I have recently distributed a memorandum entitled “A United Nations Proposal Defining Corporate Social Responsibility For Human Rights,” which discusses a report by a Special Representative to the U.N. Secretary-General. The report has broad implications for global business and particularly for companies operating on a global basis, in emerging markets, in underdeveloped countries, or in countries that lack a democratic system. The report, which will be considered in a June session of the U.N. Human Rights Council, proposes that corporations bear the “responsibility to respect human rights,” that the State has a “duty to protect” against human rights abuses by companies, and that both the State and businesses must provide more effective access to remedies for human rights violations. In the memorandum, we explain that the framework recommended to the U.N. could impose on businesses an array of expansive obligations requiring close attention by corporate management and boards. The memorandum sets forth the core principles which the U.N. Human Rights Council may endorse to guide corporate responsibilities for human rights and additionally considers their implications for directors.

The memorandum is available here.

In Miller v. McDonald, et al., ( D. Del., Bankr., April 9, 2008), the Bankruptcy Court for the District of Delaware decided an issue of great importance to those who follow corporate governance issues related to the fiduciary duties of officers and directors. In this opinion on a motion to dismiss claims against an officer of a company, the Bankruptcy Court relied on decisions of the Delaware Chancery Court and the Delaware Supreme Court to deny a motion to dismiss in the course of ruling that Caremark duties would be imposed on an officer (who was not a director), that was on the management team when the President of the company committed fraud and other actions and omissions that ultimately led to the bankruptcy filing of the company. This is notable in part because there are not as many decisions that address the fiduciary duties of officers, as opposed to directors of a corporation.

Here is a summary of a Delaware Chancery Court decision of a few weeks ago that also imposed fiduciary duties on a corporate officer, (with a link to other similar cases and to a recent article on the topic by Professor Lyman Johnson).

…continue reading: Court Imposes Caremark Fiduciary Duty on Corporate Officer

We have recently distributed a memorandum entitled Delaware Court Rejects Per Se Rules for Financial Advisor Proxy Disclosures, which discusses the ruling of the Delaware Court of Chancery in In re BEA Systems Inc. Shareholders Litigation, a lawsuit arising out Oracle’s $8.5 billion acquisition of BEA Systems. The court denied plaintiffs’ motion to enjoin a special stockholders’ meeting to vote on the merger on the basis of allegedly insufficient disclosure in the merger proxy. The ruling, issued from the bench, provides helpful further guidance regarding the application of Delaware’s materiality standards, especially as the relate to claims challenging the disclosure of investment banker analyses. The ruling also noted the importance of transactional and market context in evaluating claims that seek to interfere with shareholder decision-making or the timing of a proposed transaction.

The memorandum is available here.

The transcript of oral argument and rulings of the court is available here.

The Financial Times recently published the following op-ed piece of mine, entitled Judgment Too Important to be Left to the Accountants.

Two serious asset bubbles–the dotcom explosion of the late 1990s and the recent dizzying ascension in housing prices–have developed in the US economy within the past decade.

Given their damaging consequences, it is time to look for causes. One area that merits attention is fair value accounting, which was adopted as policy by the accounting profession in the 1990s.

This accounting convention requires financial intermediaries to carry their assets at market values, even if those assets are not being held for trading purposes.

When the dotcoms were in vogue, the assets of securities firms and other equity intermediaries were inflated, just as, more recently, rising housing values made banks and other mortgage lenders look flush. Inflated balance sheets and income statements supported more borrowing and more leverage; suddenly, the markets were awash in liquidity and risk premiums fell to unprecedented levels. It could be argued, then, that fair value accounting was the hothouse in which these bubbles bloomed; when prices are rising this system seems both to stimulate and ride the wave of irrational exuberance.

But matters look much less agreeable when the same asset values are falling. Then, the process works in reverse, and the spiral points downwards.

As assets fall in value, leverage rises, creditors and counterparties demand more collateral coverage, and companies must sell assets that they can no longer finance. Forced asset sales drive down prices, causing further write downs of assets under fair value principles–even for those who are not selling. And so it goes on. The downward spiral is continuing as this is written, and where it stops nobody knows.

Fair value accounting also has a one-size-fits-all quality that mimics the inflexibility of over-regulation. Valuing assets with reference to the market seems reasonable for firms that earn their profits from, say, buying and selling securities. In that case, what the market will pay for the firm’s assets and liabilities at any given time may be a good way to assess its overall value. But what about intermediaries such as commercial banks, which are generally in the business of profiting from cash flows? Does it make any difference to an investor in a bank–an investor who is looking to the bank’s success in corralling cash flows–that the market value of the assets that produce these flows may vary?

Many banks point out that the cash flows on portfolios they have substantially written down are doing just fine. A wooden application of fair value accounting to banks–while it may simplify the work of accountants–seems to do a disservice to bank investors, and even more so bank depositors.

If, as banks claim, fair value accounting is causing commercial banks to appear much weaker than they are in fact, it is creating a financial crisis where a mere slowdown might have been warranted.

Fair value accounting is clearly the reigning orthodoxy among accountants, but is that the right test? Accounting is simply a measurement system. What we want to know determines what and how we measure. Which is more important, the balance sheet or the income statement? Do we want to measure financial strength or earnings per share or cash flows? Is the purpose to inform equity investors or creditors and counterparties? Does one measurement system meet all of these objectives?

Given its impact on institutions and whole economies, common sense suggests that we consider whether one means of measurement is the only one we should be looking at. The world view of accountants at a particular time should not determine the answers to these questions.

It is important to recall the famous remark of Clemenceau that war is too important to be left to the generals.

Electronic Arts, Inc. recently submitted to the SEC a no-action request seeking concurrence of the SEC Staff that a shareholder proposal I submitted may be excluded from the company’s proxy materials for the 2008 annual meeting. In response to the company’s no-action request, I filed a complaint, through my counsel, in the United States District Court for the Southern District of New York. The complaint seeks, among other things, a declaratory judgment that Electronic Arts may not exclude my proposal from the company’s proxy materials and an injunction requiring the company to include the proposal.

My proposal is precatory and recommends that the board of directors submit to a shareholder vote an amendment to the company’s charter or by-laws. The suggested amendment, if adopted, could facilitate by-law amendments initiated by shareholders. In particular, the suggested amendment could require the company to submit to a shareholder vote shareholder-initiated proposals for changing the by-laws that meet certain procedural and substantive requirements. The suggested amendment could also require the company to include such proposals in the company’s proxy materials for the annual meeting.

I view my precatory proposal as rather moderate and believe that its passage and implementation could well benefit the company’s shareholders. Many shareholders, I believe, would vote for the proposal if given the opportunity to do so. I also believe that, for the reasons indicated in the complaint, the company’s attempt to exclude the proposal from the company’s proxy materials is entirely without merit. I hope that the company will change its position and allow shareholders to vote on my precatory proposal. The text of my proposal is available here, the company’s no-action request is available here, and my complaint is available here.

I would like to express my appreciation to the law firm of Grant & Eisenhofer for its invaluable legal advice and representation in this matter. I also wish to thank Greg Taxin and Julie Gresham of Spotlight Capital, and my Harvard Law School colleagues Victor Brudney, Allen Ferrell, Howell Jackson, Reinier Kraakman, and Mark Roe, for helpful comments and conversations on my shareholder proposal.

My colleagues, Amy Goodman, Gillian McPhee and I have recently published our thoughts on issues to be considered by boards of directors in setting their own compensation. We outline recent trends in compensation practices, particularly since the passage of the Sarbanes-Oxley Act, and discuss issues confronting boards of directors as they review their compensation programs; the issues include: the appropriate forms of cash compensation and equity compensation; the mix between equity and cash components of compensation; the adoption of stock ownership and retention policies; the use of perquisites; and the process for evaluating director compensation. We find that boards of public companies increasingly seek external guidance on these issues, recognizing that, when the board sets its own pay, it is in an unavoidable conflict of interest situation as are the corporate managers overseen by the board.

The memorandum is available here.

Recently, I blogged about a case brought in the US District Court, Southern District of Texas, by Apache Corporation, who sought a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. The case sought to enjoin a lawsuit brought by NYCERS in the Southern District of New York over the exclusion of a employment-related proposal by the Corp Fin Staff under the “ordinary business” basis of the SEC’s shareholder proposal rule (ie. 14a-8(i)(7)).

A few days ago, Judge Miller of the US District Court, Southern District of Texas ruled from the bench for Apache, granting Apache’s declaratory judgment. I have posted the Order and related Memo - even the trial transcript - from the court in the “Shareholder Proposals” Practice Area on TheCorporateCounsel.net.

Interestingly, Judge Miller’s opinion appears to stake out new territory from a judicial point of view. For the first time, a court has endorsed Corp Fin’s view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving. We’ll see if the Second Circuit ultimately follows suit (I believe the Texas case isn’t binding on the SDNY one, but under a res judicata theory, it’s likely the Second Circuit would recognize the SDTX’s decision and rule in favor of Apache).

Also interestingly, the Texas court didn’t take the bait offered by Apache with respect to the appropriate standard of review for SEC Staff no-action: Apache asked the court to find that a company that excludes a shareholder proposal in reliance on a no-action letter is entitled to a rebuttable presumption that such exclusion was proper. The court declined to adopt such an approach, however, concluding that Staff no-action letters are only persuasive - but not binding - authority.

The opinion is available here.