I share Prof. Ribstein’s concerns about the federalization of corporate governance contained in the Dodd bill. Though Senator Carper wasn’t able, in the end, to get the proxy access provisions out of the Dodd Bill, which I think were the most troubling, we did eliminate another of Senator Schumer’s ideas. (The corporate governance provisions of the Dodd bill were taken from Sen. Schumer’s “Shareholder Bill of Rights.”) The initial draft of the Dodd Bill included a restriction prohibiting any publicly traded company from having a staggered board. I suspect we have the good work of Senator Carper and Congressman Castle’s offices to thank for their continued work against that provision. The option to have a staggered board is part of the Delaware brand’s advantage. Nearly 80% of Boards and their shareholders used to embrace the staggered election approach, since then some (but not most) companies’ shareholders have pushed, and been successful, in changing to annual elections under existing rules, a development which Delaware’s freedom-of-contract philosophy embraces. Now roughly 50% of publicly traded firms have staggered boards. I should add…this, like most corporate governance changes, is not exclusively a Delaware issue…as Delaware is home to only 50% of publicly traded companies and 60% of the Fortune 500.
When I testified in the Senate against the corporate governance provisions of this bill, I remember when Senator Corker quipped: “We’re a staggered body. The folks in the other house aren’t staggered, and we’ve all seen the crazy ideas they often send our way.” I also appreciated Senator Johanns of Nebraska when he observed, after one of my defenses of Delaware in testimony (quickly becoming my night gig) “When I was Governor of Nebraska, I tried to take on Delaware. And you know what I found out? That was going to be pretty hard, because Delaware sure was doing something right.” (See Bainbridge on the misguided efforts of the upper midwest to challenge Delaware).
I plan to write more about the other provisions once the conference committee has met to reconcile the two bills. One provision of the Dodd bill that I think will be particularly difficult to implement is the provision requiring disclosure of employee hedging. Perhaps its simple enough, the company either discloses whether it has a policy or not, but if the SEC interprets its powers to actually regulate hedging it will be all but impossible to define just what, in the wide universe of financial bets out there, constitutes a hedge. If I buy Netflix stock am I partially hedging a Blockbuster holding? That aside, let me save more analysis for a post-conference report.
Where do we go from here? Delaware reinvigorated its brand by embracing, in part, Marty’s Lipton’s invention of the poison pill in the early 80s as a defense to new shareholder takeover proposals. The new battleground will be defenses to proxy fights. We’ve already seen this issue discussed briefly, though not fully adjudicated, in the Amlyin case, which reviewed a contractual provision in debt covenants, the so-called “proxy put” that would accelerate debt upon the election of hostile directors not approved by the Board’s nominating committee. Gordon Smith weighed in here and Francis Pileggi discussed the case here.
Though Vice Chancellor Lamb did not expressly rule the provision violated Delaware law, in dicta he came fairly close. He noted that the provision seemed like it could prevent any contested elections, which would present a public policy dilemma. I wonder if he would have felt the same if, long before the actual proxy fight, the shareholders approved of the proxy put covenants?
Jay Brown (from the anti-Delaware blog “Race to the Bottom”), of course, disagrees strongly with Vice Chancellor Lamb’s approach, despite agreeing with this particular bit of dicta. It’s interesting to note that if Jay Brown was right, and Delaware were fully captured by management, Vice Chancellor Lamb wouldn’t have had any incentive to go out of his way to disapprove of the proxy put provisions in dicta. (A frequent Delaware critic, Jay did however recently say some good things about our blog Truth on the Market, our blog’s new member Prof. Ribstein’s former six year opus at his Ideoblog, and our blog neighbor Professor Bainbridge. I’ll offer that while I disagree with Jay’s general worldview I always appreciate his well-crafted arguments and diligent blogging. His blog is a necessary addition to your google reader.)
Delaware’s future, in my opinion, is to think up what other structural defenses could viably protect against hostile proxy fights while at once surviving:
i) Delaware law’s strictures under Blasius, Chesapeake, Amylin, and other opinions vigorously protecting the shareholder franchise and shareholder rights,
ii) Exchange listing requirements, and
iii) SEC proxy rules.
I’m already on the case as my primary research project for the summer. I’ve got roughly 15 ideas at this point for structural provisions that shareholders and managers might opt-into. I’m also planning to offer some explorations into “Theory of the Firm” literature to justify the effort. For that element of the theoretical justification I plan to focus particularly on the literature’s founders like Alcian, Demsetz, and Manne, to show how the presence of empowered but conflicted shareholders (who are able to collude with managers) stands to significantly distort the advantages of firms which justify the departure from market processes that firms ultimately represent. Though something of a fellow traveler to Bainbridge’s director primacy work, the article will take a distinctly different path to arrive at many similar policy conclusions. Look for an article up on SSRN by the end of the summer.