders will convert to common stock.
Going-Private "Dilemma"?--Not in Delaware
By Jon E. Abramczyk, Jason A. Cincilla and James D. Honaker , 58(4): 1351–l71 (Aug. 2003)
This Article is a response to Bradley R. Aronstam, R. Franklin Balotti & Timo Rehbock, Delaware's Going-Private Dilemma: Fostering Protections for Minority Shareholder in the Wake of Siliconix and Unocal Exploration, 58 Bus. Law. 519 (Feb. 2003), in which the authors contend that Delaware law does not adequately protect the rights of minority stockholders when their interests are purchased by a majority stockholder through a tender offer and follow-on short-form merger. This Article surveys the current case law on tender offers and the statutory right of appraisal and concludes that the concerns raised in the February article are addressed by the existing framework for going-private transactions. The proposals to alter the current jurisprudence or amend the appraisal statute that are presented in the February article are not only unnecessary but also undesirable from the standpoint of minority stockholders because additional regulation would discourage majority stockholders from initiating going-private transactions that offer minority stockholders a premium for their stake in the company.
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)
Revisiting Delaware's Going Private Dilemma Post– Pure Resources
Bradley R. Aronstam, R. Franklin Balotti, and Timo Rehbock, 59(4): 1459–82 (Aug. 2004)
This Article revisits the issues explored in Delaware's Going-Private Dilemma: Fostering Protections for Minority Shareholders in the Wake of Siliconix and Unocal Exploration (" Delaware's Going-Private Dilemma "), an article published in the February 2003 edition of The Business Lawyer. Specifically, it reexamines Delaware's Going-Private Dilemma in light of the Court of Chancery's decision in In re Pure Resources Shareholders Litigation (" Pure Resources ") and the critique offered in Going-Private "Dilemma"—Not in Delaware (the "Response"), an article published in the August 2003 edition of The Business Lawyer. The Article argues that the Response misconstrues Delaware's Going-Private Dilemma by, among other things, treating the two steps of going-private transactions as analytically unrelated. It moreover charges that the Response overstates the supposed effectiveness of the existing safeguards available to minority shareholders in such transactions and concludes that, notwithstanding the additional and laudable protections proffered by the Court of Chancery in Pure Resources , the need for the proposed reforms advocated in Delaware's Going-Private Dilemma continues.
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.
Twenty—Five Years After Takeover Bids in the Target's Boardroom: Old Battles, New Attacks and the Continuing War
Martin Lipton, 60(4): 1369—1382 (August 2005)
Twenty—five years after the publication of Takeover Bids in the Target's Boardroom, Martin Lipton reflects on the development of, and current discourse regarding, the key principles presented in Takeover Bids --a rejection of board passivity and the endorsement of the board as gatekeeper. These theories were affirmed by both common law and legislative guidance in the years following the publication of Takeover Bids. Mr. Lipton identifies the next wave of challenges to these core principles, as evident in the recent multi—level and multi—jurisdictional attack on the ability of the board and management to manage effectively the corporation. He discusses how proposals from special—interest shareholders and proxy advisory firms, as well as new state common law theories of director liability, pose significant threats to the fundamental principles that underlie the business judgment rule and that fuel entrepreneurialism through the corporate structure.
When the Existing Economic Order Deserves a Champion: The Enduring Relevance of Martin Lipton's Vision of the Corporate Law
William T. Allen and Leo E. Strine, Jr., 60(4): 1383—1398 (August 2005)
Deepest understanding comes when we see in the particular events before us the working out of the most general forces. In this essay, the authors seek to view Martin Lipton's important contribution to the development of corporation law of his era in terms of the largest economic and ideological forces at play over the last twenty—five years. They conclude by looking forward and see in the development of powerful institutional investors a new set of problems for those interested in the responsible control of private economic power.
UNOCAL Revisited: Lipton's Influence on Bedrock Takeover Jurisprudence
R. Franklin Balotti, Gregory V. Varallo, and Brock E. Czeschin, 60(4): 1399—1418 (August 2005)
When Martin Lipton published Takeover Bids in the Target's Boardroom twenty—five years ago almost none of the now familiar takeover jurisprudence had been decided. Delaware, as well as other state and federal courts, were struggling to articulate a standard of review which balanced concerns about a board's independence when faced with a takeover with the more traditional deference to directors' decision—making authority. Mr. Lipton argued that a target's board--as opposed to its shareholders--should have primacy in responding to a takeover bid. Five years later, in Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court announced the legal standard that would govern target directors of Delaware corporations in the takeover context. With Unocal, Delaware takeover law gained a series of principles which in many respects form the bedrock of modern takeover jurisprudence. This article investigates how Lipton's articleÂ influenced the Delaware Supreme Court's approach to takeover law in the Unocal decision.
Takeovers in the Boardroom: Burke versus Schumpeter
Ronald J. Gilson and Reinier Kraakman, 60(4): 1419—1434 (August 2005)
This article, written on the occasion of the 25th anniversary of Martin Lipton's 1979 article, Takeover Bids in the Target's Boardroom expresses the view that Takeover Bids is a Burkean take on a messy Schumpeterian world that, during 1980s, reached its apex in Drexel Burnham's democratization of finance through the junk bond market. The authors of this article reflect on the irony that today, long after the Delaware Supreme Court has adopted many of Lipton's views, there is a new market for corporate control that no longer poses the threats--or supports the opportunities--that the market of the 1980s created. Today's strategic bidders and their targets share the same boardroom views. And for precisely this reason, "just say no" is no longer the battle cry that it once was. It stirred the crowds in the past precisely because hostile takeovers could be credibly depicted as a sweeping threat to the status quo--a claim that no one would make about today's strategic bidders. The market for corporate control now is a process of peer review, rather than an instrument of systemic change. What is lost as a result is just what, in the conservative view, has been gained: the capacity of the market for corporate control to ignite the dynamism that in our view has served the U.S. economy so well. Although Lipton may still lose today's battle to allow targets to just say no to intra—establishment takeovers, he will still have won the larger war. The authors of this article conclude that for now, at least, boardrooms are insulated from much of the force of a truly Schumpeterian market in corporate control of the sort we briefly glimpsed during the 1980s.
Takeovers in the Ivory Tower: How Academics Are Learning Martin Lipton May Be Right
Lynn A. Stout, 60(4): 1435—1454 (August 2005)
In 1979, Martin Lipton published an essay arguing that corporate law gives directors and not shareholders the authority to decide whether a company should sell itself at a premium, and that this is a good thing for both shareholders and society. After years of vocal disagreement many academics are starting to suspect Martin Lipton is right. Much of the academic hostility that initially greeted Lipton's claim was based on two important ideas in finance economics: efficient market theory and the "principal—agent" model of the public corporation. Scholars have begun to examine each of these ideas more closely, and neither is holding up especially well. This article questions whether maximizing share price is always in the best interest of society, the firm, or shareholders themselves.
M&A Today--Practical Thoughts for Directors and Deal—makers
Peter Allan Atkins, 60(4): 1455—1468 (August 2005)
The publication of Marty Lipton's Takeover Bids in the Target's Boardroom 25 years ago reflected the need for guidance to directors and other key participants in the M&A world. An important perspective on that guidance involves considering where we are today in the M&A arena. This article addresses that inquiry from a practitioner's viewpoint. It offers directors and deal—makers practical, common—sensical and experience—tested advice on how director decisions and deal—making efforts can comport with the substantial responsibilities and goals of these key participants in today's M&A world. The author underscores that the rules of engagement in the M&A arena for directors and deal—makers today are quite often, and importantly, about basics, common sense and sound process--and that there is a clear and continuing need to develop a plain—English understanding of these rules.
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.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
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.
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.
Freezeout Doctrine: Going Private at the Intersection of the Market and the Law
Faith Stevelman, 62(3): 775–912 (May 2007)
Delaware's fiduciary doctrine governing going private transactions by controlling shareholders is presently in disarray. Controllers generally select between single step cash-out mergers and tender offers followed by short-form mergers to do these freezeouts, and they are subject to very different equitable standards depending on the format selected by the controller. Furthermore, the courts' longstanding commitment to applying strict scrutiny in the adjudication of freezeouts is in tension with the popular disfavor towards private class-action litigation. This disarray threatens minorities' interests in freezeouts and capital market values more generally. This Article reviews the foundations of freezeout doctrine and proposes that the Entire Fairness doctrine should apply as the standard of review in all freezeouts unless prior to accepting the controller's offer the target company's independent directors conducted an auction or market check to ascertain if better offers were available.
Meeting Daubert Standards in Calculating Damages for Shareholder Class Action Litigation
Linda Allen, 62(3): 955–970 (May 2007)
Current practice in class action litigation entails a series of arbitrary assumptions about fundamental parameters that may not meet Daubert standards of scientific evidence. This Article surveys the commonly used models used to estimate stock price inflation and the number of damaged shares for the purposes of damage calculations in shareholder class action litigation. This Article proposes tractable methods for improving current practice using: (1) a regression approach to event studies and (2) a new model (denoted the Theoretically-grounded Microstructure Trading Model or TMTM) that incorporates the well-established literature of market microstructure and trade direction into a model that can be estimated utilizing publicly available data. Actual trading data are used to validate the assumptions of the TMTM approach and to refute the assumptions of extant trading models such as the Proportional Trading Model (PTM) and the Two Trader Model (TTM).
Pandora's Ballot Box, Or a Proxy with Moxie? The Majority Voting Amendments to Delaware Corporate Law (The Legend of Martin Lipton, Re-Examined)
J.W. Verret, 62(3): 1007–1058 (May 2007)
In August 2006 the Delaware General Assembly adopted an amendment to the Delaware General Corporation Law which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval. This Article compares this provision to other approaches and explains the reasons underlying its adoption. It also briefly summarizes the evolving shareholder empowerment debate and analyzes the majority voting provision in the context of that discussion. The presence of activist shareholders will be an especially important phenomenon affecting this analysis. This Article then describes some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities laws affecting the shareholder franchise. The most prevalent corporate strategies responding to this movement are explored and the difficulties of implementing majority voting are described. Finally, voting schemes from the political sphere are analyzed to find analogous lessons for the corporate arena, including exploring a runoff election proposal for corporate elections. The Article concludes with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, New York Stock Exchange regulatory initiatives, and the responses from Delaware incorporated entities. This Article blends financial regulatory theory, interpretation of Delaware Court of Chancery cases, and practical analysis on the future of the majority voting movement and the strategic choices facing board of directors. The result is a developed framework for how majority voting could serve to alter significantly the balance of power between shareholders and board members.
At the Crossroads: The Intersection of Federal Securities Laws and the Bankruptcy Code
Wendy Walker, Mike Wiles, Alan Maza, and David Eskew, 63(1): 125–146 (November 2007)
This Article examines the ways in which the federal securities laws and the U.S. Bankruptcy Code do—and, at times, do not—work together, with an emphasis on the potential conflict between the Fair Funds Provision of the Sarbanes–Oxley Act of 2002, which permits the U.S. Securities and Exchange Commission to distribute penalties and disgorged funds collected from debtor–corporations to shareholders, and the "absolute priority rule," which prevents distributions to equity holders in Chapter 11 reorganization cases absent payment in full of creditors. Although touched upon in some of the largest bankruptcy cases in recent years, including Enron, WorldCom, and Adelphia, this potential conflict has not been squarely addressed by the courts and presents issues which should be examined by Congress.
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.
Special Report of the TriBar Opinion Committee: Duly Authorized Opinions on Preferred Stock
TriBar Opinion Committee, 63(3): 921–928 (May 2008)
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.
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.
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.
Nibbling at the Edges—Regulation of Short Selling: Policing Fails to Deliver and Restoration of an Uptick Rule
Douglas M. Branson, 65(1): 67–94 (November 2009)
For several decades, most commentators' mantra on short selling has been promotion of informational efficiency, which translated into minimal regulation. Individual investors, the U.S. Securities & Exchange Commission ("SEC"), and other groups of observers believe that escalating amounts of short selling, including naked short selling, have been a substantial cause of market volatility, investors' wholesale retreat from the stock markets, and severely declining market indexes and share prices, particularly in financial stocks. This Article reviews recent SEC proposals and enactments, including restoration of an uptick or similar "sales price restriction" rule, or installation of circuit breakers adding restrictions on short selling of stock following a precipitous price decline in the stock, and enactment of formerly temporary regulations requiring market participants (broker-dealers mostly) to close fails to deliver after three days rather than thirteen days. Open fails to deliver often are evidence of naked short selling and stock price manipulation, which the SEC has battled since adoption of Regulation SHO in 2004. The Article concludes that these are Main Street versus Wall Street issues. Damping down market volatility is more important to Main Street traders than is promotion of high degrees of informational efficiency, while for professional traders, hedge funds, and high volume short sellers, informational efficiency is more important. The SEC's objective is not to serve one goal rather than the other but to regulate so as to achieve a balance between the two policy objectives.
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.
Attacking the Classified Board of Directors: Shaky Foundations for Shareholder Zeal
Michael E. Murphy, 65(2): 441–486 (February 2010)
The practice of dividing the corporate board into classes, with each class up for election in successive years, has venerable roots in corporate practice. However, it has recently come under concerted attack by institutional shareholders that fear its misuse as a takeover defense. Examining the issue from several perspectives, this Article argues that the possible misuse of the classified board as a takeover defense justifies no more than case-by-case consideration. A separate concern is that the classified board may constitute a barrier to a minority shareholder voice. While this concern has some merit, this Article argues that the classified board is a redundant barrier to a minority shareholder voice that has importance only if preceded by other reforms to enfranchise minority shareholders.
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)
This article responds to the article Is Delaware’s Antitakeover Statute Unconstitutional? Evidence from 1988 –2008 , by Guhan Subramanian, Steven Herscovici, and Brian Barbetta. That article also appears in this issue of The Business Lawyer. The author argues that SHB’s analysis actually provides support for the opposite result by demonstrating the practical problems associated with a broad federal role in corporate governance.
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.
SEC Enforcement Actions and Issuer Litigation in the Context of a "Short Attack"
Charles F. Walker and Colin D. Forbes; 68(3): 687-738 (July 2013)
Issuers faced with a short attack—short selling of the issuer’s stock combined with the spread of negative rumors—may contemplate defensive strategies such as litigation and contacting government regulators, in addition to the investor and public relations efforts that are typically utilized in the wake of negative media coverage. Precedent calls for caution in these circumstances, as the record shows that the results of such strategies are mixed, with the SEC often turning its investigative focus to the issuer, and with costly litigation frequently resulting in compromise. This article begins with a discussion of the recent history of regulatory and legislative efforts to address concerns around short attacks and “naked” short selling. It then turns to a discussion of the SEC enforcement cases and private litigation relating to short attacks, and concludes that the SEC has appropriately brought enforcement cases only in clear-cut instances of fraud, while policing the margins through enforcement of the technical requirements of Regulation SHO. The article shows that the SEC enforcement record in this area, and the proof issues generally attendant to these cases, present important considerations for issuers who perceive themselves under siege in a short attack.
Restoring Equity: Delaware’s Legislative Cure for Defects in Stock Issuances and Other Corporate Acts
C. Stephen Bigler and John Mark Zeberkiewicz; 69(2): 393-428 (February 2014)
In 2008, this journal published an article noting the difficulty under Delaware law in determining whether defects in stock issuances would render the stock void, and thus incapable of being validated or ratified, or merely voidable, and thus susceptible to cure by ratification. The Delaware legislature has adopted amendments to the General Corporation Law of the State of Delaware, which amendments will become effective on April 1, 2014, that are designed to overrule the existing precedents requiring that defective stock and acts be found void. The amendments expressly provide that defects in stock issuances and other acts render such stock and acts voidable and not void, if ratified or validated in accordance with the new ratification statutes. The amendments provide Delaware corporations with two alternative paths—one involving remedial action taken at the corporation’s initiative, the other involving a court proceeding—to ratify or validate stock and other corporate acts that, due to a defect in authorization, might under prior law have been void and incapable of ratification. In this article, we summarize the reasons why the ratification statutes were necessary, provide an overview of the new Delaware ratification statutes, and discuss examples of circumstances where the ratification statutes could be utilized, specific types of defects that could be validated, which alternative path (self-help or courtassisted) might be appropriate in various circumstances, and the effect of validation.
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.
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)
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.
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.
Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States
Leo E. Strine, Jr., 71(4): 1081-1112 (Fall 2016)
These days it has become fashionable to talk about whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many have come to the conclusion that the answer to that question is no. As these commentators note, the investment horizon of the ultimate source of most equity capital—human beings who must give their money to institutional investors to save for retirement and college for their kids—is long. That horizon is much more aligned with what it takes to run a real business than that of the direct stockholders, who are money managers and are under strong pressure to deliver immediate returns at all times. Americans want corporations that are focused on sustainable wealth and job creation. But there is too little talk accompanied by a specific policy agenda to address that incentive system.
This Article proposes a genuine, realistic agenda that would better promote a sustainable, long-term commitment to economic growth in the United States. This agenda should not divide Americans along party lines. Indeed, most of the elements have substantial bipartisan support. Nor does this agenda involve freeing corporate managers from accountability to investors for delivering profitable returns. Rather, it makes all those who represent human investors more accountable, but for delivering on what most counts for ordinary investors, which is the creation of durable wealth by socially responsible means.
The fundamental elements of this strategy to promote long-term American competitiveness include: (i) tax policy that discourages counterproductive behavior and encourages investment and work; (ii) investment policies to revitalize our infrastructure, address climate change, create jobs, and close our deficit; (iii) reforming the incentives of and enhancing the fiduciary accountability of institutional investors; (iv) reducing the focus on quarterly earnings estimates and improving the quality of information provided to investors; and (v) an American commitment to an international level playing field to reduce incentives to offshore jobs, erode the social safety net, and pollute the planet.
Tenure Voting and the U.S. Public Company
David J. Berger, Steven Davidoff Solomon, and Aaron Jedidiah Benjamin, 72(2): 295-324 (Spring 2017)
Many believe that today’s public markets pressure companies to focus on short-term gain at the expense of long-term value. One way to address this concern is through the corporate capital structure. A “tenure voting” structure awards long-term stockholders more votes per share than short-term stockholders. We explore how such a model might impact short-termism, and how it compares to existing “one share, one vote” alternatives, such as dual-class and multi-class stock. Our objective is to provide an initial roadmap of legal and practical considerations for companies considering this innovative capital structure.
The Real Problem with Appraisal Arbitrage
Richard A. Booth, 72(2): 325-352 (Spring 2017)
In the controversial practice of appraisal arbitrage, activist investors buy up the shares of a corporation to be acquired by merger in order to assert appraisal rights challenging the price of the deal. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are (or will be) forced to sell their shares in the merger. But the real puzzle is why appraisal arbitrage is profitable, given that an appraisal proceeding’s goal is to determine the fair price of target shares using the same techniques of valuation used by financial professionals who advise the parties to such deals. Thus, commentators have argued that the profit derives from (1) a free option to assert appraisal rights at any time until target shares are canceled, (2) the award of prejudgment interest at a too-generous rate, and (3) the use of a too-low supply-side discount rate in the valuation of shares. As this article shows, none of these explanations has merit, but the third may be on the right track in that it has become almost standard practice among appraisal courts to reduce the discount rate for the so-called terminal period beyond five years into the future by the projected rate of inflation plus general economic growth. The fallacy in doing so is that the discount rate implicit in market prices already incorporates these factors because investors demand and expect returns commensurate therewith. Although it may be appropriate to adjust the terminal period discount rate for company-specific growth funded by the plowback of returns at a rate implicit in projected terminal period cash flow, assuming that growth will simply happen in lockstep with the economy as a whole would be incorrect. Thus, awards that are skewed to the high side by erroneous valuation practices likely encourage appraisal arbitrage.
The “Long Term” in Corporate Law
J.B. Heaton, 72(2): 353-366 (Spring 2017)
To read influential corporate lawyers, legal academics, and jurists, shareholders are an alarmingly myopic bunch who demand that corporate directors and managers make short-term decisions that sacrifice long-term value. But here is the mystery: there is virtually no evidence that shareholders prefer short-term gains that are smaller than larger (discounted) long-term gains.
This article makes a simple claim: the short term/long term rhetoric in Delaware corporate law masks the real battle, one between a rational desire by clear-sighted shareholders for shareholder value maximization, on the one hand, and a desire by courts and others for corporate longevity— i.e., long-term corporate survival—on the other. Corporate law directs, or at least allows, directors to manage for long-term survival under cover of long-term shareholder wealth maximization, i.e., a state of sufficient ongoing profitability that allows the corporation to exist for as long as possible, regardless whether that level of profitability actually is value-maximizing for shareholders.
The problem this raises is obvious: if Delaware allows corporations to prioritize longevity, then that is a goal often at odds with what shareholders want. Whether this policy is good or bad for society, I leave for another day. But so long as Delaware leaves the power of the vote with shareholders while giving directors a hidden power to act against shareholder interests in the name of corporate longevity, we can expect (and will continue to see) shareholder objections and activist efforts in many cases where corporations are worth more in different form, whether differently oriented, smaller, acquired and merged into larger organizations, or, to put it harshly, liquidated and dead altogether.
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.
Death by Auction: Can We Do Better?
Peter B. Ladig; 73(1): 53-84 (Winter 2017/2018)
The purpose of a business divorce is to sever the business relationship between or among the owners of the business. The most common judicial means of achieving this goal is a state dissolution statute. Most state dissolution statutes empower courts to sever the business relationship through various means. Some states even permit the entity or the other equity interests to avoid dissolution by exercising a statutory right to buy out the plaintiff’s interests. Delaware has eschewed this approach, instead providing few statutory directions or options and trusting its Court of Chancery to exercise its equitable discretion appropriately. Delaware courts historically were reluctant to dissolve operating, profi table entities, but in recent years Delaware courts have come to recognize the fallacy of forcing people to continue a business relationship that has fallen apart, and judicial dissolution is no longer the rarity it once was. A continuing problem, however, is that there is little common law guidance on how dissolution should be accomplished in a manner that is consistent with principles of Delaware law and that also recognizes the unique nature of these kinds of business divorces. In the absence of such guidance, Delaware courts default to what they know: an auction or sale process designed to attract the most number of bidders to maximize the entity’s value. This article suggests that the Court of Chancery should not consider an auction or other public sale process to be the default solution, that general principles of equity permit the Court of Chancery to grant many of the statutory remedies available in other states, and that a forced public sale should be the remedy of last resort.
Distributed Stock Ledgers and Delaware Law
J. Travis Laster and Marcel T. Rosner, 73(2): 319-336 (Spring 2018)
Effective August 1, 2017, the Delaware General Corporation Law (the “DGCL”) now authorizes Delaware corporations to use blockchain technology to maintain stock ledgers and communicate with stockholders. Consistent with the DGCL’s status as an enabling act that facilitates private ordering, the blockchain amendments are permissive. In the near term, they create a foundation for a technology ecosystem by removing any uncertainty about the validity of shares that have been issued or are maintained using blockchain technology. Over a longer time horizon, the amendments foreshadow a more flexible, dynamic, and digital future in which distributed ledger technology and smart contracts play major roles.
Corporate Governance and Countervailing Power
Brian R. Cheffins, 74(1) 1-52 (Winter 2018/2019)
The analysis of corporate governance has been a one-sided affair. The focus has been on “internal” accountability mechanisms, namely boards and shareholders. Each has become more effective since debates about corporate governance began in earnest in the 1970s but it is doubtful whether this process can continue. Correspondingly, it is an opportune time to expand the analysis of corporate governance. This article does so by focusing on three “external” accountability mechanisms that can operate as significant constraints on managerial discretion, namely governmental regulation of corporate activity, competitive pressure from rival firms, and organized labor. A unifying feature is that each was an element of a theory of “countervailing power” economist John Kenneth Galbraith developed in the 1950s with respect to corporations, an era when external accountability mechanisms did more than their internal counterparts to keep management in check.
Dilution, Disclosure, Equity Compensation, and Buybacks
Bruce Dravis, 74(3) 631-658 (Summer 2019)
Equity compensation and company share buybacks are complementary: Equity compensation share issuances increase outstanding shares; buybacks decrease outstanding shares. Yet the two types of transactions require very different approval processes and securities and financial disclosures, and generate different financial and tax results, all of which are described in this article, and illustrated by data collected from fifty-nine of America’s largest public companies. This article encourages critics of buybacks to consider the complexity and interrelationship of buybacks and equity compensation.
The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers
Robert Bartlett, Matthew D. Cain, Jill E. Fisch, and Steven Davidoff Solomon; 74(4) 967-1014 (Fall 2019)
Using a sample of 388 securities fraud lawsuits filed between 2002 and 2017 against foreign issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. We find that the description of Morrison as a steamroller, substantially ending litigation against foreign issuers, is a myth. Instead, we find that Morrison did not significantly change the type of litigation brought against foreign issuers, which, both before and after this case, focused on foreign issuers with a U.S. listing and substantial U.S. trading volume. Although dismissal rates rose post- Morrison, we find no evidence that this was related to the decision. Settlement amounts and attorneys’ fees remained unchanged post-Morrison. We use these findings to theorize that Morrison was primarily a preemptive decision about standing that firmly delineated the exposure of foreign issuers to U.S. liability in response to the Vivendi case, which sought to expand the scope of liability for foreign issuers whose shares traded primarily in non-U.S. venues. When Morrison is placed in its true context, it is justified as a decision in line with administrative and court actions that have historically aligned firms’ U.S. liability to be proportional to their U.S. presence. Although Morrison had this defining effect, it did not change the litigation environment for foreign issuers, which was the oft-cited import of the decision. More generally, our analysis of Morrison also underscores how the decision has been mistakenly characterized as a case primarily about extraterritoriality rather than standing.
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.
The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi
Joseph A. Grundfest; 75(1): 1319-1398 (Winter 2019-2020)
The Securities Act of 1933 (“Securities Act”) provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court, where dismissals are less common and where weaker claims are more likely to survive. Directors’ and officers’ insurance costs for initial public offerings (“IPOs”) have since significantly increased. Today, approximately 75 percent of section 11 corporate defendants face state court proceedings. Federal forum provisions (“FFPs”) respond to the migration of Securities Act claims to state court and to increased insurance costs by requiring that Securities Act claims be litigated in their traditional federal forum.
Confronting the Problem of Fraud on the Board
Joel Edan Friedlander; 75(1): 1441-1494 (Winter 2019-2020)
Recent precedents make it difficult to challenge transactions approved by a board of directors and a stockholder majority. When should such cases be filed, proceed beyond the pleading stage, and prevail? My answer is that judicial intervention should remedy and detertortious misconduct that corrupts board decision-making (i.e., misconduct that the Delaware Supreme Court has called “illicit manipulation of a board’s deliberative processes” or “fraud upon the board”). Commission of fraud on the board is an omnipresent temptation for self-interested controllers, activist stockholders, officers, financial advisors, and their legal counsel. Fraud can be used to put a company in play, steer a sale process toward a favored bidder, suppress the sale price to a controller, or make a favored bid look more attractive.
Uncovering the Hidden Conflicts in Securities Class Action Litigation: Lessons from the State Street Case
Benjamin P. Edwards and Anthony Rickey; 75(1): 1551-1570 (Winter 2019-2020)
Courts, Congress, and commentators have long worried that stockholder plaintiffs in securities and M&A litigation, and their counsel, may pursue suits that benefit themselves, rather than absent stockholders or the corporations in which they invest. Following congressional reforms that encouraged the appointment of institutional stockholders as lead plaintiffs in securities actions, significant academic commentary has focused on the problem of “pay to play”—the possibility that class action law firms encourage litigation by making donations to politicians with influence over institutional stockholders, and particularly public sector pension funds.
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.
Loss Causation and the Materialization of Risk Doctrine in Securities Fraud Class Actions
Richard A. Booth; 75(2): 1791-1814 (Spring 2020)
In the context of a claim for securities fraud under SEC Rule 10b-5, most federal circuit courts have ruled or recognized that loss causation can be proven by an event that demonstrates an earlier statement by a defendant company to be false. In other words, corrective disclosure need not take the form of speech. Rather, a statement can be shown to be false by the materialization of a risk that was concealed by the company, and investors can be compensated for any losses they suffer as a result. Although this doctrine is well established, its ultimate effect is to overcompensate investors, thus encouraging excessive securities litigation and chilling voluntary disclosure.
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.