Countrywide Financial is a name that has come to be synonymous with the subprime meltdown that has shaken investors and sent the world’s central bankers scrambling to rejigger their playbook. Less attention has focused on Countrywide’s corporate governance and compensation practices, however. Therein lie some important clues to what is behind the turmoil now being felt by the company and its stakeholders.

The lesson of Countrywide is instructive at a time when there is considerable pressure to retreat from Enron-era reforms, with many claiming they are too costly and not necessary. On the contrary, Countrywide shows that improvement is far from universal when it comes to corporate governance and that, once again, excessive CEO pay is still the Typhoid Mary of the boardroom, showing up time and again just before calamity strikes, as it did with Enron, WorldCom, Tyco, Adelphia, Nortel, and more. It also shows that a single company’s misjudgments can carry profound consequences for other corporations, public institutions and a wider community of interests, which is why society itself has a considerable stake–separate and apart from that of shareholders–in seeing CEO pay returned to reasonable levels.

…continue reading: Countrywide’s Corporate Governance: Definitely Subprime

My paper Mandatory Disclosure and Stock Returns: Evidence from the Over-the-Counter Market just came out in the June edition of the Journal of Legal Studies. The paper examines the effects of the extension of the Exchange Act reporting requirements to the over-the-counter (”OTC”) market in 1964. This was the most important extension of reporting requirements in U.S. history–aside from the original securities acts themselves.

The paper documents substantial reductions in stock price volatility in the OTC market as a result of the disclosure requirements. This is consistent with the variance-bound finance literature (including Kenneth West’s Dividend Innovations and Stock Price Volatility (1988), and Stephen LeRoy’s and Richard Porter’s The Present-Value Relation (1981)), which predicts that increased disclosure should reduce firm-specific volatility in the presence of discounting. The paper also documents positive abnormal returns associated with the market anticipating passage of the 1964 amendments. This is consistent with the view that increased transparency should reduce firm value expropriated by insiders, resulting in greater value for shareholders (as described in Andrei Shleifer’s and Daniel Wolfenzon’s Investor Protection and Equity Markets (2002)).

The full paper is available here.

Many car advertisements on TV bear a legend explaining that the driving depicted is by professional drivers on a closed track–and warning viewers not to try the twists and turns at home. Well, maybe something like that could or should be said of the European Court of Justice’s recent decision, a precis of which appears here, striking down Germany’s “Volkswagen law” and seeming to pave the way for Porsche to acquire the company.

One might recall the earlier periods over here when state anti-takeover statutes bit the dust one by one, yielding to a perceived national policy of unrestrained takeover activity and opposition to the local interest of states (especially non-chartering states) in preserving the independence of their corporate residents. There are probably more twists and turns to come as the EC works out what is meant by the “free movement of capital.”

(Note: In August, Vice Chancellor Leo E. Strine, Jr. upheld a special committee’s decision to postpone a stockholder meeting on the day of the meeting so that the company could solicit more support for a pending merger in Mercier v. Inter-Tel. In the analysis that follows, Travis Laster and I consider the implications of Inter-Tel for Delaware’s merger jurisprudence.)

As a doctrinal matter, Inter-Tel will stir much debate. Vice Chancellor Strine held that Unocal reasonableness should be the sole standard of review for decisions related to shareholder meetings on mergers, and that the more exacting standard announced in Blasius should be limited to director elections. The Vice Chancellor hinted that he might favor such an approach in Chesapeake v. Shore as well as in Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, an article he co-authored with Chancellor William T. Allen and now-Justice Jack Jacobs in The Business Lawyer in 2001.

Applying Unocal, Vice Chancellor Strine holds that the directors’ actions were “reasonable in relation” to a “legitimate corporate objective.” Nevertheless, after conducting his Unocal analysis, the Vice Chancellor also found a “compelling justification” for the board’s decision under Blasius, concluding that “compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders’ decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no . . . the opportunity to receive the bid will be irretrievably lost.”

Here are some other highlights of the opinion that emphasize more mundane issues:

1. The Vice Chancellor did not appear troubled by the fact that the Board “postponed” the meeting rather than convening the meeting for the sole purpose of adjournment. The Delaware General Corporation Law speaks only of adjournment, not of postponement. It has nevertheless been the widespread practice that a meeting can also be “postponed” without being convened and adjourned, and Inter-Tel supports this approach.

2. Inter-Tel does not resolve whether the “postponed” meeting must be treated as a new meeting for purposes of the notice to stockholders required under the DGCL. For a merger vote under Section 251, notice must be given at least 20 days in advance of the meeting. For an adjourned meeting, a new notice is not required if the date of the meeting is moved in a single adjournment by less than 30 days. The issue of sufficient notice for the postponement may have been raised by the parties but mooted when the Board again reset the date of the meeting so there would be enough time to satisfy a 20-day minimum-notice requirement. The argument that a “postponed” meeting should be treated as an “adjourned” meeting for purposes of shareholder notice therefore remains unaddressed.

…continue reading: Another Blockbuster Merger Decision From Vice Chancellor Strine

(Editor’s Note: This post comes to us from Jonathan Hayter of the National Law Journal.)

The National Law Journal recently published The Year of Living Dangerously for GCs, which highlights the unprecedented increase this year in federal prosecutions of general counsels of major corporations. In the first nine months of this year, the article explains, the government initiated fraud proceedings against nine general counsels–including in-house advisors at Apple and Comverse, among others.

Several of the cases, including the recent indictment of Kent Roberts, formerly General Counsel at McAfee, involve prosecutions of attorneys allegedly involved in relatively recent options backdating scandals. In others, however, the government has alleged more traditional wrongdoing–such as in the case of Kevin Heron, former General Counsel of Amkor Technology, who was recently indicted for insider trading.

The increase in prosecutions of general counsels has given rise to concern that the attorney-client privilege between management and in-house counsel has been seriously compromised. Executives are unlikely to trust an attorney, the article argues, who may later be pressured to disclose privileged information or else face federal prosecution. (As the article notes, a Senate bill currently under consideration would bar federal agencies from conditioning prosecutorial leniency on disclosure of privileged information. Andrew Tuch recently posted here about a report by former Delaware Chief Justice E. Norman Veasey indicating that the in-house bar remains concerned about the implications of federal prosecutions on corporate privilege even following the issuance of the McNulty Memorandum.)

Though Congress declined to pass legislation last year that would have required corporate attorneys to disclose evidence of wrongdoing, SEC Chairman Christopher Cox has made clear that he expects general counsels to play a more substantial role in disclosing corporate fraud. Thus, the article suggests,this year general counsels face in a difficult quandary: management is disinclined to tell them anything, but if fraud is later revealed the government is likely to assume that they knew about everything.

The full article is available here.

Jay W. Eisenhofer, a partner in the law firm Grant & Eisenhofer P.A., recently presented his paper Investor Litigation in the U.S.–The System is Working here at Harvard Law School. Co-authored by Gregg S. Levin, the paper is critical of efforts to “discredit” the “long-established mechanism” of investor class actions.

Investor Litigation in the U.S. discusses the reported decline in the international competitiveness of U.S. capital markets, considers recent evidence on the listing premium enjoyed by firms cross-listing in the U.S., confronts the so-called “circularity argument” often levelled at the securities litigation system, and canvasses corporate governance reforms said to have directly resulted from shareholder litigation. The paper concludes that the “current system of investor rights has resulted in lower costs of capital and higher valuations” and that no case can be made for radical litigation reform.

The full paper is available for download here.

The Corporation Service Company has recently made available to readers of this Blog the Delaware Business Entity Law database, which includes a wide range of Delaware materials of interest to practitioners and academics alike. The database includes Volumes 1 and 2 of Delaware Laws Governing Business Entities in a searchable format, plus links to statutes, case annotations and opinions. The site’s research tools allow users to create electronic bookmarks and to take notes anywhere on the site. Users can also print, email and export search results. The site also includes the unique features found in the printed version of these materials, such as blackline amendment notes and new annotations.

Readers can access the Delaware Business Entity Law database by going here and using the login “cscinfo@incspot.com” and password “delaware”. Free access to the site expires on December 23.

When you’re right, you’re right. And when you’re wrong, you are very wrong. Here is yet more evidence of the value to stockholders of staggered boards. Anyone listening up there in that ivory tower?

On October 15, Lance E. Lindblom, President and CEO of The Nathan Cummings Foundation, gave a presentation at Harvard Law School on shareholder activism. Based in New York City, The Nathan Cummings Foundation is a grant-making body committed to democratic values, social justice, and building a socially and economically just society. With an endowment of over $500 million, the Foundation uses its shareholder status to vote proxies and file shareholder resolutions in a manner consistent with achieving its mission and discharging its fiduciary obligations.

In his presentation, Mr. Lindblom explained why the Foundation has adopted an activist role as shareholder, drawing links between social justice and long-term shareholder value. Since January 2007, the Foundation has cast 536 votes on 155 proxies, including 417 on company resolutions and 119 on shareholder proposals. The Foundation casts its votes in accordance with its own proxy voting guidelines and using information supplied by Institutional Shareholder Services.

Mr. Lindblom explained the circumstances under which the Foundation will vote on–and raise–shareholder proposals. He noted that a shareholder proposal drawing substantial support is more likely to encourage management to engage shareholders on the issue. Since 2003, the Foundation has filed over 30 shareholder resolutions with 22 corporations. Mr. Lindblom noted that shareholder resolutions have resulted in change at companies including General Electric, The Home Depot, Anadarko Petroleum and Apache Corporation. Moreover, he explained, investor coalitions like the Interfaith Center on Corporate Responsibility and the Investor Network on Climate Risk have substantially increased institutional leverage with corporate management on issues including climate change, energy efficiency and corporate political contributions.

In wide-ranging comments in response to questions from Lucian Bebchuk, Beth Young and Harvard Law School students, Mr. Lindblom discussed the merits of reforming the rules that allow investors to file shareholder resolutions, the corporate costs imposed by shareholder activism, and the extent to which some resolutions advocate positions harmful to broader shareholder interests.

A webcast of Mr. Lindblom’s talk can be viewed here.

(Editor’s Note: This post comes to us from J.W. Verret, a former Olin Fellow in Law and Economics who has written extensively on corporate governance matters. Lynn Stout previously posted on her Wall Street Journal op-ed on the SEC’s upcoming vote on proxy access here; Jay Brown responded to that piece in this post; and Lucian Bebchuk recently posted here on a comment letter submitted to the SEC by thirty-nine law professors on this subject.)

I certainly admire Professor Stout’s work on corporate governance, which has substantially informed my understanding of the issue of shareholder primacy. I cannot agree, however, with the views set forth in her recent Wall Street Journal op-ed on the SEC’s upcoming vote on shareholder proxy access, which urges the SEC to substantially restrict shareholder access to the corporate ballot.

Professor Stout suggests that manager-friendly access rules are responsible for the fact that many of the largest companies are headquartered in the United States, and shareholder-friendly rules explain the absence of large companies in the United Kingdom. But the cross-Atlantic comparison is shaky at best. A variety of macroeconomic differences offer a more cogent explanation for the disparity between the U.S. and the U.K. in headquartering large firms than board sensitivity to shareholder communications. (Moreover, as Jay Brown previously argued on this Blog, many of the largest firms headquartered prior to recent pro-shareholder reforms in the United Kingdom.).

The conventional wisdom has always been that institutional investors are unwilling to engage in substantive oversight of their investments because of conflicts of interest and collective-action problems. Activist hedge funds are changing that calculus because they are able to internalize future reputation benefits from oversight. As I explain in my forthcoming article Pandora’s Ballot Box, or a Proxy With Moxie?, these activists benefit from improved capital flows from institutional investors through reputational benefits, and can use their reputational capital to engage in more cost-efficient saber-rattling in future contests. That reputation benefit only works, however, if the activist fund builds value for the large, long term investors that dominate the electorate.

Skeptics of shareholder empowerment, among whom Professor Stout and Professor Stephen Bainbridge are the leading voices, tend to ignore two critical policy considerations. First, Delaware corporate law has ensconced the shareholder franchise as the basis for its elegant and risk-savvy review mechanism of board decisions, both in the form of the business-judgment rule and the demand requirement for derivative litigation. Second, the relevant question with respect to shareholder empowerment is not how well the status quo has performed in the past, but how much better markets might perform under narrowly tailored proxy reform that would make elections a realistically balanced endeavor.

In Pandora’s Ballot Box, or a Proxy With Moxie?, I set forth my own proposal for proxy reform, which utilizes an instantaneous-runoff voting method and preferential voting to empower a majority of shareholders to supervise the board with minimal cost to the proxy process. My proposal also would address Martin Lipton’s central objection to most proxy reform by avoiding the election of special-interest directors. The article, which will appear in the The Business Lawyer  shortly, is available for download here.

Corporate democracy depends upon stockowners being able routinely to promote actions on the governance of the corporation. Unfortunately, managements have been able to ignore votes on stockowner proposals, essentially doing whatever they choose notwithstanding the shareholder vote. Bylaws are typically bereft of any provisions governing the implementation of stockowner proposals, and it is nearly impossible for stockowners to discover the results of the vote, the require standard for passage of the proposal, the board’s subsequent deliberations on a “passed” proposal, and the stockowners’ ability to enforce a “passed” proposal.

One major company, however, does disclose these procedures to the public. Occidental Petroleum Corporation started reporting the procedural requirements governing stockowner proposals in 2003 when it was confronted with my proposal requesting that it do so, and Occidental has reported every year since.

…continue reading: What Happens to Votes on Stockowner Proposals?

(Editor’s Note: This post comes to us from Jonathan Hayter of the National Law Journal.) 

The National Law Journal recently published Efforts To Protect Privilege Falling Short, an analysis of the effectiveness of the so-called McNulty Memorandum, which is designed to curb misconduct by prosecutors seeking privileged information from companies during corporate investigations. The article describes a report on the issue recently produced by former Delaware Chief Justice E. Norman Veasey, now a senior partner at Weil, Gotshal & Manges LLP, for the Senate Judiciary Committee.

Serving pro bono as a “neutral narrator” at the request of the Coalition to Protect the Attorney-Client Privilege, the former Chief Justice spoke personally with defense counsel about the progress made by the Justice Department and other government agencies since the McNulty Memorandum was issued. According to the article, many respondents reported progress by the government, but those presenting post-McNulty information expressed doubts about the effectiveness of the Memorandum in curbing the practices it was intended to address.

Respondents reported a range of experiences with prosecutors. In some cases, according to the article, respondents said that prosecutors claimed not to know about the existence of the Memorandum–and sometimes attempted to avoid the Memorandum’s reporting requirements by pressuring defense counsel.

The full article is available here.

(Editor’s Note: This post comes to us from Gary M. Brown of Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.)  

I recently published Scheme Supreme, an analysis of Stoneridge Investment Partners LLC v. Scientific Atlanta, Inc., in which the Supreme Court will decide whether third parties may be held liable for violations of federal securities laws. The article points out that much commentary on Stoneridge has oversimplified the case, suggesting that third-party liability was foreclosed in Central Bank v. First Interstate Bank when in fact Central Bank explicitly left the issue open.

Having served as special counsel to the U.S. Senate Committee on Government Affairs in the Enron investigation, in my view Stoneridge will be crucial in determining whether the true culprits in major corporate scandals can be held liable under the securities laws. The opening paragraph of Scheme Supreme explains:

The Supreme Court recently heard oral argument in the case of Stoneridge Investment Partners LLC v. Scientific Atlantic, Inc. The case will be the latest of numerous Supreme Court cases that have given substance to the nature and extent of liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. The facts in Stoneridge, as well as those of other companion cases awaiting action by the Court (e.g., Enron), have been the subject of numerous Wall Street Journal editorials over the past two years. The most recent, A Class Action Scheme, referred to Stoneridge as “the business case of the year.” That’s cliche and, like much of the discussion of the theoretical underpinnings of the case of the last two years, understates the importance of the case. Stoneridge will be the most important securities case in a generation–a veritable Brown v. Board of Education of securities law–further refining the question of who can be sued and who cannot under Rule 10b-5.

The full article is available for download here.

One consequence of the M&A boom that charged into the first half of 2007 before sputtering out this summer is that it put the validity of deal-protection measures back in the spotlight.  I co-authored a piece with Travis Laster in last month’s M&A Lawyer entitled Judicial Scrutiny of Deal Protection Measures that discusses several recent Delaware decisions focusing, in particular, on termination fees.

The Caremark decision, for example, balked at the notion that a 3% termination fee was reasonable per se, while subsequent decisions–namely Netsmart, Topps, and Lear–upheld the validity of significantly higher termination fees.  (Editor’s Note: Our contributors give further background and analysis on Netsmart and Topps in posts here and here; analysis of Caremark is available here and here.) 

The lesson for directors remains that the context of the deal always matters, and our article describes many of the typical justifications for deal protections that should be considered by boards and their counsel. We also build on recent court commentary on the issue of “equity value” versus “enterprise value” in reviewing termination fees under Unocal.

The full article is available here, and is being reproduced with the permission of Thomson West.

(Editor’s Note: Lynn Stout discussed her Wall Street Journal op-ed on the SEC’s upcoming vote in a post available here. Lucian Bebchuk recently posted here on a comment letter on these proposals submitted to the SEC by thirty-nine law professors.)  

Professor Lynn Stout recently published an op-ed in the Wall Street Journal entitled Corporations Shouldn’t Be Democracies. The piece opposes shareholder access to the proxy for the adoption of election-related bylaws and urges the Commission to adopt a proposed rule that would eliminate such access. (One of us has explained our opposition to the no-access proposal in a comment letter submitted by the Race to the Bottom Blog.) The absence of concrete data in the piece exemplifies the difficulty opponents have had in developing credible positions against shareholder access.

…continue reading: The SEC: Gatekeeper of Shareholder Rights?

On Friday, September 28, on the occasion of the Annual Francis G. Pileggi Distinguished Lecture in Law, sponsored by Widener University Law School’s Delaware Journal of Corporate Law, Harvard Law Professor Mark Roe presented his paper Does Delaware Compete?. The audience included leading Delaware lawyers and judges–both sitting and retired–eager to hear about the state of interstate corporate chartering competition. Yet, describing what he calls a “revisionist perspective,” Professor Roe argued that such competition no longer meaningfully exists: Delaware has won, and no other state is bothering to compete.

…continue reading: Does Delaware Compete?

Recently, in the Law School’s Seminars in Law & Economics and Law, Economics, and Organization, Florencio Lopez de Silanes presented his latest work with Rafael La Porta and Andrei Shleifer (LLS) on legal origins. Over the last ten years, LLS and different co-authors collected data on various sets of legal rules in up to 129 countries. They covered areas of law ranging from civil procedure to military conscription, but mostly focused on legal rules particularly relevant to corporate finance. In all their studies, LLS invariably found that common law countries had “better” laws than civil law countries, particularly those of the French legal family. In particular, it appeared that common law countries were much better at protecting investors, and hence developed larger and more liquid financial markets.

These findings had an enormous academic and real-world impact–and generated a good deal of controversy. In The Economic Consequences of Legal Origins, written for the Journal of Economic Literature and presented at the Law and Economics seminar, LLS provide a synthesis of the academic debate that has taken place over the last ten years. Here is their abstract:

“In the last decade, economists have produced a considerable body of research suggesting that the historical origin of a country’s laws is highly correlated with a broad range of its legal rules and regulations, as well as with economic outcomes. We summarize this evidence and attempt a unified interpretation. We also examine the effects of legal origins on resource allocation and economic growth. Finally, we address a broad range of objections to the empirical claim that legal origins matter.”

The paper’s survey of the existing literature is outstanding. Yet the paper’s main contribution is its articulation of a “unified interpretation” of the empirical results. LLS “develop the Legal Origin Theory, namely that legal origins represent fundamentally different strategies of social control of economic life.” A big advantage of this theory is that it can explain why legal origins also seem to matter in areas dominated by statutes, such as military conscription or the regulation of entry of new businesses. These subjects had eluded previous attempts at explanation; earlier hypotheses had usually focused on the differences between judicial and legislative law-making.

One may wonder, however, what is specifically “legal” about the “Legal Origins Theory” as now articulated by LLS. To be sure, the theory predicts differences in legal rules as found in the data collected by LLS and others. But the theory seems to locate the root cause of these differences in the cultural and political inclinations of countries’ populations or elites rather than in institutional differences (even though LLS argue vigorously against competing cultural and political explanations in the paper). Among the many questions raised by the theory, then, is how these inclinations could have been so profoundly influenced by the identity of the colonizing power–which is ultimately what legal origins refers to (where a country chose its legal family, as in the case of Japan, legal origin is endogenous and hence does not have explanatory power). Likewise, one might ask how these inclinations could be so stable over time, especially through the many and often profound changes in local political climate.

…continue reading: The Economic Consequences of Legal Origins

The Program on Corporate Governance has recently released our paper CEO Tenure, Performance and Turnover in S&P 500 Companies.  As Dennis Berman noted recently, our study identifies two groups of CEOs, ”owner-CEOs” and ”manager-CEOs,” and shows that manager-CEO retirements increase substantially during the fifth year of the CEO’s tenure.  The abstract of the piece is as follows:

The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance.  However, less is known about the institutional and personal correlates of CEO turnover.  In this study, we find two CEO characteristics interact with turnover: tenure and ownership.  We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns–”owners” (who have large personal shareholdings) and ”managers” (who have smaller holdings).  The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions.  Turnover of all kinds is low during a CEO’s first four years on the job.  In contrast, once a CEO reaches his fifth year, retirements begin a multi-year increase and exits via merger exhibit a large one-year spike.  These term effects are strongest for relatively young CEOs, and appear to be independent of such factors as firm performance or retirement norms.  We also find that deals and retirements are partially related, but partially distinct, modes of CEO turnover in other respects, which are similar along some dimensions but sharply different along others.

The full Article can be downloaded here.

A recent decision of the federal District Court for the District of Massachusetts has ruled that I cannot serve as class representative in a securities-fraud class-action because, the court said, I am an “activist shareholder.”  The decision concludes:

“Both [John P.M.] Higgins and Monks are “shareholder activists” and, as such, subject to unique defenses.  Specifically, defendants aver, Higgins and Monks purchased shares of [the company] to “engag[e] in activist strategies [and] overcome existing corporate governance problems to enhance shareholder value.” In particular, defendants argue that Higgins and Monks purchased shares . . . on the theory that the company was poorly managed and that the stock price would likely decline; therefore, they could not have relied on any alleged misstatements.  They point to, inter alia, the following facts: (1) Higgins and Monks “had numerous communications with . . . directors and management”; (2) Monks had two friends “[who] were [directors], whom he regarded as sources of inside information”; and (3) Monks “published several books . . . which undermine any suggestion by plaintiffs’ counsel that Monks[ or] Higgins relied on any alleged misstatements by Defendants.”

While their status as “shareholder activists” does not, ipso facto, disqualify Higgins and Monks from serving as class representatives, in this case, the record suggests that they may be subject to unique defenses and therefore do not satisfy the “typicality” requirement.  Accordingly, I decline to name them class representatives.”

Over many years of active involvement in the governance of American corporations, I have come to the conclusion–documented in Corpocracy, to be published by Wiley this November–that shareholder rights are, in fact, a nullity.  It has often been observed that the only meaningful role for an American shareholder is as a plaintiff, particularly in class-action litigation.  There is, therefore, profound irony in the fact that someone characterized as an “activist shareholder” would, by virtue of that designation, be foreclosed from representing a class in securities-fraud suits.  The logical and linguistic torture of being excluded from the class–made all the more difficult by the fact that it was gratuitous, given that the court permitted another plaintiff to serve as class representative–simply because I am a “shareholder activist,” subject only to the assurance that this status is not an ipso facto disqualifier from serving as a representative, is less painful than the realization that, in the year 2007 in the Commonwealth of Massachusetts, one is literally powerless to have an impact in cases of acknowledged corporate fraud.

The district court’s Memorandum of Decision is available here.

The Wall Street Journal recently published my op-ed, Corporations Shouldn’t Be Democracies, on the SEC’s forthcoming decision on two proposed rules governing shareholder access to the corporate proxy.  As the article notes, Chairman Cox is about to cast a crucial vote on the issue, and he should vote not to expand shareholder access to the corporate ballot. The piece explains:

Successful corporations are not, and never have been, democratic institutions. Since the public corporation first evolved over a century ago, U.S. law has discouraged shareholders from taking an active role in corporate governance, and this “hands-off” approach has proven a recipe for tremendous success.

The full article is available here.

(Editor’s Note: We also recently posted a comment letter from thirty-nine other law professors urging the SEC not to adopt any proposal that would interfere with shareholder access to the corporate ballot. That post is available here.)

The SEC recently pulled out all the stops in marketing its “landmark” announcement that the XBRL taxonomy for U.S. financial reports using GAAP is ready to be tested by third parties–but not the general public quite yet–with an intended completion date of December 5th.  (When their work is finished, XBRL tags will allow investors and analysts easily to download financial reports filed with the SEC into spreadsheet software like Excel.)  It certainly is quite an achievement that the team that has worked closely with the SEC Staff has managed to get this project moving so quickly.  This development follows last week’s announcement that the SEC has made the source code for its Interactive Financial Report Viewer available for free use by the market.

This is all to the good.  However, I am a bit concerned about the Chairman’s remarks that rules could be proposed this Spring, and adopted as early as next Fall, mandating the use of XBRL.  A change this big–and this technical–takes time, particularly if our historical experience with Edgar is any indication.  (Perhaps it was an omen that the SEC’s press conference yesterday was delayed by half an hour due to technical glitches.)

It is comforting to know that, over the last year, 8,300 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to banking regulators.  My faint memory of Call Reports is that they are fairly simplistic compared to U.S. GAAP, but it’s still comforting to know that there is some XBRL experience out there beyond several dozen pilot volunteers.

During his remarks, Chairman Cox waxed about a mythical Sally Q spending more time with her kids because XBRL saved her research time.  I understand his point, but I don’t really view XBRL as a substitute for reviewing SEC filings.  We all know that two companies with identical situations might well report completely different numbers for a particular line item because each selected a different accounting treatment.  Reading the financials in their full context will continue to remain important. 

In the end, I think XBRL will have a bigger impact on issuers’ ability to put together their financials internally.  Yes, there might be cost savings, but implementing XBRL will also have costs.  The real change here might be a more streamlined, efficient process for gathering the data that makes up a company’s financials.

Thirty-nine law professors, including myself, have filed a comment letter in favor of placing shareholder-proposed bylaw amendments on the corporate ballot.

The SEC has been seeking comments on two proposals that would allow companies to exclude all or some shareholder-proposed bylaw amendments concerning shareholder nomination of directors. The comment letter opposes both proposals. It urges the SEC to avoid producing impediments to shareholders’ exercise of their right under state law to initiate bylaw amendments concerning shareholder nomination of directors.

There is substantial disagreement among the law professors submitting the comment letter regarding the substantive merits of proxy access bylaws, and thus as to whether shareholders would benefit from adopting such bylaws. We are unanimous, however, in our belief that shareholders should be allowed to make the decision on this subject for themselves, and that companies should not be allowed to make the decision for them by excluding proposed bylaw amendments from the corporate ballot.

The law professors submitting the comment letter are affiliated with twenty-four universities around the country. The full list of the professors and their affiliations is as follows:
Ian Ayres (Yale Law School);
Michal Barzuza (University of Virginia School of Law);
Lucian A. Bebchuk (Harvard Law School);
Laura N. Beny (University of Michigan Law School);
Lisa E. Bernstein (University of Chicago Law School);
Bernard S. Black (University of Texas Law School);
William W. Bratton (Georgetown University Law Center);
Richard Buxbaum (University of California at Berkeley);
William J. Carney (Emory Law School);
Stephen Choi (New York University School of Law);
John C. Coffee, Jr. (Columbia Law School);
James D. Cox (Duke Law School);
Lawrence A. Cunningham (George Washington University Law School);
George W. Dent, Jr. (Case Western Reserve University School of Law);
Einer R. Elhauge (Harvard Law School);
James A. Fanto (Brooklyn Law School);
Allen Ferrell (Harvard Law School);
Jill E. Fisch (Fordham University Law School);
Merritt B. Fox (Columbia Law School);
Tamar Frankel (Boston University School of Law);
Jesse M. Fried (University of California at Berkeley);
Jeffrey N. Gordon (Columbia Law School);
Henry Hansmann (Yale Law School);
Jon D. Hanson (Harvard Law School);
Peter H. Huang (Temple University James Beasley School of Law);
Marcel Kahan (New York University School of Law);
Vikramaditya S. Khanna (University of Michigan Law School);
Reinier H. Kraakman (Harvard Law School);
Donald C. Langevoort (Georgetown University Law Center);
Louis Lowenstein (Columbia Law School);
Steven G. Marks (Boston University School of Law);
Dale Arthur Oesterle (Moritz College of Law, Ohio State University);
Richard W. Painter (University of Minnesota Law School);
Frank Partnoy (University of San Diego School of Law);
Katharina Pistor (Columbia Law School);
Robert A. Ragazzo (University of Houston Law Center);
Kenneth E. Scott (Stanford Law School);
D. Gordon Smith (Brigham Young University); and
Guhan Subramanian (Harvard Law School).

The full text of the comment letter is available here.

(Editor’s Note: This post comes to us from Professor Jonathan Adler of the Case Western Reserve University School of Law.  Additional posts on Stoneridge and its potential implications are available here and here.)

Next Tuesday, the Supreme Court of the United States will hear oral argument in Stoneridge Investment Partners v. Scientific Atlanta, the most important securities-law case in years.  The question presented–when, if ever, shareholders may sue third parties for their participation in allegedly fraudulent transactions with a public corporation–could have profound economic and legal implications. 

The case has attracted over two dozen amicus briefs, filed by everyone from the National Association of Manufacturers to the Council of Institutional Investors.  Over 30 states and divided current and former SEC Commissioners have weighed in.  The case prompted considerable internal debate within the Bush Administration before the Justice Department finally filed a brief opposing liability in the case.

This Friday, the Center for Business Law and Regulation at the Case Western Reserve University School of Law and the Federalist Society’s Corporate Law Practice Group are co-sponsoring a half-day conference analyzing the case, entitled Scheme Liability, Section 10(b), and Stoneridge Investment Partners v. Scientific Atlanta.  Two morning panels will examine the legal and policy questions at issue in the case.  Speakers will include Professors Stephen Bainbridge (of the UCLA School of Law), Barbara Black (of the University of Cincinnati College of Law), Jay Brown (of the University of Denver Sturm School of Law), and Richard Painter (of the University of Minnesota Law School), as well as Andrea Seidt (an Assistant Attorney General of Ohio) and James Copland (of the Manhattan Institute for Policy Research).  A third panel will feature a debate between Eric Isaacson (of the Coughlin Stoia firm) and Ashley Parrish (of Kirkland & Ellis) on the merits of the case.The event is free and open to the public and will be webcast live. 

Further details, including registration and information on how to view the webcast, are available here.

I have recently posted my article Motivations for Public Equity Offers: An International Perspective, coauthored with Woojin Kim.  The article examines the reasons that firms tap public equity markets by analyzing the ultimate uses of the funds raised through both initial public offerings (IPOs) and seasoned equity offerings (SEOs) in 38 countries between 1990 and 2003.

It seems that firms spend the money raised mostly on capital expenditures and R&D, suggesting that demand for capital to finance investments is indeed an important motivation behind public equity offers.  On the other hand, some firms seem to take advantage of mispricing in the market by hoarding more cash and offering more old shares–potentially held by insiders–when market valuation is high relative to accounting numbers.  In short, both market timing as well as investment financing seem to drive firms to engage in public offerings.

The full article is available here.

This Thursday and Friday, Harvard Law Professor Robert Sitkoff, recently named one of Lawyers Weekly’s up and coming lawyers of 2007, will travel to Delaware for a stay as a visiting scholar at Widener University School of Law.  The visit will feature a presentation of his article Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, co-authored with Jonathan Klick.  (Professor Sitkoff described that article in this post.) 

On Friday at 2:00 PM, Professor Sitkoff will deliver a talk entitled The Rise of the Statutory Business Trust as part of Widener’s visiting scholar lecture series.  Vice Chancellor Strine will also offer commentary on that subject following Professor Sitkoff’s lecture. Details on the talk, and Professor Sitkoff’s visit, are available here.