If your experiment needs statistics, you ought to have done a better experiment.”  Ernest Rutherford

Sometimes you need to get into the fundamentals to understand if your belief system is sound.  In corporate governance literature of the last two decades, there is no more fundamental concept than Tobin’s Q, which legions of law professors have used as a proxy for firm value.  Based on regression analyses examining variations in Tobin’s Q, they have made definitive pronouncements about any number of corporate governance topics, from staggered boards to the value of activism.  Yet tracing the evolution of Tobin’s Q to its current state—a state completely alien to the original conception—reveals a twisted tale, proceeding like an epidemiological disaster in which Tobin’s Q transforms from an innocent and useful organism in macroeconomics to an unrecognizably mutated and widespread disease in corporate governance literature, infecting policies and practices throughout the corporate governance world. Continue Reading Mutant Q – The Superbug Infecting Foundational Studies on Entrenchment, Staggered Boards, and Activism

Beyond the cacophonous din of voices calling for companies to serve a “social purpose,” adopt a variety of governance proposals, achieve quarterly performance targets, and listen to (and indeed even “think like”) activists, there is now, most promisingly, a call from genuine long term shareholders for public companies to articulate and pursue a long term strategy.[1]  This latest shareholder demand directly supports the achievement of traditional corporate purposes, and seems, more than any other shareholder demand of the last decade, the most likely to increase shareholder value.  Yet in current circumstances, where all corporate defenses have been stripped in the name of “good governance,” boards and management have been given zero space in which to formulate and implement a long term strategy.  Indeed, the very fact that shareholders must demand corporations focus on long term strategy demonstrates just how effectively the governance movement has been co-opted by market forces to serve the interests of short term activists and traders to the detriment of long term investors.  It is time for long term investors to recognize that aspects of the good governance movement have in fact come at significant cost to their own investors, to be perhaps a bit more wary of partnerships with activists, and to actively create the conditions that will allow boards and management to focus on the long term.  Exhortations are not enough. The first step should be to bring back staggered boards. Continue Reading Long-Term Investors Have a Duty to Bring Back the Staggered Board (and Proxy Advisors Should Get on Board)

Directors of UK companies which are “for sale” are not (unlike directors of Delaware companies) subject to Revlon type duties to take active steps to obtain the best price reasonably available to shareholders.

However, directors of UK companies are subject to a duty to act for proper purposes, which has been interpreted by UK Courts as requiring strict board neutrality when battles for corporate control arise.  (This duty to act for proper purposes, which originated in common law principles, applies in addition to the restrictions on frustrating action applicable to listed companies under the UK Takeover Code.)  The UK proper purposes duty would for instance likely prohibit directors of UK companies from taking actions permitted under the Delaware Unocal principles, such as the establishment of a poison pill in response to an unsolicited offer which posed a threat to corporate policy. Continue Reading Staying Neutral – UK Supreme Court Re-emphasizes Primacy of Board Neutrality When Battles for Corporate Control Arise

On May 2, 2014, the Delaware Chancery Court denied a motion to preliminarily enjoin Sotheby’s annual stockholder meeting based on allegations by an activist stockholder, Third Point LLC, that the Sotheby’s board of directors violated its fiduciary duties by adopting a rights plan (or “poison pill”) and refusing to provide a waiver from its terms in order to obtain an advantage in an ongoing proxy contest.  Continue Reading Rights Plans and Proxy Contests: Chancery Court Denies Activist’s Motion to Enjoin Sotheby’s Shareholder Meeting

As widely reported, a vehicle formed by Pershing Square and Valeant Pharmaceuticals acquired just under 5% of Allergan’s shares after Allergan apparently rebuffed  confidential efforts by Valeant to get Allergan to negotiate a potential acquisition.  The Pershing Square/Valeant vehicle then crossed the 5% threshold and nearly doubled its stake (to 9.7%) over the next ten days, at which point it made the required Schedule 13D disclosures regarding the accumulation and Valeant’s plans to publicly propose an acquisition of Allergan.  The acquisition program has raised a number of questions.  Continue Reading The Schedule 13D Ten-Day Window and Other Issues: Will the Pershing Square/Valeant Accumulation of a 9.7% Stake in Allergan Lead to Regulatory or Congressional Action?

Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment. Continue Reading Selected Issues for Boards of Directors in 2014