Source: https://www.professorbainbridge.com/professorbainbridgecom/2009/08/index.html
Timestamp: 2019-04-26 09:45:01+00:00

Document:
Kennedys. Clintons. Bushes. Increasingly, we have precisely the sort of dynastic political families against which Jefferson warned.
With Massachusetts having paid its final respects to Senator Edward M. Kennedy, the politics of succession begins in earnest this week - candidates will emerge, a race will take shape, and the Kennedy clan will have to reveal whether it wants to keep the seat in the family.
Payne said Kennedy’s decision to run would have a huge impact. “His candidacy in a special election would force all other candidates - real or imagined - to think twice about whether they want to take on a Kennedy so close to Senator Kennedy’s death,’’ he said.
Joe Kennedy’s decision is likely to determine the plans of the dean of the Massachusetts congressional delegation, US Representative Edward J. Markey, who is telling associates he is seriously considering running, and US Representative Michael Capuano, a Somerville Democrat who is also thinking of joining the primary race. Both are Kennedy loyalists and would not run against a member of the family, according to people familiar with their thinking, who spoke on condition of anonymity to discuss internal political calculations.
One is reminded of the corrupt family fiefdoms of British politics of the 19th Century, where seats were handed down from father to son.
... this fixation on parent-child, sibling and spousal succession for elected office is particularly problematic. It's certainly true that one can find, in individual cases, instances of self-sufficiency and merit even among those benefiting from nepotism and family names. But the fact that it is now so commonplace -- almost presumptively expected -- for political power to be passed along to close family members is quite anti-democratic. The number of families possessing some sort of aristocratic-like claim to elected office is clearly increasing. By definition, that diminishes the role of merit and the need for democratic persuasion in how elected leaders are chosen. And this dynamic, in turn, fuels how insular, incestuous, unaccountable and bloated with entitlement the Beltway culture is.
... One of the most encouraging aspects of Barack Obama's success -- and, for that matter, the ascension of someone like Sarah Palin or Bill Clinton -- is the pure self-sufficiency and lack of family connection behind it. But even pointing that out demonstrates how meritocratic self-sufficiency has almost become the exception rather than the rule. That we now treat Presidents like Kings and expect them to exercise similar powers is consistent with the broader trend whereby we are ruled by a Versailles on the Potomac, with all the bloated, decadent insularity that implies.
Setting aside the question of whether Barack Obama's success owes a worrying amount to the other scandal of American political life--the great urban political machines, which at least in Chicago still have too much power--the point is exceptionally well taken.
Via The Defining Tension comes this video in which an animated puppy explains the duties of the audit committee of a nonprofit.
I must quibble with one aspect of the discussion; namely, the characterization of the business judgment rule as a standard of conduct.
As TDT's BFA notes, the business judgment rule is properly understood as a standard of review (specifically, an abstention doctrine) rather than as a standard of conduct.
Remarkably, the commentator (the dog if you will), qualifies the business judgment rule as a standard of conduct for directors to follow, apparently referring to California corporate law.
That doesn't seem to be in line with the general approach that the business judgment rule is primarily a standard of review by the court, a tool of judicial review, not to be conflated with the fiduciary duties of care and loyalty resting on directors. See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2002) and Moran v. Household International, Inc., 490 A.2d 1059 (Del. Ch. 1985). Although there is a connection between these duties and the rule, they're not the same and should not be treated as such. For the gist of the rule, properly understood a policy of judicial non-review, see here.
Some scholars have sought to reconcile the duty of care and the business judgment rule by distinguishing between standards of conduct and standards of review. According to this conception, the duty of care is a standard of conduct, which specifies how directors should conduct themselves. In contrast, the business judgment rule is a standard of review, which sets forth the test courts will use in determining whether the directors’ conduct gives rise to liability. Unlike typical negligence tort cases, in which the standard of review and the standard of conduct are identical, in corporate law they purportedly diverge. The function of the business judgment rule thus is to create a less demanding standard of review than the (largely aspirational) standard of conduct created by the duty of care. But what is the standard? It may be mere subjective good faith, it may be a requirement of rationality, it may be gross negligence. No one seems to know for sure. The key point for our purposes, however, is the basic claim that, as a substantive standard of review, the business judgment rule entails “some objective review of the quality of the [board’s] decision, however limited.” Accordingly, as articulated by most of its proponents, this dual standards interpretation is inconsistent with our argument that the business judgment rule should be deemed an abstention doctrine.
The MBCA recently adopted a different version of the dual standards approach, which ends up much closer to our abstention interpretation. New MBCA § 8.30 sets forth the standards of conduct for directors. Analogously to those Delaware decisions describing the duty of care as process oriented, § 8.30 focuses on the manner in which the board carried out its duties, not the correctness or reasonableness of its decisions. Under § 8.30(a) the director must act in good faith and in a manner the director reasonably believes to be in the corporation’s best interest. Note the absence of any reference to due or reasonable care. Those references appear only in § 8.30(b), which relates solely to the directors’ duty to make informed decisions. When “becoming informed” the board is to exercise “the care that a person in a like position would reasonably believe appropriate under similar circumstances.” There is a striking contrast with the Van Gorkom obligation to gather all materially information reasonably available to the board. Under the MBCA, directors can act on less than all available information, provided doing so satisfies the reasonable person standard.
Conduct that satisfies the requirements of § 8.30 cannot result in liability. Conduct falling short of those aspirational goals can only result in liability if it violates the standards of director liability set forth in MBCA § 8.31. Specifically, under § 8.31(a)(2), liability can be imposed where the director acted in bad faith, did not reasonably believe the action to be in the corporation’s best interest, was not informed to the extent the director reasonably believed appropriate under the circumstances, was interested in the transaction, was not independent, engaged in self-dealing, or failed to exercise oversight over a sustained period.
Although the drafters deny any intent to codify the business judgment rule, MBCA § 8.31(a)(2) effectively codifies a fairly aggressive version of the abstention approach to judicial review advocated by our interpretation of the business judgment rule. Unlike Van Gorkom, for example, under which a court asks whether the director gathered all material information reasonably available, a court under § 8.31 asks only whether the director was informed to the extent the director reasonably believed appropriate under the circumstances, a much more deferential standard. Unlike Caremark, director misfeasance with respect to oversight results in liability only where there has been a “sustained failure” or the director failed to timely take action after being put on notice of potential problems. The MBCA thus comes close to codifying Graham’s position on oversight duties.
Looking sort of Joan Jett-ish, no?
Another shot of the newest Bainbridge.
We held the second annual PB.com fantasy football league draft this afternoon. The league is PPR. The other major scoring tweak is that offensive players get 6 points for a return TD and one point per 35 return yards. This mattered a lot in my choices.
The other major tweak is that I use a points championship rather than the more typical H2H with a playoff system. I do so mostly just to be different. But I also think the rotisserie scoring system is a better measure of the quality of a fantasy team, because it reduces the impact of a key player having either an unusually good or unusually bad week. Chance events that skew one week matter less.
Lineup is 1 QB, 2 RB, 2 WR, 1 WR/RB flex, 1 TE, 1 K, 1 DST, and 6 reserves.
As usual, I drafted 6th. I feel sort of like Patrick McGoohan--I'll have picked 6th in 3 of 4 drafts this year, and 2 of 4 last year. How can random number generators keep slotting me at 6 over and over? Bizzare.
All but 1 league member was on line for the draft, which made it a lot of fun. Plenty of good natured chatter.
1.6: Steve Slaton. Even though Matt Forte, Steven Jackson, and Larry Fitzgerald were still on the board, I like Slaton to stay healthy and do well in a PPR league. Interestingly, Andre Johnson went at 1.3 and Randy Moss went at 1.5.
2.7: Reggie Wayne. How can you not like Peyton Manning's #1 WR?
3.6: Aaron Rodgers. I think you have to have an elite QB this year and Rodgers' preseason is confirming that last year was no aberration. He may not be Drew Brees, but I think he's a top 5 QB and Brees, Manning, and Brady had all gone in round 2. Since I have Rivers (who went at 3.7) in another league, Rodgers was the logical choice.
4.7: Ryan Grant. I'm not a huge fan of Grant, but he's a rare almost every down back in a league increasingly dominated by RBBCs. To get him in round 4 seemed like good value.
5.6: Eddie Royal. I was sweating the 5th round, hoping Royal would fall to me. When he did it took me maybe 3 seconds to draft him. With Brandon Marshall in Josh McDaniel's dog house, I like Royal to be Denver's #1 WR for much of the season. I also see him as a young Wes Welker, who has special value in a PPR format. In my league, he may have extra value if he ends up featuring in the Broncos' kick return game. McDaniels recently said "Eddie is definitely going to be a factor in the return game whether it be kickoffs or punts."
6.7: Owen Daniels. I was hoping Leon Washington would fall to me here, but he had gone at 5.10. Some of the elite TEs had already gone off the board, so it was time to grab either Daniels or Cooley, who were the best choices left. A coin flip sent me to Texas.
7.6: Devin Hester. To get Jay Cutler's #1 WR, plus the potential for bonus return yards, here was good value.
8.7: Julius Jones. I'm not a big fan, but Jim Mora recently said "Julius is going to be our workhorse, our lead dog," which is what you want for a RB3.
9.6: NY Jets DST. Defenses had been coming off the board since round 7. How can you not like Rex Ryan's pedigree?
10.7: Chris Chambers. My main options were Cedric Benson and Donald Driver. I probably should have gone with one of them.
11.6: Bernard Scott. Did I overrate his game against the Rams? I suspect he'll get dropped from my roster early. There's another backup RB I have my eye on that I like better and who didn't get drafted.
12.7: Earl Bennett. I'm betting the Vandy connection means Cutler will give him a fair number of targets.
13.6: David Akers. Too early for a kicker, but we're scraping the bottom of the barrel here.
14.7: JaMarcus Russell. He's having a good enough preseason to justify a late round flyer.
15.6: Jeremy Maclin. Kevin Curtis is already dinged, as usual. Maclin could end up being the Iggles #2 WR and get some return yards too. It seemed worth a gamble in the last round.
I like my starters a lot. My bench...not so much. No real deep sleepers. But I allow unlimited roster moves in the PB.com league, so I can work the waiver wire as needed.
Perlstein couldn't be bothered. Instead he resorts to lazy fallacies of post hoc ergo propter hoc and argumentum ad verecundiam to try to prove that the Obama administration is a wise and prestigious political institution because nuts are attacking it the way nuts previously attacked other wise and prestigious political institutions, such as Adlai Stevenson. Even with the force of illogic on his side Perlstein cannot make his case.
Honest (except for not mentioning all those campaign contributions) and appalling. The Democrats are happy to ration our health care but are too scared to take on the trial lawyers.
Here's a handly clip-out form for explaining it to him/her/it.
The BMW M3 is an Environmentally Better Choice than the Toyota Prius?
According to today's WSJ, "the measure [Rule 14a-11] looks like it will be passed by the Securities and Exchange Commission in November." It will allow mere 1% stockholders to put director candidates into corporate proxy materials, at the company's expense. SEC Chair Schapiro, who evidently holds the deciding vote with the Democrats and Republicans split 2-2, thinks this will bring more accountability, in the wake of the financial crisis.
the reason why the SEC should keep its hands-off here has more to do with the appropriate limits of SEC power than with the substance of the proposal. This is a matter of internal corporate governance which should be for the states. There is no justification for making this a federal matter unless you buy in to the shareholder democracy myth.
I've written about proxy access frequently in the past, explaining why I think it's a very bad idea. See, e.g., A Comment on the SEC Shareholder Access Proposal, which gets into the problem in detail.
The Securities and Exchange Commission is now considering proposed regulations designed to allow shareholders to nominate directors and, moreover, to require the incumbent directors to place the shareholder's nominee on the company's own proxy statement and ballot, albeit under relatively limited circumstances. At first blush, the regulation strike many people as perfectly reasonable. After all, directors are elected by shareholders, so why shouldn't the shareholders be allowed to nominate directors?
This argument, however, fails to put the SEC proposal in context. The SEC's proposed regulations are just the latest in a continuing string of new corporate governance rules. Taken together, these new rules have significantly increased the regulatory burden on Corporate America. So let's step back and look at the SEC proposal in its proper context: the recent corporate scandals and the government's response.
History teaches that market bubbles are fertile ground for fraud. Cheats abounded during the Dutch tulip bulb mania of the 1630s. The South Sea Company, which was at the center of the English stock market bubble in the early 1700s, itself was a pyramid scheme. No one should have been surprised that fraudsters and cheats were to be found when we started turning over the rocks in the rubble left behind when the stock market bubble burst in 2000.
We all know the litany, of course: accounting scandals at Enron and WorldCom, to cite but two; insider trading at ImClone; alleged looting at Adelphia and Tyco; and so on. New York's attorney general, Elliott Spitzer has brought to light high profile problems calling into question the integrity of both stock market analysts and mutual fund managers.
Corporate scandals are always good news for big government types. After every bubble bursts, going all the way back to the South Sea Bubble, a slew of new laws have been enacted. Why? There is nothing a politician or regulator wants more than to persuade angry investors that he or she is "doing something" and being "aggressive" in rooting out corporate fraud. Look, for example, at how vigorously the SEC is trying to keep up with attorney general Spitzer.
Hence, it was entirely predictable that the shenanigans at Enron, WorldCom et al., coming after several years of steady decline in the stock market, would lead to regulation. Yet, how quickly we forget. Remember what Ronald Reagan said: "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"
Like a cook who throws spaghetti at the wall to see if it's done, legislators and regulators have been throwing a lot of new rules at corporations to see what sticks: Sarbanes-Oxley, numerous SEC regulations, California's onerous corporate disclosure act, Spitzer's settlement with the analyst community, and countless law suits and indictments. Unlike the cook, who stops when the spaghetti is done, the lawmakers just keep throwing stuff at corporations without stopping to ask whether enough is enough.
The costs of all this regulatory activity are beginning to mount. Some companies, for example, will incur 20,000 staff hours to comply with just one SEC new rule -- a rule the SEC estimated would require only 383 staff hours per firm. According to a study by Foley Lardner, "Senior management of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of the Sarbanes-Oxley Act of 2002 (SOX), new SEC regulations and changes to [stock] exchange listing requirements."
If adopted, the SEC's shareholder access proposal would significantly add to that regulatory burden. A review of contests in the late 1980s found that insurgents spent an average of $1.8 million and incumbents an average of $4.4 million. Those costs are almost certainly much higher today, but let's use them as a baseline. Assume that a company faces a shareholder nominee every three years. Assume further that a shareholder nomination contest costs one-third what a full proxy contest costs. On those assumptions, each public corporation would face annualized costs of about $500,000. Using the 10,000 actively traded U.S. companies in the Compustat database as a proxy for the number of companies potentially subject to the rule, we can estimate an aggregate annual cost of $5 billion. Of course, I may be overestimating the number of contests and the cost of each contest. Remember two things, however: (1) I'm using 1980s era cost estimates and (2) the SEC grossly underestimated the cost of complying with Sarbanes-Oxley.
A more conservative estimate might use data about shareholder proposals under current SEC regulations. According to the SEC's own figures, the cost per company of including a shareholder proposal in the proxy statement is $87,000. ISS tracked 1,042 shareholder proposals at public corporations during the 2003 proxy season, which gives us total corporate expenditures on shareholder proposals of $90,654,000.
Either way, there can be no doubt that giving shareholders access to the proxy statement to nominate directors is going to be expensive. Plus there are all the indirect costs. Companies are already having a hard time attracting independent directors. The shareholder access proposal likely will make that search even harder. Why would somebody be willing to serve on the board if he or she might be the one singled out to be ousted?
The election of a shareholder representative also will disrupt the delicate internal dynamics that make boards successful. Its effect will be analogous to that of cumulative voting, which allows minority shareholders representation on the board. Experience with cumulative voting suggests that it often leads to pre-meeting caucuses by the majority and a reduction in information flows to the board as a whole. In turn, this results in adversarial relations between the majority and minority board members, which interferes with effective board governance.
Is it clear that the benefits of shareholder access will exceed these costs? Why, for example, should you and I have to subsidize some activist or gadfly who wants some free publicity?
· Shareholders representing at least 35% of the votes withhold authority on their proxy cards for their shares to be voted in favor of any director nominated by the incumbent board of directors.
Nothing in either trigger limits the rule to the Enrons of the world. If enough shareholders are disgruntled, for whatever reason, they can force a vote. This makes no sense. The point of all these reforms, supposedly, is to restore investor confidence by ensuring good corporate governance. But if firms are well-managed why put them to the expense and bother of a shareholder nomination contest?
Just as a good cook eventually stops throwing spaghetti at the wall, it is time for the regulators to stop, take a deep breath, and stop throwing new reforms at Corporate America. Let's wait and see how the first couple of rounds of reform play out before imposing yet more burdens on corporations in our still precarious economic environment.
As bad as the original proposal was, however, things may be about to take a turn for the worse.
"While details of the proposal are still being worked out, it would essentially allow shareholders to sit down with a company and agree on a person to replace a director who has been targeted by investors for removal. If an agreement couldn't be reached, shareholders would likely gain the right to nominate their own director the following year. The proposal may allow companies to bypass negotiating with investors if they agree to include shareholder-backed nominees on the ballot the following year."
(1) Which shareholders get to sit down with management? All of them, which can be in the millions, or just a select few? If a select few, how do we ensure that the interests of the few coincide with those of the many? How, for example, do we ensure that unions don't use the shareholder access rule for leverage in collective bargaining (as they often use the current shareholder proposal rule)? Or that social activists don't use it to promote a social agenda at odds with the profit-maximization interests of most shareholders?
(3) The presence on the board of a single shareholder-approved director likely will have a highly disruptive effect on the board's decisionmaking processes. Granted, some firms might benefit from the presence of skeptical outsider viewpoints. The analogy to cumulative voting, however, suggests that such benefits will be rare. It is well-accepted that cumulative voting tends to promote adversarial relations between the majority and the minority representative. On such boards, the majority tends to resort to pre-meeting caucuses at which decisions are worked out. In addition, management tends to restrict the flow of information to such boards, out of concern that the minority will use confidential firm information for improper purposes. A chief indirect cost of the proposed compromise therefore will be less effective governance.
(4) Finally, and perhaps most disturbingly, there is still nothing in the reported compromise that would limit the rule to situations in which the targeted board is clearly dysfunctional. Instead, it apparently still applies to all public corporations, whether their internal governance is good, bad, or just indifferent. Hence, if enough shareholders are disgruntled, for whatever reason, they can force a vote. This makes no sense. The point of the rule, supposedly, is to restore investor confidence by ensuring good corporate governance. But if firms are well-managed why put them to the expense and bother of a shareholder nomination contest?
A post by Kevin Brady on Francis Pileggi's Delaware corporate law blog alerts us to Chancellor Chandler's decision in In Re: Trados Incorporated Shareholder Litigation, No. 1512-CC (July 24, 2009), read opinion here. The facts are fairly complicated. Suffice it for our purposes to say that Trados Inc. entered into a merger agreement with SDL, plc, under which Trados' preferred stockholders would get $57.9 million to satisfy their liquidation preference, management would get $7.8 million under a golden parachute-type arrangement, and the common shareholders would get exactly nothing.
Plaintiff contends that the merger took place at the behest of certain preferred stockholders, who wanted to exit their investment. Defendants counter by arguing that plaintiff ignored the “obvious alignment” of the interest of the preferred and common stockholders in obtaining the highest price available for the company. Defendants assert that because the preferred stockholders would not receive their entire liquidation preference in the merger, they would benefit if a higher price were obtained for the Company.
Generally, the rights and preferences of preferred stock are contractual in nature. This Court has held that directors owe fiduciary duties to preferred stockholders as well as common stockholders where the right claimed by the preferred “is not to a preference as against the common stock but rather a right shared equally with the common.” [Citing Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986).] Where this is not the case, however, “generally it will be the duty of the board, where discretionary judgment is to be exercised, to prefer the interests of common stock—as the good faith judgment of the board sees them to be—to the interests created by the special rights, preferences, etc., of preferred stock, where there is a conflict.” Thus, in circumstances where the interests of the common stockholders diverge from those of the preferred stockholders, it is possible that a director could breach her duty by improperly favoring the interests of the preferred stockholders over those of the common stockholders.
Here the divergence of interest did implicate a preference of the preferred stock; namely, the liquidation preference. Ergo, no fiduciary duty to the preferred and potential liability for preferring their interests over that of the common.
I think Chandler got the law and its application to the facts right. I want to use this case, however, as a jumping off point for discussing the basic issue of whether there ought to be fiduciary duties to the preferred at all.
Unlike bondholders, who are creditors of the corporation, holders of preferred stock are nominally shareholders. In addition, while bond indentures tend to be lengthy and highly detailed, the organic documents governing preferred stock tend to be bare-bones affairs. To what extent are preferred stockholders therefore entitled to the benefits of fiduciary duties or other extra-contractual protections?
Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986), split the baby in an interesting way. A prospective buyer of MGM, Bally Manufacturing, made a total offer for the company, leaving to MGM’s board the task of dividing the proceeds between the common and the preferred. The preferred shareholders objected to the division set by the board. Did the board owe the preferred shareholders fiduciary duties of care and loyalty with respect to division of the deal?
Jedwab has a certain superficial plausibility, but proves unpersuasive on closer examination. First, a number of Delaware supreme court precedents in fact suggest that all of the rights of preferred stockholders are contractual in nature, not just those relating to their preferential rights and special limitations. See, e.g., Judah v. Delaware Trust Co., 378 A.2d 624, 628 (Del. 1977) (“Generally, the provisions of the certificate of incorporation govern the rights of preferred shareholders, the certificate . . . being interpreted in accordance with the law of contracts, with only those rights which are embodied in the certificate granted to preferred shareholders.”).
The supreme court’s holding in Wood v. Coastal States Gas Corp., 401 A.2d 932 (Del. 1979), seems particularly problematic for Jedwab’s viability. In Coastal, plaintiff-preferred shareholders challenged a spin-off transaction as violating the provision of Coastal’s articles of incorporation governing conversion of their stock to common. Holding that its duty was to interpret the contract created by the conversion provision, the court concluded that the preferred stockholders’ rights were not violated. To be sure, Coastal involved a preferential right and thus fell into the category of rights that even Jedwab acknowledges to be contractual in nature. The Coastal court, however, used very broad language in defining the rights of preferred stockholders: “For most purposes, the rights of the preferred shareholders as against the common shareholders are fixed by the contractual terms agreed upon when the class of preferred stock is created.” The qualifier, “for most purposes,” does not leave a lot of wiggle room for Jedwab to sneak through. Even more significantly, however, the Coastal court expressly rejected the plaintiff-preferred shareholders’ claim that the spin-off unjustly enriched the common stockholders. In so holding, the court opined that whatever participation rights the preferred stockholders possessed must be created by the articles of incorporation. By thus rejecting an extra-contractual remedy, the Coastal court further confirmed the essentially contractual nature of preferred stockholders’ rights.
Second, Jedwab depends on the proposition that preferred stock is granted certain rights by statute and common law even where the corporation’s organic documents are silent. The chancellor cited two such examples: Where the contract is silent, preferred stock get the same voting rights as common stock. Where the contract is silent, preferred stock participates pro rata with the common in a liquidation. Neither of these examples, however, rise to the same level as conferring the benefits of fiduciary obligation on preferred stockholders. Neither entails the sort of open-ended inquiry required by fiduciary obligation, nor does either entail the same risk of conflicting interests.
Finally, from a policy perspective, several objections to Jedwab can be noted. For example, it creates a two masters problem. Jedwab does not eliminate potential conflicts of interest between the holders of preferred and common. Whose interests must the board maximize when those interests clash? Chandler says the common, but seemingly only when the preferred’s preferences are involved.
On a related note, the Jedwab opinion makes clear that the preferred are not entitled to an equal share in the merger consideration—only to a fair share. Yet, how does the board decide what is fair ex ante? Even if the board makes a good faith effort to set a fair price, the indeterminacy of valuation means that reasonable people could differ. Conversely, if the prospective buyer proposed the division to be made between the common and the preferred, the board likely would escape liability. Among other things, the board could defend itself on causation grounds—i.e., whether or not the board breached its fiduciary duties, that breach was not the cause of plaintiff’s injuries. See, e.g., Dalton v. Am. Inv. Co., 490 A.2d 574 (Del. Ch.), aff’d, 501 A.2d 1238 (Del. 1985) (declining to reach issue of fiduciary obligation to preferred stockholders as there was no causal link between alleged breach and alleged injury).
Finally, Jedwab implies that the preferred may have greater rights with respect to nonpreference issues than with respect to preferences, which seems odd at best. Cf. Gale v. Bershad, 1998 WL 118022 (Del. Ch. 1998), in which Vice Chancellor Jacobs followed Jedwab in asking whether the right in question is “created not by virtue of any preference” but is “shared equally with the Common.” Id. at *5. As to contractual rights arising out of the preferred stock’s preferential rights or special limitations, however, Vice Chancellor Jacobs further noted that an implied covenant of good faith constrained the board’s discretion. Id.
In RGC Intern. Investors, LDC v. Greka Energy Corp., 2000 WL 1706728 (Del. Ch. 2000), Vice Chancellor Strine favorably referred to a characterization of Jedwab as an exception to the general rule “that the rights of preferred stockholders are largely governed by contract law and that corporate directors do not owe preferred stockholders the broad fiduciary duties belonging to common stockholders.” Id. at *16. I would prefer Jedwab to be seen not as a narrow exception to the general rule, but as an aberrational violation of that rule. It ought to be overturned on both doctrinal and policy grounds.
In fairness, Jedwab wrestled with a persistent problem in the preferred stock area. As noted, bond indentures are hundreds of pages long and deal with virtually every conceivable contingency. In contrast, preferred stock certificates of designation tend to be relatively short and to deal with only a few issues. Which leaves unresolved a nagging question; namely, how do you deal with issues that come up that the contract does not cover? The answer, by analogy to the bond setting, is to use an implied covenant of good faith rather than fiduciary duties. In this context, such a covenant would preclude the board from taking action that deprives the preferred of the benefit of their bargain. To the extent that covenant fails to provide adequate protections, portfolio theory teaches that the preferred stockholders should engage in self-help by diversifying their portfolio.
It's a visual gag, so you have to click through.
I got a call from a lawyer for a major bank that's been getting a lot of bad press for corporate governance failures. The lawyer wanted to know if I would make myself available to talk to the press to explain why his client was doing the right things.
It's about the third or fourth time this has happened recently.
I'm not sure which I found more insulting: that these lawyers thought I would shill for their client or that they thought I would do it for free.

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