The Delaware Supreme Court has issued its opinion in the AFSCME/CA matter. The opinion is available here. We have earlier posted on this important case here, here, and here.

We have received communications from several of our guest contributors.

Ted Mirvis of Wachtell, Lipton, Rosen & Katz writes:

The Delaware Supreme Court much-awaited decision on the AFSCME stockholder bylaw proposal did not disappoint. It is a thoughtful and important treatment of the intersection of stockholder and director authority. The director-centric view won. Here is our memo on the decision.

John F. Olson of Gibson, Dunn & Crutcher LLP offered a different perspective:

While the Delaware Supreme Court’s unanimous opinion, responding to the SEC’s two certified questions, is a clear victory for CA, Inc., and the SEC has already issued the requested no action release, the opinion of the Court provides a road map for different mandatory by-laws dealing with the election of directors that can be adopted by shareholders without offending Delaware law, even if some corporate expense is involved. The key is to leave room for director fiduciary discretion to prevent abuses. Thus, there is something for both sides to cheer about and, in Delaware, the fun has just begun.

J.W. Verret of George Mason University School of Law, who posted with us on the case here, offered the following comments:

For more analysis on this issue, see my essay on SEC Certification to the Delaware Supreme Court here. The verdict is in. First, let’s review the issues. The SEC certified two questions to the Delaware Supreme Court:

1) Is the AFSCME Proposal a proper subject for action by shareholders as a matter of Delaware law?

2) Would the AFSCME Proposal, if adopted, cause CA to violate any Delaware law to which it is subject?

The Court’s ruling is an affirmative answer to both questions. Shareholder proposals like the one at issue in this case are a proper subject of shareholder action, and are not invalid encroachments on Board authority merely because they mandate a payment of money. Yet, as the Court could conceive of a way in which mandated payment could cause the Board to violate its fiduciary duty to the shareholders, the bylaw is illegal under Delaware Corporate Law for lack of a “fiduciary-out” exception.

My prior post, and an analysis from Professor Bainbridge here, describes the recursive loop between DGCL 141 and DGCL 109(a). More commentary from Larry Ribstein, and his compilation of links to other commentators, can be
found here. Rather than avoiding the question, as both counsel invited them to do, the Court faced this paradox head on. Boards and shareholders are both granted the right to amend the bylaws in the DGCL. Shareholder authority to amend bylaws is limited by 141, but the extent of that limitation has been mired in uncertainty. The Court also rejected CA’s argument that any limitations on Board’s authority must be contained in the Certificate of Incorporation.

The Court has given us its first look into the contours of 141’s limit on 109(a). The Court rested in a process/substance distinction outlined in previous Court of Chancery opinions. Bylaws mandating substantive business decisions are impermissible, but bylaws altering the process whereby Boards make decisions are permitted. In analyzing this bylaw, the Court announced “We conclude that the Bylaw, even though infelicitously couched as a substantive-sounding mandate to expend corporate funds, has both the intent and the effect of regulating the process for electing directors of CA.”

As to the second question, the Court held that, because of conceivable circumstances in which the bylaw could require the Board to reimburse insurgents running solely for personal reasons, there are conceivable situations in which the bylaw would require the Board to violate its fiduciary duty. This relied on similar holdings in Quickturn and Paramount v. QVC. The Court was unconvinced that the fact that limitation was shareholder adopted reduced the impact on the board’s ability to discharge its fiduciary duties. (Though including this mandate in the Certificate of Incorporation would be permissible.) The Court relied on its prior holding in Hibbert v. Hollywood Park for the proposition that only reimbursement for contests involving substantive differences about corporation policy are permitted.

Technically this is a loss for AFSCME, but the opinion should be considered a measured victory for the shareholder activist community. A reimbursement bylaw with a fiduciary duty out exception does not eliminate all of the risk associated with funding a proxy campaign. Only proxy access to the corporate ballot can do that. But such a bylaw would significantly reduce the risk associated with funding a proxy campaign. There is a good chance that a Board’s decision to withhold reimbursement through claims that its fiduciary duty requires it would be subject to heightened review under Blasius, since the Court has accepted that this bylaw is intimately connected with the election process and candidate’s incentives to run for election.

(Editor’s Note: The post below comes to us from Jennifer G. Hill of the University of Sydney, Australia, who has a continuing position as Visiting Professor at Vanderbilt Law School.)

In Unocal Corp v Mesa Petroleum Co (493 A. 2d 946, 957 (Del SC, 1985), the Delaware Supreme Court stated that “our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs”. Historically, however, this evolution and growth has occurred with only limited and sporadic attention to international corporate governance regimes.

In my recent paper, Regulatory Show and Tell: Lessons from International Statutory Regimes, which was recently presented at a recent Symposium at Widener University to mark the 40th anniversary of major revisions to the Delaware General Corporation Law, I examine reasons for the relative lack of attention in the US to international corporate regimes. One possible reason is the influence of competition for corporate charter theory in the US. Another is the fact that it is often assumed that a standardized Anglo-US model of corporate governance exists, and that US corporate law reflects the law in other common law jurisdictions.

The paper challenges the assumption that there is a harmonized common law model of corporate law, by reference to differences between the approach of the US and some other common law jurisdictions in the topical area of shareholder rights. The paper argues that, at a time when there is growing skepticism about the influence today of the competition for corporate charters, it makes sense for the US to examine and test how international jurisdictions address common problems in corporate regulation. One recent event reflecting growing interest in this regard was the announcement by the SEC in March 2008 that it had entered into a pilot mutual recognition program with Australia in relation to securities market regulation.

The paper is available here.

(Editor’s Note: This post is by John F. Olson and Amy L. Goodman, partners at Gibson, Dunn & Crutcher LLP in Washington, DC)

In a post to this blog on June 25th, Marty Lipton presented a paper entitled “Shareholder Activism and the Eclipse of the Public Corporation: Is the Current Wave of Activism Causing Another Tectonic Shift in the Public Corporation?,” in which he expressed concern about the eroding centrality of the board and its vulnerability to pressure to seize short-term value at the expense of long-term value creation. Marty is one of our most experienced and thoughtful observers of corporate governance trends, based in large part from his front row seat as an advisor to many corporate boards and managements. However, while his points of caution are well worth bearing in mind, we think that directors and those who advise them must do more than decry what to many are troublesome trends that erode the ability of the board to take decisive action on behalf of the corporate enterprise.

The new world of inexpensive and constant communication is not limited to the corporation and its constituents; it is part of everyday life in every realm. Shareholder and other interest groups are going to make themselves heard; proxy contests are going to be cheaper and more accessible to those who may have short term goals; regulation will continue to be hard pressed to adapt quickly to these changes. In response to this environment, which we argue is inescapable, we submit that it’s time to move beyond the us (corporate board/managers) versus them (shareholder) mindset and recognize the commonality of interest that exists between boards and most shareholders in creating long-term value. We are preparing a paper that will develop these ideas in more detail but wanted to encourage more dialogue surrounding these important issues now.

Given the increasingly complex and global world facing corporations today, we need to get away from focusing on the corporate governance issue du jour or per annum to assisting the Board in addressing its complex role. In recent years, there has been an annual “hot” corporate governance issue–from declassifying boards, to shareholder approval of poison pills, to majority voting for directors, to an advisory vote on pay. While companies have embraced many of these proposals, boards of directors are becoming increasingly concerned about the amount of time and attention they, management and the company’s advisors must spend on responding to the corporate governance issue du jour. It may be time to step back and consider whether other issues should take priority, especially given the state of the economy and the many challenges facing corporate America.

In our upcoming paper, we will address some of the issues that deserve focus from shareholders, directors, business executives and other interested stakeholders.

• First, and not necessarily in order of importance, we need to develop effective methods of board/shareholder communication that build on new electronic capabilities but are not burdensome and do not increase liability risks.

• Second, boards and business executives need to effectively and regularly communicate corporate strategy and the board’s oversight role to investors, the business press and analysts, once again without fear of increased liability.

• Third, companies need to make good investor relations, and “good listening” a day to day corporate priority, and shareholders need to take advantage of these opportunities to present their views to business executives and directors.

• Fourth, shareholders need to think for themselves and reduce their reliance on proxy advisory services and be more transparent in their proxy voting decision-making processes.

• Fifth, companies, boards and their advisors need to figure out a way for directors to spend more time addressing strategy and risk and less time on compliance.

• Finally, while efforts to better educate directors about corporate governance and their fiduciary responsibilities has been salutary, we now need to shift our efforts to better educating directors in understanding the businesses, including the risks, of their companies.

(Editor’s note: This post summarizes today’s oral argument in Delaware. For previous posts on the Blog about the case, and for the parties’ briefs, see here and here.)

AFSCME Employees Pension Plan submitted a shareholder proposal for inclusion in CA’s proxy materials for their annual meeting scheduled to be held on September 9, 2008. That proposal sought to amend CA’s bylaws to require the company to reimburse the reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least one nominee from the dissident slate was victorious. CA sought no-action relief from the SEC permitting it to exclude that proposal under Rule 14a-8 as illegal under Delaware law, and the SEC certified the question to the Delaware Supreme Court. The Court’s opinion stands to re-define the nature of corporate federalism and ring in a new collaborative relationship between the Delaware Courts and the SEC. Indeed, it may encourage the SEC to include more state law carve-outs in future rule-making.

I wrote an essay (available here) on this issue in March predicting that the SEC would certify the bylaw question to Delaware soon. For more on the growing trend of shareholder democracy behind this challenge, see Pandora’s Ballot Box, or a Proxy with Moxie: Majority Voting, Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined (available here). For more on bylaws, see Profs. Coates and Faris’s work (Second-Generation Shareholder Bylaws: Post-Quickturn Alternatives, 56 Bus. Law. 1323 (2001) (with B. Faris)) and Prof. Hamermesh’s article (available here). Anticipating that the opinion in this difficult case might make use of dicta guidance, see also my article with Chief Justice Steele on the Delaware Guidance Function (available here).

This post summarizes a very lively oral argument in Dover, Delaware this morning. The Justices and the parties displayed a rigorous command of this intricate subject, working in a very short timeframe. It was fascinating to watch these masters of the Delaware General Corporation Law at the height of their craft.

Arguing on behalf of Computer Associates was Robert Guiffra of Sullivan & Cromwell. His presentation focused on two key issues: first, he argued that this bylaw does not relate to an election of directors, but merely comes into play after the election, and thus is not protected by the principles in the Blasius line of cases. As a mandated payment of expenses it relates to control of the corporate treasury, part of the business and affairs of the corporation as defined in Rule 141(a). As such, limitations on the Board’s authority may only appear in its Certificate of Incorporation, not its bylaws. Second, he argued that the Board must be permitted to make a determination of whether a reimbursement was consistent with its fiduciary duty, where this bylaw mandated payment under all circumstances.

Arguing on behalf of AFSCME was Michael Barry of Grant & Eisenhofer. His presentation focused on two key issues: first, he argued that this bylaw relates to an election, implicates the shareholder franchise and Blasius review, and is not a part of the ordinary business affairs of the corporation. As such, it does not undermine the Board’s authority under section 141. He also argued that where directors are mandated to reimburse expenses, they cannot be doing so for the purposes of entrenchment, and thus cannot logically do so in violation of their fiduciary duties. He also cited Delaware’s approval of mandatory indemnification bylaws as binding precedent on this issue.

Both Counsel admitted that, though the bylaw was unclear, reimbursement of expenses for the full contest and not just for the successful nominee was anticipated. Both parties also skillfully argued that the Court need not permanently resolve any looming contradiction between section 109 and section 141(a) to rule in their favor. Section 109 of the DGCL grants shareholders the right to adopt bylaws, and section 141(a) reads that “the business and affairs of every corporation…shall be managed by…a board of directors.” Thus, the oft referenced “recursive loop” in which a bylaw adopted under section 109 might limit a board’s authority under 141(a). The Court nevertheless asked counsel’s opinion concerning the intent of the legislature in creating two conceivably conflicting sections of the code.

Questions from the Court during oral argument make any predictions difficult. The Justices pushed counsel for CA over whether the prospect of reimbursement was inextricably linked to the success of an election, and whether the bylaw would be legal if adopted by the Board. The Justices pushed counsel for AFSCME over whether there might be any circumstances under which a bylaw could force inequitable reimbursement and whether the Board’s authority to adopt bylaws was co-extensive with that of shareholders. Interestingly, Justice Berger, when she served as a Vice Chancellor, suggested in dicta that stockholders create a bylaw limiting the board’s power to amend a stockholder adopted bylaw in American Int’l Rent a Car, an opinion from 1984, which may indicate her view on whether the right to adopt bylaws is co-extensive. The Court also questioned whether the “reasonable” qualifier in this bylaw left enough room for board discretion not to reimburse wasteful expenses.

My own prediction is a substantive victory for AFSCME is possible, but the holding would be limited. If the Court allows election bylaws that mandate board action, it may require bylaws mandating board action have a “fiduciary out” clause similar to what we see in deal lock-in measures. This could be accomplished, I think, either by ruling that the bylaw is illegal only for lack of a fiduciary-out or ruling that the bylaw is legal but that a Board could ignore it if it’s fiduciary duty required it (board action which would then be critically reviewed under subsequent challenge, and the standard of that review for such a decision could be formulated in this opinion). The one thing I am most confident about is that the Court is likely to leave open the possibility to rule that other forms of bylaws, especially poison pill related bylaws, run afoul of 141(a).

In advance of the scheduled Delaware Supreme Court hearing tomorrow on the validity of the proposed shareholder-adopted election bylaw submitted for inclusion in the proxy materials of Delaware corporation CA, Inc, we are posting the briefs of the two sides, which were filed yesterday. As previously reported on the Blog, the case is before the Court on two questions certified by the Securities and Exchange Commission and accepted by the Court. Submitted by AFSCME Employees Pension Plan, the bylaw would require the company to reimburse reasonable stockholder expenses incurred in running a short slate of director nominees for election.

The brief of CA, Inc is here, and the brief of AFSCME Employees Pension Plan and its appendix are here and here. Oral argument is scheduled for tomorrow, July 9, at 10:00 a.m.

The Staff of the Securities and Exchange Commission has certified to the Delaware Supreme Court two questions of law regarding the permissibility of a bylaw amendment submitted as a shareholder proposal to a Delaware corporation, CA, Inc. The amendment would require the company to reimburse reasonable stockholder expenses incurred in running a short slate of director nominees for election. This is the first time that the SEC has used this certification procedure.

CA asserts that the shareholder proposal may be excluded from its 2008 proxy materials under Exchange Act Rule 14a-8 on the grounds that the proposal is an improper subject for shareholder action under Delaware law and that the proposal, if adopted, would cause CA to violate Delaware law. The Court has agreed to an immediate determination of the questions certified and ordered briefs to be filed on or before Monday, July 7. Oral argument is to be held on Wednesday, July 9.

The Supreme Court’s order accepting the questions certified by the SEC is available here. The SEC’s certification of questions of law, with the SEC General Counsel’s covering letter, are available here and here. The competing legal opinions are available here and here.

While the bulk of the commentary about last week’s CSX/TCI opinion has focused on the requirement for disclosure of derivatives under the Williams Act, the hedge fund defendants missed a great opportunity to attack the odious practice of management using shareholder money to sue a dissident on any pretext in order to entrench itself.

Generally, courts have been getting tougher on implied rights of action and especially so in securities lawsuits. In meVC Draper Fischer Jurvetson Fund,Inc., v. Millennium Partners, 260 F. Supp. 2d 616 (S.D.N.Y., 2003), Judge Sand, citing Alexander v. Sandoval, 532 U.S. 275 (2001) and Olmsted v. Pruco Life Ins. Co. of New Jersey, 283 F.3d 429 (2002) ruled that there is no right of private action section under section 12d(1)(A) of the 1940 Investment Company Act. It dismissed prior cases finding a right of private action as belonging to an “ancien regime.” A similar finding was made by the Third Circuit in a lawsuit brought under the Postal Reorganization Act, Wisniewski v. Rodale, Inc., 510 F.3d 294 (3rd Cir., 2007). The Wisniewski court ruled that after Sandoval a private right of action under a federal statute may be implied only if the court determines that Congress intended to create (1) a private right and (2) a private remedy.

I see no way that a court can find a principled distinction with respect to a private right of action between section 12d(1)(A) of the 1940 ICA and section 13(d) of the 1934 Act. At a minimum, after Sandoval in 2001 the issue of standing for 13(d) claims is certainly fair game. There is no “rights creating” language in either law that would support a right of private action by a supposedly aggrieved company.

Of course, unless a defendant raises the issue, I wouldn’t expect any judge to do it on his own. In the CSX case, the hedge fund defendants blew it and Judge Kaplan perfunctorily noted in passing that there is an implied right of private action under section 13(d) based on pre-Sandoval precedents based on the premise that the “congressional purpose was furthered by providing issuers with the right to sue ‘to enforce [the] duties created by [the] statute’ “�. However, in dismissing one counterclaim for proxy fraud, Judge Kaplan indicated he was well aware of CSX’s real motive:

CSX’s Purposes in Bringing this Lawsuit

CSX’s March 17, 2008, press release quotes Mr. Ward as saying that “[CSX] filed this suit . . . to ensure that all of our shareholders receive complete and accurate information.”� Defendants argue that this statement is materially false and misleading.

Speaking bluntly, this contention does not warrant a serious response. If the American people do not know that not every protestation of high motive, made in a contested election, can be taken literally, there is not much hope for any of us.

This realistic observation shows why courts should reject a private right of action in 13(d) cases. They are invariably brought by a management that is under siege for the purpose of fending off a dissident and retaining control of the company. Just look at the relief sought. It is always draconian — to sterilize the votes of the dissident and/or to prevent the dissident from soliciting or voting proxies. This effort to frustrate a shareholder vote is an abuse of the law’s intent as well as a breach of fiduciary duty.

One can always justify private lawsuits to enforce any law as furthering that law’s legislative purpose. But, imagine the abuses that policy would allow without considering the costs. If I have a dispute with my neighbor about leaving his junk on his lawn, should I be able to pressure him to remove it by suing him because he does not have a valid safety inspection sticker on his car? I have no problem with issuers complaining to the SEC about alleged violations of securities laws (or a neighbor complaining to the DMV that my car inspection has expired). But, unless the law specifically allows for private lawsuits, the decision as to whether the public good is served by bringing an enforcement action (or perhaps simply asking the alleged violator for corrective action) should be determined only by the SEC, not by the management of a company faced with a proxy fight which invariably has an ulterior objective.

Thus, with respect to 13(d) lawsuits, limiting enforcement authority to the SEC is both good law and good policy. We just need some defendant to raise the issue.

(Editor’s note: We also learned from our Guest Contributor John F. Olson that his firm, Gibson, Dunn & Crutcher LLP, has also just issued a memo on this important decision.)

“The securities markets operate in the real world, not in a law school contracts classroom. Any determination of beneficial ownership that failed to take account of the practical realities of that world would be open to the gravest abuse.” That is just a teaser of an opinion in which every page is a gem. Judge Kaplan’s opinion in the CSX/TCI case is long but well worth reading wholly apart from those with interest in the particular facts of that particular case. It treats with great insight and expertise the activist stockholder tactic of using swaps to gain increased leverage and potential advantage while staying below (they think, or better, thought) the 5% public reporting threshold of Section 13(d) of the Williams Act.

The decision comes to the brink of holding that the long side of a cash-settled total return swap conveys old-fashioned “beneficial ownership” (voting or investment power) of the shares held in the counterparty’s hedge position in the typical case where the long knows and intends that the financial institution on the other side will perfectly hedge by buying the shares and holding them until the unwind (whether that is effected ultimately in cash or in kind). While making a persuasive case for that conclusion, Judge Kaplan rests the beneficial ownership conclusion on the oft-ignored-but-nevermore “anti-evasion” SEC Rule 13d-3(b) which is an effective tool to prevent devices to prevent beneficial ownership from doing so. As to relief, the Court deemed itself constrained by prior precedent not to sterilize the shares bought under cover of 13(d) violation (it did enjoin future violations), but virtually invited the Second Circuit to revisit the question by declaring that the Court would have granted that relief had it discretion to do so. While there will likely be an appellate ruling in the case (an expedited appeal is being taken), Judge Kaplan’s opinion will undoubtedly stand as must reading.

Our short memo on the decision is here, and the Court’s opinion is available here.

My colleague Laura A.McIntosh and I have written an article recently published in the New York Law Journal on May 22, 2008 entitled Corporate Governance Update: Advance Notice Bylaws: Lessons from Recent Cases. Until recently, advance notice bylaws have been unremarkable and fairly uncomplicated provisions, generally easily complied with and largely uncontroversial. In two recent cases, Jana Master Fund, Ltd. v. CNet Networks, Inc. and Levitt Corp. v. Office Depot, Inc., the Delaware courts allowed activist stockholders to exploit potential drafting ambiguities to circumvent the well-intended rationale of the advance notice bylaw. As a result, advance notice bylaws have emerged as an important battleground in the conflict between companies and activist stockholders. Our article describes the purpose, operation and functions of an advance notice bylaw and considers the CNet and Office Depot decisions. Against the backdrop of these cases and in light of the increasingly complicated mechanisms through which investors hold stock, the article also discusses important points that companies should consider when reviewing their advance notice bylaws and bringing them up to date.

The article is available here.

It’s the height of proxy season, and with the high-profile shareholder meetings taking place at Exxon last week and Yahoo later this summer, a new website ProxyDemocracy.org offers tools to help individual investors take part in the process.

Although individuals own over 25% of US equity, institutional investors run the show when it comes to proxy voting. Driven by a mix of corporate governance zeal and fiduciary duty, mutual funds, pension funds, and other institutions invest in proxy voting research and vote their shares almost 100% of the time. By contrast, only about 20% of individual investors bother to vote; it’s safe to assume that even fewer read the proxy statement and know what they’re voting on.

Given the difficulty of researching the issues on the ballot and the ease of free riding, it’s not surprising that individual investors generally pass up their voting rights as owners. But it has a cost. Though many retail investors don’t realize it, their brokers vote on their behalf when they fail to send in a ballot. The standard approach brokers have taken is to cast all of these “uninstructed” shares for management, which tends to stack the deck against governance reform. Some brokers have recently enacted a “proportional voting” policy, which means that the votes for all of a broker’s clients are cast to reflect the votes of the minority who submitted a vote. But this only increases the importance of informed investor participation: if 20% of retail investors do the voting for the rest, it’s important that they know what they’re doing.

ProxyDemocracy.org, which I developed part-time over the past few years with help from a few other programmers, helps individual investors piggy-back on the research and judgment of respected institutional investors. We collect the intended votes of a handful of institutions (CalPERS, CBIS, Domini, and Calvert) that currently disclose their votes in advance of meetings. Users can sign up for free email alerts on our site to find out how those institutions plan to vote on stocks they own. Just as citizen voters take account of endorsements from respected groups like the Sierra Club or the NRA (depending on one’s political persuasion), individual investors can use these cues from known institutional investors to arrive at a principled vote more cheaply.

The site also provides tools for mutual fund owners. Around half of US households own mutual funds, and mutual funds own about a quarter of US equity. We have processed hundreds of SEC filings to help investors compare the voting records of leading mutual funds and determine whether their fund represents their interests at shareholder meetings. Not surprisingly, SRI funds tend to be much more activist than mainstream funds, but the differences among mainstream funds are significant as well: our fund profiles indicate that Schwab’s S&P 500 fund has a much more activist record than Vanguard’s, for example.

In the coming months, we plan to add more mutual fund profiles and collect intended votes from additional institutions. I encourage you to have a look at the site and pass along your thoughts and suggestions, either in the comments here or by email to andy [at] proxydemocracy.org.

At EXXON’S Shareholders Meeting on Wednesday, Resolution #5 received 39.5% of the vote, marginally shy of last year’s 40%. I was relieved as we early learned that the company was seriously soliciting investors to vote against our resolution. The realities of the proxy process are that an issuer has vast advantage. There are many large holders who want to provide 401(k) or other services or who have analysts who want continued favorable access. It is difficult under existing conditions for such holders to consider seriously their fiduciary obligations. Under those conditions, it is gratifying that we can – in a year in which EXXON’s recorded financial performance may be the best ever recorded – hold steady at 40%. If this is a base, we can work on expanding it.

A letter in support of the proposal by myself and members of the Rockefeller family, filed with the SEC on May 13, 2008, is availabe here. A CNBC video featuring my discussing the proposal is available here. The text of the proposal was as follows:

“RESOLVED, that the shareholders urge the Board of Directors to take the necessary steps to amend the by-laws to require that, whenever possible and subject to any presently existing contractual obligations of the Company, an independent director shall serve as Chairman of the Board of Directors, and that the Chairman of the Board of Directors shall not concurrently serve as the Chief Executive Officer.”

A summary of the 2008 proxy proposal votes is available here.

(Editor’s note: This column by Stephen Davis and Jon Lukomnik was originally published in the May 13, 2008 edition of Compliance Week.)

The 2008 proxy season in the United States is revealing hazardous gaps among the responsibilities expected of corporate directors, the way directors are elected, and the way investors treat decisions about how they vote.

Directors stand at the fulcrum of modern American corporate governance. They weigh the perspectives of management against the interests of shareowners. Getting that balance right is what many of the corporate governance battles of recent years have been about. As a result, demands on directors have skyrocketed. They now spend about 200 hours a year, on average, overseeing a corporation. Delaware courts give huge deference to director judgment while ruling repeatedly that the greatest power shareowners have to protect themselves is the ability to elect the board.

Only recently, however, has the process for electing directors begun to catch up to the centrality of the role. Consider that only in the last two years have most S&P 500 companies embraced a majority-vote system where directors who fail to gain a majority of ‘yes’ votes must resign their seats. That sounds like garden-variety common sense. But it represents a swift and profound revolution in Corporate America.

For decades until 2006, virtually every board director gained office in a Soviet-style election where only ‘yes’ votes counted. Investors’ only other choice was to “withhold”—the procedural equivalent of staying home. Plus, boards generally faced ballots in a single resolution that bundled all candidates together; an entire slate could be installed to pilot a public corporation even if only a single share voted yes and every other vote was withheld. A shrinking (but still significant) minority of companies still feature such rules, even now.

…continue reading: How to Hire a Director

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.

(Editor’s note: This post is by Matteo Tonello of The Conference Board Governance Center.)

The Conference Board’s Working Group on Hedge Fund Activism, established in May 2007, recently released a set of proposed recommendations for those public companies and institutional investors who might find themselves involved in an activism campaign mounted by hedge funds. The proposed recommendations are supported by a white paper discussing the Working Group’s findings. The paper is available here.

The Working Group focused on the following areas:

1. What corporations can do to better monitor securities holdings and learn about those accumulations of stock or extraordinary trading patterns that may reveal a hedge fund’s activism tactic.

2. What measures corporations can adopt to avoid becoming a target.

3. How boards and senior executives can react to an activism campaign and how they should respond to requests for change made by hedge funds.

4. How companies and large institutional investors can ensure integrity of the voting process in those situations where hedge funds borrow shares for the sole purpose of influencing a shareholders’ vote.

5. What considerations institutional investors should be mindful of when allocating some of their assets to hedge funds pursuing activism strategies.

Any interested party is invited to comment on the white paper and proposed recommendations. Comments and requests for information should be addressed to the author, Matteo Tonello, at 212-339-0335 or matteo.tonello@conference-board.org. The comment period will run until April 30, 2008.

NYCERS v. Apache Corp: Remember Cracker Barrel?

Ah, Cracker Barrel. A decade ago, the biggest Corp Fin-related controversy was the shareholder proposal’s “ordinary business” exclusion basis and the SEC Staff’s Cracker Barrel no-action letter under Rule 14a-8(c)(7) (the basis has since been renumbered to 14a-8(i)(7)). Those were much simpler times. Back then, the SEC’s dealings in corporate governance matters were pretty much limited to the shareholder proposal rule.

The Cracker Barrel saga arose due to a ‘92 no-action letter under which Corp Fin allowed that company to exclude a anti-sexual orientation discrimination proposal by stating that all employment-related proposals raising social issues were excludable. Enough fuss was raised so that the Commission specifically overruled its Staff’s position in a ‘98 rulemaking and returned the agency’s position on social issues to a “case-by-case analytical approach.” Corp Fin has been making this case-by-case determination when deliberating on social proposals ever since.

Now, a similar case has been brought in the US District Court, Southern District of Texas, by Apache Corporation, which is seeking a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. This case seeks to enjoin a lawsuit brought by NYCERS in the Southern District of New York. The facts are as follows:

- For the last two years, NYCERS has submitted proposals to companies in a campaign designed to fight discrimination against gays/lesbians and transgendered people (eg. asking companies to amend their EEO statements a la Cracker Barrel).

- This proxy season, NYCERS submits a proposal to Apache asking for the implementation of a program based on “equality principles” that include additional steps to avoid discrimination against this group of people.

- On March 5th, Corp Fin provides no-action relief allowing Apache to omit the proposal on ordinary business grounds, noting that some of the principles in the proposal relate to ordinary business.

- On April 8th, Apache filed for a temporary restraining order to try to prevent NYCERS from delaying its annual meeting and mailing supplemental materials.

- On April 9th, NYCERS files a lawsuit in SDNY, arguing - among other things - that Corp Fin had denied no-action relief for similar proposals in the past (specifically citing these no-action responses: Armor Holdings ((i)(7) denied on burden grounds) (4/3/07) and Aquila ((i)(10) denied)(3/2/06)) and that the Court doesn’t owe deference to Corp Fin’s positions anyways.

- After it filed its lawsuit, NYCERS subsequently filed for a temporary restraining order, but then quickly changed its request to an affirmative/mandatory injunction to force Apache to deliver supplemental proxy materials ahead of its May 8th annual meeting.

This is where this battle stands today, although it promises to move quickly. We have posted all of the documents filed in the SDTX and SDNY so far in our “Shareholder Proposals” Practice Area on TheCorporateCounsel.net.

(Editor’s note: The Agrawal study is described on our blog here; the initial AFL-CIO response is available on our blog here; two reactions to that AFL-CIO response - from Ashwini Agrawal and from Steven Kaplan - are available here; the subsequent AFL-CIO response is available here).

I am writing to respond to the recent post by Daniel Pedrotty, director of the AFL-CIO Office of Investment, critiquing my study on AFL-CIO proxy voting.

First, in contrast to Pedrotty’s claim that I was never in contact with the AFL-CIO Office of Investment, I contacted Michele Evans, office administrator of the AFL-CIO Office of Investment by email on May 22, 2007, and received a reply from her by email on June 1, 2007. The email exchange is available here.

Second, I would like to respond to Pedrotty’s request that I share my data with the AFL-CIO on a confidential basis with the AFL-CIO committing not to share it with any rival researcher and to use it solely to “check the accuracy” of my findings. Given that the AFL-CIO has not provided me data and information when I have requested it and has made what I consider false and misleading statements about my research, I have serious concerns, as do my advisors, that the AFL-CIO will misuse and mischaracterize any data I send them prior to publication. I therefore will not enter into the requested confidentiality agreement with them. Instead, I suggest they consult the public sources of data I use in writing my paper and replicate the findings themselves.

Third, I would like to respond to Pedrotty’s claim that the study is not possible to replicate using public information. Pedrotty makes a useful point that I did not fully describe the information I obtained from Investor Relations departments, however, as I will make clear in the next version of the paper, the findings in the paper are the same if one relies on the public data sources described in the paper. The next draft will explain that I contacted four companies whose investor relations departments confirmed, consistent with the lack of discussion of unionized workers in their 10-K’s, that they did not have union workers (an assumption I discuss in the paper). I will also make sure to fully describe any information I get from additional investor relations departments or other sources that I may choose to contact while revising my study.

As for other claims raised by Pedrotty, I have addressed them already in my earlier post, available here.

The Program on Corporate Governance has recently issued as a discussion paper my piece, entitled Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus.

On the surface, the Ringling case appears to be an irrational spat over board seats by the heirs of a very successful enterprise. However, a closer inspection reveals that the investors were neither fighting over board seats nor were they irrational. Although Edith Ringling pushed her incompetent son and Aubrey Haley her inappropriate husband, they did so to their private advantage. Although the circus cycled from one management team to another, the investors always promoted the new teams for private gain.

I argue that the root of the Ringling dispute lay in the inability of the law to enforce duty-of-loyalty standards. When the law works as it should, fiduciary duties perform two functions: they remove the incentive to appoint corporate officials by kinship rather than ability, and prevent the empty core cycling that would otherwise plague so many close corporations. Here it performed neither. In the Ringling case, I argue that the various parties had incentives to defect in the next period regardless of the alliances they formed in the current period. When the law does not enforce a duty of loyalty, this allows cycling to occur. If the law gave each investor a return proportional to his or her interest in the firm, investor alliances would not cycle. Not only will investors not appoint inept kin, management will not cycle from alliance to alliance. The Ringling circus did not degenerate into the chaos in which it found itself because the investors were spoiled or irrational. It degenerated because the law could not enforce the duty of loyalty.

The full paper is available for download here.

In a decision issued on March 13, 2008, the Delaware Chancery Court in JANA Master Fund, Ltd. v. CNET Networks, Inc. held that CNET’s advance notice bylaw applied only to shareholder proposals that are sought to be included in the company’s proxy materials pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended, and therefore did not apply to independently financed shareholder proxy solicitations. The decision is based upon the somewhat unusual wording of the CNET advance notice bylaw, the relevant portion of which is quoted below. Chancellor Chandler cited three principal reasons based on the specific language for limiting the bylaw’s applicability: (i) the language that “any stockholder…may seek to transact other corporate business at the annual meeting” does not make sense outside of the context of Rule 14a-8 because shareholders using their own proxy materials do not need management approval; (ii) the bylaw’s deadline for shareholder notice to the company is tied to the mailing date of the company’s prior year’s proxy materials, as is the deadline under Rule 14a-8 and unlike most advance notice bylaws; and (iii) in the Court’s view, most importantly, the final sentence of the bylaw (which states that “such notice must also comply with any applicable federal securities law establishing the circumstances under which [CNET] is required to include the proposal in its proxy statement…”) makes it clear that the scope of the bylaw is limited to proposals that shareholders seek to have included in the company’s proxy materials.

A memorandum summarizing the decision is available here.

(Editor’s note: The Agrawal study is described on our blog here; the initial AFL-CIO response is available on our blog here; two reactions to that AFL-CIO response - from Ashwini Agrawal and from Steven Kaplan - are available here).

Regarding the recent posting by Mr. Agrawal and Professor Kaplan,

Ashwini Agrawal, a graduate student at the University of Chicago, posted a paper on this blog that used a statistical model whose key variables were custom built by him to assert that the AFL-CIO votes its public company proxies based not on proxy voting guidelines, but on the union affiliation of public company employees. Through a series of e-mails (he has refused to meet in person or communicate over the phone) we told him he was completely and utterly wrong and asked him to release his data set. Mr. Agrawal accused the AFL-CIO of not responding to his questions after refusing to meet or release his data. University of Chicago Professor Steven Kaplan, who is advising Mr. Agrawal on this project, wrote a lengthy post defending these opaque methods.

Mr. Agrawal’s claim that he contacted the AFL-CIO and was denied information is false. Mr. Agrawal has never contacted a member of the AFL-CIO program staff to discuss his paper or ask for any data, and has refused every opportunity to meet and ask us questions.

Both posts also contain a series of important contradictions. Professor Kaplan and Mr. Agrawal repeatedly assert that the study can be easily replicated using publicly available sources of data. Kaplan emphasizes that this is “an important point. It does not rely on data that can be shaded by an interested party.”

Despite this, Kaplan later asserts that “in putting together a data set, a researcher spends a great deal of time and effort.” Which is it then? Is it a lengthy endeavor worthy of “great time and effort,” or something that’s “easily replicated?”

We continue to demand access to Agrawal’s data because it cannot be replicated. His data collection efforts were more subjective than mechanical. For example, when data on company unionization was incomplete Mr. Agrawal relied on information “from the Investor Relations departments of firms themselves.” [Appendix A, pg. 29]

The difficulty of replicating this skewed effort at data collection is obvious. How would the AFL-CIO go about determining which companies he contacted directly? Should we selectively call random Investor Relations departments and ask for the individual who spoke with Mr. Agrawal two years ago? What if the person he spoke with no longer works at the company? How do we know what source the Investor Relations Department used, and was it the same across all companies? Was a record of his phone conversations kept to back up his methodology?

Mr. Agrawal and Professor Kaplan assert that his paper has not been published, and that because it is not published they should be able to keep their data secret. It’s true that it hasn’t appeared in any peer reviewed setting–but it has been twice cited on the editorial page of the Wall Street Journal as evidence for repeated false accusations against the AFL-CIO, as well as being posted on this blog and widely circulated in academic and business circles.

Professor Kaplan’s defense that they won’t release data to a competing researcher is misplaced. We are the subject of a widely published study which makes false accusations based on unreproduceable statistical models. We are not seeking to complete a research project for a rival journal, but instead correct the record.

We would be happy to receive Mr. Agrawal’s data on the strict condition that we won’t turn it over to competing researchers or publish it in a competing paper. As outlined above, we need to review the accuracy of Mr. Agrawal’s data and statistical model, and when given the opportunity to talk to him, inform him of the serious flaws in his research.

A copy of the AFL-CIO’s recent report, Facts About the AFL-CIO’s Proxy Votes, is available here. We repeat our request that Mr. Agrawal release his data set or withdraw his paper.

(Editor’s note: We received two responses - from Ashwini Agrawal and from Steven Kaplan - to the AFL-CIO post responding to the study by Mr Agrawal of the AFL-CIO’s proxy-voting record. The Agrawal study is described on our blog here, and the AFL-CIO response is available on our blog here.)

Ashwini Agrawal wrote to us:

In my study, Corporate Governance Objectives of Labor Union Shareholders, I examine the proxy votes of the AFL-CIO Reserve Fund and Staff Retirement Fund. I compare the votes before and after the AFL-CIO split into two groups: the AFL-CIO and the Change to Win Coalition. After the breakup, the funds become relatively more supportive of directors of firms in which workers become primarily affiliated with the Change to Win Coalition.

In his blog post and letter, Daniel Pedrotty makes a number of mischaracterizations regarding my study.

For example, in the paper I note that the AFL-CIO proxy votes are cast by a third party fiduciary in accordance with AFL-CIO proxy voting guidelines; I do not argue otherwise, as Pedrotty claims. AFL-CIO proxy voting guidelines can be found here.

In another example, Pedrotty states that changes in AFL-CIO voting patterns solely reflect changes in governance characteristics. To investigate this, I look at the votes of other institutional investors who take governance characteristics into account, such as mutual funds Fidelity, Vanguard, TIAA-CREF and union pension funds associated with the Brotherhood of Carpenters (UBCJA). I find that these other investors do not change their voting patterns in the same ways as AFL-CIO funds, suggesting the AFL-CIO votes are not solely based on governance characteristics.

Pedrotty also erroneously claims I treat all firms with mixed union representation as though they are affiliated with the AFL-CIO only. Based on publicly available data, I distinctly categorize a company based on whether a significant fraction (at least 90%) of the unionized workers at the firm switches affiliation from the AFL-CIO to the Change to Win Coalition. This is meant to capture significant decreases in the AFL-CIO’s labor representation across firms. For example, if 50% of a firm’s unionized workers remain part of the AFL-CIO, while the other 50% switch to the Change to Win coalition, then I assume the AFL-CIO still has substantial labor representation in this firm. If labor interests do not influence proxy votes, this categorization should not impact the findings in the paper.

Pedrotty asserts I gather data on certain Change to Win funds but that I do not compare their voting behavior with the AFL-CIO. This is incorrect; I compare the UBCJA pension fund votes (a Change to Win affiliate) with those of the AFL-CIO funds. Upon joining the Change to Win Coalition, the UBCJA funds become relatively more opposed to directors of firms in which workers are primarily affiliated with the Change to Win Coalition.

Pedrotty also claims that I made no effort to inquire into the methods by which AFL-CIO proxies are voted. When I requested this information from the AFL-CIO Office of Investment (in May, 2007), I was told by the AFL-CIO Office of Investment that this information would not be disclosed to me (in June, 2007).

The AFL-CIO’s claim that their voting fiduciary cast votes the same way for certain CTW funds does not change the findings as they pertain to AFL-CIO affiliated funds. In addition to the AFL-CIO not disclosing the sizes of these CTW funds and the extent to which AFL-CIO proxy voting guidelines are applied to them, the AFL-CIO’s claim could reflect agency issues within the voting structure of union pension funds. However, making any such assessment is beyond the scope of my paper.

This study can be easily replicated using publicly available sources of data. Both the sources and methodologies are described in the paper, available online here. It should also be noted that I use publicly available data because it is verifiable by other researchers and because my requests to the AFL-CIO for access to their own database on union membership were denied. I am happy to incorporate the AFL-CIO’s internal data into my study, however this data has still not been given to me.

I encourage blog readers to read both my study and the AFL-CIO’s report to reach their own conclusions. Peer review, comments, and criticisms are welcome.

Steven Kaplan wrote to us:

I would like to respond to Daniel Pedrotty’s post on Ashwini Agrawal’s work. I am a member (but not the chairman) of Mr. Agrawal’s dissertation committee so I know his work well. His committee consists of four professors at the University of Chicago Graduate School of Business.

Daniel Pedrotty’s post (criticizing Ashwini Agrawal’s study) does not in any way contradict Mr. Agrawal’s study. Mr. Pedrotty claims the paper makes a “serious and completely false accusation of voting behavior.” That is not true. Mr. Agrawal’s paper reports the results of his data collection and analysis. Mr. Agrawal’s results use publicly available data and are replicable. Using data on AFL-CIO votes and data from public sources regarding AFL-CIO union representation, Mr. Agrawal finds significant changes in AFL-CIO votes. After the split of the AFL-CIO and CtW, the AFL-CIO pension fund was much more likely to vote for management and directors of companies with unions primarily represented by the CtW than before the split. At the same time, the AFL-CIO pension fund remained less likely to vote for management and directors of companies still mainly represented by the AFL-CIO. The union voting behavior that Mr. Agrawal’s analysis reports is more consistent with union self-interest than with shareholder value maximization. While any such behavior cannot be proved beyond a shadow of a doubt, the results are very statistically significant.

Mr. Pedrotty has not attempted to replicate Mr. Agrawal’s methodology or tests. He presents some other data and claims that are irrelevant to Mr. Agrawal’s analysis. And, therefore, Mr. Pedrotty’s post does not have anything substantive to say about Mr. Agrawal’s results. Given this, it is extraordinary that Mr. Pedrotty request Mr. Agrawal to withdraw or revise his paper.

Let me examine Mr. Agrawal’s paper and Mr. Pedrotty’s post in more detail.

…continue reading: Responses to AFL-CIO’s Critique of the Agrawal Study

The AFL-CIO has issued a new report, Facts about the AFL-CIO’s Proxy Votes, to explain how the AFL-CIO votes in corporate director elections. In summary, the AFL-CIO votes for corporate directors based on recommendations by an independent proxy advisor following proxy-voting guidelines that address corporate governance issues, and not union representation.

Last year, an unpublished, unreviewed paper by Ashwini Agrawal, a graduate student at the University of Chicago, was posted on this blog, making the very serious and completely false claim that the AFL-CIO is more likely to support directors at companies whose employees are no longer affiliated with the AFL-CIO.

Despite publishing his accusations in news sources and on public websites, Agrawal has refused to discuss his findings, disclose his data set, or respond to substantive criticisms of his paper. After receiving an email requesting peer review and the release of his data, he did publish a revised version on February 7th that failed to address any of the AFL-CIO’s comments, and further failed to release his data.

A letter from the AFL-CIO to Mr. Agrawal pointing out the methodological flaws in his paper and again seeking the release of his data can be viewed here.

Every year, the AFL-CIO publicly discloses each proxy vote that it casts and the corporate governance policy rationale for each vote. Disclosure of the AFL-CIO’s proxy voting record enables interested parties to monitor how the AFL-CIO voted in specific director elections and to make their own determination as to whether these votes are in shareholders’ best interests.

While the information disclosed in the AFL-CIO’s report directly contradicts the Agrawal paper, no meaningful conclusion can be drawn from any correlation between the AFL-CIO’s proxy voting and union representation. The AFL-CIO’s proxy votes are based on corporate governance issues, and any correlations with union representation are entirely coincidental and unlikely to persist over time.

The AFL-CIO has requested that the Agrawal paper be revised or withdrawn. The report Facts about the AFL-CIO’s Proxy Votes is available here.

Together with Iman Anabtawi, I have just issued a new article on SSRN entitled Fiduciary Duties for Activist Shareholders. The article is to be published in the Stanford Law Review, and a current draft is available here. The article was recently profiled in the Financial Times.

Fiduciary Duties for Activist Shareholders argues that corporate law seems to impose few or no fiduciary duties on minority shareholders in public corporations because historically, minority shareholders in public firms enjoyed little or no power or influence within the firm. The most important trend in corporate governance today, however, is the move toward “shareholder democracy.” Activist investors, especially hedge funds, are using their new power to pressure managers and directors into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions benefit the activist while failing to benefit, or even harming, the firm and other shareholders.

Greater shareholder power should be coupled with greater shareholder responsibility. Fiduciary Duties for Activist Shareholders argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders, should be applied to activist minority investors as well. There is no reason to believe that newly-empowered activist shareholders are immune to the forces of greed and self-interest widely understood to tempt corporate officers and directors. Corporate law can and should adapt to this reality.

(Editor’s Note: The post below comes to us from Peter Moon of Universities Superannuation Scheme, Phil Spathis of the Australia Council of Super Investors, and Keith Johnson of Reinhart Institutional Investor Services.)

Verizon, Par Pharmaceutical and Aflac became the first US companies over the last year to adopt policies requiring an advisory vote of shareholders on company executive compensation practices. A network of over 70 institutional and individual investors lead by AFSCME and Walden Asset Management announced in January that adoption of this ’say on pay’ policy is expected to be put on proxies at more than 90 US companies this year. With majority shareholder votes having been cast for similar resolutions at seven companies during 2007, say on pay will be one of the hottest issues in the upcoming US proxy season. In their article, Global Investors Laud Shareholder Votes on Executive Compensation, Peter Moon from the $65 billion Universities Superannuation Scheme pension fund in Britain, Phil Spathis from the $200 billion Australia Council of Super Investors and Keith Johnson from the University of Wisconsin Law School’s International Corporate Governance Initiative describe the impact that say on pay has had in other markets and discuss the benefits it could produce for both companies and shareholders in the United States.

I posted previously here on Vice Chancellor Strine’s decision in Mercier v. Inter-Tel (Delaware), Inc., and I continue to believe that it was probably the most important decision issued by the Delaware Court of Chancery in 2007. I recently wrote an article for the Securities Litigation Report discussing Inter-Tel and explaining its potential significance. In particular, Vice Chancellor Strine’s reasonableness standard in reviewing a decision to move a stockholders meeting date — if endorsed by the Delaware Supreme Court — would provide much clarity to practitioners and boards of directors. The decision is also notable for, among other things, its discussion of the roles of ISS and arbitrageurs in influencing merger votes.

The article, which originally appeared in the November 2007 issue of the Securities Litigation Report, is available here and is being reproduced with the permission of Thomson West.

Our firm has recently released a Corporate Governance Commentary providing an overview of the recent proxy rule amendments designed to encourage the use of electronic shareholder forums (for convenience, referred to as “e-forums”). The amendments were hastily adopted at a time when most of the attention was on proxy access. While the amendments were intended to benefit both companies and shareholders, it is activist investors who may be the most significant beneficiaries.

The Commentary, entitled “A Practitioner’s Guide to Electronic Shareholder Forums“, explains how the amendments facilitate the use of e-forums, and what the potential risks and benefits to companies are. It explains that for a lot of companies, e-forums may serve as an additional channel of communication with shareholders for which the companies do not have a pressing need. For companies that do decide to construct or participate in e-forums, the companies will have to be careful that the e-forums are functionally useful and are not used for launching tirades against management. Perhaps more troubling for companies, e-forums will improve the ability of hedge funds and other activist investors to mobilize.

The full Commentary is available online here.

I have just posted a forthcoming Vanderbilt Law Review article on issuer proxy access, Proxy Access in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy. The current draft is posted on SSRN here.

The abstract is as follows:

The current debate over shareholder access to the issuer’s proxy for the purpose of making director nomination is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission’s new e-proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via issuer proxy access and a freestanding proxy solicitation. The serious question relates to the appropriate disclosure required of a shareholder nominator no matter which avenue is used. Institutional investors and other shareholder activists should focus their energies on working through the mechanics of waging short-slate proxy contests using e-proxy solicitations.

Activist institutions need to work out the disclosure package required under the existing proxy rules. Such disclosure may be tested (and refined) through litigation, but a standardized package should emerge relatively quickly that the institution could use in proxy contests without a control motive. Institutional investors need to become facile with the e-proxy model (including coordinating a practice for opting-in to web-access) and should appreciate the extent to which proxy advisory services will do much of the actual solicitation work. If institutions are unwilling to make the relatively modest investment to master the mechanics of e-proxy contest, both in their initiation as well as voting in support of them, then their role in corporate governance will necessarily be limited.

(Editor’s Note: This post comes to us from Holly J. Gregory and Ira M. Millstein of Weil, Gotshal & Manges LLP.)

We have just released our annual memo identifying areas for focus by corporate governance participants in the coming year: “Rethinking Board and Shareholder Engagement in 2008″ (co-authored with our colleague Rebecca C. Grapsas). In the memo, we predict — and encourage — increased efforts by boards of directors to engage shareholders in less contentious, more cooperative interaction and communication. While we salute shareholder activism’s stimulus for rebalancing corporate power in the past twenty years, we caution that the forces for change should abate once an appropriate balance is achieved, or a new imbalance will result. Boards are well-advised to be open to shareholder communications on topics that bear on board quality and attention to shareholder value, communications that are likely to improve mutual understanding and avoid needless confrontation.

At the same time, shareholders have the responsibility to act as concerned and rational owners who make decisions based on knowledge of the nuances; who avoid rigid, box-ticking methods of judging good governance; who don’t abdicate to proxy advisors their responsibility to use judgment; and who avoid activism for activism’s sake. In this spirit, we lay out good practices of board-shareholder engagement in the areas of (1) board composition and independent leadership, (2) corporate performance disclosures, (3) executive performance, compensation and succession, (4) strategic direction, and (5) societal concerns, including climate change and other issues. Finally, we suggest that it may be time for a dialogue on the limits of shareholder power. The full text of the memo is available here.

Recently, the New England Chapter of the National Association of Corporate Directors hosted a breakfast panel featuring Vice Chancellor Leo E. Strine, Jr. and Martin Lipton of Wachtell Lipton Rosen & Katz. (John L. Reed of Edwards Angell Palmer & Dodge previously posted on the talk here.)

The NACD has released highlights of the talk, entitled The Delaware Courts, the Corporate Bar, and Being a Director. The summary describes the panelists’ insights on the upcoming proxy season, executive compensation, the committee structure in today’s boards, and the role of independent directors.

The highlights of the panel discussion are available online here.

Professor J. Robert Brown of the University of Denver College of Law (and a Guest Contributor on this Blog) recently provided a “Top Five” list of Delaware cases that–in his view–show why Delaware is “anti-shareholder and anti-plaintiff.” I realize that there are many experts who can rebut the professor’s arguments far more persuasively than I, and I am well aware that the Delaware bench certainly does not need my help to defend it.

Nonetheless, having just completed my review of key 2007 Delaware corporate decisions, I offer my own “counter-list” of the Top Five Cases of 2007 that show that the Delaware courts take shareholder rights and director duties very seriously. I could easily provide a longer list–but, for starters, here is an alternative list of the Top Five Delaware Cases of 2007.

Cross-border M&A nearly doubled from 2006 to 2007 as a percentage of total activity, and some observers see it as the savior of 2008. Here is a quick checklist of critical issues for US/non-US deals.

And sometimes less really is more: here is a one-pager on M&A in 2008.