So what does Shamrock have against Panera?

Apparently, Shamrock wants:

* the adoption of a majority voting standard for the election of Panera's directors,
* elections to be held annually, and
* the conversion of Panera's class B common stock, with their three votes each, into class A stock.

As an index of my own continuing naivete, let me admit: when I first read this list, I thought to myself "what supermajority is now required to elect a director?" My assumption, in other words, was that this was like arguing that treaty ratification in the US Senate should work by a majority standard. That would make ratification easier.

Actually, Shamrock's concern isn't that it's too difficult to get elected to the board of Panera, but that it's too easy. A mere plurality sometimes will suffice.

I live and learn.

I'm afraid I've got no further inspiration. I'm going to break for the week now. Meet me on Pragmatism Refreshed tomorrow if you'd like, or wait for my return here Sunday.

Panera Bread

I love Panera! Their stuff is delicious.

But that isn't enough to get them an entry in Proxy Partisans. There has to be some corporate tumult. As, indeed, there is.

Shamrock Activist Value Fund is demanding that the company declassify its staggered board, separate the roles of chairman and chief executive, and expand the board to include new members. "Ah, an' the Shamrock fund itself be demanding that Panera kiss the blarney stone, sure'n."

Panera is listed on Nasdaq, with the sticker symbol: PNRA. A quick perusal of its stock price shows me no obvious reason for dissatisfaction. It has held its value over the last year, even advancing a bit -- which is impressive in the present climate.

In percentage terms, it is now valued at 112% of what it was a year ago. The Nasdaq-100 index is at 93% of where IT was. The Dow Jones is at only 85%.

This doesn't mean the stock couldn't do better, of course. This does seem to be an odd time for Shamrock to launch a challenge. Panera held its annual meeting in May. So why raise these issues in July? I'll look into it, and see if I can tell you more.

Dysfunctional bankruptcy courts

It is a truth universally acknowledged that a failed business must be in want of a lawsuit.

My own bias in such cases is that investors --especially the institutional sort -- have to be prepared to take their knocks. When they invest in a risky posititon, either they were aware of the risk or they were likely lacking in their due diligence. Either way, I can work up more sympathy for the failed managers than for their vengeful former investors.

The failed managers aren't the only targets of the lawsuits that follow from a typical early 21st century business debacle.

We have these darned "fraudulent conveyance" and "avoidance" lawsuits that help spread trouble. Even the possibility that X now teeters near bankruptcy makes it very risky for anyone to accept money from X, which has a variety of perverse consequences and may have helped lead Bear Stearns to slaughter earlier this year.

Bridgeport Holdings will likely worsen the problems that arise from such situations. All it seems likely to accomplish in the first round of consequence is to drive up D&O liability insurance rates. The second round? the impact of those higher rates? an arbitrary re-allocation of resources toward fields thought to be inherent lewss transparent, and thus less likely to draw lawsuits.

Important bankruptcy precedent

The US bankruptcy court in Delaware issued an opinion in late May that may prove important to financially distressed firms considering a bankruptcy filing.

I'm only finding out about it now, I'm afraid, because the Harvard Law School Corporate Governance Blog has expounded on it.

The precedent is Bridgeport Holdings Inc. Liquidating Trust v. Boyer , a directors' & officers' liability case. The gist of it is that liability may exist for breach of fiduciary duty where D&O authorized a distress sale of most of the debtor company's property prior to the bankruptcy filing.

The decision in May was NOT on the "fraudulent conveyance" claim. Such a claim had been made and had been settled in February 2007 for $25 million. No, the claim this year was against the D&O of the conveying company as individuals.

Also, the decision in May didn't by itself attach any liability to Messrs Boyer et al. It merely said that their motion to dismiss has failed -- the lawsuit goes forward. Still, it is significant.

The judge found that specific factual allegations can make out an actionable case that D&O Defendants breached their fiduciary duty of loyalty and failed to act in good faith by abdicating crucial decision-making to their restructuring advisor, and by sitting on their hands, so to speak: by failing to monitor his execution of the ’sell strategy,’ resulting in an abbreviated and uninformed sale process.

This action can go forward despite two facts that the directors thought, or hoped, would be dispositive in their favor: their are no allegations of self-dealing, i.e. that any of the directors benefitted from their supposed abdication; and the certificate of incorporation contains an exculpation provision, purporting to bar claims for breach of duty of care, gross negligence, lack of good faith, or waste.

I suspect this decision may be bad news from the point of view of our already dysfunctional corporate bankruptcy system, and I'll try to explain why in tomorrow's entry.

Zarlink: Outcome and Issues

Zarlink Semiconductor is claiming victory after a proxy contest at yesterday's annual shareholder's meeting.

All management nominess for the board of directors, it appears, have been elected.

As to the underlying issues, they seem to come down to the acquisition of Legerity Holdings Inc., a developer of voice integrated circuits (ICs) for high-voltage, analog mixed-signal semiconductor and software technologies.

It was only 13 months ago that Zarlink (of Ottawa Canada)and Legerity (of Texas) signed the contract providing for the acquisition of the latter by the former. The deal closed last August 3.

After less than a year, then, the Leckie group apparently decided the conjunction had proven a failure, and as a result are proposing sweeping changes in the combined operation's management.

I know the hi-tech world is fast moving, but that does seem to be drawing one's guns too quickly.

Zarlink Semiconductor

Zarlink, a company that provides semiconductors adapted to wireless communication in the health care industry, is holding its annual meeting today.

It faces a challenges from shareholders who call themselves the Leckie Group.

Apparently, last-minute talks aimed at producing a settlement have failed. Zarlink had offered the Leckie Group -- led by Scott Leckie -- two seats on its board. But these would be two seats on an expanded board, and Leckie wouldn't have unfettered say on who would fill them. The idea was that Zarlink would agree in principle to create two new positions for independent directors, and the two sides would then collaborate on a list of candidates for them.

Leckie has refused. He wants three seats, without expansion/dilution, and $600,000 for costs of the proxy fight.

We'll just have to wait and see what, if anything, he gets.

Although my Wednesday morning post here is usually my last for the week, until Sunday -- I'll post again when I have some results regarding Zarlink. Frankly I'm not sure what the issues are and I'm trying to get some traction. Issues and results, them, to come....

Yahoo: The Transience of Victory

The lede in a front page story in todays's FT: "Yahoo bought some breathing space yesterday in its long struggle to remainindependent, agreeing to a ceasefire with Carl Icahn in return for giving up three board seats to the activist investor."

It seems only yesterday that I was talking about Yahoo's "victory" in that effort to remain independent. Actually, it was May 5. How time flies.

I was hardly alone in seeing it as a victory. In fact, on Friday the bright folks at Dealbreaker were referring to Icahn's efforts to press Yahoo into the arms of Microsoft as "sunk."

Apparently it isn't "sunk" at all. It now seems that the pressure for a consolidation is so great that Yahoo needed to buy "breathing space" with three board seats. Hmmmmm.

Well, let that be a lesson to you, cats and kittens. Victory, like fame, is fleeting. Sic transit gloria.

Icahn now has one-third of the nine-member board, and there will be no new drama at the company's annual meeting August 1, simply a ratification of this settlement.

How much time has Yahoo bought? According to the FT: one year. Next summer, either Yang will be able to show that independence has been worthwhile or he won't. If he can't crow by then, he'll be eating crow, and the company will be absorbed into something larger, whether MS is still interested or not.

Director Centered? Not Really, Part 2

There's another side to the AFSCME case.

Although the incumbent directors won that particular lawsuit and avoiding the meta-proxy contest that offended their sensibilities, they also inspired the Delaware Supreme Court to provide a road map for shareholder proponents in the future.

The court's opinion makes clear what is required for such resolutions to pass muster and get into the proxy materials. They must demand the reimbursement only of "reasonable" expenses -- which the AFSCME resolution did; and they must leave discretion in the board to withhold even reasonable reimbursement on "fiduciary" grounds.

One might initially react that any resolution that meets the second of those tests will be toothless. But that is, I think, to misunderstand the significance of the word "fiduciary." A fiduciary isn't "someone who has discretion to run the business as he damn well pleases." A fiduciary is somewho under enforceable obligations.

The courts suggestion, then, is that if AFSCME re-words its resolution to allow for fiduciary denials, resubmits it, and wins on that basis, and if after some future proxy contest a board of CA refuses to pay reasonable expenses despite the passage of this resolution, THAT decision will be subject to judicial review.

The decision is available here.

On page 23 there, in footnote 35, you'll find a plain statement of fact: "A decision by directors to deny reimbursement on fiduciary grounds would be judicially reviewable."

And don't say it's "only a footnote." The famous language of the Carolene Products case, about "discrete and insular minorities," is only a footnote too. It has had weighty consequences.

The Anglo-Saxon common law principles of contract and property, as they've developed in the corporate law of pertinent jurisdictions, aren't especially director centered. Directors, like other fiduciaries, are to be kept watch over. They are the employees of the real owners of a company, the equity investors.

That's a simple truth, but appears to need regular re-affirmation.

Director Centered? Not Really

Advocates of a director-centered understanding of corporate law are going to make -- or are already making -- a huge to-do about a decision of the Delaware Supreme Court Thursday.

You might as well hear about it here first, from an equity-centered fellow like me.

The case is AFSCME v. CA, and it arose (unusually) not from in-state litigation but because the Securities and Exchange Commission referred the key questions between the union pension fund and the issuing corporation to that court, as the highest authority on Delaware law.

AFSCME has sought to wage a proxy context with CA, which used to be known as Computer Associates but which has adopted the initials as the name, a common habit these days (and one I find annoying, but never mind) sought to engage in a meta-proxy-fight, pressing a shareholder's resolution that would have obliged the board of directors to reimburse stockholders for the reasonable expenses of a short-slate proxy solicitation.

In the case of a successful full-slate proxy solicitation, the issue doesn't really arise. By definition, success means the dissidents have taken over the board. But a short-slate solicitation means that dissidents are asking shareholders to put some new blood on the board, short of a majority. If they do so, then should the majority be able to deprive them of compensation for the reasonable expenses of that campaign? That was the issue.

The Delaware court said "yes, they can."

A memo issued by the law firm Wachtell Lipton on the very day of the decision heralded this as an "unequivocal and welcome holding [that] should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors."

Whoa cowboys. Not so fast. The entrenched incumbent boards of the world have won a victory here but it is a less sweeping and unequivocal one than such language suggests.

I'll say some more about the other side of this coin tomorrow.

Since last we visited Biovail

What has been going on at our favorite Canadian pharma company?

When last we visited, in May, there had just been a shake-up in management, and the re-constituted board was trying to disassociate itself from the company founder, Eugene Melnyk.

Things get curioser. On June 25, the company claimed that the new board had received "overwhelming support from shareholders" at that day's annual meeting.

Mr. Melnyk, though, responded with a statement that there was no effective vote because there had been no quorum. He has brought an action in the Ontario Superior Court asking for a declaratory judgment to that effect.

The board responded that Mr. Melnyk had withdrawn his own proxies at the last minute in an effort to deprive the meeting of a quorum, showing "a deliberate intent to circumvent the democratic process by which shareholders rejected his nominees."

The stock price has held up fairly well despite such drama. There's been a some decline over the last month, from $10.50 to about $9.80. But that skill means that it has held its value better than the stocks on the TSE 300, Canada's answer to the Dow.

Best of luck to the new board in their litigation and in facing their other challenges. L'chaim.

Beer brawl never really got going

They've wrapped it up. InBev and Anheuser-Busch have agreed on the terms of their combination. Shareholders of the target company will get a sizeable premium over the price of their stock before the bid, and Budweiser (not Stella Artois) will be the flagship brand of the combined company.

And that lawsuit filed last week? the one that invoked US policy toward Cuba? It hasn't been withdrawn, and no responsive pleading has yet been filed, but I gather it'll be allowed to wither on the vine.

Some family history. Judging from utterly unreliable comments on blogs, and deserving of all the credibility that sourcing suggests: the Busches are descended from Bavarians and Hessians. Anheuser is itself apparently a brewing town in what used to be Bavaria. There is also an Anheuser family, which joined the Busch's by marriage a couple of generations back.

InBev also gets to inherit an intellectual property dispute, because Busch ancestors got their start in brewing as frank imitators of an already well-known beer, and their "King of Beers" is a usurper.

Pivovar Budejovicky Budvar has the legal rights to market its beer under the "Budweiser" brand name in much of Europe, but it sells it in the rest of the world under variants such as "Budvar" and "Czechvar" to avoid legal squabbles with Anheuser-Busch.

Anheuser-Busch has made offers to buy the Czeck brewing company out but this has been repulsed. Keeping the Budweiser name Czech has become a matter of national pride. Perhaps it is more prideful to stand up to Americans than it would be to stand up to Belgians, so some deal will be cut in the near future as a consequence of this consolidation.

But really ... who cares? I wanted to see a fight over the merger and a proxy fight over that first fight! Waaaaah.

Greenlight Capital

An Ontario-based real estate development company has defeated claims brought in Canada's courts by the hedge fund Greenlight, to the effect that the development company's founder, Frank Stronach, has exercised excessive influence over the rest of its board, to the detriment of non-controlling shareholders such as Greenlight.

The company, MI Developments Inc., or MID, was created in 2003 when it was spun off from Magna International, an auto parts concern.

Greenlight owns more than 10% of MID shares, and it has contended that MID falsely held itself out to investors as a conventional real estate company, while turning itself into something a good deal more speculative. Specifically, it entered into challenged transactions with the Magna Entertainment Corporaton (MEC), a Delaware chartered company that owns and manages horseracing and gambling facilities in North America and Austria.

Greenlight lost both at the trial level, and more recently on its appeal. Here is the opinion.

I can't say I understand what it is all about. I'm still feeling my way through it. But I do have a sense that there's something important going on here and that understanding the issues in this lawsuit would have valuable ramifications.

As always, I'm open to your comments and assistance, dear readers.

Charming Shoppes and a paradox

The president and chief executive of women's clothing marketer Charming Shoppes (best known for its Lane Bryant brand) resigned on July 9, effective immediately.

As Dorrit Bern headed out the door, the chairman of the board, Alan Rosskaum, said what one is expected to say at such times, "We just came to an agreement that Dorrit built a wonderful platform for the company, but this was an apropriate time for the leadership change."

Ms Bern may have helped stimulate this leadership change with some of her recent cost-savings measures. She's closed 150 underperforming stores.

Also, dissident shareholders waged a successful proxy fight in recent months -- successful in the sense that forced a settlement that put two of the dissidents' nominees on the eleven-seat board.

Here's where things get a bit paradoxical. During the peak of that proxy campaign, Ms Bern was also chairwoman of the board, as well as CEO and prez. The dissidents made a point of this and of their desire to separate the roles (a common bone of contention in proxy fights these days -- we've discussed it in this blog before).

In late June, soon after the settlement, the company seemed to have conceded that point. It did separate those roles. Ms Bern stepped down as chairwoman, and Mr. Rosskaum became the chairman.

But was that point made or unmade? The separation lasted only two weeks. Then Ms Bern left, as aforesaid, and the chairman, Mr. Rosskaum, announced that he is the "interim" chief executive, pending a search. So those two posts are re-united. An "interim" position, after all, can last a long time.

And perhaps as Peaches and Herb would say, "it feels so good."

The Clydesdales Hire Lawyers

Anheuser-Busch has filed a lawsuit (as of Monday) in the federal district court in St Louis. MO seeking to preserve its independence from the Eurolopers at InBev.

One unusual twist is thatA-B wants to use the US embargo of Cuba as a justification for keeping InBev away. The euros have substantial operations in Cuba, and of course AB isn't allowed to transact business there. Ths, even if the two companies are formally merged they'd have to remain operationally distinct.

To make this a subject for a lawsuit, rather than simpky a "don't sell" pitch to shareholders, A-B has to say that this is material information that InBev is hiding in its efforts to acquire control of A-B at a price that doesn't match the economic realities of the situation.

That is, accordingly, what the complaint does.

InBen "claims it will make St. Louis the North American headquarters for the combined company, a promise it has repeated on numerous occasions since making its unsolicited acquisition offer...."

InBev's North American operations include its Cuban business. So InBev is being less-than-honest with the above cited promise.

An obvious riposts suggests itself. Surely, when the company is combined, the Cuban operations can be shifted (geography notwithstanding) to the European HQ of the resulting behemoth. The bulk of the North American operations would be, roughly, what A-B is now. That was the point of the promise, wasn't it? Not "we'll give you Missourians control of our N.A. operations" but "we'll let you keep control of yours."

Anyway, everything is given a national-security angle nowadays, and we can expect to see more of this.

Jana withdraws from field

In mid June (yes, I'm late reporting it) a group of shareholders under the leadership of JANA Partners abandoned their proxy contest against CNET, a San Francisco based website operator.

According to their filings with the SEC, JANA and ally Sandell Asset Management Corp. decided that in light of the proposed acquisition of CNET by a subsidiary of the television network CBS Corp., and the likelihood that it would go ahead regardless of any action stockholders might take, they were discontinuing their efforts.

The announcement came soon after CBS had cleared some crucial regulatory hurdles to completing the takeover.

Here's a link to an entry at the New York Times' blog, by Saul Hansell, that sought to explain the rationale for takeover.

I have no particular point to make. I've written about the JANA/CNET dispute before, and thought I'd take this opportunity to wrap up that storyline. I'm actually at the beach if you're reading this on the day it's being posted. I've figured out this neat trick blogger allows of posting automatically and a specified future date and time. I wrote these words over the holiday weekend.

That'll illustrate the extent of my techno-sophistication well enough! ;-)

The "besetting sin" of management

So: what is it?

Yesterday, pursuant to a discussion of "channel stuffing," I mentioned my opinion that short-sightedness is not high on the list of the gravest sins of corporate managements in the US.

IIRC, I even used the adjective "besetting." [Allow me to indulge my etymological fascination. Besetting means "constantly assailing." It likely originated in siege warfare, where the means of assailing a city is to "set" your own troops on all sides of it.] By psychological metaphor or extension, one's virtues are threatened, even beset, by one's vices.

My own view is that managers of US corporations are in fact rather far-sighted. The problem is: far-sighted toward what ends?

If they were trying to puff up the prices of their shares in a bubble-like fashion bound to burst down the road, that would be shortsighted. But frankly I don't think the management of many of our corporations are concerned with stock price particularly, on ANY time horizon. So the problem isn't short-sightedness. It's laziness.

The poison pill is a better example of what ails corporate America than the reports, perhaps mostly rumors, of channel stuffing. The poison pill is perfectly legal: more's the pity.

Coca-Cola settlement

Eight years ago, a group of investors sued Coca-Cola, alleging that it had been forcing some of its bottlers to buy millions of dollars of excess beverage concentrate.

Why would it do that?

This allegation involves a faux-accounting practice known as "channel stuffing." Wherever there is a "channel" between the seller of a product and the ultimate buyer, there is a temptation on the part of the seller to push more product into that channel than there is any good reason to believe the ultimate buyers will accept. The whole of the amount pushed into the chanel is then credited as sold on the books, listed as part of the asset known as "accounts receivable."

Why would a seller do that? Because dressing up the accounts receivable in this way makes the books look good, making the company seem more valuable to credulous investors, helping thereby to boost the value of the stock.

There are a range of reasons why a company wants to see higher prices of its stock, but I'll assume here that explanation is unnecessary.

The key point here is that channel stuffing is a self-defeating strategy. The retailers can't sell all the product that has been sent them and generally return it to the wholesaler/manucaturer, who eventually has to readjust his accounts receivable, bursting whatever stock-price bubble the tactic might have created. It is tempting chiefly to managements who aren't looking that far ahead, and accordingly the (alleged) prevalence of the practice is often cited as evidence of the obsession of contemporary corporate managers with quarter-by-quarter numbers, with meeting their projects for THIS quarter and damned be the consequences.

Anyway, the institutional investor, Carpenters Health & Welfare, was the lead plaintiff in the lawsuit against Coca-Cola filed in October 2000. The company has made no admission, either pursuant to this settlement or pursuant to the settlement of a civil enforcement action brought by the SEC, settled three years ago.

Frankly, I don't think that short sightedness is the besetting sin of contemporary managements. They do have sins, but that one wouldn't be high on my list thereof. Accordingly, I suspect that the practice of channel stuffing isn't all that prevalent. That's probably why this is the first time I've mentioned the practice, or even allegations thereof, in this blog.

Still, I suspect I'll have reason to mention them -- such allegations -- again.

Martin Lipton and Canada

At its base, the latest Lipton argument for managerial autonomy from stockholders is founded upon the notion of "stakeholders," i.e. that equity is only one sort of stake people have in the ongoing corporate entity.

Employees have a stake, as do customers, as do trade creditors and bondholders.

Lipton is saying that stockholders don't own the company, they own the stock, with narrowly defined rights. And the reason we must not confuse this with ownership of the company is that we ought to encourage the management to balance the needs of all the stakeholders.

That kind of reasoning holds zero appeal for me, largely because it would seem to turn the management of a publicly traded corporation into an arm of the state. It gives management precisely the sort of ad hoc balancing role that realist legal theory gives to governments and law. And, indeed, why have two such sets of ad hoc balancers around? Why not consolidate them through nationalization? This is the road down which, I submit, Lipton's argument heads us. I suspect his firm's clientele will become discontented with these arguments advanced supposedly on their behalf as they figure out such implications. But some people succeed in business precisely by virtue of their refusal to think such things through.

It's spinach, and I'm gonna leave it on the plate. Shareholders own the corporation. They own the stock, too, in the same sense that a homeowner owns the deed.

Related arguments have received a quite recent test in Canada. A consortium of investors led by the Ontario Teachers' Pension Plan (OTPP) wants to buy BCE Inc., the holding company of the telephone giant Bell Canada, in what stands to become the biggest buyout in Canadian business history.

The operational company, Bell Canada, and the holding company, BCE, are distinct legal entities, although the latter owns all the equity in the former, and the two companies have identical memberships on the board of directors. BCE's equity, in turn, is publicly traded.

Owners of debt instruments issued by Bell Canada have objected to the buy-out plan. They have said that they are "stakeholders" too. More specifically, their complaint is that OTPP and its associated entities are planning to saddle the combined company with a lot of new debt, and that this situation makes their own instruments more risky (makes an eventual default more likely). So they claimed to have a reasonable expectation (nothing in their contracts supported this expectation) that the directors of both boards set up an "independent process" to judge whether the deal is right for Bell Canada specifically and those with interests therein.

On Friday, June 20, the Supreme Court of Canada issued a quiet rebuke to Liptonesque theories, setting aside a lower court decision in favor of the bondholders, effectively letting the owners of equity sell the two companies.

So all those who believe in capitalism as a reality and ideal might want to sing this together:

O Canada, our home and native land
True patriot love in all they sons command ...
O Canada, Terre de nos aieux
Ton front est ceint de fleurons glorieux!

Martin Lipton

Martin Lipton is a founding partner of the prominent securities law firm Wachtell, Lipton, Rosen & Katz.

The May 2008 issue of the Virginia Law Review includes an essay of Mr. Lipton's with the confrontational title, "The Many Myths of Lucian Bebchuk." That's the kind of title you give to an article if you intend it to be what is nowadays known as a "fisking," a point-by-point take-down of a prominent author's fallacies.

(I'm told that the term "fisking" came about because Brit journalist Robert Fisk has been the recipient of such treatments. I've made a cursory search -- being too lazy to spend a lot of time on it -- but haven't yet found any example of an actual 'fisking of Fisk.' But, hey, who cares. The term means what it means.)

Lipton's target is, again, Lucian Bebchuk. Why? Because Bebchuk is the foremost academic defender of the shareholder franchise in corporate and securities law. Bebchuk, of Harvard Law, actually believes that shareholders own the company in a full-blooded sense of the verb "to own," that they should act like it, and that the law and regulations shouldn't be such as to discourage them from so acting.

This is what Lipton resents. He has made a career out of defending the sort of entrenched managements and boards that have the most to fear from an enraged body of shareholders, so he must discredit the Bebchuks.

"Case after leading case," Lipton writes, "confirms that directors—not shareholders—are vested with the right and independent obligation to direct the management of corporate affairs."

Well ... yes. I suppose one has to watch the adjective "independent" there. Did they acquire these rights and obligations from God? No, they acquired them from owners of equity, and the prospect of being replaced keeps them on their toes. But yes, caselaw supports the tautology that a director is supposed to direct. As a refutation of anyone's "myths," though, that's pretty lame.

Let's look to our north. The recent decision of the Supreme Court of Canada in the BCE matter speaks directly to the issues between Bebchuk and Lipton, and shares the ANglo-Saxon common law background. Accordingly, I'll say something about the BCE litigation tomorrow.