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.
Showing posts with label unitary nature of ownership. Show all posts
Showing posts with label unitary nature of ownership. Show all posts
Monday, July 21, 2008
Wednesday, July 2, 2008
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!
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!
Tuesday, July 1, 2008
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.
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.
Monday, June 30, 2008
CSX
The activist hedge funds are claiming that they won four of the five seats at issue (at a 12-seat board of directors) at last week's CSX shareholder's meeting.
The company says the vote is too close to call.
The official results are due in late July, and oral arguments about some of the legal issues this proxy fight has stirred up will take place before the appellate court in early August.
The legal issue that fascinates me is the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc. These rights can be severed from one another by statute or precedent.
Well, okay ... point taken. Still, there's something to be said for the naive view. The bundle is not arbitrary, the acts of severance that have historically made it look more like a fascis than like a single stout branch -- that has been arbitrary.
With the ownership of stock in particular, I submit that we need to stick with the single stout branch, and that the position of CSX in that respect is the more sound.
The hedge funds are trying to 'own' stock through "total return swaps" in a way that remains largely opaque to the market and their fellow shareholders.
Though they might be right about much, they are wrong about this.
The company says the vote is too close to call.
The official results are due in late July, and oral arguments about some of the legal issues this proxy fight has stirred up will take place before the appellate court in early August.
The legal issue that fascinates me is the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc. These rights can be severed from one another by statute or precedent.
Well, okay ... point taken. Still, there's something to be said for the naive view. The bundle is not arbitrary, the acts of severance that have historically made it look more like a fascis than like a single stout branch -- that has been arbitrary.
With the ownership of stock in particular, I submit that we need to stick with the single stout branch, and that the position of CSX in that respect is the more sound.
The hedge funds are trying to 'own' stock through "total return swaps" in a way that remains largely opaque to the market and their fellow shareholders.
Though they might be right about much, they are wrong about this.
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