W I T N E S S E T H:

Unearthing the Household International poison pill

In the course of a project I'm working on related to "rights agreements" (poison pills), I discovered that the ThomsonOne service has some limited availability of paper filings from the pre-EDGAR era. I searched for the earliest poison pills and was unable to find them for Lenox and El Paso (believed to be the first poison pills). However, I found the one from Household International that was the subject of the landmark Supreme Court case validating the poison pill (Moran v. Household International).

I uploaded here a  copy of the 8-A filing with the pill document attached in case readers are interested in delving into this little piece of M&A history. I inserted below the first page of the pill from the document. Many of the terms are almost verbatim identical to those used today, with the exception that the Household Pill did not contain the now-standard "flip in" feature.

Why is Delaware so dominant in corporate law?

Why is Delaware so dominant in corporate law? The traditional story among most practicing corporate lawyers is that Delaware's superior corporate law, judiciary, and responsiveness allowed it to win an interstate competition for corporate charters. According to this perspective, Delaware is "just better." But as many, many academic papers have argued, however, the true reason for Delaware's continued dominance is likely much more complex.

In my recent paper, The Delaware Trap: An Empirical Study of Incorporation Decisions, I attempt to provide some new information to help explain the drivers of incorporation decisions. Using a large dataset of corporate finance filings, I find that one of the strongest predictors of a company's choice of incorporation state is its choice of law firm. In other words, the data suggest that many companies are not choosing Delaware over other states because of the quality of its law or because of the companies' individual needs, but rather companies choose the type of law firm, and the type of law firm largely dictates the state of incorporation. These results suggest that we may need to rethink much of the research on state competition in corporate law.

Here is the abstract:

One of the most enduring debates in corporate law centers on why Delaware has become the dominant state in the market for corporate charters. Traditionally, two perspectives dominated the debate, the “race to the top” perspective that sees competition among states as driving legal rules toward efficiency and the “race to the bottom” perspective that sees competition among states as driving legal rules toward the interests of corporate managers. The two dominant perspectives have struggled to explain why approximately half of companies incorporate in Delaware, while the other half incorporate in their home states. Whether the choices are attributable to the quality of state law or to characteristics of the companies themselves or both has given rise to a large, but inconclusive empirical literature.

This Article uses a large dataset of corporate financings to shed new light on this mystery and uncovers strong evidence that some of the strongest factors in incorporation choice are factors unrelated to either the quality of state law or the characteristics of individual companies. Instead, the data strongly suggest that demographic markers of sophistication, such as choice of law firm and headquarters location, predict the jurisdictional choice about as well as state law or the business attributes of companies. Companies with more demographic markers of sophistication tend to choose Delaware incorporation, and companies with fewer demographic markers of sophistication tend to choose home-state incorporation. The finding persists even when other attributes of the company are controlled for, such as its industry classification, the amount of money raised, or whether the company is public or private. Indeed, the sophistication factors arguably predict Delaware incorporation as well or better than any factors documented in the vast literature on state competition for corporate charters.

The findings have important implications for the state “race-to-the-top” debate in corporate law. At a minimum the results in this Article make it clear that the choice of legal representation is an important missing variable in models of incorporation decisions. The fact that the choice of law firms drives the jurisdictional choice has far broader implications. If law firms drive the jurisdictional choice they may steer companies toward states that serve the law firms’ own interests without regard to the quality of legal rules or the needs of the client. When the state chosen is Delaware, as it often is, there are few alternative jurisdictions that shareholders and managers can agree on. As a result, companies inadvertently fall into a “governance trap” from which reincorporation out of state is nearly impossible. This interpretation would suggest that Delaware’s carefully calibrated positioning in the charter market has largely eliminated meaningful competition among the states for the quality of corporate law.

My paper is available on SSRN here. 

Long and short of corporate governance from Marty Lipton, again

Marty Lipton is again railing against "short-termism" in corporate governance, while confusing operational horizon short-termism (maximizing profits in the accounting sense in the short-term, which nobody advocates) with investment horizon short-termism (maximizing the stock price in the short-term, which is a plausible objective). The facile assumption that investment horizon short-termism leads to operational short-termism is seductive but largely incorrect, I argued in The Long and Short of Corporate Governance. Many thoughtful commentators disagree with my perspective that short (or long) investment horizon does not dictate short (or long) operational horizon, but to not even acknowledge the role of the market in the "long-and-short" debate isn't intellectually honest.

SEC Roundtable on Proxy Voting Announced

Yesterday the Securities and Exchange Commission announced a roundtable on proxy voting to take place on February 19. The roundtable is to focus on two key questions: (1) whether to facilitate use of universal proxies, and (2) increasing retail shareholder participation in the proxy process.

The universal proxy idea would be a useful reform, depending on how any proposal would be implemented. The current "short slate" exceptions to the "bona fide nominee" rule are unnecessarily cumbersome for those attempting to seat a few nominees on a board and invite excessive strategic manipulation. A simple proxy form with all the names of nominees clearly indicated would give shareholders the best opportunity to select the mix of nominees they prefer.

The issue of promoting retail proxy participation is an interesting one. Presumably, by "retail" shareholder the SEC means non-institutional shareholders. These shareholders have much lower rates of participation in the process than do institutional shareholders, in part because of the rational apathy that derives from holding an infinitesimal stake in the company.

Any initiative to increase retail shareholder participation in the proxy process needs to confront the basic fact of rational apathy head on, rather than taking the approach that more investor "education" is necessary. Retail shareholders don't have the economic incentives to research individual companies' nominees to determine whether or not to support them, and that's true no matter how educated or "civic-minded" the retail shareholders are. Indeed, even if one tried to determine which nominees to support, information is rarely available as to how individual directors (as opposed to the board as a whole) voted on particular matters, so they have to throw the whole slate out or keep all of them.

The only solution that would allow retail shareholders to have a meaningful participation would be to have "political parties" for corporate directors. This is the reason voters are able to make up their minds on obscure political races. Each party has a set of principles that nominees (more or less) support, enabling voters to cast ballots in political races without detailed research on each individual.

Likewise, directors could disclose which "platform" they identified most with, whether it's the ISS approach (pro-shareholder), the Business Roundtable (pro-management), or one of the employee pension funds (mixed and complicated). At least with this information retail shareholders would have an opportunity to meaningfully evaluate candidates. Without an approach like this, it seems that trying to increase retail participation in the proxy process is a lost cause.

Forum Selection Bylaws Appeal Dropped

Exclusive forum bylaws are enforceable in Delaware, at least for now. That's because, as Fish & Richardson's Litigation Blog reported, the plaintiffs have apparently dismissed their appeal of the Chancery Court case that validated the bylaws, Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp. 

This is important news for Delaware companies because exclusive forum selection bylaws can help reduce the risk of simultaneous litigation in multiple forums and adoption of the bylaws doesn't require a shareholder vote. This means that a board can adopt the bylaws at a regular meeting, and there seems to be little reason not to do so. As a result, many, many companies are adopting these bylaws each week, and those Boards who haven't examined them yet should consider doing so at their next meeting.

You can find a blog post about Exemplify's standard forum selection bylaws here. Interestingly, although most companies have adopted bylaws very close to the Chevron or FedEx ones validated in the Boilermakers decision, Exemplify analysis suggests that the standard version is evolving. In particular most firms have not inadvertently copied the misspelled word Exemplify identified in the original Chevron bylaws, although about 10% have.