Posts Tagged ‘Staggered boards’

Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP

Posted by Jonathan R. Macey, Yale Law School, on Sunday December 21, 2014 at 2:01 pm
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post provides a detailed response to a post by Professor Joseph A. Grundfest, titled A Response to Professor Macey, and available on the Forum here. Professor Grundfest’s post responded to an earlier post by Professor Macey, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud and available on the Forum here, which offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Grundfest (available on the Forum here).

In a recent post, “SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud” (available on the Forum here), I analyzed the claims that SEC Commissioner Gallagher and Professor Joseph Grundfest made in a recent paper (hereinafter “the Paper,” described on the Forum here). In their paper, Gallagher /Grundfest allege that the SRP proposals submitted by investors working with the Shareholder Rights Project (SRP) violated the securities laws by citing only one study opposing annual elections. My analysis showed that Grundfest/Gallagher’s allegations were inconsistent with the law and with the current policy and practice of SEC staff, and I concluded that the authors had wrongfully accused the SRP.

In a subsequent post titled “A Response to Professor Macey” (hereinafter “the Reply,” available on the Forum here), Professor Grundfest attempts to offer a “point by point” detailed response to my analysis. As I explain below, the Reply reverses field and drastically modifies and weakens the authors’ allegations. Furthermore, in conceding some key points that I made and in failing to address some others, the Reply itself demonstrates that Gallagher/Grundfest wrongfully accused the SRP and should withdraw their allegations.

There are many flaws in the Reply. I will discuss certain of them to show that the Gallagher/Grundfest’s accusations are spurious and no longer tenable:

(1) In a major retreat, Gallagher/Grundfest dramatically modify their allegations by:

(a) Dropping their allegations against the overwhelming majority of SRP proposals, reducing the number of challenged proposals from 129 to seven,
(b) Completely relinquishing the claim that companies can use the alleged deficiencies to invalidate declassifications that took place in approximately 100 companies, and
(c) Conceding that even the seven challenged proposals were not deficient when submitted and could at most be allegedly faulted for not being withdrawn prior to the vote;
(2) The Reply admits that Gallagher/Grundfest’s real quarrel is with the SEC, not with the SRP proposals, and that the SRP proposals would have not been viewed by SEC staff as “false and misleading” under the SEC’s current, long-held policy;
(3) The Reply concedes that the type of enforcement action or private suit the authors urge against the SRP is without a single past precedent;
(4) The Reply conspicuously fails to explain why not a single company raised a claim of material omission against SRP proposals;
(5) The Reply inconsistently endorses the non-inclusion of references to contrary studies by issuers such as Netflix while simultaneously claiming that it is impermissible for shareholders to do so; and
(6) The Reply wrongly states that I share the Paper’s “undisputed” view of the current state of the empirical evidence.

…continue reading: Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP

A Response to Professor Macey

Posted by Joseph Grundfest, Stanford Law School, on Saturday December 20, 2014 at 11:53 am
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Editor’s Note: Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School. This post responds to a post, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud, by Yale Law School Professor Jonathan R. Macey (available on the Forum here). The post by Professor Macey offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Joseph Grundfest (available on the Forum here).

In a December 15, 2014, post to this Harvard Corporate Governance blog, (here) Professor Jonathan R. Macey suggests that the article I co-authored with Dan Gallagher, “Did Harvard Violate Federal Securities Laws? The Campaign Against Classified Boards of Directors,” (here) wrongfully accuses Harvard’s Shareholder Rights Project of fraud. Professor Macey’s post presents a detailed critique, and I greatly appreciate Harvard’s courtesy in providing this opportunity for response.

…continue reading: A Response to Professor Macey

SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud

Posted by Jonathan R. Macey, Yale Law School, on Monday December 15, 2014 at 4:17 pm
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post analyzes the arguments in a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Joseph Grundfest (available on the Forum here) and a post by Wachtell Lipton (available on the Forum here).

Here is something that one does not see every day. In their recent paper “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors” posted on December 10, 2014, a sitting Commissioner of the Securities and Exchange Commission and a former SEC Commissioner accuse the Shareholder Rights Project at Harvard Law School (SRP) of violating the anti-fraud provisions of the securities laws. The alleged fraud occurred when institutional investors represented by the SRP proposed shareholder resolutions encouraging shareholders in U.S. public companies to vote to de-stagger their companies’ boards.

In this submission I present my analysis of this paper, concluding that the SRP proposals were not fraudulent or misleading and that the aggressive application of the anti-fraud provisions of the securities laws advanced by the authors of the “Did Harvard Violate Federal Securities Law?” would be inconsistent with the law and, by the authors’ own admission, inconsistent with the current policy and practice of the staff of the Securities and Exchange Commission.

…continue reading: SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud

Current and Former SEC Commissioners Question Legality of Harvard Declassification Proposals

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Monday December 15, 2014 at 9:20 am
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Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Theodore N. Mirvis, and George T. Conway III.

Today’s Wall Street Journal reports that a current SEC Commissioner and a former SEC Commissioner (now a law professor) have published a lengthy paper challenging the scholarly bona fides—and legality—of the recent efforts by the Harvard Law School Shareholder Rights Project (SRP) to cause major American corporations to declassify their boards of directors. During the past three proxy seasons, the Harvard SRP has promulgated numerous stockholder-sponsored precatory resolutions calling for declassification of companies with staggered boards, and has succeeded in causing 98 companies to remove their staggered structure and have all their directors stand for election annually.

…continue reading: Current and Former SEC Commissioners Question Legality of Harvard Declassification Proposals

Did Harvard Violate Federal Securities Law?

Posted by Joseph Grundfest, Stanford Law School, on Monday December 15, 2014 at 9:19 am
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Editor’s Note: Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School.

SEC Commissioner Daniel Gallagher and I just posted on SSRN a new paper, titled Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors. The abstract of the paper summarizes it as follows:

The Harvard Shareholder Rights Project (“Harvard SRP”) has, on more than 120 occasions, invoked SEC Rule 14a-8 to propose precatory shareholder resolutions calling for the de-staggering of corporate boards of directors (the “Harvard Proposal”), and claims to have contributed to de-staggering at approximately 100 of America’s largest publicly traded corporations. The Harvard Proposal relies on a summary of academic research that portrays staggered boards as categorically detrimental to shareholder interests, and cites only one study reaching a contrary conclusion, while dismissing that study’s analysis.

…continue reading: Did Harvard Violate Federal Securities Law?

The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday December 2, 2014 at 8:58 am
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Editor’s Note: The following post comes to us from Ronen Gal-Or and Udi Hoitash, both of the Department of Accounting at Northeastern University, and Rani Hoitash of the Department of Accountancy at Bentley University. Recent work from the Program on Corporate Governance about staggered boards includes: How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (discussed on the Forum here).

In our paper, The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections, which was recently made available on SSRN, we study the efficacy of audit committee member elections in staggered and non-staggered boards.

Voting in director elections and auditor ratifications is a primary mechanism shareholders can use to voice their opinion. Past research shows that shareholders cast votes against directors that exhibit poor performance, and these votes, in turn, are associated with subsequent board reaction. However, because a significant number of U.S. public companies have staggered boards, not all directors are up for election every year. Therefore, the efficacy of shareholder votes may not be uniform. Under the staggered board voting regime, shareholders and proxy advising firms can typically voice their opinion on any given director only once every three years. This election structure may increase the likelihood that directors who are not up for election following poor performance will be insulated from the scrutiny of shareholders and proxy advisors. In turn, this may influence the accountability of staggered directors and the overall efficacy of shareholder votes.

…continue reading: The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards

75% of 2014 Engagements Have Already Produced Agreements to Declassify

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a counsel at the SRP. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In a news alert released last week, the Shareholder Rights Project (SRP), working with SRP-represented investors, announced the high level of company responsiveness to engagements during the 2014 proxy season. In particular, as discussed in more detail below, major results obtained so far include the following:

  • Following active engagement, about three-quarters of the S&P 500 and Fortune 500 companies that received declassification proposals for 2014 annual meetings from SRP-represented investors have already entered into agreements to move towards board declassification.
  • This outcome reinforces the SRP’s expectation (announced in a blog post available here) that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in about 100 board declassifications by S&P 500 and Fortune 500 companies.

…continue reading: 75% of 2014 Engagements Have Already Produced Agreements to Declassify

Staggered Boards and Firm Value, Revisited

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday March 7, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame; Lubomir P. Litov, Assistant Professor of Finance at the University of Arizona; and Simone M. Sepe, Associate Professor of Law at the University of Arizona. Work from the Program on Corporate Governance about staggered boards includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.

Staggered boards have long played a central role in the debate on the proper relationship between boards of directors and shareholders. Advocates of shareholder empowerment view staggered boards as a quintessential corporate governance failure. Under this view, insulating directors from market discipline diminishes director accountability and encourages self-serving behaviors by incumbents such as shirking, empire building, and private benefits extraction. On the contrary, defendants of staggered boards view staggered boards as an instrument to preserve board stability and strengthen long-term commitments to value creation. This debate notwithstanding, the existing empirical literature to date has strongly supported the claim that board classification seems undesirable, finding that, in the cross-section, staggered boards are associated with lower firm value and negative abnormal returns at economically and statistically significant levels.

…continue reading: Staggered Boards and Firm Value, Revisited

Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a counsel at the SRP. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:

  • 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
  • 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
  • 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
  • Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.

…continue reading: Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons

Towards Board Declassification at 100 S&P 500 and Fortune 500 Companies: Advancing Annual Elections in the 2014 Proxy Season

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In a news alert released last week, the Shareholder Rights Project (SRP) announced the work that SRP-represented investors and the SRP are undertaking for the 2014 proxy season, and the significant contribution that this work is expected to make in moving 100 S&P 500 and Fortune 500 companies towards annual elections.

  • 31 shareholder proposals for board declassification have been submitted to S&P 500 and Fortune 500 companies for a vote at their 2014 annual meetings (listed here);
  • 7 companies—about one quarter of the 31 companies receiving proposals—have already entered into agreements to bring management declassification proposals to a shareholder vote;
  • These 7 companies are in addition to 8 other S&P 500 and Fortune 500 companies that have committed to bring agreed-upon management proposals to a vote in future annual meetings following 2012 and 2013 precatory proposals by SRP-represented investors;
  • The 15 agreed-upon management proposals to declassify, coupled with board declassifications that have already taken place at 80 S&P 500 and Fortune 500 companies as a result of the work by the SRP and SRP-represented investors (listed here), can be expected to contribute to the wide-scale move toward annual elections; and
  • The agreements already obtained following the submission of 2014 proposals, and the ongoing engagements by the SRP and SRP-represented investors with companies receiving 2014 proposals that have not yet entered into such agreements, reinforce the SRP’s expectation that, as a result of the work by the SRP and SRP-represented investors, close to 100 S&P 500 and Fortune 500 companies will have moved toward board declassification by the end of 2014.

…continue reading: Towards Board Declassification at 100 S&P 500 and Fortune 500 Companies: Advancing Annual Elections in the 2014 Proxy Season

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