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Darian Ibrahim will be guest blogging here for the next couple of weeks. Darian is an Associate Professor of Law at the University of Arizona Rogers College of Law where he teaches Business Organizations, Law & Entrepreneurship, Securities Regulation, and Contracts. He presented his latest paper, Fiduciary Duties, Individual or Collective Liability for Directors, and the Functioning of Corporate Boards, at the AALS Disney Panel. Welcome Darian!

AALS Disney Panel Podcast

Bill Sjostrom —  16 February 2007

Podcasts from this year’s AALS conference are now available. Click here for the Business Associations panel on the Disney case. Recall that Justice Jacobs from the Delaware Supreme Court (author of the Delaware Supreme Court opinion in the case) participated in addition to many heavy-hitting corporate law academics (see below).

Here’s the blurb from the program brochure on the panel:

Dimensions of Disney: The Evolution of Corporate Law and Corporate Governance

Moderator: Deborah A. De Mott, Duke University School of Law
Speakers: Robert Charles Clark, Harvard Law School
Franklin Gevurtz, University of the Pacific McGeorge School of Law
Jeffrey N. Gordon, Columbia University School of Law
Darian M. Ibrahim, The University of Arizona James E. Rogers College of Law
Jack B. Jacobs, Judge, Delaware Supreme Court, Wilmington, Delaware
Renee M. Jones, Boston College Law School
Hillary A. Sale, University of Iowa College of Law
Eric L. Talley, University of California, Berkeley School of Law
Robert B. Thompson, Vanderbilt University Law School

One or more presenters were selected from a call for papers.

In re The Walt Disney Company Derivative Litigation is a long-running and closely-watched case that raises many significant questions concerning the role of law in connection with the governance of large public corporations. These include executive compensation practices, the significance of reputational constraints on the conduct of directors and officers, and relationships between senior management and boards of directors. Disney also provides a concrete context for examining comparative institutional questions, such as the relative roles of markets, courts, shareholder voting, private litigation, securities litigation, and stock exchanges in shaping governance practices. The doctrinal issues posed by Disney, the character and content of directors’ and officers’ duties, lie at the heart of both corporate law and the coverage of business-associations courses.

This year’s Section meeting will feature panels of speakers who will present papers focused on questions raised both directly and indirectly by the case. A separate panel will focus on the challenges and rewards of “Teaching the Big Case,” i.e., Disney, which over its history has generated a lengthy trial and two opinions each from the Delaware Supreme Court and the Court of Chancery.

A draft of my new paper entitled Majority Voting for the Election of Directors is now up on SSRN. I co-authored the piece with Young Kim, a finance professor at Northern Kentucky, so it has an empirical component. Here’s the abstract:

We explore the theory, law, and practice of the shift from a plurality voting standard for the election of directors to a majority voting standard. Although not mandated by law, as of October 2006, more than 250 public companies, including at least 36% of S&P 500 companies and 31% of Fortune 500 companies, had implemented some form of majority voting. The theory behind majority voting is simple: it makes shareholder voting relevant to the outcome of uncontested elections. Specifically, under a majority voting standard, if shareholders holding a majority of shares are dissatisfied with a director, they can express this dissatisfaction by voting against him, he will not receive the requisite majority vote, and therefore will not be elected. Shareholders will, in effect, have veto power over management’s candidates. This, in turn, it is argued, “will enhance director accountability, strengthen the director nomination process, and improve company operations.” We find, however, that the theory does not match the practice. We examined more than 250 majority voting systems implemented by public companies and failed to find a single company with a majority voting system that actually gives shareholders veto power over director candidates. At the end of the day, under each of the majority voting systems we examined, all directors are ultimately selected by the existing board of directors, regardless of how shareholders vote, as is the case under a traditional plurality voting system. Hence, we view majority voting as implemented in practice as little more than smoke and mirrors. In light of this conclusion, we undertook an event study to gauge market reaction to majority voting. Specifically, we examined stock price movements of firms around announcements that they have or will adopt some form of majority voting. Consistent with our “smoke and mirrors” hypothesis, we found no statistically significant market reaction.

You can download the paper here. If you do read it and have comments, please email them to me at sjostromw [at] nku [dot] edu.

A post on DealBook pointed me to a recent SEC release I missed over the holidays. The proposed rules contained in the release “are designed to provide additional investor protections” with respect to hedge funds. The proposed rules include amendments to Regulation D that change the definition of accredited investor to be applied to a natural person with respect to an investment in a “private investment vehicle,” i.e., hedge fund. Under the proposal, for a natural person hedge fund investor to be considered accredited (what the release refers to as an “accredited natural person”), he or she would need to meet the existing definition of accredited investor under Rule 501(a)(5) or (6) (i.e., net worth of at least $1,000,000, annual income of at least $200,000, or joint annual income of at least $300,000) and own at least $2.5 million in investments. Note that it appears a hedge fund would still be able to take money from up to 35 non-accredited investors as allowed under Rule 506 provided it furnishes them the requisite disclosure and believes the investors are sophisticated (although, it seems highly unlikely that a hedge fund would bother with non-accredited investors (many funds have seven-figure minimum investment requirements), and I would view it as a red flag if it did (it can’t attract the smart money)).

I have not studied the release in depth, but one interesting thing of note is that the proposal provides that the $2.5 million threshold will be adjusted every five years for inflation, which is not the case for the $1,000,000/$200,000/$300,000 thresholds referenced above. These thresholds, as the release notes, have remained unchanged since the SEC established them in 1982. Putting aside “nanny state” criticisms referenced in the DealBook post, it strikes me as curious that the SEC would include an inflation adjuster in this new threshold yet say nothing about adding one for the old thresholds. Maybe it has something in the works.

[Have you noticed that this is the most action we’ve had in a single day on this blog in a long time? Perhaps Frank has emboldened us TOTMers.]


Bill Sjostrom —  3 February 2007

I may live in Cincinnati now, but I grew up in Rockford, Illinois with a poster of Walter Payton on my bedroom wall. Go Bears!!!!!!!!!!!!!

One of the purported advantages of blogging is it allows a blogger to float a “trial balloon” relating to traditional scholarship he/she has in the works. Readers then comment on the balloon which leads to an improved piece. So here’s my trial balloon: I’ve been working on a piece about majority voting for the election of directors. As you may know, the “majority vote movement” was launched in 2004 in the wake of the death of the SEC’s shareholder nomination proposal. The movement continues to gain momentum, and to date has been surprisingly successful. As of October 2006, more than 250 public companies, including at least 36% of S&P 500 companies and 31% of Fortune 500 companies, had implemented some form of majority voting (see Study of Majority Voting in Director Elections by Claudia H. Allen).

What I’ve been considering is whether majority voting as implemented by these 250 companies is little more than smoke and mirrors.

Continue Reading…

The current SSRN top tens for corporate, corporate governance, and securities law are after the jump. Continue Reading…

Blogger Non-Competes?

Bill Sjostrom —  21 November 2006

Per the “Out of the Jungle” blog:

Maybe it just goes to illustrate what a babe in the woods I am, or
maybe it’s that the stuff I blog is not worth much… But evidently,
bloggers on the Paul Caron blog empire are requested to sign a
non-compete clause, promising that they will not blog anywhere else on
the same topic they do there. Wow!

I don’t know whether this is true or not, but it is consistent with the reception I got from the “blog empire” when Geoff and I launched this blog (at the time I was a contributing editor on Business Law Prof Blog and Contracts Prof Blog).

HT:  Mike Whiteman

The current SSRN top tens for corporate, corporate governance, and securities law are after the jump. Continue Reading…

WaPo on stock options

Bill Sjostrom —  15 November 2006

WaPo provided its two cents on option backdating in an editorial appearing yesterday (see here). Its solution is to rein in the use of stock options, perhaps through regulation, and instead go with restricted stock. The reason: “options are opaque” and therefore “invite abuse.” Well that’s certainly a convincing argument for stripping corporations of a widely used compensation tool, and I’m sure if we went with regulation, the government would get it just right as historically has been the case in the executive comp area (yeah, right).

No More 10-Qs?

Bill Sjostrom —  7 November 2006

According to the Financial Times (via, the Big Four accounting firms will recommend in a joint paper to be released tomorrow that the current system of quarterly reports be scrapped for “real-time, internet based reporting encompassing a wider range of performance measures.” It will be interesting to see what exactly they have in mind. In particular, how will liability issues be addressed? Obviously, more frequent and quicker disclosure is good for market efficiency but increases the chances of misstatements and omissions of material facts. Oh, yeah, the SEC is going dis-imply Rule 10b-5 private causes of action and cap auditor liability, so maybe increased liability exposure isn’t a big concern. But seriously, in addition to potential 10b-5 liability, how will the proposal impact incorporation by reference into registration statements and the attendant potential Section 11 and 12 liability?

The Law Blog asks “Will the Grasso Ruling Reverberate in Corporate Boardrooms?” The post includes the following quotes from some “executive pay gurus” via Business Week:

• H. Rodgin Cohen, Sullivan & Cromwell: “The precedent-setting issue here: a CEO’s duty to inform the board fully about his or her pay and the board’s duty to learn those details. Pay formulas are so complex today that even sophisticated directors can’t figure out the bottom line.”

• Nell Minnow, co-founder and editor, The Corporate Library: “The important part of the ruling is what it says to directors. It’s a wake-up call that they have to do the math [on CEO pay packages], and ask tough questions. And more important, give tough answers — like ‘No, that’s too much.’”

• Muriel Siebert, Muriel Siebert & Co., first female member on the NYSE: “I feel sorry for Dick. He did a good job. But that money was egregious. You don’t join a non-profit and expect to be paid like that. Did the compensation committee do their homework?”

The first two quotes are in reference to the most notorious holding of Judge Ramos’ opinion: “Mr. Grasso’s duty is to be fully informed [regarding the $100 million plus balance in his SERP account] and to see to it that the Board was fully informed. He failed in this duty. . . . That a fiduciary of any institution, profit or not for- profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care.”

Although the case’s precedential strength is questionable (a lower court decision applying New York non-profit corporation law), my guess is that it will impact boardroom behavior, in part given the media attention it has received. Directors and officers have little incentive not to take the holding seriously—they don’t pay the bills for having compensation consultants and lawyers better paper the file regarding executive compensation, their corporations do. Conversely, they are potentially personally liable if they are found to have breached their fiduciary duties. Whether the additional thrashing of the waters will lead to lower CEO compensation is another question, but it will certainly generate additional professional fees. Heck, investment banks could start selling executive compensation fairness opinions.