Truth on the Market

The corporate blogosphere is abuzz with debate over my new paper, “Delaware’s Future: Reviewing Company Defenses to Shareholder Proxy Access.”  I recently blogged about 3 of the 16 defenses I have developed for Boards to defend against shareholder proxy nominations.  The shareholder activist community seems to be fairly incensed by my inventions and they want the world to know it.

Jay Brown writes over at “Race To The Bottom,” a blog dedicated to criticism of the Delaware courts, that:

As we will show, the approach used by Verrett is both bad law and bad policy but frankly an invaluable service to anyone arguing for further federal preemption of federal law.

Steve Bainbridge has offered supportive observations to the debate over my defenses.  I will note that I am a relative newcomer to this debate that Steve has been leading for 20 years and my research has benefited tremendously from the foundation that he built in this area.  Steve also has a new and clever twist on my director qualifications defense.

Nell Minow edits The Corporate Library, a proxy voting advisory group who counts as its clients the conflicted institutional investors, like unions and state pension funds, that will impose the greatest cost to shareholder wealth as they make use of proxy access under the current SEC proposal and the Dodd-Frank Bill.  In a post titled “Another Idiotic Article from Professor Bainbridge” she notes:

Stephen M. Bainbridge, who has been consistently wrong about just about everything since his defense of excessive CEO compensation more than 20 years ago, continues his losing streak….He quotes J.W Verret, who is writing an article about 16 “defenses” for companies to use to prevent shareholders from availing themselves of their rights under the forthcoming proxy access regulations….  [Nell then quotes my argument that her acerbic rhetoric does little to help her cause] I’d love to see a citation for the “acerbic rhetoric” he attributes to me.  My only recollection is asking him to support his outlandish assertions — and his silence in response.  And any documentation for his claims that fiduciary institutional investors have any motive other than sustainable value creation over the long term?  Still crickets.

First to respond to Nell, you can find some great citations to the institutional conflicts in the paper, but since it won’t be posted on ssrn for a week or two I would point to i) my paper on shareholder majority voting, which Nell ironically included in a suggested reading list for her “Corporate Library” a few years ago and what she described as “the latest and greatest in corporate governance literature” ii) recent work from Joe Grundfest iii) recent work from John Macey and iv) work from Iman Anabtawi.

As for citations to Nell’s acerbic rhetoric, I would invite our readers to watch our testimony before the House Financial Services Committee here.  Oh, and I seem to remember her referring to an “idiotic article” and noting that one of the top ten most cited scholars in corporate law has been “consistently wrong about just about everything” for the last 20 years.  Asked and answered.

Jay Brown, in a refreshing divergence from his colleagues in the institutional investor community, offers a few points worthy of response that actually include some legal reasoning.  First he responds to my Proxy Access Defense #3, regarding the increased use of Board Committees to circumvent insurgent Directors, that for such a defense “the standard of review would likely not be the business judgment rule or even the duty of loyalty but the Blasius standard since this would effectively be an act of disenfranchisement.”  Not true.  Blasius is about boards using process to keep shareholders from voting for or nominating alternative directors on their own slate.  Preventing access to the corporate proxy is a different matter altogether.  Furthermore, boards have the authority to delegate to subcommittees, and Blasius doesn’t require that Board members abstain from that delegation.

Jay also quotes Crown Emak Partners v. Kurz, but that case had to do with reductions in the size of the board on the eve of an election contest, a strikingly similar fact pattern to Blasius which was also a case in which the Board attempted to alter the size of the Board to mute the results of the contest.  Changing the size of the board to take away majority control from an insurgent slate is a very different matter from delegating to committees and keeping a minority of insurgent nominees sequestered from that committee’s deliberations.

I am glad that the institutional investor community thinks my ideas are interesting enough to argue so vociferously against them.  I can only take that as a sign that my defenses have some strategic relevance for Boards defending against proxy access nominations.  I have 13 more defenses left to present, stay tuned.