Corporate Governance

Delaware Judges, Shareholder Rights, and the Appearance of Bias (Part 6)

By J. Robert Brown

We have spent a number of posts discussing an article written by VC Strine of the Delaware Chancery and the facets of the current system of corporate governance that he does not like (grasping institutions, lazy faculty, unaccountable press, and weak kneed "professional" directors).  But he is not critical of all aspects of the corporate governance process.  There are things that meet with VC Strine's approval.  While academics are lazy and intermediaries grasping, Marty Lipton is a beacon of reason. 

• Traditional corporate lawyers, most notably Martin Lipton, rightly fear that this [say on pay] might be a near fatal slice toward the 'death by a thousand cuts' corporate boards seem to be accepting.  Mr. Lipton is also correct to fear the more general phenomenon of eroding board authority. 

CEOs for another, except, of course, those who give in too readily to shareholders.  VC Strine is clearly concerned about the hard time encountered by the modern CEO.  As he notes, "CEOs don't seem to be having fun" and, as a result, it shouldn't be surprising that they seek "solace in high pay." 

This lack of fun has also pushed them "into the loving arms of private equity buyers."  This was, of course, an argument used by some academics and, apparently, Delaware judges, to demonstrate the deplorable state of governance and the excessive costs, particularly those flowing from SOX.  CEOs were taking their companies out of the public markets to avoid these horrors. 

Butas we have written, the argument overlooked the fact, among other things, that the buyout trend was motivated by cheap capital (in the form of easy borrowing) and that with lots of private equity sloshing around, management could be induced to go private through the the payment of extraordinary sums or the prospects of extraordinary returns.  In other words, it wasn't irritation with shareholders but cheap capital and greed that explained the trend. 

The evidence?  With debt markets in turmoil, private equity firms are spending more time walking away from deals than making them.  Former scions of the private equity are showing signs of financial difficulty, withCarlyle Capital  and Blackstone both suffering.  As the WSJ put it:  "The buyout business can finally put a luckless 2007 behind it. Unfortunately, 2008 looks worse." 

In other words, VC Strine was wrong in the reasons why companies were going private, ignoring alternative explanations.  He overstated the concern of management and its reaction to activist shareholders.  His conclusion reflected his biases rather than actual market conditions.   

It is also clear from the piece that he likes poison pills.  As he observes:  "It is crazy from an investor's perspective for a target board not to have a traditional pill in place to stimulate a value-enhancing auction and to deter structurally coercive bids."  And why not, after all?  They were invented by Marty Lipton.  See Hollinger Int'l v. Black, 844 A.2d 1022, 1083 (Del. Ch. 2004)(opinion by VC Strine)(characterizing it as "Mr. Lipton's famous invention").  

So, when appearing before VC Strine, it is safe to rely on the views of Marty Lipton and to couch arguments in a way that suggests sympathy for the difficult and joyless role of CEOs.  As for any challenge to the legality of a poison pill, if you are defending it, you couldn't be in a better courtroom.   

Full post as published by The Race to the Bottom on March 12, 2008 (boomark / email).