Source: https://www.professorbainbridge.com/professorbainbridgecom/2008/06/index.html
Timestamp: 2019-04-26 10:00:56+00:00

Document:
U.S. railroad CSX Corp's unusual decision to postpone releasing results of a shareholder vote looked to some like a desperate attempt to delay the inevitable appointment of several dissident nominees to its board.
But the company has bought itself a month before it has to announce whether any of the five dissident nominees of activist hedge funds The Children's Investment Fund (TCI) and 3G Capital Partners made it onto the board -- the two funds claim they won four seats on the 12-member board -- giving it time to rethink its strategy, and perhaps alter the vote.
"A delay is in the interest of the incumbents as it gives them continued control of the corporate machinery to seek fresh options," said Stephen Bainbridge, a professor of law at UCLA. "(CSX) may have lost narrowly and will need to go back out there to persuade select shareholders to change their vote."
... law professors say that as Ward adjourned the meeting rather than ending it, the meeting is still in session and votes could still be changed or added. This provides CSX with time and room to maneuver, but also opens up the risk of lawsuits from TCI and 3G over the delay.
I am reminded here of State of Wisconsin Investment Board v. Peerless Systems Corp., 2000 WL 1805376 (Del. Ch.), in which Peerless sought shareholder approval of amendments to its stock option plan, referred to as Proposal 2, which plan benefited its directors. SWIB opposed Proposal 2 and solicited proxies against it. At the annual shareholder meeting, the proposal did not pass. The chairman closed the polls with respect to two other proposals, but adjourned the meeting for 30 days without closing the polls with respect to Proposal 2. During the adjournment period, Peerless selectively solicited shareholders. When the meeting resumed, Proposal 2 passed. SWIB sued.
Because the Peerless board acted for the ?primary purpose? of interfering with the free exercise of the shareholder franchise, the Blasius Indus. v. Atlas Corp. standard applies. Under that standard, the board must demonstrate that there was a ?compelling justification? for its actions.
The chancery court drew a number of unfavorable parallels between Peerless?s conduct with respect to Proposal 2 and its handling of other votes. Peerless claimed it adjourned the meeting due to low turnout, for example, but the turnout at a recent special meeting to vote on an acquisition had been even lower but there had been no adjournment. The selective solicitations and absence of general disclosures were also inconsistent with Peerless?s claimed reasons. The court concluded that management adjourned the meeting solely because it was dissatisfied with the result of the voting.
The court evaluated no fewer than six alleged ?compelling justifications? proffered by Peerless. At the end of that process, the court expressed doubt as to whether the defendant would be able to establish any of them at trial, but concluded that the state of the record does not allow summary judgment for either side. I believe the case thereafter settled.
Blasius has always been controversial and Vice Chancellor Leo Strine recently suggested scrapping the Blasius standard in favor of one based on Unocal. If CSX does try a selective resolicitation and litigation results, this high profile proxy contest could present the Delaware courts with an opportunity to recast Blasius.
Has Chancellor Chandler Embraced Director Primacy?
In his recent decision in In re TRANSKARYOTIC THERAPIES, INC., Delaware Chancellor William Chandler offers his court's latest word on the "somewhat nebulous" "fiduciary duty of disclosure." Chandler undertakes a lengthy and very helpful review of the development of the law relating to disclosure claims characterzied as arising out of fiduciary obligations rather than out of fraud. This is almost certain to end up in many casebooks. Bill and Mark will never go for it, however, as they are firm against the sort of long recitations of legal evolution on which I would dote were it not for their constant vigilance, so users of our case book probably won't see it.
The solicitation of proxies for the shareholder vote approving the merger of Shire and Transkaryotic occurred over three years ago. The merger has happened; ?the metaphorical merger eggs have been scrambled.? An injunctive order requiring supplemental, corrective disclosures at this stage would be an exercise in futility and frivolity. Indeed, there are no longer shareholders of Transkaryotic from whom to solicit proxies.
This makes sense to me. The point of a fiduciary duty of disclosure ought to be limtied to ex ante remedies designed to ensure that the corporate governance mechanisms under state law are validly followed. As a practical matter, ex post relief long after the transaction in question has been effected is more properly the province of federal proxy litigation. As a legal matter, such a claim might well not fall within the scope of the Delaware exemption to the PSLRA/SLUSA regime.
FN 94. See, e.g.,8 Del. C. ? 141(a); Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 374 (Del. Ch.2004) (?[T]he director-centered nature of our law [ ... ] leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes.?); cf., Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U.L. REV. 547, 605 (2003) (concluding that ?the board of directors is not a mere agent of the shareholders, but rather is a sort of Platonic guardian serving as the nexus of the various contracts making up the corporation.?).
Is Chancellor Chandler endorsing director primacy? If so, it could not be more timely, since my book on director primacy is due for release on July 28th.
FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).
Director primacy. Catch the wave.
HT: Francis Pileggi, who analyses some of the case's other key points.
Does Yahoo's Severance Plan = A Dead Hand Pill?
Two Detroit pension plans, which sued Yahoo in March in the Delaware Chancery Court, are now requesting a trial to take place before Yahoo's August 1 annual meeting, when Yahoo management will face a proxy battle with Icahn, who has put up a slate of directors.
[The] brief filed by the plaintiffs ... claims [that "Yahoo's board disabled itself from rescinding the severance plans during the pendency of a proxy fight" and because "Icahn's slate is barred from rescinding the severance plans if it prevails in its proxy contest."
Sounds like both the current board and any future board's hands would be tied. A neat trick, and one that the brief says looks a lot like a management defense known as the "dead hand poison pill" --- a tactic that has been struck down by the Delaware courts.
The "dead hand" attack is a clever one, says Professor Stephen Bainbridge of the UCLA School of Law, who has written about the Yahoo severance plan on his widely read blog.
"This is their most interesting argument," Bainbridge says. Delaware law provides that any limit on a board should be in a corporation's articles of incorporation.
While interesting, the plaintiffs' argument is also pernicious. Or, perhaps it would be better to say that the cases on which the argument rests are pernicious.
Precommitment strategies ? abound in business life. When a corporation?s board of directors authorizes the inclusion of a negative pledge clause in a bond indenture, the board disables the corporation from issuing certain types of secured debt. When the board and/or shareholders adopt a mandatory indemnification amendment to the bylaws, they precommit the corporation to a policy of indemnifying officers and directors under circumstances in which the statute does not mandate such indemnification. And so on.
In Carmody v. Toll Brothers, however, the Delaware chancery court cast considerable doubt on the validity of an emergent corporate precommitment strategy?the dead hand poison pill?suggesting, inter alia, that the board of directors likely lacked authority to adopt such devices. In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., the Delaware supreme court invalidated a related device?the no hand poison pill?solely on grounds that a board of directors lacks authority to adopt such devices.
By relying on the scope of the board?s authority, the Delaware supreme court made a serious error. The court misinterpreted relevant Delaware law. Its unjustifiably called into question the validity of a host of corporate precommitment strategies. Most important, however, it called into question a basic tenet of Delaware corporate law; namely, the plenary authority of the board of directors. Delaware law wisely vests formal decisionmaking authority in the hands of the board of directors. Indeed, it is fair to say that if Delaware did not do so, the modern corporation could not exist. Yet, if read broadly, Quickturn denies the board?s authority to make many ordinary corporate governance devices requiring board self-disablement.
In striking down the no hand poison pills on authority grounds, ? the Delaware supreme court seemingly has limited the use of such precommitment strategies by adopting a broad principle that boards have an ongoing duty to constantly reevaluate their decisions. ? [The] Delaware supreme court?s decision was scarcely compelled by the relevant statutory language.
The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
On its face, ? 141(a) is directed to an entirely different problem than the one raised by the no hand pill. In particular, note the reference in the second sentence of ? 141(a) to the ?powers and duties? of the board being ?exercised or performed? by such other persons as provided in the certificate of incorporation. This language clearly reflects a concern with the special problems of close corporations, whose shareholders often seek to modify the default rules of corporate governance so as to run the firm as though it were a partnership. Delaware has a special set of statutory provisions for close corporations whose articles of incorporation contain an election to be governed by those provisions. Among the special rules applicable only to such so-called statutory close corporations is a provision authorizing shareholders to limit the powers of the board of directors by mere contract. Outside of that limited context, however, ? 141(a) makes clear that any such shareholder-initiated limitation on the board?s authority must be included in the articles of incorporation. Taken as a whole, therefore, ? 141(a)?s language regarding exceptions to the board?s authority is not concerned with self-imposed limitations on the board?s authority. Instead, ? 141(a) is concerned with ensuring the validity of such close corporation governance provisions, while requiring that they be included in the articles of incorporation rather than by mere contract. On its face, nothing in the statute compels a conclusion that the board cannot create self-imposed limitations on its authority.
I then pointed out that "boards of directors commonly bind themselves to particular strategies through the use of various devices. Many such devices limit the discretionary authority not only of the adopting board, but also of future boards that might wish to pursue a different strategy. Indeed, it is the very ability to bind future decisionmakers that is the hallmark of any precommitment strategy."
In Phelps Dodge Corp. v. Cyprus Amax Minerals Co., Chancellor Chandler opined that no shop clauses ?are troubling precisely because they prevent a board from meeting its duty to make an informed judgment with respect to even considering whether to negotiate with a third party.? But this begs the question of why the board cannot make an informed decision to tie itself to the mast. Suppose the board of directors makes an informed decision that the merger proposal on the table is the best deal they are likely to get for their shareholders and that granting a no shop clause is necessary and appropriate to induce the prospective acquirer to make a formal bid. The board recognizes that a no shop clause will impede its ability to negotiate with any competing bidders who subsequently emerge, but the board decides to accept that risk and go forward. In doing so, the board relies on the old adage that a bird in the hand is worth two in the bush. So long as the decision to enter into the no shop clause was an informed one, why should a board of directors have an on-going fiduciary duty to constantly reevaluate its decision? ?
The court?s emerging hostility to precommitment strategies is puzzling. It had taken a more sensible approach to precommitments in Grimes v. Donald, where the board of directors approved an employment agreement with a newly-hired CEO giving the CEO largely unfettered control of the corporation. Among other things, the agreement empowered the CEO to declare unilaterally that he had been constructively terminated if, in his good faith judgment, the board substantially interfered in his management of the company. In that event, the CEO would receive a very substantial severance package. A shareholder complained that ?the potentially severe financial penalties which the Company would incur in the event that the Board attempts to interfere in [the CEO?s] management of the Company will inhibit and deter the Board from exercising its duties under Section 141(a).? The court aptly observed that ?business decisions are not an abdication of directorial authority merely because they limit a board?s freedom of future action,? a turn of phrase that nicely captures the basic thesis of this Article.
I then argued that precommitments are perfectly defensible in my director primacy model of corporate governance.
Quickturn was wrongly decided because prophylactic limitations on the board of directors? authority are unacceptable. Recognizing that many readers will not accept such an expansive understanding of the directors? primacy, in this section I assume arguendo that at least some prophylactic restrictions on board authority are appropriate. Even with that concession, however, Quickturn still was wrongly decided. We have seen that Quickturn?plausibly interpreted?threatens to invalidate any precommitment strategy not authorized in the articles of incorporation. Surely the Delaware supreme court did not intend such a result. At the very least, one would have expected such a sweeping change in the law to be more explicitly signaled. Yet, as we have also seen, Quickturn already has been extended?fortunately only in dicta?to no shop clauses. In sum then, the weakness in the supreme court?s Quickturn opinion is twofold: (1) the court cannot possibly intend for their holding to be read broadly, but (2) their opinion provides no firebreak between valid and invalid precommitment devices.
In my opinion, no such firebreak exists. ?
If there is no firebreak, what should the Delaware supreme court have done? Instead of creating a novel doctrine based on statutory authority, the court should have relied on the well-established principles outlined in Unocal and its progeny. Dead hand and no hand pills unquestionably raise very serious issues of target director fiduciary duty. The market for corporate control and, in particular, the unsolicited tender offer are critical accountability mechanisms by which agency costs are constrained in the corporate setting. Director action that impedes unsolicited bids therefore is tainted by a conflict of interest, as Unocal recognized. Indeed, it is difficult to imagine a legally cognizable threat sufficiently severe for a dead hand pill to pass muster under the proportionality prong of Unocal. Binding someone else?s hands, as the dead hand pill does, does seem more problematic than binding one?s own. Such concerns become even more pronounced, when the decision to disable another is tainted by a conflict of interest situation.
Yet, never before had the Delaware supreme court adopted a prophylactic prohibition in response to that taint. To the contrary, the court rejected just such an approach when it rejected academic calls for a rule mandating director passivity in the face of an unsolicited bid. Moreover, Delaware courts have employed even Unocal cautiously. They recognize the danger ?that courts?in exercising some element of substantive judgment?will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ.? Consequently, just as is called for by Arrow?s analysis, Unocal and its progeny establish an ?intermittent? accountability mechanism ?capable of correcting errors? but which does not ?destroy the genuine values of authority.?
The Delaware supreme court should acknowledge that both self-disablement by the board of directors and disablement by the board of other constituencies are legitimate and accepted corporate governance practices. It then should emphasize that such self-disablement raises issues of fiduciary duty, especially when tainted by the sort of potential conflict of interest inherent in takeover defense decisions.
Under Delaware law, takeover defenses are allowed as long as they do not have a "preclusive effect." On this score, he also does not hold out much hope for the plaintiffs, who claim the plan would potentially cost $2.4 billion. That amounts to less than 5 percent of Microsoft's initial $44.6 billion offer for Yahoo.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.