Corporate Governance

Beneficial Ownership - By-Law Disclosure Proposal

By Harvard Law School Program on Corporate Governance

My partner James C. Woolery and I have prepared a memorandum entitled “Beneficial Ownership - By-Law Disclosure Proposal,” in which we propose an innovative by-law amendment as a response to the threat posed to a company by the secret accumulation of its shares by activist investors. Secrecy is often achieved in this context through the use of total returns swaps and other derivatives, which may allow the accumulation of a large, and sometimes dominant, position in the target company. Despite legal claims that these derivative holdings are not the same as beneficial ownership - claims being tested in litigation arising from the recent CSX proxy fight - in reality activists demand that targets, and their board of directors, defer to the activists as though they were full owners of the stock represented by the derivatives.

In the memorandum we discuss a number of techniques corporations have used to protect against this threat, and we outline a proposal that involves amending advance notice by-laws governing shareholder proposals to include new continuous disclosure obligations. Compliance with this disclosure obligation is a prerequisite for giving effective notice of an intention to nominate directors or present business at a stockholders’ meeting. To our knowledge, a by-law incorporating the concepts we outline in our proposal has not yet been adopted by any corporation.

Our memorandum is available here.

Full post as published by The Harvard Law School Corporate Governance Blog on September 16, 2008 (boomark / email).