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.