Corporations in general!

1. Why corporations?
a. Corporation law is part of a broader set of laws governing business entities. Other U.S. business
entities include:
i. Sole proprietorships
ii. LLCs
iii. LPs
iv. S-Corporations
v. Close corporationsike family owned buisnesses, maybe a small chain
vi. LLPs
vii. General Partnershipstraditionally law and accountant firms, but becoming llcs more lately
b. Most large businesses in jurisdictions around the world are set up in a form similar to the US
corporate law form.
c. Why are LLCs being made more often than corps now, even though corps are super fast and easy
i. LLCs can elect to be taxed like partnerships (pass-through taxation), avoiding the double
taxation of corporations (tax on profits at the corporate level, then a tax on shareholders
when they are paid dividends
ii. LLCs are very flexible-can be made into anything. Dont have required annual meetings, say
iii. Further, in many states, the LLC may provide asset protection that goes beyond even that
provided by the corporation.
d. Large (and especially public) businesses are almost uniformly incorporated. What explains this?
i. Enabling nature of corporate law?
1. Not as flexible as LLCs
ii. Protection from liability for investors?
1. Most other entities also offer this
iii. Path dependency?
1. Possiblecorporations in their current legal form have been around for centuries.
LLCs are recent.
iv. People generally know what they are going to get with corporations, so if you are trying to
raise a lot of capital you will usually incorporate before selling interests in the firm to
investors.
2. 5 typical cross-jurisdictional corporate characteristics
a. Legal personality
i. Ability to contract and own property
1. A single, central point to contract withdont have to coordinate shareholders and
workers and management to all sign, say
2. For the corporation to serve as a credible contracting party, claimants on the firm
(creditors, for example) must know that the firm will be shielded from claims by
creditors of the shareholders.
a. Firm creditors get paid before shareholder creditors (priority), the result
being that shareholder creditors generally have no claim on the firm
whatsoever, and can only make a claim on the value of the shareholders
shares in the event of the shareholders bankruptcy; and
b. There is liquidation protection, so that shareholders cant drain firm assets
at will
3. Contracting with an entity depends on the counterparties ability to:
a. Identify those in authority to contract (designated managers), and
b. How the firm or the counterparties may sue when things go wrong with
contracts.
ii. Delegation of authority (single point)
1. Only the board and the board's designees (e.g., CEO, CFO, and other employees)
can enter into contracts on behalf of the corporation. Shareholders cannot bind the
corporation in contract.
iii. Ability to sue and be sued (single point)
1. Corporations can sue and can be sued without any involvement on the part of the
shareholders: no need to serve them.
2. A creditor of an investor cant sue the corporation for amounts owed by the
investor, since the corp is a separate entity and therefore shielded from another
entitys liabilities
iv. All of these are set as default rules by jurisdictional corporate laws
b. Limited liability
i. Entity Shielding
1. Entity is not liable for the debts (by contract or in tort) of the investors
ii. Owner shielding
1. Owners are not liable for the debts (by contract or in tort) of the company
iii. Asset partitioning
1. Refers to the separation of investor and company assets, but also refers to the
separation of assets and liabilities within the business.
iv. Example
1. Companies may want to divide up assets into separate companies in order to limit
liabilities associated with a particular entity, and to allow creditors to more easily
track assets (which helps in obtaining credit).
2. Note, though, that the entire scheme of limited liability encourages creditors to
monitor the firmthey have the downside risk, not the shareholders. As it turns
out, much of the risk assessment is undertaken at the investment stage, through
credit ratings (S&P, Moodys).
3. To the extent debt holders manage risk during the investment, it is through
covenants in the debt agreements.
c. Transferable shares
i. The shares of publicly-traded firms change hands constantly
ii. liquidity is the term used to describe the ability to quickly buy or sell a stock with minimum
price effects.
iii. Freely tradable refers to the ability of a shareholder to trade in shares without restriction in
public markets. Some freely tradable shares may enjoy high liquidity, but some may not.
iv. Public corporations
1. Traded on public markets
2. Allows for more diversification
3. Makes it more difficult to enter into control agreements among shareholders
4. Not all public corporations are equally-traded. In the U.S. and many other
jurisdictions, there are different levels of markets, from the largest, most liquid
(NYSE, Nasdaq), to the lowest (Pink Sheets).
5. Some public corporations are effectively controlled by a group: foreign jurisdcitions;
google dual-class
v. Private corporations
1. Not traded on a public market
2. Often tightly controlled (e.g., by a family)
d. Delegated management under a board
i. Board above CEO above CFO and COO
ii. Board is elected by shareholders, but that is the extent of shareholders direct oversight of
the board.
iii. The board has the legal obligation to manage the corporation, and they hire managers to
handle the day-to-day operations of the corporation.
iv. Boards also have committees that handle certain aspects of the management role. In the
U.S., publicly-held companies typically have at least these three:
1. audit committee,
2. compensation committee, and
3. nominating and governance committee.
v. In some jurisdictions we find two-tier boards that typically serve to provide protection to
various constituencies. Not everyone wants to focus on shareholder wealth maximization.
e. Investor ownership (cant go in and take all the staplers, say)
i. Two key elements of ownership
1. Control rights
a. Right to elect directors
b. Right to vote on major corporate decisions like mergers or sales of all or
substantially all of the firms assets
2. Residual interest
a. Shareholders get whatever is left over after all the other bills are paid
b. But typically do not have the right to require a dividend payment;
dividends are discretionary payments approved by the board
ii. Features of Shareholder ownership
1. Shareholders primarily are protected by law, not by contract
2. Shareholders generally are passive, and for the most part want management to
pursue long-term shareholder wealth maximization
3. Most jurisdictions have a kind of entity that allow for control but do not provide
cash flow rightsnon-profit firms.

Corporate law itself
3. Sources of corporate law
a. Special business forms: dont share the five corp characteristics
i. Non-profit entities
ii. Closely-held corporations
1. U.S.: close corporation, LLC
2. U.K: private company
3. France: SARL
4. Germany: GmbH
5. Italy: Srl
b. Liability v control
i. Constantly in conflict
ii. Generally, in torts and contracts, liability follows control. If you exercise control over the
entity, you can potentially be held liable.
1. In the U.S., we have started to move away from this principle with entities such as
the LLP and the LLLP, so that general partners are not necessarily liable for the acts
of the partnership
c. US law tends to be enablingsomewhat customizable--not mandatory. 3 big sources for publically-
traded companies:
i. State laws (which cover most corporate governance issues, such as most director elections
issues, directors duties, shareholder voting rights, etc.),
ii. Federal laws (primarily SEC disclosure rules, which may affect governance of the company
for example, executive compensation disclosures or disclosures relating to the directors),
and
iii. Listing standards (such as a requirement to have independent committees on the board to
supervise audits, handle compensation matters and select new directors).
d. European jurisdictions tend to have many more mandatory provisionsnearly half cant be avoided
i. National corp laws
ii. EU directives
1. Approved by the Member States, who must fit their corporate codes within the
regulatory space left by the directives.
iii. Listing standards
e. Statute & contract in corporate law
i. Shareholder rights and many other aspects are primarily governed by statute, but the
statutes do not work like many areas of the law that you have encountered.
ii. Corporate law is not a necessity: the relationships that create a corporation could still be
created by contract.
4. Mandatory law versus default provisions
a. Corporate law is primarily enabling, not mandatory, but the EU is condiserably more mandatory with
at least half of company rules being mandatory
i. Corp law typically offers a standard set of default provisions, from which you may deviate
ii. Default provisions enhance contracting efficiency to the extent that they are the provisions
that most parties would most commonly select
b. Types of default provisions
i. Default that allows for a range
1. Approval of 50% of shareholders (could be a higher numbersay, 75%) for certain
transactions
2. Number of directors (e.g., minimum of 3 directors, but not more than 15)
ii. Choice of 2 alternatives
iii. Menus (not often employed)
c. The ND experiment
i. North Dakota revised its corporate law to allow for stronger shareholder rights; North
Dakota hoped that shareholders would form their companies under ND law or press to move
from less shareholder-friendly states.
ii. If state chartering competition is a race to the bottom, managers will prefer Delaware to
North Dakota because the former facilitates the extraction of private rents.
iii. If state competition is a race to the top, investors will prefer the director primacy approach
taken by Delaware to the shareholder primacy one adopted by North Dakota.
d. Examples from Delaware:
i. The board of directors of a corporation shall consist of 1 or more members, each of whom
shall be a natural person.
ii. Unless otherwise restricted by the certificate of incorporation or bylaws, the board of
directors shall have the authority to fix the compensation of directors.
iii. Says unless otherwise specified a lot in the bylaws of certificate of incorporation.
e. Many mandatory provisions do exist:
i. Can express strong societal norms (German co-determination system)
ii. Help counteract market failures (certain corporate constituents may be powerless and not
able to effectively bargain, so the law protects their interests)
iii. They may provide a signalling effect
1. Simply the idea that by doing business under a certain set of rulessay, North
Dakotas lawssignals to investors that management is in effect tying its own
hands
2. Esp. Securites RegulationSeveral Chinese firms have opted to comply with more
stringent U.S. firm filing requirements, rather than somewhat weaker international
firm standards, when listing on US exchanges, as a signal that it is going to be bound
by high standards from which it will not be able to deviate.
f. Legal rules versus contract
i. Gap-filling function of corporate law
1. Contracts are incomplete. Case law, statutory amendments, and administrative
rulings fill in the gaps.
2. This gap-filling function incentivizes firms to use default provisions
3. Using non-standard terms takes you away from the safety of precedent and the
beneficial network effects of standard forms
4. It also takes you away from any changes in the law that may help the contract
adapt to a changing legal environment.
ii. Default provisions work in the same way. Note, though, that not all jurisdictions have a
rolling default regime like Delaware (so long as you dont deviate from the default, you are
governed by the default, no matter how the default changes).
iii. In the UK, if you select the default at time A, you are bound by the rules that existed at time
Ayou must affirmatively change them as you go along.
5. Regulatory competition
a. How can you have competition in corporate law?
i. US: internal affairs doctrine. Out-of-state business may choose to be governed by a
particular states corporate laws (typically this choice is Delaware)
ii. EU: Centros and Uberseering decisions allow EU businesses to incorporate in other EU
jurisdictions
b. Explaining Delawares pre-eminence
i. Revises statutes to reflect technological and business innovations: phoned board meetings,
voting online, etc.
ii. Experienced and expert group of corporate lawyers. It is a learned, proud, and insular
community.
iii. Court system designed to respond quickly, efficiently and expertly to corporate litigation: the
Delaware Court of Chancery, whose specialist judges hears cases without a jury. Most
Chancery Court decisions that are appealed are affirmed; most decisions are not appealed.
iv. Immensely deep and broad body of case law - jurisprudence covinering all of the
intricicies. In great detail, Delaware cases answer (and update earlier answers) to the
questions. Out of State generally look to them for guidance,
v. Delaware is a small state. Its financial dependence on being an independent provider of
corporate law keeps Delaware from acting impulsively.
6. The goal of corporate law
a. What is corporate law supposed to do?
i. Narrow conceptions:
1. Economic orderingefficient allocation of capital
2. Maximize shareholder welfare
3. We still have externalities created by business lawdo we deal with those directly
through business law, or do we deal with those through things like environmental
law, employment law, etc.?
ii. Broader conception: larger societal goals, such as redistribution of wealth, environmental
protection, labor rights
b. This question is partially answered by considering who corporate law privileges. Who ultimately
controls the corporation?
i. Shareholder primacy arguments
1. Shareholders in a corporation are principals who hire corporate officers and
directors to act as their agents. Corporate managers only job is to maximize the
wealth of the shareholders
2. Or, shareholders own the corporation and the only social responsibility of
business is to increase its profits.
ii. Director primacy/team production arguments
1. Directors, as a group of mediating hierarchs, both
a. 1) actually possess the authority in the corporation from a doctrinal and
statutory basis, and
b. 2) are the best receptacles of power, because, among other reasons, the
are able to mediate among the many different preferences of
shareholders.
c. Forces shaping corporate law
i. US institutional investor ownership
1. Institutional investor ownership of publicly-held U.S. firms has steadily risen, to
what is now a dominant share of the market.
2. Direct ownership by individuals has decreased dramatically as many have shifted
from ownership of a portfolio of stocks to ownership of a portfolio of fund interests,
often provided through union membership, employee benefits programs, or other
retirement savings vehicles.
3. Also, activist institutional investors, such as pension funds, have gained a greater
percentage of the market relative to less active funds.
4. While relatively new players such as hedge funds retain only a small percentage of
the total market capitalization, they are far more active traders than other funds
and have an outsized influence on governance matters.
ii. Other ownership patterns
1. US & UK: dispersed ownership; significant institutional investor ownership
2. Japan: dispersed ownership; Keiretsu cross-holdings
3. France: controlling state shareholder
4. Germany: controlling group of firms
5. Italy: controlling family shareholders
iii. International competition
1. Securities markets are become more globalized, and firms are competing for capital
internationally.
2. Corporate governance standards, promoted by corporate governance ratings firms,
proxy advisors, and, to some extent, by securities exchanges, attempt to provide a
set of good governance practices for public corporations worldwide.
3. Even supporters of good governance metrics generally see some difficulties in
promoting common governance standards across jurisdictions with different
ownership patterns: The impact of many key governance arrangements depends
considerably on companies ownership structure: measures that protect outside
investors in a company without a controlling shareholder are often irrelevant or
even harmful when it comes to investor protection in companies with a controlling
shareholder, and vice versa.
iv. Harmonization or competition?
1. Accounting standards: trending towards harmonization
a. International Financial Reporting Standards, or IFRS: SEC may allow US
firms to report financials using IFRS as early as 2015
2. Securities markets: also (slowly) trending to harmonization
a. IOSCO: non-binding principles regarding auditor independence and auditor
oversight, corporate financial disclosure and transparency, Regulatory
principles regarding conflicts of interest for financial analysts, credit ratings
agencies, and a Multilateral Memorandum of Understanding on
enforcement cooperation
3. Corporate laws: somewhat competitive, although harmonizing as well
4. Regarding harmonization of US corporate law, look at the creeping federalization
of the law: Sarbanes-Oxley, RAFSA, and many other minor SEC initiatives over the
last 20 years.
7. Agency relationshipsanother force shaping corp law
a. Finding solutions to agency problems is one of the central concerns of corporate law. 3 biggies:
i. Shareholders and managers
ii. Minority shareholders and majority/controlling shareholders
iii. The firms and contracting counterparties
b. What is agency?
i. Restatement of Agency (Third) of Agency 1.01: the fiduciary relationship that arises when
one person (a principal) manifests assent to another person (an agent) that the agent shall
act on the principals behalf and subject to the principals control, and the agent manifests
assent or otherwise consent so to act.
ii. Concerns:
1. If our agent is running the business for us, he knows more about what he is doing
and how the business is going than we do (information asymmetries)
2. Because he knows that we do not know what is going on, he may decide to shirk or
otherwise act opportunistically
3. If we are a dispersed group of shareholders, we will suffer from coordination (or
collective action) problems if we want to inhibit opportunistic behavior
iii. Corporate law helps solve many of these problems to the advantage of both agents and
principals
1. Some solutions are regulatory in nature: Dependent on the enforcement ability of
legal regulators (e.g., the SEC)
2. Some are governance solutions: Dependent on the ability of principals (such as
shareholders) to coordinate to punish shirking and opportunism
Strategies for reducing agency costs
iv. Regulatory strategiesthe stuff the gvt puts in the statues about what corps can or should
do.
v. Governance strategieswhere we the lawyers will be adding value for our clients and
earning our pay. How do we set up a director compensation K or anything? Our value comes
from our judgement.
c. Regulatory strategies
i. Rules v standards
1. Rules prescribe specific behaviors ex ante
a. Constraining and rigid, but predictable and certain, which helps with
deterrence
b. Example: drinking age in US 21
c. Not many corporate law rules
2. Standards allow for adjudication ex post
a. Standards guide decisions but provide a greater range of choice or
discretion; for example, a standard may provide a framework for balancing
several factors.
b. More situationally fair and sensitive, flexible.
c. Example: did management act fairly in approving a self-dealing
transaction?
ii. Setting terms of exit and entry
1. Entry terms
a. Specific terms that agents must abide by before entering into the agency
relationship.
b. Example: disclosure regarding a proposed director: list name, ages,
positions, offices, relationships to other board members
2. Exit terms
a. Right to withdraw investment
i. Appraisal rights
ii. Most high-end investment vehicles (e.g., hedge funds and private
equity funds) have lock-up agreement that limit the ability of
investor to remove funds for a set period of timeup to 10 years
b. Right to transfer (e.g., sell shares)
Regulatory Strategies Governance Strategies
Agent constraints Affiliation terms Appointment rights Decision rights Agent incentives
Ex Ante Rules Entry Selection Initiation Trusteeship
Ex Post Standards Exit Removal Veto Reward
c. If we sell your shares, itll drive down the company pricesucks to be your
job!
d. Governance strategies
i. Selection and removalappointment rights
1. Director election
2. RAFSA: Majority voting rule
a. Any director who receives less than a majority of votes cast must offer
his/her resignation to the board of directors.
b. The board must accept the resignation or unanimously reject the
resignation as long as it provides a public explanation for its rejection
within 30 days thereof.
c. Contested elections would only require a plurality standard.
3. Moving back from classified boards to annual ones so its easier to get rid of
managers
ii. Initiation and ratificationdecision rights
1. Initiation
a. is not much of an issue in US corporate lawshareholders have almost no
power to initiate anything, although they are able to (within strict limits)
make proposals in the companys proxy statement.
b. UK shareholders generally have better initiation rights, such as the ability
to call shareholder meetings.
2. Ratification/approval of board-okayed stuff is much more important, although only
the most fundamental corporate decisions (e.g., mergers) need be ratified by
shareholders.
iii. Trusteeship and rewardagent incentives
1. Reward strategies tie the performance of the company to the pay of the agent
(high-powered incentives), like Executive stock option plans
2. Trusteeship strategies play off of low-powered incentives like reputation--
Independent directorships may partially operate off this principle, although note
that directors in the US and UK are generally very well-paid
e. Compliance and enforcement
i. Enforcement provided by public regulators such as the FSA (UKs financial regulator) and the
SEC is of primary importance for regulatory strategies
1. Antifraud actions (e.g., insider trading)
2. Criminal charges
3. Disclosure review
ii. Governance strategies rely more on the enforcement abilities of the agents (private
enforcement), typically through the court system
1. Derivative suits
2. Class action suits
iii. Gatekeepers: who are they?
1. Auditors, having to sign off on stuff
2. Lawyers
3. Accountants, if they know the business is shady, have to make a noisy withdrawal
which implies to the SEC that they need to examine the business
4. Most countries have rules governing gatekeeper activities.
a. US:
i. requires that the auditor of financial statements report certain
matters to the issuer's audit committee, including "critical"
accounting policies used by the issuer
ii. require disclosures to investors of information related to audit
and non-audit services provided by, and fees paid to, the auditor
of the issuer's financial statements
iii. Prohibits officers and directors, and persons acting under their
direction, from taking any action to influence the audit if that
person knew or should have known that such action could result
in rendering the financial statements materially misleading.
b. UK
i. Company auditor must be a member of a recognized supervisory
body and hold a recognized supervisory qualification.
ii. The U.K.s five supervisory bodies are responsible for the day-to-
day supervision of auditors and audit firms. The legislation places
new requirements on the supervisory bodies, designed to
ensure the independence of the regulation of major public
interest audit work.
iv. Enforcement mechanisms
1. Disclosure
a. Disclosure serves several functions:
i. Reveals possible shirking and opportunism
ii. Principals can act to either stop the transaction or sue based on
the breach of fiduciary duty
iii. Example of the use of disclosure to reduce agency costs: a
director can transact with own corp and not be per se void if
1. Disclosure of interest/relationship + good faith majority
authorization by board/committee
2. Or disclosure to shareholders who good faith majority
vote
3. Or is fair when authorized/ratified
b. With disclosure
i. Lower standard of review: presumption that the transaction is
fair, burden on the plaintiff
c. Without disclosure
i. Higher standard of review: transaction must be shown to be
entirely fair, burden on the defendant
2. Executive compensation
a. Federal regulatory efforts
i. Sarbanes-Oxley 402: no loans to officers and directors
ii. Proxy Disclosure Rules: Beginning in 1993, the SEC required
companies to
1. provide tables setting out for annual compensation, long-
term compensation (i.e., options) and all other
compensation;
2. provide narrative disclosure of employment contracts
with management and a discussion of compensation
committee policies; and
3. a graph showing 5-year cumulative shareholder returns,
compared to the market and peer companies
iii. What was the effect of this disclosure? Compensation
Increases!
1. The SEC thought that more information would serve
to shame companies. Instead, CEOs, consultants and
compensation committees were able to make easier
comparisons of salary, and CEO salaries jumped.
iv. 2006 Executive Compensation Rules: The SEC again went after
executive compensation.
1. a single number capturing all the compensation;
2. enhanced disclosure of perks and related-party
transactions;
3. new Compensation Discussion and Analysis section,
designed to provide material information about the
compensation objectives and policies for named
executive officers without resorting to boilerplate
disclosure.
v. The new rules again try to make disclosure more clear. Will
this cause another spike in executive compensation? Probably
not, because there is so much institutional investor activism
working against it.
vi. RAFSA
1. Say-on-pay: the statute would give shareholders an
annual advisory vote on executive pay
2. Advisorybut has an important signaling effect. Because
you pay someone (the ISS?) to research an executive and
tell you how to vote. Maybe 15-20% at least will just
automatically go with ISSs assessment.and if directors
ignore majority shareholder votes, ISS recommends
voting against them!
b. Private initiatives:
i. Say-on-pay shareholder initiatives:
1. Shareholders get right to a non-binding vote on executive
compensation not less frequently than once every three
years.
2. Not less frequently than once every six years,
shareholders would have the right to decide whether the
vote on executive compensation would occur every one,
two or three years.
3. Public companies also will be required to provide
detailed disclosures, and a non-binding shareholder vote,
regarding "golden parachute" payments in connection
with an acquisition, merger or sale transaction.
4. There are about 12K listed public companies. Maybe 50-
100 fail their say on pay votes a yearbut then, the
market has been doing better. People are more pissed
about CEO paychecks when the stock is low to begin
with.
ii. Compensation "Clawback"
1. "Recovery of Erroneously Awarded Compensation"
directs the SEC to issue listing standard: "claw back" or
rescind incentive compensation for "executive officers" if
such compensation proves to be based on inaccurate
financial statements.
2. Applies to executive officers who received incentive-
based compensation, including stock option awards, w/in
3 yrs before the date of the restated financial
statements, so that any current or former executive
officer affected would have to return to the company any
excess compensation received as a result of the
inaccuracy.
3. Such restatement must be the result of a material
noncompliance with any financial reporting requirement,
a trigger that would be met almost automatically if in
fact a restatement has been effected.
4. Congress purposefully does not require in section 954 a
showing of any wrongdoing on the part of the executive.
iii. Independent Compensation Committees
1. Listing standards requiring that compensation
committees include only independent directors (already
required by NYSE and NASDAQ) and have the authority
to hire independent compensation consultants.
2. Requires companies to disclose whether or not the
compensation committee retained the services of a
compensation consultant, whether the advice of such
consultant raised any issue of conflict of interest and
how any such conflict was resolved.
3. The SEC has the discretionary authority to exempt a
public company or a class of public companies from
these compensation committee standards.
4. "Controlled companies" (more than 50-percent
controlled by an individual, a group or another issuer)
also will be exempt from the requirements of section
952.
iv. Enhanced Proxy Disclosure
1. Clarify proxy disclosures regarding compensation,
including requiring companies to provide charts that
compare executive compensation with stock
performance over a five-year period.
2. Clarify proxy disclosures regarding hedging arrangements
of equity securities of the company entered into by
employees and directors
3. Requires proxy disclosure of the reasons that a company
either has or has not designated the same individual as
both CEO and board chair.
4. New disclosures aimed at eliciting reasons that the
company believes that its board-leadership structure is
most appropriate at the time of filing.
v. Beside the above initiatives, some companies are working on pay
issues on their own: Pfizer says that it will meet with shareholders
regularly to discuss pay issues, and Aflac put a say-on-pay
proposal on its ballot in 2009.
3. Wall Street Pay: A Record $144 Billion
a. A 4% increase from the $139 billion paid out in 2009, according to the
survey. Compensation was expected to rise at 26 of the 35 firms.
b. Does say-on-pay even work? UK experience:
i. The best argument for a mandatory rule is that it would
destabilize pay practices that have produced excessive
compensation and that would not yield to firm-by-firm pressure.
ii. But pay continues to increase.
iii. Likely evolution of a best compensation practices regime which
would embed normatively opinionated practices that would ill-
suit many firms. There is some evidence of a UK evolution in that
direction.
c. This problem might be more pronounced in the US because US
shareholders are even more likely than their UK counterparts to delegate
judgments over compensation practices to a small number of proxy
advisors who themselves will be economizing on analysis.
4. Regulating [clearly] excessive pay
a. Fiduciary duties?
i. Typically, a compensation board acting in good with to the best of
their judgment wont get in trouble
b. Criminal charges?
i. Prolly not
ii. Only if you dont disclose stuff will you get in trouble
c. If anyone has a say on the right amount of exec pay, its the state court
i. but there can be business judgment deferrence (nearly
impregnable standard for board of director decisions that dont
involvepotentital conflicts of interest)
d. US Disney decision: The Disney directors were sued for allowing Ovitz to
be paid a compensation and severance package of $140 MM for about 1
years work.
i. Confirmed that directors may be personally liable for damages for
breach of an independent fiduciary duty of good faith, even in the
absence of self-interest or fraud, if they consciously disregard or
are deliberately indifferent to their duties.
ii. However, that the Disney directors (including Eisner) had not
breached this duty of good faith: may not be subject to
indemnification under Delaware law or to D&O insurance
coverage.
e. Contrast this to Germany, where excessive pay may result in criminal
liability.
f. In addition to the disclosure thing upping salaries, there was a tax thing
where non-incentive-based compensation over $1mil would be taxed
super heavilyso stock options and such got more popular. And at the
time, the market was good. Legislation can haveunintended consequenses!

8. Control.
a. Al Davis, Owner of the Oakland Raiders
i. formed a partnership with a few wealthy folks and the partnership acquired the Raiders.
ii. renegotiated the partnership agreement and took control. (Just needed enough votes on his
side...and/or enough other people who wont vote)
iii. Until 2005 he controlled the Raiders without ever owning a majority of the partnership
b. Control is about what you can get done, not the actual percentage you own. You just have to get
people to vote how you want them to.
c. The Benefits of Control
i. Controlling shareholders can extract gains from the company that others cannot.
ii. Some of the benefits of control extracted by the Rigas family:
1. used corporate money to buy more shares for themselves, which they then could
either sell for a profit or keep and vote. They were loaned the money.
2. Payment of $241,167,006 in personal margin loans and other debt of the Rigas
Family, consisting of $177,789,669 paid in 2002.
3. Exclusive use of luxury condominiums in Colorado and Mexico, and at least two
New York City apartments, all of which were paid for by Adelphia.
4. Use of approximately $12.8 million in Adelphia funds for the construction of a golf
club and golf course on land, located near Coudersport, Pennsylvania, and mostly
owned, directly or indirectly, by the Rigases.
iii. Theres no fraud with all of this shit unless you lie (which they did!) If they hadnt, would
have just been breaches of fiduciary duty. In some cases, you can give shareholders a bad
deal and still get away with it.
9. Protecting minority shareholders
a. Appointment rights
i. Cumulative voting
1. Default in CA but not DE, allowed most places
2. Typical plurality voting: One share, one vote. You will vote on a single slate of
directors. Say you own 100 shares: you get 100 votes on the slate
a. Standard voting procedure in contested elections: Lets say there are two
seats available. You nominate Davis and Burns. I nominate Plankton and
Stewie. If I own 9,000 shares and you own 10,000 shares, your candidates
would win, and Id have no seats.
3. Cumulative voting provides protection for minority holders.
a. We each get as many votes as there are available seats multiplied by the
number of shares we own.
b. You have 20,000 votes to spend while I have 18,000. You know you
dont have enough votes to win both, so you put all your votes with Davis.
c. They cant prevent you from getting one of the people you want since you
still have a good-sized chunk of shares can still get somebody on. Hooray
for math!
ii. Voting caps
1. An upper limit on the shareholder votes that may be exercised
2. This is presented as a minority protection device, but why is it probably most
valuable as an anti-takeover device?
b. Prohibiting control structures
i. Examples of minority control structures:
1. Pyramid:
a. Investor X obviously controls Operating Company by controlling the
holding companies, but investor Xs cash flow rights are only 60% of 60% of
60% of 60%.
b. Assume operating company were distributing a 1,000,000 dividend to its
shareholders: C would get 60% of 1,000,000 (600,000); B would get 60% of
600,000 (360,000); A would get 60% of 360,000 (216,000); and X would get
60% of 216,000 (129,600).
c. On the other hand, most jurisdictions permit pyramid structures.
2. Cross-holdings:
a. So many different companies have fingers in each others pies, and vice
versa, that its corps as a network controlling corps?
3. Dual-class structures:

a.
Being a voting bloc alone gives lots of control
b. The SEC doesnt like dual-class structures, as a corporate governance
thingtried and failed to make voting structure a listing requirement
c. Google shareholders couldnt vote off all their crazy employee perks
because they didnt have control
d. Germany, Italy and Japan prohibit shares with multiple votes, but US
permits them.
ii. EX: director elections?
1. Staggered or classified boards
2. Primarily put in for protection against raiders. You cant get rid of the board in one
year only.
3. Result: you must negotiate with the board which can secure higher value for
shareholders in a takeover.
4. Staggered boards may jsut just result in entrenchmentdirectors and the managers
who effectively put them there keep their jobs, and value-enhancing takeovers are
impeded.
c. Equal treatment
i. Poison pills
1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a
discount, dilluting how much power the acquirer had
2. (A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price
after the merger. No longer existsbecause it gave you rights in a different
corporation which is awkward and probably not legal?)
ii. Dividends
iii. Stock repurchases at above market rates (greenmail)
1. Investor acquires a bunch of shares and threatens a proxy fight.
2. The company, eager to avoid a proxy fight it thinks it could lose, agrees to buy that
investors held stock at a premium. (And then people see this as an awesome
strategy. Its like negotiating with terrorists)
d. Decision rights
i. Supermajority provisions, As long as the controlling shareholder doesnt actually have a
supermajority of the shares
e. Incentives
i. Trusteeship
ii. Equal treatment
10. Protecting employees
a. Easiest way? Dont let stockholders do whatever they want for their own betterment, because
maximizing profit can suck for employees.
b. Many jurisdictions (including US, UK, Japan) do not provide voting rights to employees.
i. But Japan tends to have a pro-employee corporate culture in generalworks them very
hard, but rewards them for it.
c. Other jurisdictions provide for co-determinationa sharing of the decision rights between
shareholder representatives and employee representatives
i. France: minority representation for employees in some cases
ii. Austria, Denmark, Czech Rep.: employee representatives make up 1/3 of the boardno
control, but a seat at the table
iii. Germany: quasi-parity co-determination. Germany clearly has the strongest employee
protections of any major jurisdiction.
1.
2. A management group and a labor group work together to determine what happens
3. Note that the board chairman is elected by the stockholders, and he or she has the
tie-breaking vote.
d. Incentives strategies: to whom does the board (and particularly, independent directors) owe its
duties?
i. Cause its duties that are actually actionable
ii. Typically, directors owe a duty to maximize returns for the company as a whole
iii. In practice this means that companies will focus on stock price. Duty to shareholders/comp
iv. You see directors arguing for the interests of non-shareholder constituencies
*employees/creditors/etc when they are trying to prevent an acquisition!
v. Why do we have a shareholder wealth-maximizing norm?
1. In some jurisdictions, like DE, when a company /is/ going to be sold, on its way,
Revlon duty applies: you MUST focus on the bottom line.
2. OH: in deciding whether or not a merger is good for a company, we can consider
what happens to workers, the communities, heck, society/economy as a whole,
instead of just a good deal for the shareholders.
e. Thinking of the rights of shareholders and other corporate constituencies, what are the economic
justifications for giving shareholders the most appointment and decision rights?
i. E is leveraged: gets a lot of gains while B just gets what they bargained for
ii. Bank will be as cautious as possibleall they want is to maximizes their chances of getting
their 5%.
iii. E, on the other hand, will take at least some risks to seek out a greater profit margin, though
they wont risk gambling everything away. Risk can be a good thing! It has opportunity!
Giving the residual claimant (Entrepreneur here) voting control maximizes the value of the
corporation. Parties therefore would generally want ex ante to give the residual claimant
voting control.
11. Protecting creditors
a. Giving shareholders appointment & decision rights can jeopardize the interests of creditors in several
ways:
i. Asset siphoning or dilution (draining out good ones, so theres less for creditors to rely on)
ii. Asset substitution (shareholders or management sell low-risk assets for high risk assets)
iii. Increasing the firms borrowing (take on more risks)
b. Why should corporate law protect creditors at all?
i. Limited liability makes it especially easy to cheat creditors. Easy to misrepresent, shift assets
into and out of corporate solution -- play bait and switch, etc.
ii. creditor protections benefit other stakeholders as well, including employees. Preventing
shareholders from looting the company helps anyone else with a claim on company assets.
iii.
c. Creditors are supposed to be paid back before stockholders.
d. Example: UBS financial services
i. Employees had strong incentives to engage in socalled carry trades in which they used UBS
capital to invest in highyielding mortgage-backed securities. UBS charged a very low cost of
capital and did not vary that charge based on the riskiness of the assets being purchased.
ii. The fee structure at UBS provided special incentives to buy riskier securities. The accounting
treatment allowed traders to book profits the moment the trade was executed with no
clawback based on subsequent outcomes.
iii. UBS provided insufficient incentives to protect the UBS franchise longterm. They gave lots
of current cash compensation to individuals engaged in transactions that exposed the
company to huge risks. They awarded bonuses that were measured against gross revenue
after personnel costs, with no formal account of the quality or sustainability of those
earnings.
e. Advertisement for a new bank No shareholders to pay, so long term value
f. So what do we do to protect creditors, besides contract?
i. Ex ante insolvency: (before bankruptcy occurs)
1. Mandatory disclosures
a. Disclosure is required by most (countries) jurisdictions, in accordance with
the jurisdictions accounting standards
b. In the US, disclosure requirements are federal (SEC), not state,
requirements. Most states require no disclosure, including Delaware,
which has never required periodic disclosures, even to shareholders.
c. California, however, does have a few basic disclosure requirements for
public companies
i. The name of the corporations independent auditor and a
description of non-audit services performed for the corporation
during the previous 24 months;
ii. A copy of the last report that the auditor prepared for the corp
iii. The annual compensation paid to each board member and each
executive officer, which includes preferential share issuances or
option grants
iv. Description of any loans that the corporation made to a board
member at a preferential loan rate during the previous 24
months, including the amount and terms of the loans
v. Indication whether any bankruptcy petition was filed the
corporation, any of its executive officers, or members of the
board of directors within the previous ten years
vi. A statement indicating whether any member of the board of
directors or executive officer of the corporation was convicted of
criminal fraud during the previous ten years
vii. A statement indicating whether the corporation violated any
federal securities laws or any securities or banking provision of
California law during the previous 10 years for which the
corporation was found liable and in which a judgment of over
$10,000 was entered; and
viii. If the corporation is a California domestic corporation, a
statement certifying that the information provided is true and
correct.
2. Capital regulation
a. how much $$ must be put into the corporation at the time of
incorporation, and how much can be taken out?
i. Par-value: bottom limit to the value of a share
b. Distribution constraints
i. Prevent dividends that would drain the company of assets needed
to satisfy creditors
ii. A restriction on the return of capital to shareholders can be
understood as protecting creditors against the risk of
opportunistic behaviour by the shareholders.
iii. Distributions to shareholders reduce a companys net assets,
making it more exposed to the risk of default. Creditors interests
can be harmed even if the company does not actually become
insolvent: such a transfer will still decrease the expected value of
their claims, whilst commensurately enhancing the combined
value of shareholders private wealth and their stake in the firm.
iv. Nimble dividend test: Delaware
1. The directors may declare and pay dividends upon the
shares of its capital stock, or to its members if the
corporation is a nonstock corporation, either
a. (1) out of its surplus
b. (2) in case there shall be no such surplus, out of
its net profits for the fiscal year in which the
dividend is declared and/or the preceding oen
2. Surplus can be in retained earnings.
3. Par value is the stated legal capital, which you cant really
touch in most cases.
4. You will never, ever be able to pay more than the total
shareholders equity, though you can always get at least
the retained earnings.
a.
c. Minimum capital and capital maintenance requirements
i.
ii. Public companies in Japan must have a minimum share capital of
about $100,000
iii. EU: more creditor-friendly
1. Public companies must have a minimum share capital of
at least 25,000 Euros.
2. Private company rules are left to the states. Many states
impose significant capital requirements on companies.
a. English company law imposes no minimum
capital requirement for private companies.
iv. Rare in the US except for banks, insurance companies, brokerage
companiesyou want those to have a cushion of cash on hand!
More debtor-frindly
v. So, bigger devod markets = lower capital requirements. Those
capital requirements are security for debt, for creditors
1. Arguments against minimum capital requirements:
a. Illusory protection to creditors and shareholder
w/ tiny capital threshcolds for huge companies
even
b. Capital maintenance doctrine is not a capital
adequacy requirement
c. Increased costs and unnecessary barrier to
incorporation
vi. Higher minimum capital requirements are associated with weaker
investor protection and less access to nance for small and
medium-size enterprises: hard to start shit up
1. Arguments for minimum capital requirements:
a. Protect creditors and prevents frivolous
incorporation
b. Facilitates borrowing
c. Minimum capital acts as a capital adequacy and
asset backing requirement.
d. Can be used to pierce the corporate veil & a risk
allocation device
vii.
ii. Ex post insolvency: standard-based duties
1. About loss of capital
a. SEC: requirement to call shareholders meeting if net assets (shareholders
equity) falls below half the companys legal capital
b. In some jurisdictions, a company must be put into liquidation if net assets
fall to a certain level (e.g., below the legal capital amount)
2. Why force firms to bankruptcy?
a. Reduce the ability of shareholders to act against shareholder interests as a
firm enters the zone of insolvency.
3. Note that zone of insolvency depends on the jurisdiction: sSome jurisdictions start
to impose obligations when the company is approaching insolvency because it has
reached the level of its minimum capital requirement. You dont want the
shareholders in a failing company to strip out everything of value before the
insolvency actually occurs and puts them at the back of the line!
a. In the US and UK, there is a shift in dutiesfrom shareholders to
creditorsonce a company enters the zone of insolvency.
b. In other jurisdictions, there is not really a shift in duties so much as a
general duty to act that is triggered when entering the zone of insolvency.
c.
4. Director liability/duties in the zone of insolvency
a. When we look at how various jurisdictions impose duties on directors, we
see that directors obligations differ
i. in when they apply (duties apply earlier in some jurisdictions than
othersin other words, the zone of insolvency may actually be
bigger)
ii. in the stringency of the standard of care.
b. The advice generally applies to UK firms as well, and much of it also applies
to firms in other jurisdictions as well.
c. Actions that increase stockholder return by impairing creditors claims
should be thoroughly scrutinized; stockholders should not be given
preferential treatment at the expense of creditors (e.g., directors should
not authorize and fund a dividend or a stock redemption at such time).
d. One creditor or one class of creditors should not be given preference over
another.
e. A reasonable effort should be made to learn all the facts before taking a
specific course of action; directors should genuinely believe that any
decisions made are in the best interests of the corporation in its entirety
(their decisions will be reviewed in hindsight in light of the effect of such
actions).
f. Transactions that would constitute a fraudulent conveyance (i.e., a transfer
for less than fair value) or a preferential payment to one creditor should
not be approved.
g. Directors should propose at each annual stockholder meeting a resolution
affirming that all business decisions and actions taken by the directors and
officers of the corporation were taken in good faith after an exercise of
reasonable care.
5. Fraudulent transfer/conveyance doctrines (they go by various names depending on
the jurisdiction, but the goal is the same)
a. Verestar and atc telecom
i. Verestar was founded in 1999 as a wholly owned subsidiary of
ATC for the purpose of owning and operating ATC's teleport
business. ATC initially capitalized Verestar with, an amount that
the Committee asserts was inadequate given the size and nature
of the teleport business.
ii. ATC and its directors and officers also allegedly held out to
creditors and the public in general that Verestar was a division of
ATC. A subsidiary may be wholly owned, but its a separate legal
entity that can fold on its ownwhereas if you say one of your
divisions is failing, thats you yourself thats failing, so youre on
the hook for your debts.
iii. , ATC also caused Verestar to engage in an extremely aggressive
acquisition strategy, secure in the belief that in the event the
teleport business failed, it could extract the value of the business
at the expense of Verestar's other creditors. Each of these
transactions contributed to Verestar's increased operating costs
and major revenue losses.
iv. , when it was clear that Verestar would ultimately have to be
liquidated, ATC's and Verestar's officers and directors (mostly the
same individuals) agreed on a scheme entitled Project Harvest,
a program to transfer as many of Verestar's assets and as much of
its value as possible to ATC before Verestar's inevitable collapse.
Under Project Harvest, ATC allegedly cut off new funding to
Verestar and began to siphon off its value. ATC also allegedly
caused Verestar to sell certain assets to ATC for little or no
consideration and to convey other assets to third parties and
divert the proceeds to ATC.
v. This was a fraudulent transaction.
b. *Worldcoms new board+ also agreed to examine its options to undo the
terms of a severance package and loan to ousted CEO Bernard Ebbers. A
person close to the matter said the 11-member board would like to treat
the severance package given to Mr. Ebbers as a "fraudulent conveyance"
The central issue is whether Mr. Ebbers's severance perquisites, which
included an annual payment of $1.5 million for the rest of his life and a
five- year schedule to repay the company his $408 million in loans, were
wrongfully influenced by a board member who received his own
perquisites in return. Director Stiles A. Kellett, who headed the executive-
compensation committee, was one of two directors who approved the
loans and severance package for Mr. Ebbers. He received a lease to use the
company's jet for $1 a month, plus $400 per hour for usage.
6. Shareholder liability: equitable subordination doctrine
a. Like fraudulent conveyance law, equitable subordination is transaction-
focused.
b. Comes into play only in bankruptcy and only when a major shareholder has
made loans to the corporation.
c. Basic issue is: when can bankruptcy court set aside controlling
shareholders loans and give 1st priority, preference in distributing
corporations assets or value to outside creditors?
d. Basically you cant turn your shares into debt so youll get paid sooner
e. Equitable subordination in the U.S. is a relatively soft remedy compared to
fraudulent conveyance: a fraudulent conveyance is void; whereas an
equitable subordination just means that you, the shareholder/creditor,
have to take one step back behind the other creditors.
i. In Germany, by contrast, shareholder loans are automatically
subordinated.
ii. In Italy they are subordinated only under certain conditions.
7. Veil-piercing
a. Limited shareholder liability allows huge sums of capital to be raised with
relatively little risk to the individual investors.
i. People would be less willing to serve as an officer or director if
they were liable for a corporation's losses, and so officers and
directors of corporations are generally not held liable for the
losses of the corporation.
b. (lifting) the corporate veil describes a legal decision where an shareholder
of a corporation is held personally liable for the debts of the corporation
anyway. This doctrine is also known as "disregarding the corporate entity".
c. Basis for limited liability
i. Corporations exist in part to shield their shareholders from
personal liability for the debts of a corporation. As the capital
needed to finance the largest projects grew, and along with it the
necessity of raising money, investors were reluctant to invest
because of the risk involved in essentially guaranteeing the entire
debt of the business entity.
ii. In modern times, the only large business entity that can result in
personal liability for huge sums of money is acting as a "name" for
a large insurance underwriting concern, such as Lloyds of London.
If, for example, any shareholder of General Motors were
responsible for the entire amount of its losses, it is unlikely that
any person would invest in the shares of the company (though
this is far from clear in the case where responsibility for losses
would be spread among thousands or millions of investors). As
such, shareholder liability serves a useful purpose in allowing
huge sums of capital to be raised with less risk to the individual
investors.
iii. Similarly, officers and directors of corporations, like other
employees, are generally not held liable for the losses of the
corporation. In a similar manner, people would be less willing to
serve as an officer or director if they were liable for the entire
amount of the corporation's losses (though not necessarily for a
fractional amount).
iv. However, for corporations with only one shareholder, officer and
director (often the same person), courts of law have found that
individuals could escape liability for their own misconduct by
holding assets in the name of the corporation. Unlike a large
corporation where no individual shareholder could possibly obtain
management authority over the corporation, closely held
corporations are potentially expressions of the will of a few
shareholders.
v. Historically, corporations with 10 or more shareholders are not
likely to be affected by piercing.
d. Basis for piercing
i. Before invoking the doctrine, a plaintiff must first establish an
independent basis to hold the corporation liable
ii. Courts will generally require that the corporate form was used to
commit fraud or perpetrate some other dishonest act
1. Want a unity of intereststhe corp isnt there to be
separate, more just cover for an individual
2. And then the harm/fraud/whatever that the corporate
form was used to perpetratelying cheating stealing!
iii. U.S. Courts have avoided making strict tests for piercing; instead,
courts look at the attendant facts and equities
1. You never see (big/)public companies getting their veil
piercedtoo many shareholders for unity of interests.
iv. Two kinds of corporate creditors
1. A tort creditorowed damages.
2. A K creditorcorp failed to fulfil or something. Have
more power to protect self (due diligence, etc) than tort
creditors do, but nevertheless are more likely to get the
veil pierced. Maybe its easier to find K misconduct than
that harm with a tort?
v. Basis for piercing the veil
1. If holding only the corporation liable would be singularly
unfair to the plaintiff and the shareholder's actions were
clearly designed to attempt to pass personal liability off
to the corporation.
2. Generally, courts are reluctant to rebut the presumption
of limited liability and pierce the veil. In most
jurisdictions, no bright line rule exists and the ruling is
rather based on case-by-case decisions.
a. In the US, different theories, most important
"alter ego" or "instrumentality rule", attempted
to create a piercing standard. Mostly, they rest
upon three basic prongs
i. "unity of interest and ownership",
ii. "wrongful conduct" and
iii. "proximate cause".
b. However, the theories failed to articulate a real-
world approach which courts could directly
apply to their cases. Thus, courts struggle with
the proof of each prong and rather analyze all
given factors.
i. This is known as "totality of
circumstances".
3. Generally, the plaintiff has to prove that
a. the corporation was set up to perpetrate a
fraud,
b. or the incorporation was merely a formality and
that the corporation never held proper
shareholder meetings to distribute profits as
dividends. This is quite often the case when a
corporation facing legal liability transfers its
assets and business to another corporation with
the same management and shareholders.
4. It also happens with single person corporations that are
managed in a haphazard manner. As such, the veil can be
pierced in both civil cases and where regulatory
proceedings are taken against a shell corporation.
5. Factors that courts often consider in veil-piercing cases:
a. So grossly undercapitalized that fraud is likely;
b. Failure to observe corporate formalities;
c. Intermingling of assets of the corporation and of
the shareholder;
d. Treatment by an individual of the assets of
corporation as his/her own
e. Failure to pay dividends
f. Siphoning of corporate funds by the dominant
shareholder(s)
g. Non-functioning corporate officers and/or
director
h. Concealment or misrepresentation of members
i. Absence of corporate records;
j. Was the corporation being used as a "faade"
for dominant shareholder(s) personal dealings;
k. Failure to maintain arm's length relationships
with related entities;
l. Manipulation of assets or liabilities to
concentrate the assets or liabilities;
6. Not all of these factors need to be met in order for the
court to pierce the corporate veil.
7. Further, some courts might find that one factor is so
compelling in a particular case that it will find the
shareholders personally liable.
e. Companies may want to divide up assets into separate companies in order
to limit liabilities associated with a particular entity, and to allow creditors
to more easily track assets (which helps in obtaining credit).
i. Sometimes subsidiaries are used inequitably, and courts will
engage in what is called reverse veil piercing, where the court
will pierce through the veil to the parent, then go back down into
another subsidiary to get assets to satisfy a claim.
ii. What concerns are raised if you introduce reverse piercing? Not
clear why you should penalize other creditors (overtones of first
half of jingle rule). One of the objectives of limited liability is asset
partitioning => apportion collateral among creditors.
iii. Easy way to apportion collateral among creditors.
iv.


12. Related-party transactions
a. Why allow related party transactions? (Remember that they are typically voidable and not per se
void)
i. Used to be, a trustee couldnt do any deals, even good ones, with the trust; now theyre
voidable instead or per se void.
ii. No other parties with whom insiders can transact
iii. Insiders know the firm better, and so are better positioned to maximize value
iv. Some related-party transactions are essential (compensation and trading)
b. History of related-party regulation
i. Trust law provided models
1. Trustee may not deal with trust property on his own account (transactions void)
2. Trustee may not deal with a trust beneficiary, absent disclosure and fairness
(transactions voidable)
ii. Over time, corporate law increasingly followed the trust beneficiary model (transactions not
voidable if fair and approved by disinterested directors), rather than the stricter trust model
(transactions with trustee are void without reference to fairness and approval by
disinterested directors)
13. Strategies for dealing with conflicts of interest in related-party transactions
a. Disclosure
i. Microsofts related-party disclosure from its 2008 proxy statement:
1. As in prior years, the Company has engaged in business transactions with Corbis
Corporation, a company that provides digitized images and production services. Mr. Gates is
the sole shareholder of Corbis. Microsoft paid Corbis approximately $730,000 in fiscal year
2008 as licensing fees for digital images to be used in Microsofts products, services, and
marketing materials. Those licenses were entered into at arms length, and are similar to
license agreements Microsoft enters into from time to time with other providers of digital
images. The terms of the Corbis transactions are established by Corbis and the business
group at Microsoft seeking to use the digital images. We believe the terms are no less
favorable to Microsoft than what are offered by Corbis to other large customers. Corbis also
uses Microsoft software in its business, and paid approximately $1.17 million in fiscal year
2008 for software license fees under our standard licensing program. Mr. Gates is not
involved in negotiating agreements with Corbis or setting price or other terms, either on
behalf of Microsoft or Corbis.
ii. Ohio and Delaware have similar conflicts statutes. There are basically 3 ways to keep a
transaction from being voided:
1. 1) disclosure + disinterested director approval;
2. 2) disclosure + shareholder approval;
3. 3) fairness and approval by directors or shareholders.
iii. RMBCA 8.61:
1. (1) directors action respecting the transaction was at any time taken in compliance
with section 8.62 [similar to Delaware & Ohiodisclosure + approval];
2. (2) shareholders action respecting the transaction was at any time taken in
compliance with section 8.63 [similar to Delaware & Ohiodisclosure + approval];
or
3. (3) the transaction, judged according to the circumstances at the time of
commitment, is established to have been fair to the corporation.
4. Note 3 to RMBCA 8.61 states that non-disclosure is an example of unfair dealing,
which suffices to make the transaction unfair even if the price is fair.
b. Dissolution and exit rights
i. Used only in closely-held companies in cases of oppression
c. Trusteeship: independent approval by board committees
i. When considering a related-party transaction, companies typically:
1. Discuss the possible transaction as a board, then
2. Form an independent committee to review and possibly approve the transaction
ii. When setting up the independent committee, companies should
1. Make sure the committee is truly independent
2. Special committees should hire their own outside counsel, consultants and bankers
(making sure there are no waived conflicts)
3. Make sure the process is impeccable
iii. The cautionary tale: Oracle
1. Stanford law professor and former SEC commissioner Joe Grundfest was not found
to be independent from other directors because 1) one of the other interested
directors was Grundfests professor, and 2) the disinterested and interested
directors had ties to Stanford.
2. The court declined to focus narrowly on the economic relationships between the
members of the special committee and the defendant officers and directorsi.e.,
"treating the possible effect on one's personal wealth as the key to an
independence inquiry." Commenting that "homo sapiens is not merely homo
economicus," Vice Chancellor Strine wrote, "what is important is that by any
measure this was a social atmosphere painted in too much vivid Stanford Cardinal
red for the [special committee] members to have reasonably ignored."
iv. Other jurisdictions also require disinterested board approval, although the requirements
often pertain to a more narrow range of transactions than in the U.S.
1. France and Japan are an exception, requiring disinterested board approval of all
non-routine transactions. France also requires disinterested board approval for
majority shareholder transactions. Japan requires disinterested approval for deals
between companies with interlocking directors
2. Disinterested board approval is also effectively mandated in corporate opportunity
cases in the U.S., U.K. and Japan, and sometimes also in Germany, France and Italy
a. When does a corporate opportunity exist?
i. Line of business test is most frequently used:
1. Is the opportunity related to the corporations activities
so that the fiduciary is essentially in competition with the
company?
2. Is Corbis in the same line of business as Microsoft?
Maybe, prolly not. But if Microsoft wanted to obtain
Word Perfect or something, thats iffier.
ii. These tests, like other equitable doctrines in corporate law such
as veil piercing, are quite malleable.
v. When can the fiduciary take the opportunity?
1. The corporation doesnt care (rejection)
a. Delaware General Corp. Law 122. Specific powers.
i. Every corporation created under this chapter shall have power to:
Renounce, in its certificate of incorporation or by action of its
board of directors, any interest or expectancy of the corporation
in, or in being offered an opportunity to participate in, specified
business opportunities or specified classes or categories of
business opportunities that are presented to the corporation or 1
or more of its officers, directors or stockholders.
b. Dreamworks does movies, and Spielberg might not want to do all his
movies through them, so the waiver is there so he doesnt have to like
share all his movie scripts with the company before getting the chance to
do them on his own.
2. The corporation cant take it (incapacity)
vi. In the U.S., the fiduciary bears the burden of proving that the decision to allow him or her
the opportunity was in good faith
d. Shareholder approval
i. No jurisdiction mandates shareholder approval for all related-party transactions
ii. Say-on-pay regulations do exist in many jurisdictions
iii. France and the UK go farthest
1. France: shareholder ratification of non-routine transactions
2. UK: shareholder approval for non-routine transactions with directors and major
shareholders
iv. Approval review standards: DE
1. Pretty outcome determinative. Likely to win if you disclosed, but will probably get
sued and might get forced to settle if only it was fair. Like rational basis v strict
scrut.
2.
e. Rules
i. Bans on loans to directors and officers
1. Only in France and the U.S. (one of Sarbanes-Oxleys provisions)
ii. Insider trading
1. Widely prohibited, and may be enforced through
a. 1) prohibitions on short-sale trading, and
b. 2) trading on material, non-public information
2. Is insider trading wrong?
a. For insider trading:
i. Market efficiency. Milton Friedman: You want to give the people
most likely to have knowledge about deficiencies of the company
an incentive to make the public aware of that. Better pricing will
result for the market as a whole.
b. Against insider trading:
i. Fairness: should we allow insiders to take advantage of
knowledge they obtain as a result of their position? (does this
sound in the corporate opportunity doctrine?)
ii. Further, will investors play a game if they know that it is rigged?
3. Generally, insider trading refers to insiders, such as officers and directors, trading
on material, nonpublic information. The term is also less accurately used to
describe trading by outsiders who trade on material non-public information in
breach of a fiduciary duty owed to the source of the information.
4. Insider trading was a factor (but perhaps not a major factor) leading to the Crash of
1929, which led to the Securities Act of 1933 and the Exchange Act of 1934.
5. UK Law:
a. The offence of insider dealing is set out in Section 52(1) of the Criminal
Justice Act 1993 (CJA). The elements of the offence have detailed
definitions which are contained both within primary and secondary
legislation. In short there are three ways in which an individual, possessing
inside information, can commit an offence:
i. dealing in securities
ii. encouraging another person to deal in securities or
iii. disclosing inside information.
b. The dealing offence and the encouraging offence both refer to dealing in
securities.
c. The CJA sets out certain circumstances that must exist for the offence to
be committed. The disclosing offence refers to the passing of inside
information but it is not necessary to prove that there has been any
dealing as a result of the information. The defences are either general or
specific.
i. The general defences identified are:
1. He did not at the time expect the dealing to result in a
profit attributable to the fact that the information in
question was price-sensitive information in relation to
the securities;
2. ii. At the time he believed on reasonable grounds that
the information had been disclosed widely enough to
ensure that none of those taking part in the dealing
would be prejudiced by not having the information; or
3. iii. He would have done what he did even if he had not
had the information.
ii. In addition Schedule 1 CJA contains separate special defences that
are designed to ensure that legitimate market practices are not
hindered. They are:
1. i. A defence that protects the normal activities of market
makers acting in good faith;
2. ii. Market information defences;
3. iii. A price stabilisation defence.
6. US
a. U.S. State law
i. States have used fiduciary duties [to the stockholders], corporate
opportunity and unjust enrichment theories to police insider
trading.
ii. Note also that these corporate law-based theories do not cover
outsider tradingwhat if a lawyer trades on material, nonpublic
information he obtains from a company client? State securities
laws may cover such activity, but not in all cases/states.
iii. A bit more like UK law
b. Federal law:
i. 10b-5 hunting knife surgery
1. Rule 10b-5
a. Cant via interstate commerce or national
securities exchange
i. employ any device, scheme, or artifice
to defraud, [including hacking!]
ii. make any untrue statement of a
material fact or to omit to state a
material fact necessary in order to
make the statements made, in the light
of the circumstances under which they
were made, not misleading, or
iii. engage in any act, practice, or course of
business which operates or would
operate as a fraud or deceit upon any
person [Lie, omit, or issue a half-truth]
b. in connection with the purchase or sale of any
security
2. Into this void steps federal securities regulation.
3. The current federal securities prohibitions on insider
trading can be broken into two broad categories:
a. classical theory
b. the misappropriation theory.
4. The key legal provision for both is Rule 10b-5 under the
Exchange Act. While Rule 10b-5 says nothing directly
about insider trading, the SEC has established the
prohibitions through litigation, persuading the courts
that insider trading involves deception.
5. Disclose or abstain if you want to trade
a. Employees, officers and directors have a duty to
disclose or abstain from trading
b. Constructive or temporary insiders (lawyers,
investment bankers, accountants) also have a
duty to disclose or abstain from trading
c. Can trade on specific, limited trading window
daystypically within a few days after major
financial disclosures, such as 10-Q and 10-K
filings.
d. Insiders can set up a trading program that they
do not control, so that they cannot be said to be
trading on the basis of material, nonpublic
information.
ii. Section 16 axe surgery that tried to remedy info assymetry
1. Section 16 is the only part of the Exchange Act that
specifically addresses the problem of insider trading,
despite Congresss particular concern with the problem
at the time of drafting. Section 16 covers trading in any
of the equity securities of the public companyeven
unregistered preferred stock.
2. Section 16(a) requires reporting of trades to the SEC by
designated insiders:
a. Persons who are beneficial owners of 10% or
more of any class of equity securities (you
probably have enough clout to ask for and
obtain info other shareholders couldnt)
b. Directors and officers of the issuer
3. Section 16(b) is the short-swing profits rule. Section
16(b) works mechanically, and has no scienter
requirement.
4. 16(b) requires disgorgement of profits made from
a. A purchase and a subsequent sale within six
months or
b. A sale and a subsequent purchase within six
months
5. In calculating damages, the SEC will match any
transactions that produce a profit
a. The lowest price in, highest price out
methodology therefore does not consider the
insiders net investment performance (e.g.,
losses during the 6 months) but instead focuses
solely on the pairs of transactions generating
the greatest profit calculation.
b. Section 16(b) is designed as a prophylactic
measure to block the most egregious forms of
insider trading where an insider trades based on
inside information. The provision is not
intended to penalize all insider trades e.g.,
insider trades where there is a little likelihood
that the insider has an informational advantage.
c. The net decline in share value is not a signal that
the insider had an informational advantage;
indeed, it may signal that the insider had no
informational advantage at all! Section 16(b)
seems much less justified on those facts, and
the damages formula weaker still.
6. So, this is kinda dumb
a. Over-inclusive: six months is a long timeyou
might have another reason to sell/buy, like a kid
being born or going off to college. And maybe
the purchase was a gift to you that you
obtained.
b. Under-inclusive: six months and a day, and
trading is fine! (You still may be liable under the
other bit of the rule, but, eh)
7. Compare.
a. UK tends to be more standard-based, US more rule-basedUS wants you
to follow the speed limit, while UK wants you to follow the flow of traffic.
But with insider trading, the UK is more like the US? Its a crime, so we
want clearer definitions. In much of the EU, there are lots of laws on the
books, but much fewer court-made standards, so they feel less bound by
precedent.
f. Standards

14. Fundamental Changes
a. When do we want shareholders to have a say in these big changes?
i. Usually shareholders dont care about everyday operations, but they care about things that
will fundamentally impact the value of their shares or that will effect their rights as
shareholdersturning into a classified board, major acquisitions, etc
b. The default: directors have the power to manage the affairs of the corporation
i. Example from Delaware:
ii. 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 . . .
c. When does corporate law give shareholders the power to make decisions? When the decisions
i. Are large relative to the participants stake in the company, and
ii. Create a possible conflict of interest for directors, even if this conflict does not rise to the
level of a self-dealing transaction
d. It is not really the size of the decision that matters, per se; what really matters is how economically
material that decision is to shareholders.
i. Example of the importance of certain transactions compared to others:
ii. In certain merger situations, in Delaware, not only do shareholders get voting rights, but
directors may also be held to a higher standard of review of there actions.
iii. Delawares Revlon duty kicks in when a sale of the company is inevitable; the board can no
longer try to stop a sale, but takes on the role of an auctioneer. The boards actions are
subject to a higher level of scrutiny when Revlon applies because of the importance of the
transaction.
e. Paramount Communications v. QVC
i. What is it about a sale of control that justifies a heightened standard of review of the
boards business judgment?
1. The acquisition of majority status and the consequent privilege of exerting the
powers of majority ownership come at a price: usually a control premium which
recognizes not only the value of a control block of shares, but also compensates the
minority stockholders for their resulting loss of voting power
2. There will be a controlling stockholder who will have the voting power to: (a) elect
directors; (b) cause a break-up of the corporation; (c) merge it with another
company; (d) cash-out the public stockholders; (e) amend the certificate of
incorporation; (f) sell all or substantially all of the corporate assets; or (g) otherwise
alter materially the nature of the corporation and the public stockholders' interests.
3. Once control has shifted, the current Paramount stockholders will have no leverage
in the future to demand another control premium. As a result, the Paramount
stockholders are entitled to receive, and should receive, a control premium and/or
protective devices of significant value.
ii. Compare this situation to a deal in which the same shareholders company was acquiring a
much smaller company (a whale/minnow merger). Are the shareholders of the acquiring
companythe whale shareholderslosing anything? Is their investment fundamentally
changing? Probably not, so they typically do not get voting rights (but the minnow
shareholders, do, of course).
iii. Control premium: people who dont want to sell and know you plan to make a profit will
hold out until you offer usually 15-20% above the going market price. And once you hear
that someone is interested in buying a company, stock price tends to go up when people
think it likely the deal will close.
iv. Higher scrut around mergers/acquisitionsshareholders dont have a lot of individual power
but do in the aggregate
v. Once you sell, youre outyou wanna hold out till you get that control premium. Make them
pay for the econ power. Or something.
15. Charter Amendments
a. Changing the balance of power in the company by changing the rules of the game.
b. A preliminary question: what is the rulebook?
i. In most European jurisdictions and Japan, the most important rules are kept in the charter
ii. In the U.S., some of the rules are in the charter, but many others are in the bylaws
1. Ex articles
a. Shares
b. No pre-emptive rights
c. Limitation on certain director liabilities
d. Mergers
e. Like a constitution
2. Ex bylaws
a. Voting
b. Directors meetings, qualifications, etc.
c. Officers
d. Share transfers
e. Access to books and records
f. More admin-y stuff
g. Like statutes
c. Who Amends
i. Most of EU and Japan: Supermajority of shareholders approve, charter is amended
1. A supermajority provision protects the minority by giving them veto rights
(provided the proportion of majority ownership is not to large).
2. Obviously these jurisdictions are more concerned with the majority
shareholder/minority shareholder conflict than the management/shareholder
conflict.
3. (Maj might be kiretsus or the state or conglomeratesand we want more than
whoever that nations big shareholders are to have a say here)
ii. US: Board initiates, majority of shareholders approve, charter is amended
1. based on dispersed ownershipit is unlikely that he board is controlled by a
majority that can push through whatever it wants.
2. However, in such cases (e.g., Google), minority shareholders dont have much say in
charter changes.
3. The U.S. is more concerned with the management/shareholder conflict, however,
and this structure protects against management entrenchment (at least through
charter changes).
4. Because many provisions end up in the bylaws, the ability of shareholders to initiate
bylaw changes has been a big issue in corporate law in recent years. About half
large US public companies allow shareholders to initiate bylaw changes, but most
are proposals only, not binding on the board.
5. Shareholders can generally make procedural changes, but not substantive changes,
to the bylaws
d. Regulatory review of charter amendments
i. In the U.S., the duty of loyalty serves the major role in policing amendments that would
harm a class of shareholders
1. Federal regulation by the SEC was found to be beyond its powers, although national
stock exchanges still exercise some regulation over some charter amendments that
affect shareholder rights (e.g., dual class recapitalizations)
2. Rewriting/changing a contract
3.
ii. European and Japanese exchanges also regulate certain charter amendments, although
some controversial activities, like dual class capital structures, are dealt with more through
share issuance rules than through charter amendment rules
1. Making a new contract with new consideration
16. Share issuance
a. Pre-emptive rights: the right to buy shares if the company decides to issue new shares (protects
against dilution of voting power)
b. While many jurisdictions mandate or provide pre-emptive rights as a default, the US does not
(although listing requirements may impose a shareholder vote in cases where there is a shift in
effective control). The U.S. strategy in dealing with potential conflicts caused by share issuance is the
duty of loyalty
c. The duty of loyalty can be more effective than pre-emptive rights because in many cases the minority
does not have the ability to take advantage of the pre-emption.
d. Preferred stock is almost never issued by public companiesthe US treasury and sovereign wealth
funds were given it by banks after the financial crisis. Usually pre-public companiesoften venture
capital stuff. When the next investors take notie, you want to avoid them voting in ways that would
hurt your own earlier investors interests.
17. Mergers
a. A bit of U.S. merger history
i. Today, you typically see only majority vote requirements (although shareholders can put in
higher requirements).
ii. Today there is no restriction on the type of consideration used in mergerscash-outs are
thus permitted. (Maybe we dont want to give you cash, we just want to give you money
and
iii. Appraisal rights were also put in state codes about a century ago. (More to come on
appraisal)
b. Shareholder power across jurisdictions
i. Remember that shareholders vote on only a relatively few matters; mergers are one of these
if the shareholders company is the target, or if the shareholders company is acquiring a
significantly-sized company (whale-minnow mergers dont require approval of the whale's
shareholders).
ii. Substantially all assets purchases typically do not require approval. Substantially all asset
sales do. The one would be a bigger change to your voting rights than the others.
iii. The minnow-shareholders who are selling out get voting rights; the whale-shareholders
dont. Likewise, buying out most of a company, the board gets to decide what to do with
your money.
c. Majority/minority conflicts
i. Freezing out the minoritygetting rid of shareholders you dont want
1. Short form merger
a. If you own above a certain percentage of shares (e.g., 90%), you can cash
out the other shareholders without their approval! Muahahaha! But
shareholders may be protected by appraisal rights?
ii. Tender offer (no coercive offers, independent special committee approval, and disclosed
fairness opinion)
iii. Going dark (delisting)
iv. Asset sales
v. Reverse stock splits (e.g., exchange 10,000 old shares must be exchanged for every 1 new
share; the value of the 1 share is equal to 10,000 old shares; fractional shares are cashed
out!)
1. Berkshire Hathaway, for example, lets its stock climb up into the hundreds of
thousands of dollars so that the little people cant buy in
2. Most companies arent like that: they want more liquidity, more trading. Like, for a
pension fund, you want liquid assets so that you can pay out=sell stocks without
having a terrible effect on the stock because its offset by all the other trading going
on. Also people like insurance companies, mutual funds are required to
3. So a stock split: when prices start to get too high, you split shares into fractions:
instead of 1 $80 share, you now have 2 $40 shares, which are much more liquid.
d. Managerial entrenchment
i. Board-centric U.S.:
1. Trusteeship (independent director review)
2. Decision rights (director elections)
3. Standards (duty of loyalty review)
e. Standard of Review
i. Controlling shareholder in place: special committees judgment
1. If independent, entire fairness standard with plaintiff having the burden
2. If not independent, entire fairness standard with defendant having the burden
3. Entire fairness review
a. Fair dealing
b. Fair price
ii. No controlling shareholder in place
1. Business judgment review
2. We assume they dont know the other guys, so we trust theyre not going to screw
over the shareholders
iii. All of this has to go through a board. Even a tender offer (offering tender for most /all of
outstanding tender shares) the board has to look at that and decide if its fair.
f. UK & Japan:
i. The law makes it somewhat easier to avoid going through the board, and the board is
banned from trying to frustrate the deal
g. Managerial nest feathering
i. Fear that shareholders will have good deals blocked by managers who dont want to lose
their positions and powerwe want a market for corporate control
ii. But corporate raiders can be scary. How can shareholders fight wasteful mergers?
1. Approval process (if approval is required) or ability to call shareholder meeting (not
very useful in the U.S., but may be useful in the UK, for example)
2. Use of gatekeepers with fairness opinions: Someone independent comes in to say,
hey, this is a good deal! As long as it was someone truly independent and honest
producing the opinion, non-lazy investment bankers tailoring properly and not
seeking future work from one side or the other.
3. Appraisal rights/remedy
a. Shareholder protections in mergers
i. Generally, shareholders get a vote on the deal
ii. Exceptions
1. Whale/minnow instead of traditional mergers
a. No approval necessary if increase in outstanding
shares does not exceed 20%
2. Triangular mergers (Acquirer shareholders dont vote)
3. Short-form mergers
a. Appraisal rights, but no voting rights
4. Asset deals
a. Voting rights (when substantially all of the
assets are sold), but no appraisal rights (no de
facto merger doctrine in Delaware)
5. Constraints on board discretion are reserved for a very
few fundamental transactions and instances: election of
directors, changes to certificate of incorporation, etc.
b. Appraisal rights, a/k/a dissenters rights, are typically available when
shareholder get a vote on a deal (although shareholders in short-form
mergers also get them)
i. The right makes more sense when corporations are closely held.
Big changes may alter investors expectations, and if there is no
ready market for the shares of the dissenter, the dissenter is stuck
with an investment she doesnt want.
c. How does appraisal work?
i. Dissenting shareholders file notice of dissent during a 20-day
window before the shareholder vote on the merger.
ii. Dissenting shareholders must not vote on the merger.
iii. Dissenters must file a petition for appraisal within 120 days after
the merger.
iv. The court conducts an appraisal hearing.
d. There are two major problems with the appraisal process, however.
i. First, it is difficult to use.
1. The shareholder will often have to pay out significant
funds in the beginning for lawyers to take the case
2. There will also be expert witness fees.
3. Proceedings take a long time, and the valuation process
leaves a lot to be desired.
4. After the action, dissenters may get some of their costs
covered by the corporation pursuant to The costs of the
proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the
Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares
entitled to an appraisal.
ii. Second, we have a large exception: the market-out rule.
h. Standards play a key role in evaluating control-party transactions in the U.S. and elsewhere
i. Often these are judged under various fairness standards (UK, US & France)
ii. In short-form merger situations (majority owns 90% or more), the available remedy is
typically appraisal rights (Japan, US, EC), which provides a fair price to aggrieved
shareholders
iii. In some jurisdictions, cash squeeze-outs may only be made once the majority shareholder
reaches 95%, and may be approved ex ante (France) or litigated ex post (Germany)
i. Protecting other constituencies
i. Creditors have less protection in the US generally; in the EU and Japan creditors in some
instances can demand new security or can demand to be cashed out
ii. Employees
1. EU: Acquired Rights Directive mandates consultation with employees
2. US: employees have no formal say, although in mergers and stock sales union
agreements are adopted by the surviving entity
18. Corporate Divisionsthe opposite of a merger
a. Might be to limit liability
i. Companies may want to divide up assets into separate companies in order to limit liabilities
associated with a particular entity and to allow creditors to more easily track assets (which
helps in obtaining credit).
ii. When this occurs, however, creditors may be concerned with how easily they are able to
access assets.
iii. Suppose that Toxic Toys has SoIAB Co in existence for years, then creates new LETC Co and
ALDUC Inc, and shifts assets into the new corporate division. How can creditors protect
themselves?
b. Not highly regulated in the U.S.duty of loyalty hangs over all such transactions
i. Exception: voting rights are given when all or substantially al of the assets are sold
c. EU law requires similar protection to that seen in mergers
i. E.g., creditors may require security or have their clams discharged
ii. In practice, the requirements are not always imposed, often because of transactional
engineering (e.g., structured as an asset sale)
d. Another reason why overall shareholders receive less protection when corporations are divided is
that divisions are often less materialsmaller, typicallyand that divisions have a lower risk of
agency costs. There is no last period problem for example (the managers taking their last chance to
take away as much as possible from the business).
19. Reincorporation
a. Youll usually be fine reincorporating into DE, ppl will like it, but other states like ND are less likely
b. Why reincorporate?
i. If you believe that law is a product, then you will want the best product available. Why
settle for bad corporate law?
ii. Corporate law is often thought of as either a race-to-the-top or a race-to-the-bottom.
People who believe in a more director and manager-centric corporate law are typically on
the race-to-the-top side. People who believe that shareholders need more power are on
the race-to-the-bottom side (see, e.g., http://www.theracetothebottom.org/)
c. The basic argument for competition for corporate charters among states (U.S.) and countries (EU)
i. States are incentivized to produce the best possible corporate law product; some states
(particularly Delaware) depend on the tax revenues from corporations
ii. Why are states incentivized? Because shareholders will pay more for better corporate law, in
the form of a higher share price
1. In other words, reincorporating in Delaware increased shareholder wealth. This
finding strongly supports the race to the top hypothesis.
2. If shareholders thought that Delaware was winning a race to the bottom,
shareholders should dump the stock of firms that reincorporate in Delaware,
driving down the stock price of such firms.
3. Additional support for the event study findings is provided by takeover regulation.
Delaware statute is the least restrictive and imposes the least delay on a hostile
bidder. Given the clear evidence that hostile takeovers increase shareholder wealth,
this finding is especially striking. The supposed poster child of bad corporate
governance, Delaware, turns out to be quite takeover-friendly and, by implication,
equally shareholder-friendly.
d. US

e. In the EU, reincorporation is not as straightforward
i. In the past, liquidation of the former company was sometimes required
ii. Now, companies may be merged or converted into a SE (which provides vertical regulatory
competition but not may eliminate vertical regulatory competition), which may then easily
migrate to other jurisdictions
iii. Also, reincorporations have been simplified in the EU through the Cross-Border Merger
Directive, although qualifications apply
iv. Note that it is not simple to get out of, say, Germanys co-determination rules under the
cross-border rules. The basic employee voice rules will carry over into the new entity,
although they can be modified if the companies and employees so agree. Even if the co-
determination system remains, however, the rules may be somewhat softened under the
new jurisdiction, thus explaining the high rate of German companies forming SEs.
20. Voluntary liquidation
a. Remember that creditors are first in line when a company is liquidated. Shareholders come last.
b. Sometimes there is enough gruel to go around. Can shareholders decide to liquidate the company?
i. In the EU, shareholders may call for a liquidation without board approval.
ii. In the US, shareholders do not have that power.
c. Part of the trick in managing a voluntary liquidation is knowing who to put in charge. You will worry
that shareholders will take advantage of creditors (in an insolvency setting, the court will oversee the
process).
i. In the UK, the existing management cant act a liquidator.
21. Significant transactions redux
a. When is a transaction significant enough to give shareholders and other non-management
constituencies a voice?
b. US: no general ruledepends on the type of transaction
i. Some statesselling all or substantially all of the assets. 51% of assets? Best ones? Most
important ones? Differs.
ii. Minnows get a voice that whales dont
iii. But everywhere: if you give up at least 20%of your outstanding stock to pay for your
purchase, your shareholders do get a say, because youre diluting their voting rights.
c. Germany: decisions affecting a major part of the companys assets and having a highly significant
impact on the value of shareholders rights. Very squishy rule.
d. UK: Any transaction involving 25% or more of a companys assets, profits, gross capital or where
consideration is 25% or more of the market capitalization of the company
22. Control Transactions
a. Merger: going through a shareholder vote (oftenand in the US, alwaysafter board approval)
b. Control transactions include mergers, but also include direct acquisitions of stock by the acquirer
without employee the corporate mechanism (e.g., a tender offer)
c. Control rights usually invovle a pairing together of cash flow controlecon rightsand cotnrol in the
sense of voting power. Mergers will certainly involve that.But there are other control transactions
(assets, esp. if a lot) or stock transactions or stuff.Well focus on stock transactionswanna buy
everythign woo!
d. Acquiring a company without going through a merger: several possibilities
i. Acquisition of shares on the open market:the slow, relatively simple way.
1. Preferably buying up the floatas much of the loose stuff as you can without
upping the price too much
2. Still has regulatory constraints once you reach a threshold
3. US: 5% and above you have to file with the SEC what youre going to do with the
shares and where the money for it came from (if youre borrowing the money,
youre probably gonna try to turn around a quick profit instead of sticking around
for the long haul, might gut R&D or such)
ii. Acquisition of a control block from a single shareholder (or just a few)
iii. Tender offer to all shareholders (Hey errbody, tender all your shares to me for cash/junk
bonds/ etc!)
e. Icahn example
i. Classic controlbuy enough shares to outright pick all the directors. Icahns usual strategy is
to get enough shares to be influentialyou might not properly own the directors but you
can get them to listen to you.
ii. Proxy fights? Well give you a seat on the board if you stop trying to buy up everything on
the open market! Nope. No big shareholders want to sell, but offers a pretty big tender
offer, tried to get them (or his lenders?) to waive some protective provision? .even if he
gets the waiver, there would be a poison pill in place if he got more than 20% so that every
other shareholder would get to buy cheap stock, decreasing the value of what hed bought.
iii. In 2009 he made a tender offer for Lions Gate debt. Carl Icahn then launched a tender offer
to increase his equity stake in Lions Gate Entertainment to about 30 per cent, which would
make him the largest shareholder.
iv. made a $79m offer worth $6 a share but must first negotiate a waiver with the companys
lenders to avoid accelerating payments on the groups debt. The offer caused a spike in
Lions Gate shares, which rose 6 per cent in afternoon trading to $5.57. However, there are
obstacles in Mr Icahns path to increase his stake.
v. Lions Gate, which did not respond to requests for comment, has a change of control
mechanism on its revolving credit facility, so any shareholder building a stake above 20 per
cent automatically triggers a default, allowing lenders to accelerate maturity of the debt. It
is our understanding that any such event of default could be avoided through a waiver by
the lenders ... or through Lions Gates prepayment or elimination of the senior revolving
credit facility, Mr Icahn said in a statement.
vi. Icahn has grown frustrated at another defensive stance taken by the management: it
proposed a poison pill defence, which would have diluted the value of other holdings in the
company in the event of Mr Icahn increasing his stake above 20 per cent. Mr Icahn said he
was dismayed that the board had chosen to implement a poison pill.
vii. I believe these tactics serve only to strip shareholders of an opportunity and entrench
management, he said. Lions Gate previously criticised our tender offer for being partial.
That is no longer the case.
viii. Later, Icahn increased his bid to $7. Just yesterday, Mr Icahn launched a renewed hostile bid
for Lions Gate just 24 hours after the end of a 10-day truce between the activist investor and
the Hollywood studio. Mr Icahn made a hostile bid worth $6.50 a share less than the $7 a
share offer he made a few months ago, which Lions Gate at the time described as
financially inadequate. Mr Icahn had, until Tuesday, steadily amassed a stake of 37.3 per
cent. But within hours of his announcing his bid, Lions Gate revealed that it had reduced its
debt, converting about $100m of its bonds into equity. The move dilutes shareholders
stakes in the company and cuts Mr Icahns stake from 37.3 per cent to about 33.5 per cent.
The bonds were held by Kornitzer Capital Management and the conversion into equity gave
the company a stake in Lions Gate of about 9 per cent. But in a separate transaction,
Kornitzer sold its new Lions Gate shares to MHR Fund Management, which is controlled by
Mark Rachesky, a long-time friend of Mr Icahn. The deal lifted Mr Racheskys stake in the
group from 19.7 per cent to 28.9 per cent.
ix. The increase in his stake means Mr Rachesky could potentially block Mr Icahns hostile bid or
any subsequent offer he makes for Lions Gate.
f. What are the agency issues at play here?
i. Note that we have no controlling shareholders. Lions Gate is publicly traded. The largest
shareholders are 1) Icahn at 33.5%, and 2) Icahns former CIO Mark Rachesky at 28.9%.
Despite their past (or because of it?), the two are not friends in this transaction.
ii. Further acquisition of stock by Icahn will definitely cost some directors (and probably
management) their jobs. Shareholders may worry that managers will entrench themselves
at the shareholders expense.
iii. Alternatively, managers may accept a bad deal because they get a golden parachute in the
event of a change in control. That doesnt seem to be an issue here.
iv. Icahn wants to spend as little as he can on all our shares so that hell make a greater profit.
As shareholders, we dont have as much info as the managers; Icahn probably has second
best to them. Can we trust either of them? Golden parachutes (if theres a takeover and you
get kicked out with a big chunk of money) might encurage the managers to lie about it being
a good deal for us, especially if theyre unlikely to win in the long run. But if they think they
can, they might try to stay in place een if he would be good for us.
v. The law wants to help us wwith this.
vi. But note that Carl Icahn may not be presenting a good deal to shareholders; if management
makes it easy for him to acquire the company, he will obviously do it as cheaply as he can.
vii. How can acquirers get people to accept too little for their stock?
g. Finishing the story
i. SEC Charges Lions Gate With Disclosure Failures While Preventing Hostile Takeover
ii. Washington D.C., March 13, 2014 The Securities and Exchange Commission today charged
motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately
disclose to investors a key aspect of its effort to thwart a hostile takeover bid.
iii. Lions Gate agreed to pay $7.5 million and admit wrongdoing to settle the SECs charges.
iv. According to the SECs order instituting settled administrative proceedings, Lions Gates
management participated in a set of extraordinary corporate transactions in 2010 that put
millions of newly issued company shares in the hands of a management-friendly director. A
purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who
had been locked in a battle for control of the company for at least a year. However, Lions
Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent
managements control, instead stating in SEC filings that the transactions were part of a
previously announced plan to reduce debt. In fact, the company had made no such prior
announcement. Lions Gate also represented that the transactions were not prearranged
with the management-friendly director, and failed to disclose the extent to which it planned
and enabled the transactions with the expectation that the director would get the shares.
h. Tender Offers
i. Hypo
1. Gordon Gekko, the managing partner at the leveraged buyout firm Slash/Burn Fund
LLP, comes to you seeking advice on launching Slash/Burns tender offer for
Sleeping Bear
2. tender offer for 51% of the Sleeping Bear common stock at $20 per share, to be
followed by a squeeze-out merger to eliminate the remaining 49% of the shares at
$15. (Sleeping Bears stock has been trading in the $12 to $13 range.)
3. announce Slash/Burns offer Friday afternoon after the markets close with the offer
to remain open until close of business on Monday.
4. Shares tendered into the offer will be taken up on a first come, first served basis.
5. Once tendered the shares cannot be withdrawn.
a. The provision precluding withdrawal greatly reduces the risks from a
competing bidder trumping Slash/Burns offer.
6. Call CEO privately and offer him $22 for his shares.
a. would also put a large block of shares in his hands, putting him
considerably closer to the magic 51% number.
7. All of these terms were permissible prior to the Williams Act. And Slash/Burn does
not need to disclose anything about its plans for Sleeping Bear after the merger.
8. Gordon will want to voluntarily disclose his plans for the back-end merger to freeze
out the minority shareholders because it will push shareholders into tendering. But
he will want to keep all of his other plans to himself.
9. This is not necessarily a bad deal from the perspective of Sleeping Bears
shareholders. This is only a bad deal for Sleeping Bears shareholders if accepting
the deal carries a substantial opportunity cost that another bidder would come
along with better terms, or that Ben would be able to create more value if Sleeping
Bear remained independent.
10. Note that the incentive to tender, and to do so as soon as possible, exists whatever
one thinks of the merits of the offer, assuming one thinks that other shareholders
are likely to tender. Even if most shareholders agreed that the offer was a bad deal,
there is no collective action mechanism that would allow them to resist the tender
offeror. Once shareholders start to believe that others may tender, this becomes a
self-fulfilling prophecy.
ii. So what do we do?
1. Federal law yells at you now. Have to leave the deal open for 20 business days, no
sweetheart deals for the CEO
a. DE talks about owing fiduciary dutiescontrolling shareholders do owe
them, but non-controlling people who are trying to takeover dont owe
squat!
2. If a golden parachute were to kick in for supporting the deal
a. The CEO is stuck with his duty of loyalty! Muaha. Have to solve things
fairly.
i. What are some of the rules we use to mitigate the problems of 1) managerial opportunism on the
one hand, and 2) acquirer opportunism on the other hand?
i. Managerial opportunism solutions
1. Decision rights: in most jurisdictions, shareholders have the right to decide directly
to accept an offer or not (but without regulating acquirer opportunism, this would
be a bad strategy); however, depending on the jurisdiction, management may make
it more difficult for an offer to be made . Might get shareholders to do semiposion
pills, stuff to kick in if the deal turns out bad only?
2. Most EU jurisdictions, notably the UK, employ a no-frustration rule:
a. During the course of an offer, or even before the date of the offer if the
board of the offeree company has reason to believe that a bona fide offer
might be imminent, the board must not, without the approval of the
shareholders in general meeting:
i. (a) take any action which may result in any offer or bona fide
possible offer being frustrated or in shareholders being denied the
opportunity to decide on its merits; or
1. (i) issue any shares or transfer or sell, or agree to transfer
or sell, any shares out of treasury;
2. (ii) issue or grant options in respect of any unissued
shares;
3. (iii) create or issue, or permit the creation or issue of, any
securities carrying rights of conversion into or
subscription for shares;
4. (iv) sell, dispose of or acquire, or agree to sell, dispose of
or acquire, assets of a material amount; or
5. (v) enter into contracts otherwise than in the ordinary
course of business.
b. Basically, You just cant get in the way! If someone comes in and tries to
make a crappy deal, you have to let them.
3. More socialist countries, they allow more of the tender offer stuff. Engines are
roughly equivalent in perormance for the different cars they serve, but niehter is
much much better than the other, or else wed only use one. These things may be
different in the guts of their systems, but they achieve te same basic stuff once you
add in the tax code and employment regulations and suhc. We protect employees
less with employment law, but more with corporate; the EU tends to protect more
with corporate and less with EU.
4. Shareholders can also be given the right to decide on defensive measures (this
happens to some degree even in the US; Lions Gate received approval from
shareholders to introduce a poison pill, for example. The text labels this an
example of joint decision-making)
5. Standards: ex post review of decisions (or injunctions to prevent the effect of
decisions, as in the ITT/Hilton case) provide some protection against managerial
entrenchment and help set the rules of the game for subsequent deals
6. Removal rights are now more important in the US than they have been since before
the 80s as we have seen a shift from classified boards to annually elected boards
7. Reward strategies: Golden parachutes can serve a purpose! (at least in the U.S.)
Theyre a double-edged sword. Youre giving someone something for doing no
more work and they can encourage recipients to stick their shareholders with bad
deals, but they also mean that managers might care less about entrenching
themseles in their cushy jobs.
ii. What about when we have a controlling shareholder? What are the risks to minority
shareholders and other constituents?
1. Looting
a. Harris v. Carter
i. It is established American legal doctrine that, unless privileged,
each person owes a duty to those who may foreseeably be
harmed by her action to take such steps as a reasonably prudent
person would take in similar circumstances to avoid such harm to
others.
ii. Controlling shareholders may not be reckless drivers.
b. Warning signs that your buyer may be a looter:
i. *S+uspicious circumstances in a corporate control transfer can
include, but are not limited to, the following criteria: 1) an
excessive or inflated purchase price offered for the control shares,
incommensurate with the inherent value of control stock; 2)
awareness on the part of the seller that a buyer intends to finance
the purchase with the acquired corporation's own assets; 3)
insistence by a buyer that corporate assets be converted to cash
and made available either prior to or immediately after the
transfer; 4) notice of a buyer's reputation for fraudulent conduct,
including prior acts of looting or participation in other fraudulent
activities; 5) notice that a buyer lacks any source of adequate
funds to finance the purchase.
2. Sale to a party that simply intends to run things in a way that harms constituent
interests
iii. Investor protection
1. Securities vs. other products
a. Why are securities different from other products?
i. Importance of the capital market and investments for the
economy: A well-functioning capital market will direct capital to
their highest value uses, to the benefit of all in society.
ii. Importance of investments relative to other decisions people
make: large amounts of cahs in like retirement funds
iii. Collective action problems among investorswidely dispersed
and all need info that might not want to share to benefit others if
it takes up resources
iv. Investments are intangible with asymmetric info: much harder to
value
1. right to receive dividends from the corporation
generally discretionary with the board;
2. right to vote may lead to change in control; and
3. right to receive something in case of liquidation.
v. Does paternalism justify securities regulation? Taking too many
risks or too fewif behavioral biases cloud investors, should the
government step in to protect investors from themselves?
b. Suppose you buy Aromatrim. It works for a whileyou are sickened for a
few meals, but after a while you are so hungry that the smell of rotting
food does not discourage you from eating. How do you feel about your
purchase? Suppose that you are the chief policy person at the FDA. Is
there anyway you can regulate to protect consumers? What possible
regulations exist and are they are cost effective in the case of Aromatrim?
i. Should we provide merit regulation e.g., having regulators
evaluate such products before they are sold?
1. Benefits The benefit might be rather small. Suckers are
saved some money.
2. Costs It may work for some people.
ii. Should we force disclosure? Maybe costly confusion info
overload? How about gun-jumping-style rules? (Among other
things, the gun-jumping rules prohibit many types of disclosures
that may condition the market for the securities of a company
about to sell into the public market.; also provide for the
distribution of a mandatory disclosure document (the
prospectus). Along the same lines, we could prohibit sales until
prospective customers first receive the 100-page disclosure
document described above and then are given sufficient time to
read the disclosure document (A day? A week?). We could also
impose antifraud liability to ensure the accuracy of the disclosed
information. Antifraud liabilitythis is usually a given for most
jurisdictions.
1. Benefits The benefit again might be small. On the one
hand, disclosure, gun-jumping rules, and antifraud
liability do not ban Aromatrim outright. So the danger of
regulatory mistake inherent in merit regulation is
reduced. On the other hand, people can determine for
themselves for a mere $50 whether Aromatrim will work
for them extensive pre-purchase disclosures may not
assist consumers that much in this endeavor. Many
people are not going to read a prospectus just to buy
Aromatrim!
2. Costs Disclosures may be expensive particularly for
small business owners like Aromatrim. The high cost of
disclosure, etc. may in effect drive many smaller
manufacturers out of business. Even if Aromatrim is able
to afford the high cost without going out of business, the
gun-jumping requirement of delay, etc. may hurt
Aromatrims ability to advertise and expand its market.
Aromatrim is not the only one to bear such a cost. To the
extent we cannot identify good and bad diet aid
manufacturers ex ante (and hence why we choose
disclosure as opposed to outright prohibitions), many
good diet aid manufacturers will be constrained or
eliminated by the high costs of a disclosure regime.
iii. Perhaps the government should (at taxpayer expense) provide
diet aid brochures and classes to the public, attempting to
educate the public as to the varying quality of diet aids sold in the
U.S.?
1. Answer Both the costs and benefits of this approach
are less than other means of intervention (merit
regulation or disclosure-based regulation). Printing
brochures and holding some classes will be cheaper than
having companies develop large disclosure documents or
excluding some candy manufacturers. However, benefits
are lower, too, to the extent that education will not
protect consumers who: (a) ignore the educational
materials; or (b) even with education still purchase
Aromatrim. Moreover, most people have an intuitive
sense of the kinds of candy they like and the risks
inherent in buying an unknown brand of candy.
Education may not improve on this intuitive
understanding.
c. Key factors:
i. Small manufacturer regulation is extremely costly on a per unit
basis (to the extent regulation has a fixed cost component, as it
typically will).
ii. Is there a consensus on what works? If people disagree on
whether Aromatrim works then it doesnt make sense to prohibit
it. Regulation becomes more plausible if there is a consensus
regarding the goal of regulation.
iii. The amount that consumers have at stake here we have $50.
Even with disclosure consumers wont pay much attention. And
even if consumers are harmed by buying a bad product, the harm
is small and consumers can self-protect by not buying it anymore.
Aromatrim will quickly be driven out of business.
iv. If we regulate too much making the purchase of diet aids slow
(e.g., gun-jumping rules) and expensive (given the added cost of
regulation) consumers wont want to buy any. Too much
regulation can easily reduce consumer welfare (assuming any of
these work).
v. Other protections may exist for consumers. For example, perhaps
community pressure can force Aromatrim to make a refund.
d. Hypothetical #2 Aromatrim has finally hit the big-time. In order to go
national, it needs to raise $40 million. It does so through a public offering
of common stock for Aromatrim Inc. to a wide variety of shareholders
throughout the United States. Morgan Stanley, a Wall Street investment
bank, assists in the offering. After going public Aromatrims securities
are to be traded on NASDAQ. Shortly after the IPO, word about the
ineffectiveness of Aromatrim spreads. Demand drops. And Aromatrims
business and stock become worthless.
i. Question How have things changed with the purchase of
securities instead of Aromatrim? Is there more or less danger to
public investors buying an ownership interest through Aromatrim
stock compared to the person who just buys the salt-water
Aromatrim?
1. Intangible product. Unlike the actual diet aid, securities
are intangible. Securities provide value only through the
rights they provide investors. Many students will know
something about common stock. *Perhaps ask the
class if anyone owns any common stock]. Ownership of a
share of common stock gives an investor pro rata rights
to a firms cash flows (in the form of dividends), assets in
liquidation, as well as to vote to elect the board of
directors (among other voting issues such as approval of
mergers, etc.)
2. Bigger chance for fraud (investors putting more money
on the line and are greedy so they may ignore red flags).
3. Perhaps greater danger to capital market (e.g., the
capital market is more important to the economy than
the diet aid market moving capital to their highest
value use increases overall economic growth).
4. Homogeneous product (stocks) with larger number of
buyers who want similar information leads to a collective
action problem. No one investor will fully internalize the
benefit of negotiating for information disclosure so may
not engage in the cost of negotiation.
ii. Question If you are going to regulate what do you do? Will
any of our policy levers assist the public investors? More so than
for diet aid consumers? Is it worth the cost? Consider the
following policy options:
1. Mandatory disclosure? With a large number of public
investors, it will be difficult (and costly) for any one
investor to negotiate for disclosures, i.e., the one
investor will not internalize the full benefit to the group
and thus not negotiate that hard. In addition, there is a
possibility of duplicative information research by
dispersed investors. Mandatory disclosure will reduce
this duplicative information research at least with
respect to firm-specific information about Joes
confections.
2. Gun-jumping? Here the risk of irrational exuberance
is considerably more acute. But the costs to
informational efficiency are correspondingly increased if
we move to suppress disclosure in the public capital
markets.
3. Antifraud? Still critical, but the mechanisms may need
to be adjusted to deal with the collective action problem
facing dispersed investors. Will one individual investor
holding only a fraction of the shares find it worthwhile to
incur the large costs of suing the issuer for fraud? We
discuss the class action form of litigation prevalent in
securities fraud litigation in Chapter 5.
4. Merit regulation? The costs of mistake are substantial
here, given the risk of drying up capital for new and
innovative businesses in the economy.
5. Education? Most public investors know less about
investing than the general public knows about candy. So
education may help investors. But, are investors
receptive to education or are they swayed by animal
spirits and greed to make poor decisions in the capital
markets? Assumptions about investors and how they
behave are critical for how we structure securities
regulations. Students should be on the lookout for
implicit assumptions about investor behavior and how
these assumptions may change in different areas of
securities regulation.
iii. Question What if we replace Aromatrim with Pfizer any
difference in how you regulate?
1. Answer Pfizer is a larger company with a long record of
trading in the public markets. There will therefore be a
large number of sophisticated institutional investors
actively trading in Pfizer stock. Arguably, there will be an
efficient capital market for Pfizer stock. If so, then at
least publicly available information will be incorporated
in the stock price. This means that investors can then
look to the stock price instead of any information
disclosure for protection. Second, many analysts will
follow the company. If we can trust the analysts, a
somewhat dubious proposition, then they may be an
alternate source of information for investors. Note,
however, that mandatory disclosure may still be helpful
in subsidizing the research by analysts. But if the
analysts and institutional investors are the primary
influence on security prices this may influence our view
of the appropriate scope of mandatory disclosure.
Sophisticated investors may not value the same sorts of
disclosures as would the archetypal widows and
orphans.
2. Mandatory disclosure
a. Bigger, fancier purchases mean you as a consumer want more disclosures.
b. Incentives to disclose: money
c. Incentives not to disclose?
i. Coordination problems: a common standard of disclosure is
important and voluntary disclosure may fail to provide this
standard, but are we sure that the standard chosen by the
regulator is the proper standard?
1. Basically these are reviews of the securitybut how do
we know if its compared to a good standard?
2. Collective action problems with restaurants---its a
crappy place to eat, but you wont know that until you
get thereunless there are online reviews!
ii. Agency Costs: because managers' compensation is tied to higher
stock price, managers have an incentive to delay or conceal bad
news about the firm, but investors will assume that no news is bad
news, so managers would not benefit much by hiding adverse
information.
1. Conflict minerals rule: an SEC standard created recently
that forces companies to disclose their use of like
potential blood diamonds, so that when you buy your
computer or whatever it isnt helping to fund child
soldiers and shit.
2. Businesses do not like that rulesometimes they might
be getting the material from a supplier who cant get it
anywhere else. (They might like it more if it were a
voluntary disclosure they could brag about.)
3. Supposed to be a naming and shaming kind of thing
maybe consumers will stop buying from you until you
change!
4. Should we have more ethical disclosure things? Child
labor? Connections to Israel (some people want that?)
Would more knowledge actually hurt the consumer? It
can have a price impact, because you have to spend time
investigating and shit?
5. The downside of disclosure? If youre an investor and
given a hundreds-of-pages long docutmenteventually
you give up and stop reading because its just too
overwhelming to find what you want to know! So how
about something like the FDA food labels? New
development, tagging some of the inforamaiton so you
can search for what is relevant to you
iii. Accurate pricing of assets (allocative efficiency): accurate pricing
insures that capital will be allocated to its best use, which benefits
the economy as a whole, but market prices may not reflect
fundamental values, and speculative trading may erode any
benefits. (Things like stock market bubbles ruin efficiencies
iv. Positive externalities: information produced by one firm for its
investors may be valuable to investors in other firms, (e.g., a
companys statements may reveal something about industry in
which it operates), but voluntary disclosure, however, is likely to
generate the same positive externalities. Does mandatory
disclosure significantly increase these third party benefits?
1. Something you do that helps other peopleif Microsoft
discloses, that helps yahoo investors, because they can
compare competing practices and funding and shit! But
nonmandatory disclosure would help as much as the
mandatory.
2. Negative externality: some kind of harmful effect that
comes from what youre doing that you dont
compensate for. Like, acid rain from unchecked factory
pollution. Or the burning river.
v. Duplicative Information: mandatory disclosure reduces wasteful,
duplicative search costs incurred by market professionals, but
again, what is the optimal level of disclosure? Has the SEC chosen
an appropriate level of disclosure to reduce duplicative search
costs? Does forcing certain disclosures compromise a companys
competitive position?
vi. Two big risks of mandatory disclosure (having to reveal
information), besides the costs:
1. Competitors might be able to exploit that info
2. Plaintiffs attorneys! Maybe what you disclose is
materially misleading and then you get your ass sued.
3. (But once youre public youd have to give this info out
anyway)
d. Materiality: Why is the concept of materiality important?
i. Disclosure requirements
1. In certain areas of Regulation S-K, which tells us what to
put in our periodic reports, materiality is referenced
explicitly to help companies determine what information
is specifically required to be disclosed. However, there is
no general requirement that companies disclose all
material informationjust the information that the SEC
tells a company to disclose.
2. In certain areas of Regulation S-K, materiality is
referenced explicitly to help flush out what information is
required to be disclosed. For example, Item 101 of
Regulation S-K (Description of Business) provides that
issuers must: Describe the general development of the
business of the registrant, its subsidiaries and any
predecessor(s) during the past five years . . .. Information
shall be disclosed for earlier periods if material to an
understanding of the general development of the
business. However, there is no general requirement
that companies disclose all material information.
ii. The second area where materiality is important is in flushing out
the mandatory disclosure requirements of the securities laws.
1. --The SEC disclosure filing forms (i.e., annual Form 10-K,
quarterly Form 10-Q, etc) refer to Regulation S-K that
represents the SECs ex ante determination of what
information investors desire. Whether or not an
information item is material, if an SEC filing form in
conjunction with Regulation S-K requires the disclosure
then failure to disclose the information will lead to
liability (although not necessarily antifraud liability).
2. --In certain areas of Regulation S-K, materiality is
referenced explicitly to help flush out what information is
required to be disclosed. For example, Item 101 of
Regulation S-K (Description of Business) provides that
issuers must: Describe the general development of the
business of the registrant, its subsidiaries and any
predecessor(s) during the past five years, or such shorter
period as the registrant may have been engaged in
business. Information shall be disclosed for earlier
periods if material to an understanding of the general
development of the business. (emphasis supplied)
3. -- As well, under Rule 408 and Rule 12b-20, firms must
add additional information necessary to make any
required information item not materially misleading.
Antifraud liability imposes a similar duty not to make
half-truths under Rule 10b-5 for example.
iii. Antifraud liability
1. All of the securities antifraud provisions make reference
to the presence of a material misstatement or the
omission of a material fact that is required to be
disclosed.
2. It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any
national securities exchange, . . .
3. (b) To make any untrue statement of a
material fact or to omit to state a material
fact necessary in order to make the
statements made, in the light of the
circumstances under which they were made,
not misleading . . .
4. in connection with the purchase or sale of any security.
5. Materiality is a broad threshold requirement for much
(but not all) of the disclosure requirements contained in
the securities laws. All of the securities antifraud
provisions, for example, make reference to the presence
of a material misstatement or omission where additional
information is necessary to make what has already been
disclosed not materially misleading. There is, however,
no general requirement that companies disclose all
material information.
iv. Materiality standard from TSC Industries
1. Substantial likelihood
2. reasonable investor would find significant
3. given the total mix of information
4. (Basically, would it effect the stock price? Compre to
what has happeneded to companyies in similar situations
in the past? Ask specific questionsany material legal
proceedings against the company, say)
e. Examples of Affirmative Disclosure Obligations
i. Registration statement (e.g., for an IPO) .
ii. Periodic reporting (10-K, 10-Q, 8-K).
iii. SA Rule 408 and SEA Rule 12b-20: In addition to the information
expressly required to be included in a statement or report, there
shall be added such further material information, if any, as may
be necessary to make the required statements, in the light of the
circumstances under which they are made not misleading.
iv. Once a firm begins to disclose, it has an obligation to not make a
material omission and to avoid half-truths (10b-5).
v. Insiders must disclose or abstain from trading based on
material, non-public information.
3. Who discloses?
a.
i. Companies with securities listed on a national securities
exchange
1. --Section 12(a) makes it illegal for a broker-dealer to
trade in securities listed on a national exchange unless
issuer has registered
2. --Section 12(b) allows issuers to register with the
exchanges
ii. Over the counter stocks ( 12(g)(1)(B))
1. assets exceeding $10 million and
2. class of equity securities held by at least 500 persons
(Rule 12g-1)
a. Rule 12g-1 increases limit to $10 million from
statutory standard of $1 m.
b. --Determined as of the last day of the fiscal year
c. --Companies have to be careful with number of
shareholders if they do not want to accidentally
become reporting companies
d. --Private placements only works if number stays
below 500 (once cross the 500 threshold then
issuers of private placements become subject to
the periodic disclosure requirements among
other provisions of the Exchange Act).
3. SEC rules prevent companies from evading reporting
requirements by manipulating record ownership
a. --Securities are frequently held in street name,
i.e., brokers name, even though customers
actually own the securities, appearance of fewer
shareholders
b. --Rule 12g5-1(b)(3) prevents companies from
manipulating this practice in order to evade
registration
iii. Under 15(d), companies that have filed a Securities Act
registration statement that has become effective
1. --The addition of 12(g) means that 15(d) today does
relatively little work, as few companies doing a public
offering of their equity will end up with fewer than 500
shareholders after the offering. Section 15(d) does,
however, continue to capture firms that offer debt to the
public while continuing to hold their equity closely.
2. 12g: collective action problem. We dont have any info!
So now well make you share that info with all of us.
Because you become public involuntairly, google kep its
dual-class structure to keep control of the company
iv. The public disclosure regimes in the US and Europe are fairly
similar. But what about for private companies (i.e., companies
not trading on a public market)? Pre-IPO? (initial public offering)
1. US: state law generally requires no significant disclosures
2. EU: significant disclosures, but not as much as public
companies require
b. Exemptions from disclosure
i. Why do you want one?
1. Mandatory Disclosure (e.g., registration statement &
periodic filings)
2. Gun-Jumping Rules
a. Restrictions on information disclosure
b. Distribution of Prospectus
3. Prospectus (and Registration Statement) updating
a. Heightened Antifraud Liability ( 11 and
12(a)(2); note that 10b-5 will still be available)
ii. 2 kinds of exemptions are available
1. 3 of the Securities Act exempts types of securities from
the registration requirements
a. E.g., U.S. treasury bills and commercial paper
are exempt securities; note also that intrastate
offerings and small offerings are also exempt
under 3.
2. 4 of the Securities Act exempts specific transactions
a. 4(1): transactions not involving an issuer,
underwriter or dealer
b. 4(2): non-public transactions
c. 4(3): transactions by a dealer (except where a
prospectus is required, or with respect to an
unsold allotment)
d. 4(4): unsolicited brokers transactions
iii. The securities laws do not take a one-size-fits-all approach.
1. Imagine that a beverage company, Trendy, needs $10
million to start its Lean-Green expansion campaign. If
Trendy were to opt for an initial public offering, what is
in store for Trendy? Several possible responses exist:
2. Direct costs of the offering (attorney fees, underwriter
fees, underwriter discount)
3. Underpricing (although maybe can avoid if use Dutch
Auction as with Googles IPO offering in 2004).
4. Delay (at least several months)
5. Public scrutiny from the public disclosure
6. Costs of restructuring the corporation (incorporation in
Delaware, corp. governance changes, etc.)
7. These costs may simply make a public offering not worth
it for Trendy. Trendy, of course, could turn to various
alternative forms of financing. But none are perfect.
8. Founder/Insider financing insiders may not have the
cash or desire to put money into Trendy
9. Bank financing often banks will ask for a personal
guarantee and require fixed interest payment, etc.
10. Internal financing Trendy simply may not have the cash
on hand
11. Providing for more limited securities offerings opens up a
new set of alternative financing options for issuers.
c. Going private/going dark
4. Contents of disclosure
a. 10-K (yearly disclosure)
i. Item 1. Business.
ii. Item 1A. Risk Factors.
iii. Item 1B. Unresolved Staff Comments.
iv. Item 2. Properties.
v. Item 3. Legal Proceedings.
vi. Item 4. (Removed and Reserved).
vii. Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
viii. Item 6. Selected Financial Data.
ix. Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations.
x. Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
xi. Item 8. Financial Statements and Supplementary Data.
xii. Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
b. 8-K: Something that happens in the interim between quarterly and yearly
disclosuresomething big you have to let them know about
i. Item 1.01 Entry into a Material Definitive Agreement.
ii. Item 1.02 Termination of a Material Definitive Agreement.
iii. Item 1.03 Bankruptcy or Receivership.
iv. Item 3.01 Notice of Delisting or Failure to Satisfy a Continued
Listing Rule or Standard; Transfer of Listing.
v. Item 3.02 Unregistered Sales of Equity Securities.
c. REG S-K, Item 303 MD&A
i. Describe any known trends or uncertainties that have had or that
the registrant reasonably expects will have a material favorable or
unfavorable impact on net sales
ii. Any trend uncertainty, risk to our buisness? Something that could
affect us for better or worse?
iii. Most of the 10K stuff is historical infouseful, but maybe not so
much as future stuff. Like, the salary at your old retail job versus
your salary at your new biglaw jobwhich would you rather get
credit on?
iv. The MD&A requirements are intended to satisfy three principal
objectives:
1. to provide a narrative explanation of a company's
financial statements that enables investors to see the
company through the eyes of management;
2. to enhance the overall financial disclosure and provide
the context within which financial information should be
analyzed; and
3. to provide information about the quality of, and
potential variability of, a company's earnings and cash
flow, so that investors can ascertain the likelihood that
past performance is indicative of future performance.
5. Governance and enforcement
a. Sources of governance for corps
i. In other jurisdictions, such as the UK, listing standards may play a
more significant role than in the U.S.
ii.
b. SEC enforcement actions
i. In 2007 they stopped publihing all the actions they were foing?
ii. Investigations < Administrative proceedings < Civil proceedings; if
bad enough, the DoJ will bring an enforecoment proceeding
under criminal statutes
Core Enforcement Program Areas

2003 2004 2005 2006 2007 2008
Financial Disclosure 29% 28% 29% 24% 33% 23%
Investment Advisers/
Investment Companies 11 14 16 16 12 13
Broker-Dealers 20 22 15 13 14 9
Securities Offerings 16 15 9 11 10 18
Insider Trading 7 7 8 8 7 9
Market Manipulation 5 6 7 5 5 8
Delinquent filers -- -- -- 16 8 16
Other 12 8 16 7 11 4
iii. SEC Enforcement statistics as of 12/12/13:
1. Number of Entities and Individuals Charged: 169
2. Number of CEOs, CFOs, and Other Senior Corporate
Officers Charged: 70
3. Number of Individuals Who Have Received Officer and
Director Bars, Industry Bars, or Commission Suspensions:
40
4. Penalties Ordered or Agreed To: $1.64 billion
5. Disgorgement and Prejudgment Interest Ordered or
Agreed To: $981 million
6. Additional Monetary Relief Obtained for Harmed
Investors: $400 million
7. Total Penalties, Disgorgement, and Other Monetary
Relief: $3.02 billion
c. Plantiffs attnys suing, typically for misleading disclosures
i. Merge into a publically trader US comapy, and now your foregin
company gets in easy without the IPO process
ii. Plaintiffs attnys are very entrepenurialtry to sell legal claims
which may or may not actually work out
iii. Two things that det if theyll take the case: enough money to
make it worth our while? And do I have a good story to sell (a
compellign fact pattern that the judge or jury will see as fraud?)
iv.
d. We have fewer public companies than we did in the 90smore companies
are going private, delisting, leaving the market than entering it!
i. IPOs and M&As are competing in pretty much the same market
were not going to push companies if we cant get all the money
for them
23. Ownership structures and law
a. Recall that corporations, regardless of jurisdiction, have several common features
i. Legal personality
ii. Limited shareholder liability
iii. Transferable shares
iv. Centralized (and delegated) management
v. Investor ownership
b. These features create a common type of investment vehicle. Jurisdictions do have some important
differences, however. Many of these differences are differences in form but not function (remember
that corporations in international markets have incentives to compete with one another, and so will
be functionally competitive even if the form is not similar). However, some differences are not
reconciled functionallypolitical or historical forces can explain many of these divergences. We can
also explain some of the divergences as rent-seeking: groups in power are able to create structures
that will allow them to extract special benefits.
c. Looking at ownership structures can sometimes hel to explainwhy the law is the way it is, based on
who is in power. To broadly generalize:
i. Dispersed ownership: Japan, UK, US to a lesser extent
ii. Controlling shareholder: FR, GER, IT
d. Manageyment-shareholder conflict
i. Contolling shareholder
1. Theory
a. Strong appointment / decision rights
b. No detailed proxy rules
c. Less detailed disclosure rules
d. Less private enforcement
e. Less strict on related party transactions (the related parties are often
controlling shareholders
f. Less protection for non-shareholder interests
g. Explicit worker protection in fr and ger
2. Practice
a. Matches up pretty well
b. Related party: in practice, this matches up pretty well. France and
Germany have some criminal prosecutions against controlling shareholders
who tunnelsecretly taking out assets from the corporationbut these
are only used in the most flagrant cases. Things are changing for these
countries, though, to the extent that their shares compete in global
markets. To attract outside capital, shareholders from other jurisdictions
may require more disclosure and other protections than traditionally
offered to minority shareholders. In Italy and Germany, minority
shareholders have increasing rights (regarding director elections and
shareholder resolutions, respectively).
ii. Dispersed shareholder(managers not shareholders have the power)
1. Theory
a. Protect managers from hostile takeovers [US]
b. Detailed proxy rules and detailed disclosure
c. Robust private enforcement [US]
d. More strict on related party shit
e. More protection for non-shareholder interests (usually managers align ith
this because they want money and their jobs; incentive compensation ties
their payment to stock price so they care about stock price too)
f. More protection for non-shareholder interests in the UK and Japan, less
protection in the U.S.
2. Practice:
a. Really depends on the jurisdiction. The U.S. is board-centric, but the other
jurisdictions are more shareholder-centric. Remember the UKs no
frustration rule? In Japan, shareholder groups have helped protect each
other from takeovers. However, Japan is more permissive towards
takeover defenses than the UK.
b. Related party: This matches up pretty well, although there are some
significant differences between the board-centric US and the more
shareholder-centric UK & Japan. The U.S. polices related party
transactions aggressively. The mandatory bid rule is more about helping
large, institutional shareholders (who might be more focused on liquidity
issues), and the equal treatment norm in Japan also reflects the interests
of large shareholder groups.
c.
3.
e.
i.
ii.
f.
Leveraged deal: you borrowed money to do it? SO gains and stuff?

Dodd-Frank gave shareholders more power? CT has lots of hedge funds (Dodd) and MA has lots of Democrats
(Frank?) who care more about shareholders than managers.

Stock options v stock? The right to buy stock at a certain incentive strike-level, say, $15 if the company is at $10 at
the time, so the recipient will work to raise the stock price to $20 so they can buy it in the money. Rights given
at or out of the money so it will rise. Vs actual stock just going into their account.


Merger: one company merges into another such that it ceases to exist. If both companies still exist as separate
entites, its an acquisition instead. In a takeover, someone just buys up a bunch of shares
You might want to get rid of shareholders so that you can become a private company again---maybe dont want to
deal with disclosure obligations and such (delisting?)

Class One!

Book is to help, but dont kill yourself trying to slog through it.

Exam: essay, not issue spotting. More about understanding why corp law works, jurisdictional differences and
why theyre there.

No official office hours yet, but office is down those stairs in the lodge and hell prolly be there in the hour
before class starts.


Dan Sandman lectures!

So. The Scottish referendum is coming up this September. The thought is that its going to be a close race, but
is more likely to go separate if theres a higher turnout. British government has been giving more power back
to the Scottish parliament, and a while back returned the stone that represents Scottish independence.
Scotlands problem is that they are pretty dependent on broader British resources. Do they have to change
currency? Will the EU let them in? Independence would require changes on an immense scale. In particular,
its been a battle of the economists. And because its political, theres overstatement on both sides, hooray.

(The Scottish Referendumonly people born in and currently residing in Scotland can vote, but the voting age
for this matter has been lowered to 16!)

At the same time, theres been talk of Great Britain dropping out of the EU! Sentiment grumbles about
increasing outflows with no returns. The EU is the biggest market in the worldand originally, thats what
people thought it was all going to be markets and trade and taxes and border crossings without passports. GB
never adopted the Euroand over the years, the EU has been turning into a political union.

These are the two big macro forces affecting things in GB right now. Generally, countries dont like it when
their subdivisions try to secede. And GB doesnt much enjoy being told to do by the EUeven though EU
directives tend to use very, very gentle, slow, encouraging directives, not dictates. Germany tends to pay all
the billsIreland and Scotland are among the people whose bills are being played. If either of these big
changes happenswell. Upheaval. Well see.

Stereotypes, that do affect business and law:
Brits: standoffish and reserved, particularly in business. More methodical and thorough, much slower
than in the US. More articulate/bright? Higher standard for reading levels in general publications. Many fewer
people go on to secondary edubut those who do are very well educated indeed.
Yanks: too loud and friendly, possibly phony. Impatient and action-oriented. Maybe less intelligent
overall, but more people getting more university degreesjust maybe less of those at going on to the top
levels. Nation of immigrants told that this is the land of opportunity through education! But were speaking
English dammit, not the language of the old country.

We gained from them contract administratorslegal assistance, sometimes backgrounds in quality control or
business or engineering...sit in on negotiations and take notes, then set up the payments or inspection teams
or whatever according to the finalized agreement. Many developers in the US love them now.

Sohow do the gvts vary in trade and business?
Brits: more relaxed approach to business regulation in general. Originated complier explained: disclose
whether or not youre in compliance, and if not, say why you cant and how youll try to get there and when in
all. Enforced compliance is more about aiming and asking for timelines and efforts than hitting the goal right
away.
Yanks: Much more disclosure required. More specific guidelines instead of general targets and timelines.
More state-by-state room for experimentation and sharing innovations.

Diplomacy and foreign affairs?
Brits: have the residual Commonwealth: British merchants stayed while the politicians eventually pulled
out. Still have a huge array of consulates that help their companies do business around the world.
Yanks: embassies are less business-friendly and helpful for working abroad, though theyre still certainly not
bad.

Legal systems?
Brits: Magna Carta and an unwritten constitution. More reliance on the common law. Increasingly
litigious, but growing. Less putative damages awarded. More judge-tried cases, less legal advertisement. Loser
pays the winners attorney fees, so plaintiffs are less likely to bring suit in the first place. Traditionally less
efficient legal system, though, which also discourage suits. Only in 2010 made the Antibribery Act, but is much
stricter.
Yanks: written Constitution with amendments. More arguing about words and meanings, but hard words
to point to. They think were too argumentative, especially about language. More litigation? (at least in
numbers, if not percentages?) And foreign companies fear American courtsmight not even want to risk doing
business here. Both sides pay their own attorneys fees, unless you contract otherwise. Foreign Corrupt
Practices Act 1979cant bribe foreign officials even in countries where its commonplace.


Class Two!
What gave rise to corporate governance in the UK? (The US and the UK are world leaders on this?)

Polly Peck financial scandalthe equivalent of the Enron scandal. 1991.

Appointment of Cadbury to a board thing
One provision
Second provision: at least three indy dudes on the audit committees
(recommended: ALL independent dudes)

Consultation and consultation and consultationlots of proposals and discussions

In 1994, listing rules that embrace major aspects of the report5 or 6 point governance code!
All large UK companies that are listed on the London stock exchange must comply or explain!

More recently, a proposal for a stewardship code, again encouraging companies to disclose a
compliance/explanation to the people particularly about environmental things

Again, guiding principles, not precise standards.

Gender diversityone of the biggest issues
The EU has said that all member countries should set own targets and measure progress against them
about more women working on their boards
France/Netherlands: 40% by 2017
UK: 25% by 2015
Here, most boards are comprised by experienced CEOs of companies, or former ones. In the US, drawing
only from this pool makes it hard to add more women; adding in CFOs, for instance, would help quite a bit.
The glass ceilingprogress is being made, but were not there yet.
Theres a core of female directors who are highly sought after, since their pool is so small. That means the
smartestbestmostdesired directors are on more than one board, and then people complain about them being
on too many! (Dr. Shirley Jackson, who was at one time on 11 of them, was always prepared for all of
thembut ISS pushed her to step down from 4 or 5 of them.)
Lets bring in presidents of universities and non-profits, and other big good academics! So the US is
making more progress than expectedand very real benefits have emerged from integrated boards. Everyone
is more professional and business-oriented and civil and people get shit done, son. Boards with at least two
women outperform those with fewer on three meaningful financial measures.
The US probably does lead here; the UK isnt going as well, but its trying.

More corporate government differencesboth counties are looking at the other to see which practices are
suceeeding.
CEO and Chairman of Board positionsthey should be separate positions for each to be most effectual
~84% of UK companies have in fact split the roles
US is only up to ~25%!
Staggered boards (3-year terms once elected)? Being given up for annual elections?
Okay, so, its like senators operating on different term cycles. Say, 3 groups of directors each elected
to three year terms: one in year 1, one in 2, one in 3. If youre trying to boot the board, the most you
can clear out in one year is a third of them. Because with 2/3 of the board, youre good, you cant do
much until after the second year.
More annual elections in the US now, because many activist shareholders support annual elections.
Also opposed by hedge funds
Poison pills? Defenses against takeovers, those are also opposed?
Hedge funds dislike these, because theyre generally looking for the short term profit, just to flip
things quickly---they want to be able to sell their shares quickly
Director refreshmentprobably a tough sell. A new battleground.
Basically, term limits! You can only be on a board for so many years.
Unfortunately, doesnt that mean getting rid of well-established, experienced people who help make
things good!
Executive compensation
Proposals that under the UK Corp Gov Code, companies must administer executive compensation
with an eye to emphasizing the long-term best interest of the company!
What we mean is encouraging variable pay in the form of LTI: long-term incentive
compensation. Stock options and restricted stock grants. You want good things to happen
to the company over time so that you do better yourself.
Stock options, you can cash in once they rise above a certain threshold, or above
Restricted stock grants, if a certain condition is met, so many shares are granted to you
(but youre stuck with them till you leave.) For example, if the company as a whole has
reduced its OSHA recordable rate below a certain threshold, then you get so many shares
in your account.
Say on pay: shareholders get a say on executive pay
Advisory voting by shareholders used to be taken on compensation plans
Eventually that evolved into a fully binding boat
Another variation on that, do you approve the whole plan or just individual pieces of it all?
Another variation not here in the states, shareholder approval of awards given under a
plan! (do the shareholders necessarily know enough to decide if an individual award
should be made? Prolly notthe comp committee shouldnt abdicate that power. The
comp board can be voted out, anyway, if they make disliked com decisions.) Awfully
personal, isnt it!
What about Director compensation?
Not discussed near as thoroughly in annual reports as executive compshould prolly
receive more scrutiny, since it can be impressively large.
Some directors are paid at least in part in stockother than that occasional occurrence,
directors also dont often have performance-tied compensation.
All committee chairs make a bit more money than other members of a committee do.
Audit, compensation, or governanceits audit who makes the most, since they actually
have a very time-consuming job! Tons of hours spent not actually in meetings.
Say youre chair of the board (and not ceo) youll still make a bit more money cause
youre doing stuff between meetings
There are positions like chairmen-lite, presiding directors and lead independent directors,
too, instead of a chair proper, but they also get a bit more.
Disclosures to be improved in certain areas, like risk management and the accounting aspects of disclosure
(presently very arcane and complex.)
Concern accounting?
Board size
Generally, UK has come to smaller boards than US. 7-9 instead of 11-13 directors. Banks may have
like 19 or more.
Both are aiming to get smaller, thoughmove faster, more quickly, and need less total pay.and you
want diversely qualified people from different personal and professional backgrounds, not necessarily
just a lot of people.
Corporate secretaries, among other things, help identify and recruit those diverse peeps

Practicing law in a corporate law department
A corporate lawyer works in a corporate legal departmentbut they dont always do corp/security stuff. May
be in-house litigators or such, employment law, breach of contract peeps, people representing the corp-
plaintiff, environmental, labor, benefits, real estate, commercial sections counseling marketing, sale of goods
UCC junk, specialized stuff like energyfuckin errbody man!
There are some benefits to that type of practiceI mean, everything has benefits, but.
Moritz produces a lot of good in-house counsel, traditionally
Not as much money as a partner in a big firm, but a competitive annual salary
Probably a bit better on benefits than a private practitioner, including pension plans
Maybe long-term incentives like stock options
More pure form of practice? Representing the company as a wholeyou kind of get to identify with
what youre representing since youre a part of it!
Can change your job without changing your employer! Can be general or specific as you decide.
Dont have to go out to drum up business.
In private work, you might get a bonus from the company for all future dealing with a
client you pull in