The Geography of \u3cem\u3eRevlon\u3c/em\u3e-Land

In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court explained that, when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country? By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. The seemingly settled rules made doctrinal sense and were sound from a policy perspective. Indeed, my thesis herein is that Revlon and its progeny should be praised for having grappled—mostly successfully—with the core problem of corporation law: the tension between authority and accountability. A fully specified account of corporate law must incorporate both values. On the one hand, corporate law must implement the value of authority in developing a set of rules and procedures providing efficient decision making. U.S. corporate law does so by adopting a system of director primacy. In the director primacy (a.k.a. board-centric) form of corporate governance, control is vested not in the hands of the firm’s so-called owners—the shareholders—who exercise virtually no control over either day-to-day operations or long-term policy, but in the hands of the board of directors and their subordinate professional managers. On the other hand, the separation of ownership and control in modern public corporations obviously implicates important accountability concerns, which corporate law must also address. Academic critics of Delaware’s jurisprudence typically err because they are preoccupied with accountability at the expense of authority. In contrast, or so I will argue, Delaware’s takeover jurisprudence correctly recognizes that both authority and accountability have value. Achieving the proper mix between these competing values is a daunting—but necessary—task. Ultimately, authority and accountability cannot be reconciled. At some point, greater accountability necessarily makes the decision-making process less efficient. Making corporate law therefore requires a careful balancing of these competing values. Striking such a balance is the peculiar genius of Unocal and its progeny. In recent years, however, the Delaware Chancery Court has gotten lost in Revlon-land. A number of chancery decisions have drifted away from the doctrinal parameters laid down by the Delaware Supreme Court. In this Article, I argue that they have done so because the Chancellors have misidentified the policy basis on which Revlon rests. Accordingly, I argue that chancery should adopt a conflict of interest–based approach to invoking Revlon, which focuses on where control of the resulting corporate entity rests when the transaction is complete

Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called “Shareholder Proposal Rule”) to not just manage but even micromanage corporate decisions. The Rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micromanagement. The Rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion of proposals relating to ordinary business operations under Rule 14a-8(i)(7) is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. For example, corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters. This creates a gap through which countless proposals have made it onto corporate proxy statements. This Article proposes an alternative standard that is not only grounded in relevant state corporate law principles but is easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper

The Short Life and Resurrection of SEC Rule 19C-4

After a brief description in Part I of dual class capital structures, Part II of this Article evaluates rule 19c-4 and the Commission\u27s arguments as to the need for regulation of dual class stock. In essence, the Commission argued that shareholders were being forced to accept certain types of dual class transactions without having any meaningful voice in the matter. Part II demonstrates that dual class transactions are objectionable not because of these so-called collective action problems, but because of the conflict of interest inherent in management\u27s decision to propose such transactions. Once dual class stock is seen as a conflict of interest problem, the question arises as to whether the SEC had authority to adopt rule 19c-4. Conflict of interest transactions traditionally are a matter of state law; indeed, rule 19c-4 was the SEC\u27s first substantive regulation of conflict of interest transactions generally applicable to public corporations. More generally, it also was the SEC\u27s most direct regulation of corporate governance to date. In June 1990, the United States Court of Appeals for the District of Columbia invalidated rule 19c-4 on the grounds that the Commission had exceeded the statutory authority delegated to it by Congress. Part III argues that the court of appeals\u27 decision was correct in light of the Exchange Act\u27s literal language, its legislative history, and its historical context. Part III concludes by examining some of the broader implications of the D.C. Circuit\u27s opinion for future SEC regulation of corporate governance, proxies, and takeovers. Because the SEC decided not to seek en banc or Supreme Court review of the D.C. Circuit panel\u27s decision, the battleground has shifted back to the states and the SROs. As of this writing, two of the principal SROs have adopted listing standards modeled on rule 19c-4. Part IV of this Article argues that the SROs are an appropriate forum in which to address the conflict of interest potentially present in dual class transactions, but that simply grafting rule 19c-4 into SRO listing standards is the wrong answer to the problem. Instead, Part IV offers an alternative regulatory scheme

A Critique of The American Law Institute’s Draft Restatement of the Corporate Objectiv

The American Law Institute (ALI) is currently working on a Restatement of the Law of Corporate Governance (Restatement). At the ALI’s May 2022 annual meeting, the membership approved, inter alia, § 2.01, which purports to restate the objective of the corporation. Section 2.01 differentiates between what the drafters refer to as common law jurisdictions and stakeholder jurisdictions. The latter are those states that have adopted a constituency statute (a.k.a. a non-shareholder constituency statute). The drafters assert that, in common law jurisdictions, the corporate objective is to “enhance the economic value of the corporation, within the boundaries of the law . . . for the benefit of the corporation’s shareholders . . . .” In doing so, the corporation is allowed to consider the impact of its actions on various stakeholders, provided doing so redounds to the benefit of shareholders. In stakeholder jurisdictions, the corporation’s objective is to “enhance the economic value of the corporation, within the boundaries of the law . . . for the benefit of the corporation’s shareholders and/or, to the extent permitted by state law, for the benefit of employees, suppliers, customers, communities, or any other constituencies.” In both sets of jurisdictions, the drafters assert that the corporation “may devote a reasonable amount of resources to public-welfare, humanitarian, educational, and philanthropic purposes, whether or not doing so enhances the economic value of the corporation.” This article is intentionally agnostic on the underlying normative issue of whether corporations should focus exclusively on shareholder interests or should also consider stakeholder interests. Instead, it offers a critique of § 2.01 and offers suggestions so as to clarify important open questions and better align § 2.01 with current law. Aspects of § 2.01 addressed herein include: Do corporations have objectives? What is the corporate objective? Are tradeoffs allowed? Is opting out allowed? Should § 2.01 mandate obedience to the law? Does § 2.01 embrace Caremark? How does § 2.01 apply in takeovers? What rules govern corporate charitable activities? Why did the drafters ignore the special problems of multinationals

Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases

This article, by Professor William D. Warren of UCLA School of Law, analyzes Kokesh v. SEC where the Supreme Court held that disgorgement – a tool used by the SEC to recover ill-gotten gains through the courts – was a penalty rather than a remedy for the purposes of determining the appropriate statute of limitations. Warren contends that Kokesh raises questions about the validity of disgorgement as a sanction, especially considering issues of SEC authority, judicial power, and interstitial lawmaking

Corporate Directors in the United Kingdom

In the United States, state corporation law uniformly provides that only natural persons may serve as directors of corporations. Corporations, limited liability companies, and other entities otherwise recognized in the law as legal persons are prohibited from so serving. In contrast, the United Kingdom allowed legal entities to serve as directors of a company. In 2015, however, legislation came into force adopting a general prohibition of these so-called corporate directors, albeit while contemplating some exemptions. This Article argues that there are legitimate reasons companies may wish to appoint corporate directors. It also argues that the transparency and accountability concerns that motivated the legislation are overstated. The requisite enhancement of transparency and accountability can be achieved without a sweeping ban. Accordingly, this Article proposes that Parliament either repeal the ban or, at least, authorize liberal exemptions