Corporate & Securities Law

Delaware’s Future

I share Prof. Ribstein’s concerns about the federalization of corporate governance contained in the Dodd bill.  Though Senator Carper wasn’t able, in the end, to get the proxy access provisions out of the Dodd Bill, which I think were the most troubling, we did eliminate another of Senator Schumer’s ideas.  The initial draft of the Dodd Bill included a restriction prohibiting any publicly traded company from having a staggered board.  I suspect we have the good work of Senator Carper and Congressman Castle’s offices to thank for their continued work against that provision.  The option to have a staggered board, which about half of all publicly traded companies now have, is part of the Delaware brand’s advantage.

When I testified in the Senate against the corporate governance provisions of this bill, I remember when Senator Corker quipped: “We’re a staggered body.  The folks in the other house aren’t staggered, and we’ve all seen the crazy ideas they often send our way.”  I also appreciated Senator Johanns of Nebraska when he observed “When I was Governor of Nebraska, I tried to take on Delaware.  And you know what I found out?  That was going to be pretty hard, because Delaware sure was doing something right.”  (See Bainbridge on the misguided efforts of the upper midwest to challenge Delaware).

I plan to write more about the other provisions once the conference committee has met to reconcile the two bills.  One provision of the Dodd bill that I think will be particularly difficult to implement is the provision requiring disclosure of employee hedging.  Perhaps its simple enough, the company either discloses whether it has a policy or not, but if the SEC interprets its powers to actually regulate hedging it will be all but impossible to define just what, in the wide universe of financial bets out there, constitute a hedge.  If I buy Netflix stock am I partially hedging a Blockbuster holding?  That aside, let me save more analysis for a post-conference report.

Where do we go from here?  Delaware reinvigorated its brand by embracing, in part, Marty’s Lipton’s invention of the poison pill in the early 80s as a defense to new shareholder takeover proposals.  The new battleground will be defenses to proxy fights.  We already seen this issue discussed briefly, though not fully adjudicated, in the Amlyin case, which reviewed a contractual provision in debt covenants, the so called “proxy put” which would accelerate debt upon election of hostile directors.  Gordon Smith weighed in here and Francis Pileggi discussed the case here.

Though Vice Chancellor Lamb did not expressly rule the provision violated Delaware law, in dicta he came fairly close.  He noted that the provision seemed like it could prevent any contested elections, which would present a public policy dilemma.  I wonder if he would have felt the same if, long before the actual proxy fight, the shareholders approved of the proxy put covenants?  Jay Brown, of course, disagrees completely with Vice Chancellor Lamb’s approach, despite agreeing with this particular bit of dicta.  (A frequent Delaware critic, Jay did, however, recently say some good things about TOTM and our blog neighbor Professor Bainbridge, so I note that while I disagree with Jay’s general worldview I always appreciate his well crafted arguments and diligent blogging.  His blog is a necessary addition to your google reader.)

The next step is to think up what other structural defenses could viably protect against hostile proxy fights while at once surviving Delaware law, exchange listing requirements, and SEC proxy rules.  I’m already on the case as my primary research project for the summer, I’ve got about 15 crazy schemes.  Look for an article up on SSRN by the end of the summer.

Full post as published by Truth on the Market on May 24, 2010 (boomark / email).