Pandora's ballot box, or a Proxy with Moxie? Majority voting, corporate ballot access, and the legend of Martin Lipton re-examined

Business Lawyer

Volumn 62, Issue 3, 2007, Pages 1007-1058

  Verret, J W ^a,b,c  

^a HARVARD LAW SCHOOL   (United States)

^b Delaware Court of Chancery ^*  (United States)

^c Meagher and Flom LLP   (United States)

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[No Author keywords available]

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EID: 36649022684     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (362)

1. Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structures, 3 J. FIN. ECON. 305 (1976), as reprinted in THE ECONOMIC NATURE OF THE FIRM, at 315, 321 (Louis Putterman & Randall S. Kroszner eds., 2d ed. 1996).
2. 75 Del. Laws ch. 306 (S.B. 322), § 5 (2006) (codified at DEL. CODE tit. 8, § 216 (2007)). (Citations to the Delaware Code are to the official online version at http://www.delcode.delaware.gov/ (last accessed May 30, 2007)).
3. See Harrah's Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 311 (Del. Ch. 2002).
4. Martin Lipton & William Savitt, The Many Myths of Lucian Bebchuk, 93 VA. L. REV. 733 (2007). In that article, Lipton responds to Lucian Bebchuk's piece that forms the foundation for our understanding of the shareholder empowerment movement in this article.
5. Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675 (2007). Though it is not the intention of this article to take a side in the empowerment debate, Bebchuk's piece is vital to understanding how majority voting fits into the shareholder empowerment movement.
6. For another of Lipton's responses to Bebchuk, see Martin Lipton & Steven A. Rosenblum, Election Contests In the Company's Proxy: An Idea Whose Time Has Not Come, 59 BUS. LAW. 67 (2003).
7. DEL. CODE til. 8, § 141 (2007).
8. Section 216 provides: "In the absence of such specification in the certificate of incorporation or bylaws of the corporation:... (3) Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors." DEL. CODE tit. 8, § 216 (2007).
9. See American Bar Association, Committee on Corporate Laws Discussion Paper on Voting by Shareholders for the Election of Directors (June 22, 2005), in THIRD ANNUAL DIRECTORS' INSTITUTE ON CORPORATE GOVERNANCE, CORPORATE LAW AND PRACTICE COURSE HANDBOOK SERIES, 1506 PLI/Corp 473, 479 (Sept. 15-16, 2005) (citing S, 93, 134th Gen. Assembly, 66 Del, Laws ch. 136, § 11 (1987), reprinted in 2 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 216).
10. DEL. CODE tit. 8, § 109(b) (2007).
11. 75 Del. Laws. ch. 306 (S.B. 322), § 5 (2006) (codified at DEL. CODE tit. 8, § 216 (2007)).
12. DEL. CODE tit. 8, § 141(k) (2007).
13. Vice-Chancellor Strine has stated in dictum that the removal power is a fundamental right, thus it is likely that a bylaw purporting to restrict the removal power for unclassified boards would be held invalid. See Rohe v. Reliance Training Network, Inc., No. 17992, 2000 WL 1038190, at *11 (Del. Ch. July 21, 2000) ("Like the right to elect directors, Delaware law considers the right to remove directors to be a fundamental element of stockholder authority"). However, the fact that a statutory removal requires a vote of a majority of "all shares entitled to vote" makes the removal power extremely difficult to exercise.
14. DEL. CODE tit. 8, § 141(b) (2007). Presumably, a shareholder could, after a successful withhold vote election, petition the Court of Chancery for a special election under Section 225, DEL. CODE tit. 8, § 225 (2007), but it is uncertain how the Court of Chancery would react to situations in which the bylaw leaves discretion in the hands of the board in how it responds to the vote. See infra Section VII.C
15. 74 Del. Laws ch. 306 (S.B. 322), § 3 (2006) (codified at DEL. CODE tit. 8, § 141(b) (2007)).
16. See, e.g., Unisuper Ltd. v. News Corp., No. 1699-N, 2005 WL 3529317, at *5 (Del. Ch. Dec. 20, 2005).
17. See Joseph A. Grundfest Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates, 45 STAN. L. RFV. 857 (1993).
18. Id. at 934.
19. Grundfest cites three iterations of the institutional investor collective action problem: (i) rational apathy where each discounts the marginal effectiveness of individually joining the group; (ii) a gametheory type dilemma whereby each individual has an incentive to free ride; and (iii) the difficulty of finding a homogenous result that they can all agree on with the attendant costs of communicating among shareholders in the group, Id. at 909. This concept is also explored in more detail in Section IVB. infra.
20. Martin Lipton, Takeover Bids in the Target's Boardroom, 35 BUS, LAW, 101 (1979).
21. William T. Allen & Leo E Strine, When the Existing Economic Order Deserves a Champion: The Enduring Relevance of Martin Lipton's Vision of the Corporate Law 60 BUS. LAW. 1383 (2005);
22. R. Franklin Balotti, Gregory V. Varallo & Brock E. Czeschin, UNOCAL Revisited: Lipton's Influence on Bedrock Takeover Jurisprudence, 60 BUS. LAW. 1399 (2005);
23. Lynn A Stout, Takeovers in the Ivory Tower: How Academics Are Learning Martin Lipton May Be Right, 60 BUS. LAW. 1435 (2005).
24. See infra notes 82-121 and accompanying text.
25. Grundfest, Just Vote No, supra note 15, at 866.
26. Id. at 909.
27. SEC Rule 14a-4(b)(2), 17 C.F.R. § 240.14a-4 (2007). In compliance, the proxy may include (i) a "withhold" box next to the name of each nominee, or (ii) an instruction in bold face type that a voter may strike through a name to vote against the nominee, or (iii) designated blank spaces in which the voter is permitted to enter names of nominees for which they intend to withhold a vote, or (iv) any other similar means, provided that clear instructions are furnished indicating how the security holder may withhold authority to vote for any nominee. Id.
28. Diane Del Guercio, Laura Wallis & Tracey Woidtke, Do Board Members Pay Attention When Institutional Investors 'Just Say No'? (June 2006) (unpublished manuscript, available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=575242).
29. Grundfest Just Vote No, supra note 15, at 865.
30. That negative publicity would be facilitated by the SECs directive that the results of corporate elections, including a tally of withhold votes, be publicly disclosed. SEC Rules 14a-1 to 14a-7, and 14a-10, 17 C.F.R. §§ 240.14a-1 to 240.14a-7, § 240.14a-10 (2007).
31. Grundfest Just Vote No, supra note 15, at 927-30.
32. Id. at 930.
33. See id. at 934-35.
34. Id. at 935. See, e.g., Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 956 (Del. 1985);
35. Paramount Communications, Inc. v, Time, Inc., 571 A.2d 1140, 1152 (Del. 1989);
36. Shamrock Holdings, Inc. v. Polaroid Corp.,559 A.2d 278, 286-92 (Del, Ch. 1989).
37. Grundfest Just Vote No, supra note 15, at 913. This prediction ultimately proved to be quite prescient.
38. See, e.g., Stephen Deane, Majority Voting in Director Elections, From the Symbolic to the Democratic, Institutional Shareholder Services Center for Corporate Governance (2005)
39. [hereinafter "ISS Report"], available at http://www.issproxy.com/pdf/MVwhitepaper.pdf (withhold vote campaigns at Safeway, Inc., Disney, Inc., and Home Depot).
40. Former Chancellor William Allen observed that just voting no is "like chicken soup; it couldn't hurt, and what if it helps?" Grundfest Just Vote No, supra note 15, at 868 (citing a "Private Communication with Chancellor William T. Allen (Mar. 6, 1992)").
41. Perhaps, as we shall see, majority voting is the spice to liven the soup up a bit. However, with corollary SEC and NYSE action, see infra notes 166-96 and accompanying text, perhaps too many cooks will also spoil the broth.
42. Two institutional investors presented proposals to reincorporate their respective corporations in Delaware solely to take advantage of the new majority voting amendment. See Support for Pay Proposals Marks 2007 Proxy Season, Vol. 25, No. 1, ISS CORPORATE GOVERNANCE BULLETIN, at 4-5 (June 2007), available at http://www. delawarelitigation.com/iss.pdf. See also Shareholder Proposal for Convergys Corp., filed by United Brotherhood of Carpenters Pension Fund, at 59 (Mar. 13, 2007), available at http://sec.edgar-online.com/2007/03/13/0001193125-07- 053163/section11.asp ("Our Company is incorporated in Ohio. Ohio law mandates a plurality vote standard for the election of directors. Specifically, the law states that 'at all elections of directors, the candidates receiving the greatest number of votes shall be elected.' (Ohio Revised Code, 1701.55(B)). This proposal requests that the Board reincorporate the Company under Delaware state corporate law, which provides that a company's certificate of incorporation or bylaws may specify the number of votes that shall be necessary for the transaction of any business, including the election of directors. (DGCL, Title 8, Chapter 1, Subchapter VII, Section 216),").
43. Phyllis Furman, Joy in the Mouse House: Disney Shareholders Give Eisner Thumbs Up, N.Y. DAILY NEWS, Feb. 12, 2005, at 47. For instance, Eisner was engaged in momentous litigation over the hiring of Michael Ovitz and had just lost Pixar Studios over what was arguable a personality conflict. See Greg Hernandez, Taking Final Bow Disney's Departing Eisner Upbeat in Wake of Tumultuous, 21-Year Roller-Coaster Ride, DAILY NEWS (LOS Angeles, CA) Sept. 28, 2005, at B1.
44. See Frank Ahrens, N.Y. Times Investors Urged to Withhold Votes for Directors, WASHINGTON POST, Apr. 6, 2007, at D3.
45. See Michael McCarthy, Disney Strips Chairmanship from Eisner, USA TODAY, Mar. 3, 2004, available at http://www.usatoday. com/money/media/2004-03-03-disney-shareholder-meeting_x.htm.
46. James Kristie, The evolution of corporate governance, continued, 31 DIRECTORS & BOARDS 94, Sep. 22, 2006;
47. Eisner foes say new CEO search too slow, CHICAGO TRIBUNE, Feb. 9, 2005.
48. Disney Adopts Majority Voting, CFO MAGAZINE, Aug. 19, 2005.
49. Absent broker street voting, the vote would have been a majority withhold vote. See infra Section VI.B.
50. See Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 COLUM. L. REV. 1749, 1750 n.2 (2006), citing the relevant literature as follows:
51. E.g., Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553 (2002);
52. William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 YALE L.J. 663 (1974);
53. Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. CIN. L. REV. 1061 (2000);
54. Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 NW. U. L. REV. 913 (1982);
55. Renee M. Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. CORP. L. 625 (2004);
56. Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L. REV. 1573 (2005);
57. Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUM. L. REV. 1908 (1998);
58. Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469 (1987);
59. Brett H. McDonnell, Two Cheers for Corporate Law Federalism, 30 J. CORP. L. 99 (2004);
60. Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588 (2003);
61. Mark J. Roe, Delaware's Politics, 118 HARV. L. REV. 2491 (2005);
62. Roberta Romano, The State Competition Debate In Corporate Law, 8 CARDOZO L. REV. 709 (1987);
63. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251 (1977).
64. Hamermesh, Policy Foundations, supra note 39, at 1773-74. Hamermesh indeed uses the majority voting amendment as an example of his theory in action. See id.
65. See Section VI. infra on shareholder proxy nominations.
66. See David C. McBride, Delaware Considers Majority Voting/or Directors: Proposed Amendments to the Delaware General Corporation Law, in WHAT ALL BUSINESS LAWYERS & LITIGATORS MUST KNOW ABOUT DELAWARE LAW DEVELOPMENTS 2006, 1543 PLI/Corp 289, 297-99 (May 2006).
67. See generally Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588 (2003)
68. [hereinafter "Roe, Delaware's Competition"];
69. ARK J. ROE, Delaware's Politics, 118 HARV. L. REV. 2491 (2005)
70. [hereinafter "Roe, Delaware's Politics"].
71. Roe, Delaware's Politics, supra note 43, at 2495.
72. Id. at 2513.
73. Id. at 2516.
74. Id. at 2516-17.
75. Id. at 2513.
76. In re SEC Roundtable on Proposed Security Holder Director Nominations, File No. 57-19-03, March 10, 2004, available at http://sec.gov/spotlight/dir-nominations/transcript03102004.txt ("And perhaps the Commission would want to consider if you want to adopt the provision you have on the table to create an exception for any state law that allows..,majority...voting, for example, or any organic document of a corporation like the certificate of incorporation or bylaws be effective, to allow that, then this provision wouldn't apply to any such situation as that. I think it would be an interesting proposal for the Delaware legislative branch to consider through the good offices of the counsel of the Delaware State Bar Association Corporate Law's Committee, and there are others.").
77. Ann Yerger, Executive Director, Council of Institutional Investors, Letter to David McBride from the Delaware State Bar Assn., June 15, 2005, available at http://www.cii.org/library/correspondence/061705_mcbride.htm ("I am writing to you in your capacity as Chairman of the Corporation Law Section (the "Section") of the Delaware State Bar Association to request that the Section consider recommending to the Delaware legislature an amendment to Section 216 of the Delaware General Corporation Law ("DGCL"), 8 Del. C. § 216, to make majority voting for director elections the presumptive choice for Delaware corporations.").
78. In 2007, ISS plans to include the presence and strength of a company's majority voting bylaw as an additional factor in the scoring systems it uses to rate the effectiveness of the Company's corporate governance effectiveness. See ISS U.S. Corporate Governance Policy 2007 Updates, available at http://www.issproxy.com/pdf/2007%20US%20Policy%20Update.pdf.
79. Michael Schroeder, CEOs Fight Making it Easier for Holders To Stop Board Picks, WALL ST. J., May 27, 2005, at C4 (noting the Business Roundtable's press campaign opposing majority voting).
80. See also Section VII.B. infra on the majority voting bylaws.
81. For a summary of the agenda and webcasts of the SECs most recent series of roundtables on the proxy process held in May of 2007, see Spotlight On: Roundtable Discussions Regarding the Proxy Process available at http://www.sec.gov/spotlight/proxyprocess.htm.
82. Patricia A, Vlahakis, Takeover Law and Practice 2006, in 38TH ANNUAL INSTITUTE ON SECURITIES REGULATION, CORPORATE LAW AND PRACTICE COURSE HANDBOOK SERIES, 1571 PLI/Corp 259, 278 & n.2 (Nov. 2006)
83. (citing Proxy Access: To Be or Not to Be? Thirteen Months after SEC Proposes Rule, Resolution is No Closer, 17 M&A REP. 45 (Nov. 22, 2004)
84. (noting that proxy access proposal received 16,000 comment letters, a record-breaking number) and Judith Bums and Siobhan Hughes, SEC Chairman Sees "Consensus" on US Market Reforms, Dow JONES NEWSWIRES (Feb. 10, 2005) (quoting SEC Chairman William Donaldson as acknowledging that the SECs original proxy access proposal "doesn't fly," is "too complicated," and that he would like to start over with "wholly new thoughts" on how to tackle the subject).").
85. Indeed, former Commissioner Grundfest wrote to the SEC to urge that majority voting is a proper alternative to corporate proxy access. See ISS Report, supra note 31, at 9.
86. ISS lists three reasons for targeting individual directors for withhold vote campaigns: (i) interlocking directorates involving key board committees; (ii) poor director attendance; and (iii) serving on too many boards. They also cite four factors it uses in targeting boards overall: (i) ignoring majority votes on shareholder precatory proposals; (ii) payment of excessive non-audit fees; (iii) overlooking obvious boardroom conflicts; and (iv) adoption of dead-hand poison pills. See ISS Report, supra note 31, at iii. Additionally, one can see this as following in the scandal, seen among institutional investor advocacy groups, of the Eisner saga. Excessive executive compensation and the last vestiges of postEnron outrage could be seen as having given advocates of investor democracy just enough fuel to bring this to the attention of federal regulators. In that case, perhaps Delaware is hoping it can moderate the eventual federal response.
87. See Roe, Delaware's Politics, supra note 43, at 2529, This analysis does run the risk of a reverse-causation paradox. Does the SEC act because of a lack of attention in the Delaware General Corporation Law ("DGCL")? Then does Delaware act to pre-empt the SEC? And then does the Delaware action alter the SECs response? Here we have a Delaware amendment related to an SEC proposal that previously failed to pass, but is subsequently being reconsidered due to a federal court ruling. In the end, the portion of the Roe hypothesis regarding Delaware action in advance of federal pre-emption is helpful for analyzing this policy, but shouldn't be taken to excess limits.
88. See ABA, Committee on Corporate Laws, Preliminary Report of the Committee on Corporate Laws on Voting by Shareholders for the Election of Directors, at 7 (Jan. 17, 2006), available at http://www.abanet.org/ buslaw/committees/CL270000pub/directorvoting/20060117000001.pdf
89. [hereinafter "ABA Preliminary Report"] ("Delaware is not a Model Act State, but Delaware lawmakers carefully study the work of Committee and Model Act Developments").
90. Id. at 20.
91. The holdover rule, allowing for a director failing to win an election to stay on until a replacement is elected and qualified, serves the purpose of ensuring that "the power of the Board of Directors to act continues uninterrupted even though an annual shareholders meeting is not held or the shareholders are deadlocked and unable to elect directors at the meeting." See ABA MOD. BUS. CORP. ACT §8.05, at 8-14 (2005) (Official Comment).
92. See ABA Preliminary Report, supra note 56, at 4-5.
93. See id. at 16.
94. See id. at 13.
95. CAL. CORP. CODE § 301.5(a) (West Supp. 2007).
96. CAL. CORP. CODE § 303 (West 1990).
97. See an exchange between Broc Romanek and a CalPERs representative, posted Aug. 2, 2006 on www.thecorporatecounsel.net/blog/archive/2006_08.html.
98. See 2006 Cal. Legis. Serv. ch. 871 (S.B. 1207) (to be codified at CAL CORP. CODE §§ 708, 708.5).
99. Id.
100. CAL. CORP. CODE § 708.5(c) (West Supp. 2007) ("Notwithstanding subdivision (b) of Section 301, if an incumbent director fails to be elected by approval of the shareholders (Section 153) in an uncontested election of a listed corporation that has amended its articles of incorporation or bylaws pursuant to subdivision (b), then, unless the incumbent director has earlier resigned, the term of the incumbent director shall end on the date that is the earlier of 90 days after the date on which the voting results are determined pursuant to Section 707 or the date on which the board of directors selects a person to fill the office held by that director pursuant to subdivision (d).").
101. Joseph A. Grundfest, Advice and Consent: An Alternative Mechanism for Shareholder Participation in the Nomination and Election of Corporate Directors, in SHAREHOLDER ACCESS TO THE CORPORATE BALLOT (Lucian Bebchuk, ed., Harvard University Press, 2004).
102. Id. at 10.
103. Id.
104. Id.
105. Id. at 12. For instance, decisions of special litigation committees are afforded discretion under business judgment rule. Upon proper pleading, those decisions will be examined under "entire fairness review." See Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in part, Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
106. Grundfest, Advice and Consent, supra note 68, at 12. Grundfest also notes that allowing cures by shareholder consent could allow the regulatory body to designate replacements as tainted by the withhold vote as well, thus keeping the board from using its power to replace to minimize the effect of Grundfest's proposal. Id. at 12-13.
107. ISS Report, supra note 31, at 10.
108. ISS Conference, Institutional Shareholders Services, Inc., Around the World in Sixty Minutes, An Overview of International Corporate Governance Trends, Oct. 21, 2005, at 5, available at http://www.issproxy.com/ pdf/GlobalCorporateGovernancePerspectivesSD.pdf.
109. Id. at 16.
110. ISS Report, supra note 31, at 13.
111. For more information on those differences, see generally Klaus J. Hopt, Labor Representation on Corporate Boards: Impacts and Problems for Corporate Governance and Economic Integration in Europe, 14 INT'L REV, L & ECON, 203(1994).
112. See generally ADOLF A. BERLE & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 6 (1933). The Berle-Means theory of corporate history is far from universally accepted. For instance, Walter Werner argues that the ownership/control dichotomy preceded the industrial revolution. See Walter Werner, Corporation Law in Search of its Future, 81 COLUM L. REV. 1611, 1612 (1981). Mark Roe also presents a more nuanced explanation of how market segmentation resulted from interested groups exercising political influence in favor of financial disintermediation.
113. See MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE 44 (1994). However, this article uses Berle and Means as a useful model. In much the way that Einsteinian relativity and quantum physics did not replace Newtonian mechanics as much as it demonstrated circumstances in which it was unable to describe the world, leaving Newtonian mechanics to still describe most conventional physical phenomena, the Berle-Means theory of corporate history is still a useful explanation despite the various alternate versions of economic history that it inspired.
114. BERLE & MEANS, supra note 79, at 4-7.
115. See generally Jensen & Meckling, supra note 1.
116. Id. at 318-19.
117. BERLE & MEANS, supra note 79, at 6.
118. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 749. Lipton cites another article approvingly on this point. Id. at 750 n.60 (quoting Theodore N. Mirvis et al., A Response to Bebchuk's The Case for Increasing Shareholder Power, 119 HARV. L. REV, (forthcoming June 2007) (manuscript at 7) ("[T]he assumption that undergirds much of Bebchuk's analysis, - that directors are generally engaged in a constant struggle to maximize their private benefits at shareholders' expense - cannot be even remotely squared with the experience of those of us who actually work with directors as they strive to meet their fiduciary obligations."). Lipton's conclusion fails on two grounds: he relies on anecdotal rather than empirical evidence, an analytical failing he accuses Bebchuk of on the same page and he suffers from an obvious conflict of interest. The New York Code of Professional Responsibility prohibits him from publicly disparaging his clients.
119. See NEW YORK LAWYER'S CODE OF PROFESSIONAL RESPONSIBILITY CANNON 4 ("A Lawyer Should Preserve the Confidences and Secrets of a Client"), available at http://www.nysba.org/Content/NavigationMenu/Attorney_Resources/ Lawyers_Code_of_Professional_Responsibility/Lawyers.Code.pdf. Even if Bebchuk's characterization of the agency conflict were accurate, Liptons fiduciary obligations would prohibit him from admitting it.
120. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 749.
121. See http://papers.ssrn.com/sol3/topten/topTenResults.cfm? groupingtype-3&groupingId-1.
122. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 751 n.63
123. (citing Margaret M. Blair & Lynn A. Stout, Specific Investment: Explaining Anomalies in Corporate Law, 31 J. CORP L. 719 (2006)).
124. Margaret M. Blair & Lynn A. Stout, Specific Investment: Explaining Anomalies in Corporate Law, 31 J. CORP L. 719, 726 (2006).
125. RESTATEMENT (THIRD) OF THE LAW OF AGENCY §§ 1.01 (power to select and direct), 8.01 (duty of loyalty) (2006).
126. DEL. CODE tit. 8, § 141(a) (2007) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors...").
127. See Jensen & Meckling, supra note 1, at 318-19.
128. Lipton identifies this distinction. See Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 755.
129. See E. Norman Veasey, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective on Some Key Developments, 153 U. PA. L. REV. 1399, 1419 (2005).
130. Bebchuk, The Myth of the Shareholder Franchise, supra note 4, at 680.
131. See generally Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833, 851 (2005) ("A key element of the corporate structure is the shareholder franchise-shareholders' power to elect and replace directors. Corporate statutes provide shareholders with this power, which courts view as a fundamental element of the corporate structure.")
132. (citing Blasius Indus. Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988) (noting the "central importance of the franchise to the scheme of corporate governance")). See also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
133. Some argue that shareholder supremacy fails to take into account stakeholders, such as employees or creditors, who deserve a say in corporate decision-making. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247, 275, 278 (1999). The U.S. model provides for shareholder supremacy, as shareholders are the only group with a fixed and permanent interest in the underlying assets of the corporation.
134. FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 66-72 (1991). This article does not address the shareholder v. stakeholder debate but focuses on the shareholder v. manager conflict, including the debatable assumption that the U.S. shareholder supremacy model is superior.
135. This is also observed in Stephen Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. REV. 601, 614 (2006)
136. [hereinafter "Bainbridge, Limited Voting"].
137. Blasius Indus. Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
138. See Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 736. This is part of Liptons response to Bebchuk's arguments, though he again misses the point. Bebchuk's argument is not that contests have to be frequent for the franchise to be real, but merely that the apparent lack of contests point to structural defenses, instituted by boards, that have diluted the franchise (like the staggered board, asymmetric cost reimbursement to the corporate ballot, shareholder collective action problems, broker street voting, etc).
139. See Bebchuk, The Myth of the Shareholder Franchise, supra note 4, at 686-94.
140. The Delaware Chancery Court stated: It has, for a long time, been conventional to dismiss the stockholder vote as a vestige or ritual of little practical importance. It may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been. Be that as it may, however, whether the vote is seen functionally as an unimportant formalism, or as an important tool of discipline, it is clear that it is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration not present in any other context in which directors exercise delegated power. Blasius Indus., 564 A.2d at 659 (footnote omitted).
141. E. Norman Veasey, Should Corporation Law Inform Aspirations For Good Corporate Governance Practices-or Vice Versa?, 149 U. PA. L REV, 2179, 2179-80 (2001).
142. See David C McBride & Danielle Gibbs, Interference with Voting Rights: The Metaphysics of Blasius Industries v. Atlas Corp., 26 DEL. J. CORP. L. 927, 929 (2001) ("No Delaware decision has ever found a 'compelling justification' for an action deemed to have been taken for the primary purpose of thwarting, impeding or interfering with a shareholder vote,") Lipton fails to admit that, with the structural management advantages that he has helped to craft over the years, the franchise has been diluted. His article on the quinquennial election can be viewed as favoring the staggered board, which stands as a bulwark against shareholder ability to replace a board of directors.
143. Martin Lipton & Steven A. Rosenblum, A New System of Corporate Governance: The Quinquennial Election of Directors, 58 U, CHI, L. REV. 187, 225-28 (1991), Though his proposal at that time did not consider staggered terms, his argument for longer terms comports with the three-year director term that makes the staggered board possible.
144. ROBERT C. CLARK, CORPORATE LAW 95 (1986) (noting a cynic's view that "the whole institution of shareholder voting is a fraud").
145. See also Lynn Stout, The Mythical Benefits of Shareholder Control (working paper available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id-929530);
146. Stephen Bainbridge, Director Primacy and Shareholder Disempowerment 119 HARV. L. REV. 1735, 1736 (2006)
147. [hereinafter Bainbridge, "Director Primacy"];
148. Lucian Arye Bebchuk, Letting Shareholders Set the Rules, 119 HARV. L. REV. 1784 (2006).
149. Recent evidence compiled by Professor Bebchuk indicates that the balance of power in corporate elections has, over the last 10 years, run markedly in favor of boards, Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833 (2005).
150. Bebchuk, The Myth of the Shareholder Franchise, supra note 4.
151. Id. at 683.
152. Id. at 686.
153. See Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 737.
154. Id. at 738.
155. Id.
156. See Bebchuk, The Myth of the Shareholder Franchise, supra note 4, at 688-94, 697.
157. See also infra notes 218-25 and accompanying text on broker street voting. See also infra notes 238-51 and accompanying text on staggered boards. Control of vast economic resources is at stake in this debate. The structure of the contest is weighed in favor of management, management at times has incentives that work against the best interest of shareholders, and incidents of contested elections average three per year among thousands. Although the thrust of this article is not to conclude in favor of, or against, the empowerment movement, and indeed proving that the franchise is diluted still fails to answer the question of whether or not it should be enhanced, observation of these combined factors seems to unavoidably lead one to conclude that Lipton is dead wrong when he argues that the shareholder franchise is alive and well. Unfortunately, former Chief Justice Veasey, now in private practice, makes the same mistake, perhaps for a similar reason.
158. See generally E. Norman Veasey, The Shareholder Franchise Is Not A Myth: A Response to Professor Bebchuk, 93 VA. L. REV. 811 (2007).
159. "Far from the single owner of a building, the shareholders are a diverse and ever-shifting group of people and institutions, with differing interests and, in the case of institutional investors, differing obligations to their own diverse constituencies." Martin Lipton & Steven Rosenblum, Election Contests in the Company's Proxy, An Idea Whose Time Has Not Come, 59 BUS. LAW. 67, 68 (2003). A logical observation; but also a consistent one, coming from the inventor of the poison pill.
160. "Shareholders with private interests, however, might prefer the firm to pursue those interests at the expense of the interests they have in common with other shareholders." Iman Anabtawi, Some Skepticism About increasing Shareholder Power, 53 UCLA L. REV. 561, 575 (2006).
161. Id.
162. This is also observed by Bainbridge, Limited Voting, supra note 96, at 634. The time horizon and the character of the investor determine the ability of corporate lawmakers and chancellors to encourage the shareholder primacy model.
163. Lipton & Rosenblum, supra note 110, at 74.
164. Another of Lipton's positions is that shareholder democracy encourages short term thinking that erodes value, Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 747. Although he is correct that short term thinking is usually best avoided, perhaps his efforts might be better directed at reforming the quarterly reporting approach embraced by the federal securities laws that fuels short term thinking.
165. See REPORT AND RECOMMENDATIONS OF THE COMMITTEE ON THE REGULATION OF U.S. CAPITAL MARKETS IN THE 21ST CENTURY, 72-77 (U.S. Chamber of Commerce, March 2007), available at http://www.capitalmarketscommission.com.
166. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 756.
167. Bainbridge, Limited Voting, supra note 96, at 609 (citing Morris M. Kleiner & Marvin L, Bouillon, Providing Business Information to Production Workers: Correlates of Compensation and Profitability, 41 INDUS. & LAB. REL. REV. 605, 614-15 (1988)).
168. Continuing that line of analysis, one might ask what about shareholders that have moderate risk preferences, versus high risk preferences? Also, conflicts may directly arise between shareholders that implicate anti-competitive practices. Would a large hedge fund that owns an interest in each of two competing companies make voting decisions that would work to erode value for other shareholders?
169. See Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 744.
170. See supra notes 33-38 and accompanying text regarding the Disney vote. See also L. Reed Walton, Vote Results, GOVERNANCE WEEKLY (Institutional Shareholders Services June 15, 2007), available at http://www.issproxy.com/governance_weekly/2007/031.html.
171. See infra notes 143-53 and accompanying text.
172. Although arguments about shareholder irrationality in pricing are widespread, see Lynn Stout, Share Price as a Poor Criterion For Good Corporate Law, 3 BERKELEY BUS. L.J. 43, 50 (2005), shareholder rationality in voting decisions is, however, an entirely distinct field of inquiry.
173. For an effective summary of the traditionalist view, see Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response to Bebchuk's Solution for Improving Corporate America, 119 HARV. L. REV. 1759, 1762 (2006).
174. See Jensen & Meckling, Theory of the Firm, supra note 1, at 321.
175. See Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 COLUM. L. REV. 1416, 1444 (1989).
176. But cf. Victor Brudney, Corporate Governance, Agency Costs, and the Rhetoric of Contract, 85 COLUM. L. REV, 1403, 1444 (1985) (arguing that analyzing corporate law using a contract rights paradigm is inaccurate and inefficient).
177. Some claim that one should leave it up to shareholders to express dissatisfaction with their share performance by taking the "Wall Street Walk," (Selling your shares, also known as the "Wall Street Rule," is explored in further detail in Bainbridge, Limited Voting, supra note 96, at 619), thus access to capital markets may be sufficient to discipline managerial shirking or selfdealing. If one assumes semi-strong market efficiency, shareholders should be looking out for their own interests already without the need for corporate law by simply determining who they invest in. There is a substantial literature regarding bounded rationality, beyond the scope of this article, which calls into question the rational choices of economic actors. See generally John Conlisk, Why Bounded Rationality? 34 J. ECON, LIT. 669 (1996), Reputation costs in the capital market should be the controlling force that keeps management focused on the interests of shareholders, but may be minimized by the bounded rationality of those shareholders. Another interesting dimension to the shareholder democracy debate is whether one share, one vote is the even the right allocation of voting rights.
178. See generally Shaun Martin & Frank Partnoy, Encumbered Shares, 2005 U. ILL. L. REV. 775. For instance, warrant and option holders, who have an expected interest somewhat similar to plain vanilla shareholders, get no voting rights. See id. at 791-92, This analysis can get quite complicated. For instance, a shareholder who also sells shares short is betting against the enterprise but still gets to vote in elections controlling its future. Id. at 779.
179. Bainbridge, Limited Voting, supra note 96, at 627. Some argue that what corporate law can provide is a regime that mandates accurate disclosure to make this market more efficient, as the securities laws do, but it cannot be an effective instrument to force companies to put shareholders first. They effectively argue that all we can do is require disclosure of financial data and other information, leave ultimate power and discretion in the hands of managers, and allow the capital markets to reward managers if shareholders like what the managers are doing. Traditionalists also cite what is essentially an "if it ain't broke, don't fix it" argument that the U.S. financial markets perform well in comparison to other countries, so corporate governance and board primacy cannot be all that bad.
180. See Stephen Bainbridge, Director Primacy, supra note 102, at 1739 ("Despite the alleged flaws in its governance system, the U.S. economy has performed very well, both on an absolute basis and particularly relative to other countries."). Lipton is also a subscriber to this philosophy.
181. See Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 733. This argument, however, is the least convincing proposed by traditionalist apologists. The question remains: Under an optimal governance regime, how much better would our markets perform?
182. See supra note 124.
183. Jayne W Barnard, Institutional Investors and the New Corporate Governance, 69 NC. L. REV. 1135, 1149-51 (1991).
184. Id. at 1151.
185. Id. Furthermore, institutional investors who index a portion of their portfolios, which represents an increasingly larger proportion of institutional assets, are constrained from selling shares based on the idiosyncratic characteristics of a particular stock. Id. at 1152.
186. Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833, 865-70 (2005).
187. See generally Lucian Arye Bebchuk, The Myth of the Shareholder Franchise, supra note 4;
188. Lucian Arye Bebchuk, Letting Shareholders Set the Rules, 119 HARV. L. REV. 1784 (2006). Bebchuk offers evidence that management typically ignores precatory proposals to eliminate staggered boards: "The evidence put forward below shows that management often elects not to initiate rules-of-the-game decisions for which shareholders register strong support in precatory resolutions."
189. Bebchuk, The Case for Increasing Shareholder Power, supra note 130, at 852. Bebchuk, Coates, and Subramanian aptly note that staggered boards serve as an effective sandbar against any wave of shareholder reform. See generally Lucian Arye Bebchuk, John C. Coates IV & Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 STAN. L. REV. 887, 925-39 (2002). Indeed, companies failing to accommodate the precatory proposals, as members of staggered boards, would be difficult to replace in response to their refusal to eliminate the staggered board under the precatory proposal. Critics may use this as evidence that changing election defaults is a useless endeavor. It is nevertheless uncertain whether this is an indictment of the argument of board accountability, or merely a reflection of a lack of board accountability. In other words, do shareholders fail to hold directors to the carpet because they are disinterested due to cost inefficiencies, or because they are unable due to staggered directorships? At present, about half of the top 5,000 (by size) publicly traded U.S. corporations have staggered boards, ISS Report, supra note 31, at 15, so perhaps reform activity can be effective at those companies notwithstanding.
190. Bebchuk, The Case for Increasing Shareholder Power, supra note 130, at 836-37.
191. It might be that some firms would experience shareholder adoption of pro-management bylaws, others wouldn't. Policy makers may then be able to regress the performance of the different allocations of authority, something has not been studied previously. Perhaps the difference in whether such a bylaw passes would depend in part on earning performance preceding the election, and would only target perennial under-performers.
192. 134, See, e.g., Robert C. Pozen, Institutional Perspective on Shareholder Nominations of Corporate Directors, 59 BUS, LAW 95, 95 n.2 (2003) (institutional investors held 55.8% of publicly traded equities in the United States in 2001).
193. See Bainbridge Limited Voting, supra note 96, at 618.
194. See Strine, supra note 122, at 1765 ("Those institutions most inclined to be activist investors are associated with state governments and labor unions, and often appear to be driven by concerns other than a desire to increase the economic performance of the companies in which they invest. By contrast, those institutional investors one might think are best situated to make wise voting decisions-the money managers who operate mutual funds, particularly index funds-have little desire to spend money on stockholder activism or offend corporate management.").
195. See also James A. Brickley, et al.,Ownership Structure and Voting on Antitakeover Amendments, 20 J. FIN. ECON. 267 (1988).
196. 137, See John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REV.1277, 1354-59 (1991).
197. See also Grundfest Just Vote No, supra note 15, at 909 & n.234.
198. Activism was also classically constrained by the free rider problem. "Even the most activist institutions spend less than half a basis point of assets under management (.005%) per year on their governance efforts." Del Guercio and Hawkins, The Motivation and Impact of Pension Fund Activism, working paper, 1997 (quoted in Bernard B. Black, Shareholder Activism and Corporate Governance in the United States, at 5, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW (Peter Newman, ed., 1998)). Historically, institutional investors used their power in two ways: "jawboning" management in negotiations and presenting a shareholder governance proposal at an annual meeting. Black, supra, at 2. Institutions would typically target a small number of underperforming firms to make examples of them. "For example, CalPERs, the largest state pension plan and the Council of Institutional Investors annually identify a handful of poorly performing firms as targets for governance initiatives. This lets a proposal serves double duty: as a way to improve governance procedures and as a signal of investor displeasure with management," Black, supra, at 5-6. Merely voting no is certainly less costly than submitting an alternate slate of directors. Withhold vote campaigns are more of a remote-control sort of activism, allowing institutional investors to go along with a campaign without the cost of more onerous activity leading the apathy that classically constrained it.
199. This equation and its explanation in the paragraph that follows it is drawn from Grundfest, Just Vote No, supra note 15, at 910
200. (citing Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520, at 575-91 (1989)
201. and Edward B. Rock, The Logic and (Uncertain) Significance of Institutional Shareholder Activism, 79 GEO. L.J. 445, 453-63 (1991)).
202. Grundfest Just Vote No, supra note 15, at 910, Grundfest further explains: "This last variable, p, incorporates (1) each shareholder's ex ante estimate that the process as a whole will overcome the collective action problems described above, as well as (2) the shareholders subjective assessment of the extent to which her participation in the process contributes to reaching the final outcome." Id.
203. See infra Section VI.C for a discussion of online proxy solicitation.
204. See infra Section VI.B. for a discussion of the NYSE's amendment to Rule 452.
205. See Strine, supra note 122, at 1765 ("For that reason, many rely heavily on the advice of yet another level of agency, firms like Institutional Investor Services (ISS) that provide advice on how to vote on corporate ballot issues, to satisfy their legal obligation to vote in an informed manner on behalf of their investors.").
206. Bainbridge observes that hedge funds are a new exception to the rarity of institutionally funded proxy fights. See Bainbridge, Limited Voting, supra note 96, at 630.
207. See generally Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, working paper, available at http://ssm.com/abstract=919881.
208. See Troy Paredes, On the Decision to Regulate Hedge Funds: The SECs Regulatory Philosophy, Style, and Mission, 2006 U. ILL. L. REV. 975, 976.
209. See Staff Report to the United States Securities and Exchange Commission, Implications of the Growth of Hedge Funds, at 61-64 (Sept. 2003), available at http://www.sec.gov/news/studies/hedgefunds0903.pdf.
210. See Rob Cox, Activists To The Rescue, WALL ST. J., March 31, 2007, at B14.
211. For more on this, see Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, at 4-13 (Univ. of Pa., Inst, for Law & Econ. Research Working Paper No. 06-16) (December 2006), available at http://ssrn.com/abstract=919881. Some types of actions that shareholders use are Section 220 actions (DEL CODE tit. 8, § 220 (2007)), shareholder derivative suits, appraisal rights, and injunctions against corporate merger activity. See id. See, e.g., Highland Select Equity Fund, L.P. v. Motient Corp., 906 A.2d 156, 157 (Del. Ch. 2006), clarified by, 2007 WL 907650 (Del. Ch. Mar. 14, 2007), ajj'd, 922 A.2d 415 (Del. 2007) (Section 220 action for inspection of corporate records); Shamrock Activist Value Fund, L.P. v. iPass Inc., CA. 2462-N, 2006 WL 3824882, at *1 (Del. Ch. Dec. 15, 2006) (same); Polygon Global Opportunities Master Fund v. West Corp., Civ. A. 2313-N, 2006 WL 2947486, at *1 (Del. Ch. Oct. 12, 2006) (same). The potential for such annoyance could make it economically rational for the board to pay the fund to go away by, say, buying back the fund's shares at a premium.
212. For an exploration of some of the disturbing implications of empty voting, where hedge funds purchasing the right to vote other owners' shares may result in an incentive to vote in a way that actually harms the firm, see Henry T.C. Hu and Bernard Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 BUS. LAW. 1011 (2006). Hedge fund participation in withhold vote campaigns using borrowed shares could mean that this shareholder democracy movement could be hijacked by market players with perverse incentives, as in the case of a fund with a leveraged short position in a firm that bought voting rights in that firm. Whether hedge fund participation in the shareholder democracy movement will be collaborative or parasitic remains to be seen.
213. This concern was also recently relayed by SEC Commissioner Paul Atkins. See Paul Atkins, Remarks at the Corporate Directors' Forum, January 22, 2007, available at http://www.sec.gov/news/speech/2007/spch012207psa.htm#10.
214. See Iman Anabtawi, Some'Skepticism about Increasing Shareholder Power, 53 U.C.L.A. L. REV. 561, 583 (2006). For a history of greenmail, see generally David Manry & David Strangeland, Greenmail: A Brief History, 6 STAN. J.L. BUS. & FIN. 217 (2001). Greenmail takes place when a firm pays a hostile bidder a premium for the bidder's shares in exchange for dropping the bid. Anabtawi, supra, at 583 n.112.
215. Alon Brav, et al., Hedge Fund Activism, Corporate Governance, and Firm Performance (Nov. 2006) (ECGI - Finance Working Paper No. 139/2006), available at http://ssrn.com/abstract-948907. For example, consider the share buyback programs initiated at AOL Time Warner as a result of Carl Icahn's activism at those firms.
216. See Matthew Flam, Time Warner CEO on Mayoral Run, NEW YORK BUSINESS.COM (Mar. 21, 2007), available at http://www.newyorkbusiness.com/apps/pbcs.dll/article?AID-/ 20070321/FREE/70321011/1084/STATIC;
217. see also Proxy Statement, Schedule 14A, SEC filing by Ichan Partners, LP., et al., Exhibit 3 (Sep. 12, 2005), available at http://www.sec.gov/Archives/edgar/data/1105705/000110465905043682/ a05-16099_lex3.htm. In a share buyback, a company may buy shares and convert them to treasury holdings, which has the effect of increasing the per share price of all shares outstanding as the total market value is divided over a lower number of shares. This method may be preferred over a simple dividend due to income tax efficiency. Whether this works to the benefit of other shareholders would depend on whether the time horizon of the fund, typically very short, meshes well with the other shareholders. For instance, some shareholders may prefer that more money be invested in research and development for future appreciation in share value because the firm has a distinct advantage in some area over the long term. Other shareholders may want appreciation immediately.
218. For an example of the popularity contest that activist investing has become, see the Financial Times' ranking of activist investors. Most influential activist investors, FT.COM (Ap. 11, 2007), available at http://www.ft.eom/cms/s/90229caa-e831-11db-b2c3-000b5df10621,dwp_uuid= c82c0bde-e9cd-11db-91c7-000b5df10621.html. It would be reasonable to assume that finance analysts at large institutional investors are more the target of FT's ranking than individual pensioners who generally fail to meet the investment minimums for these funds.
219. A proper model would also include a coefficient to account for the heightened risk preference of activist hedge funds. Two characteristics may lead activist investors to have a risk preference that is enhanced over that of traditional institutional investors. First, hedge funds tend to attract more risk-preferring managers who are rewarded with higher performance fees. Second, longer lock-up provisions in activist hedge funds allow capital to be restricted for longer time periods leading to an extended time horizon in which to generate a successful record of wins, This allows the hedge fund to generate capital for successive generations of activists and to allow the activist to risk losing some initial battles without having to worry about immediate withdrawal by a more risk adverse investor. See generally J.W Verret, Economics Makes Strange Bedfellows: Pensions, Trusts, and Activist Hedge Funds in an Era of Financial Re-Intermediation, U. PA. J. BUS. & EMPL. L. (forthcoming Vol. 10, Issue 1, 2007) (on file with The Business Lawyer).
220. Romano explores institutional shareholder conflicts of interest in more detail. See Roberta Romano, Less Is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 YALE. J. ON REG. 174, 177 (2001).
221. CaIPERs has a significant investment in the activist hedge fund Shamrock Holdings. See California Public Employees' Retirement System Hybrid Investments Monitoring Report, at 8 (First Quarter 2006), available at http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/invest/200606/ item03-02.pdf. CaIPERS has increased its portfolio of activist investing, or "corporate governance investments," to a total of $5 billion, or over 2% of its total portfolio, from 1.5% just last year. See Press Release, CalPERS Increases Corporate Governance Investments-Raises Potential Market Assets to $5 Billion (Sept. 13, 2006), available at http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2006/sept/corpgov-invest. xml. Some of the more recognizable names in the CalPERs governance portfolio include Breeden partners, Shamrock, and Hermes. Id.
222. Martin Lipton, Dealing With Activist Hedge Funds (Apr, 2, 2007), available at http://www.realcorporatelawyer.com/pdfs/wlrk033007.pdf.
223. See generally Verret, Economics Makes Strange Bedfellows, supra note 151.
224. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 747-49. See also Strine, supra note 122, at 1768 ("Due to her knowledge of how corporate boards work, the traditionalist has little interest in initiatives that single out specific board members for defeat or embarrassment. She knows boards almost always work by consensus and it is therefore silly to hold a solitary director responsible for a company's poor performance or lack of responsiveness to shareholder interests."), Of course, every change in corporate governance that works against the discretion and the financial security of management is hailed as yet another factor diminishing the pool of talent willing to serve on boards of directors. Lipton, The Many Myths of Lucian Bebchuk, supra note 4, at 747. The response is that if the potential director is a prestige seeker, that interest does not conflict with the interest of the company. Alternatively, if the potential director is interested in making money, increasing board compensation will encourage those interested in becoming directors. Diminishing interest in serving on boards is not nearly as convincing an argument in this context as it is when the issue is an increase in director liability. The embarrassment of a withhold vote pales in comparison to the obligations directors face in the wake of Sarbanes-Oxley, especially the Section 302 certification provision. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 302, 116 Stat. 745, 777 (codified at 15 U.S.C § 7241 (Supp. IV 2004)). See Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521, 1540-41 (2005).The marginal disincentive against serving on boards presented by the prospect of a withhold vote campaign would be minimal.
225. See Robert S. Saunders, Why Majority Voting in Director Elections is a Bad Idea, 1 VA. L. & BUS. REV. 107, 114 (2006).
226. Id. at 122.
227. For example, an employee's union could have agreed not to go along with the withhold vote against Eisner in exchange for concessions on employee bargaining. Such collusion would, however, be possible without the specter of a voting challenge.
228. ISS Report, supra note 31, at 14-15. See Saunders, supra note 157, at 120.
229. ISS Report, supra note 31, at 16.
230. Some examples of negative consequences are as follows. The board may be unable to achieve a quorum to conduct business. As listed in the Committee on Corporate Laws Discussion Paper, supra note 7, at 481, the effect of a withhold vote could constitute a breach of an executive candidate's employment agreement resulting in a trigger of severance payments, result in a "change of control" under corporate credit agreements resulting in accelerating debt or canceling a line of credit, or trigger changes in licenses, franchise agreements or other important corporate arrangements. In addition, "if a fixed number of directors is to be elected by holders of one class of securities, a failure to elect one or more directors could alter the relationship among shareholders of different classes." Id. The company's ability to comply with stock exchange listing standards or other requirements for maintaining independent directors or directors with particular qualifications may be inhibited. Id. "The failure to elect one or more candidates may alter the consequences of having a staggered or classified board.... A dissident group with minority representation on the board of directors could enlarge its percentage of directors if new nominees to the board are not elected-thereby avoiding the need for a direct proxy contest challenge and altering the existing dynamics of control contests." Id.
231. See Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law, at 98-102 (May 7, 2007) (Comments of John Wilcox, Vice-President for Corporate Governance at TIAA-CREF), available at http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf. In a different context, the President of the United Airlines Pilots Union claimed, "We don't want to kill the golden goose, just choke it by the neck until it gives us every last egg." Roger Lowenstein, Into Thin Air, N.Y. TIMES, Feb. 17, 2002, § 6 at 40.
232. See Moran v. Household International, Inc., 500 A.2d 1346, 1353 (Del. 1985) ("Having concluded that sufficient authority for the Rights Plan exists in 8 Del.C § 157, we note the inherent powers of the Board conferred by 8 Del.C. § 141(a) concerning the management of the corporations "business and affairs" also provides the Board additional authority upon which to enact the Rights Plan."); Unocal v. Mesa Petroleum Corp., 493 A.2d 946, 953-954 (Del. 1985) ("The board has a large reservoir of authority upon which to draw, Its duties and responsibilities proceed from the inherent powers conferred by 8 Del.C § 141(a), respecting management of the corporations "business and affairs." Additionally, the powers here being exercised derive from 8 Del.C. § 160(a), conferring broad authority upon a corporation to deal in its own stock. From this it is now well established that in the acquisition of its shares a Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primary purpose to entrench themselves in office."); Maldonado v. Flynn, 413 A.2d 1251, 1255 (Del. Ch. 1980), rev'd on other grounds, Zapata Corp. v. Maldonado, 430 A.2d 779, (Del. 1981).
233. Allied Chemical & Dye Corp. v. Steel & Tube Co. of Am., 120 A. 486, 492-93 (Del.Ch. 1923) (holding that shareholder's fiduciary duty to other shareholders only attaches where shareholder becomes a control shareholder).
234. See Strine, supra note 122, at 1765.
235. Id, at 1765 ("Unlike corporate managers, neither institutional investors as stockholders nor ISS as a voting advisor owe fiduciary duties to the corporations whose policies they seek to influence. And unlike the individual investors whose capital they use to wield influence, institutional investors and their advisors bear far less of the residual risk of poor voting decisions, as their compensation turns more on short-term factors than on long-run growth.").
236. Security Holder Director Nominations, SEC Rel. No. 34-48626, 68 Fed. Reg. 60784 (Oct. 23, 2003).
237. Exchange Act Rule 14a-3(a), 17 C.F.R. § 240.14a-3 (2007).
238. Brett H. McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, 3 BERKELEY BUS. L.J. 205, 211(2005).
239. This includes proposals that relate to an election, are improper under state law, have been substantially implemented by the company, or conflict with the Companys own proposal on the current ballot, among other exclusions. See Exchange Act Rule 14a-8, 17 C.E.R. § 240.14a-8 (2007).
240. See SEC Press Release 2007-71, SEC Announces Roundtable Discussion Regarding Proxy Process (Apr. 24, 2007), available at http://www.sec.gov/news/press/2007/2007-71.htm. Chairman Cox expects rule proposals on proxy access by the summer of 2007.
241. See Karey Wutkowski, SEC to propose new proxy rules in early summer, REUTERS, May 7, 2007, available at http://www.reuters.com/article/governmentFilingsNews/idUSN0734596620070507? pageNumber=1.
242. Am. Fed. of State, Cty. & Mun. Employees v. Am. Int'l Group, Inc., 462 E3d 121, 128 (2d Cir, 2006). ("Thus, we cannot agree with the second half of the SEC's interpretation of the 1976 Statement: that a proposal may be excluded under Rule 14a8(i)(8) if it would simply establish a process for shareholders to wage a future election contest.").
243. In July 2007, the SEC recommended for public comment two contradictory proxy access proposals. The first proposal would overrule AFSCME v. AIG by amending rule 14a-8 to disallow bylaw proposals relating to corporate elections. Shareholder Proposals Relating to the Election of Directors, SEC Rel. No. 34-56161, 72 Fed. Reg. 43488 (Aug. 3, 2007). The second proposal would amend rule 14a-8 to allow shareholders, or groups of shareholders holding a specified value of securities, to propose a bylaw change concerning the corporate election process. Shareholder Proposals, SEC Rel. No. 34-516160, 72 Fed. Reg. 43466 (Aug. 3, 2007), The SEC has been divided on this issue and the two proposals are a result of Chairman Cox's decision to vote for both proposals. See Statement of SEC Chairman Christopher Cox Before the U.S. Senate Committee on Banking, Housing and Urban Affairs (July 31, 2007), available at http://www.sec.gov/news/testimony/2007/ts073107cc.htm. The eventual outcome is uncertain as Commissioner Campos, a proponent of greater shareholder rights, is stepping down from the SEC. See Press Release 2007-163, Commissioner Campos to Leave SEC, Aug. 9, 2007, available at http://www.sec.gov/news/press/2007/ 2007-163.htm.
244. If the form of proxy access adopted requires shareholder approval to the bylaws, then two successive years will be required for shareholders to elect a director (that is a bylaw change in the first year, and a successful election in the second year). In addition, the fact that some corporations have supermajority voting requirements in order to amend bylaws means that process access through bylaw amendment would have a very high threshold. See infra note 225.
245. See SEC Rel. No. 34-48626, 68 Fed. Reg. at 60819. See also Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors, July 15, 2003, at 1, available at http://www.sec.gov/ news/studies/proxyrpt.htm.
246. See proposed Rules 14a-11(a)(2)(i), 14a-11(a)(2)(ii), and 14a-11(b), 14a-11(d) in SEC Rel. No. 34-48626, 68 Fed. Reg. at 60819.
247. Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511, 546 (1997).
248. SeeJ.W Verret, Comment Letter to the SEC (May 1, 2007), available at http://sec.gov/comments/4-537/4537-4.pdf.
249. See NYSE Rule 452, available at http://rules.nyse.com/NYSE/ NYSE_Rules/.
250. Rule 452, supra note 178, provides in relevant part:
251. Voting procedure without instructions: A member organization which has transmitted proxy soliciting material to the beneficial owner of stock or to an investment adviser, registered either under the Investment Advisers Act of 1940 or under the laws of a state, who exercises investment discretion pursuant to an advisory contract for the beneficial owner and has been designated in writing by the beneficial owner of such stock (hereinafter "designated investment adviser") to receive soliciting material in lieu of the beneficial owner and solicited voting instructions in accordance with the provisions of Rule 451, and which has not received instructions from the beneficial owner or from the beneficial owner's designated investment adviser by the date specified in the statement accompanying such material, may give or authorize the giving of a proxy to vote such stock, provided the person in the member organization giving or authorizing the giving of the proxy has no knowledge of any contest as to the action to be taken at the meeting and provided such action is adequately disclosed to stockholders and does not include authorization for a merger, consolidation or any other matter which may affect substantially the rights or privileges of such stock.
252. See Report and Recommendations of the Proxy Working Group to the New York Stock Exchange, at 12 (June 5, 2006), available at http://www.nyse.com/ pdfs/PWG_REPORT.pdf. [hereinafter "NYSE Report"].
253. Id. at 8 & n.9 ("Rule 452.11(2) defines a 'contest' as a matter that ?is the subject of a counter-solicitation, or is part of a proposal made by a stockholder which is being opposed by management.'").
254. Id. at 21.
255. See Recent Developments: The NYSE's "Broker Vote" Rulemaking, THECORPORATECOUNSEL.NET BLOC, May 30, 2007, available at http://www.thecorporatecounsel. net/blog/archive/001487.html. Alternative ideas discussed have included i) proportional voting, where the broker votes uninstructed shares proportionally based on the percentage of votes either way on client instructed votes; ii) adopting the NYSE's recommendation, but only when there is no active withhold vote campaign, and iii) having broker agreements include a default voting instruction.
256. See Ted Allen, SEC Hears Testimony on Broker Votes, CORPORATE GOVERNANCE BLOG (May 25, 2007), available at http://blog.issproxy.com/2007/05/ sec_hears_testimony_on_broker.html.
257. NYSE Report, supra note 180, at 13.
258. Id. at 10 ("The majority of publicly traded shares are not registered in companies' records in the names of the beneficial owners. Instead, an estimated 70 to 80 percent of all public companies' shares are held in "street name," meaning that they are held of record by brokers, banks or their depositories.").
259. See id. at 14.
260. See id. at 9.
261. See id. at 13.
262. See Recent Developments: The NYSE's "Broker Vote" Rulemaking, THECORPORATECOUNSEL.NET BLOG, May 30, 2007, available at http://www.thecorporatecounsel.net/blog/ archive/001487.html.
263. See id. at 21.
264. Id.
265. See Internet Availability of Proxy Materials, SEC Rel. No. 34-52926, 70 Fed. Reg. 74598 (Dec. 15, 2005).
266. SEC Press Release 2006-209, SEC Votes to Adopt E-Proxy Rule Amendments and Propose Mandatory Model, Dec. 13, 2006, available at http://www.sec.gov/news/press/2006/2006-209.htm.
267. Internet Availability of Proxy Materials, SEC Rel. No. 34-55146, 72 Fed. Reg. 4148 (Jan. 29, 2007) (to be codified at C.F.R. Parts 240, 249, and 274).
268. See, e.g., Use of Electronic Media for Delivery Purposes, SEC Rel. No. 33-7234, 60 Fed. Reg. 53468 (Oct. 15, 1995); Use of Electronic Media for Delivery Purposes, SEC Rel. No. 33-7233, 60 Fed. Reg. 53458 (Oct. 15, 1995); Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, SEC Rel. No. 33-7288, 61 Fed. Reg. 24644 (May 15, 1996); Use of Electronic Media for Delivery Purposes, Sec. Rel. No. 33-7289, 61 Fed. Reg. 24652 (May 15, 1996); Use of Electronic Media, SEC Rel. No. 33-7856, 65 Fed. Reg. 25843 (May 4, 2000).
269. See Bebchuk, The Myth of the Shareholder Franchise, supra note 4, at 694, 697.
270. Though H.J. Heinz is not a Delaware corporation, the pertinent operation of majority vs. plurality voting, and the process of a proxy fight, would remain the same if it were incorporated in Delaware. See 15 PA. CONS. STAT. ANN. § 1725 (West 1995).
271. Lisa Gewirtz, Heinz, Anticipation Still Buzzword, THE DAILY DEAL, Aug. 17, 2006, available at 2006 WLNR 14215438.
272. Id. Peltz is one of the more prolific activist hedge fund in the space, with a previous victory against Wendy's and a looming war against Tribune Co, see Peltz Closes In on Heinz Board, L. A. TIMES, Aug. 17, 2006, available at 2006 WLNR 14218025.
273. Id.; Teresa F. Lindeman Dissidents apparently win 2 Heinz Seats, PITTSBURGH POST-GAZETTE, Sep. 9, 2006, available at 2006 WLNR 15647153.
274. See Gewirtz, supra note 198.
275. Id.
276. Id.
277. O'Neal, Michael, Peltz Group Preaches its Gospel of Truth, CHI. TRIB., August 17, 2006, available at 2006 WLNR 14251264 ("When a reporter asked him if he considered his speech during the meeting "his Gordon Gekko moment" - a reference to Michael Douglas' classic "Greed is good" speech in the 1980s-era movie "Wall Street" - Peltz was not amused. "That doesn't warrant a response," he said frostily. Instead, Peltz sought to emphasize that he and his partners are interested in helping fix companies and participating in their growth - not tearing them down or flipping them for a quick profit.")
278. See also opening quotation, supra.
279. Lisa Gewirtz, "Heinz Vote May Hinge On One Firm" THE DAILY DEAL, August 18, 2006, available at 2006 WLNR 14299690.
280. See Heinz Press Release, Heinz Announces Preliminary Proxy Voting Results; Looks Forward with Confidence to Executing Its Plans to Increase Shareholder Value, Sept. 8, 2006, available at http://www.heinz.com/ News_f.aspx.
281. Heinz Board Approves Majority Voting, BUSINESS WIRE, November 8, 2006, available at http://www.allbusiness.com/ services/business-services/3924776-1.html.
282. Vlahakis, supra note 53, at 278 ("In June 2005, Pfizer Inc. became the first company to amend its corporate governance guidelines to require that any director who receives a majority of withheld votes submit his or her resignation to the board, leaving the outcome in the hands of the board. Since then, Walt Disney, Office Depot, Circuit City, Lucent Technologies, and over 30 other companies have adopted similar guidelines.").
283. See Dennis Berman, Boardroom Defensetration - As Proxy Season Heats Up, Companies Consider Rules to Boot Unwanted Directors, WALL ST. J., Mar. 16, 2006, at B1.
284. ISS has indicated that it may decline to endorse a campaign for a majority voting bylaw in instances where a proposal has already been adopted that substantially implemented majority voting. See MAJORITY ELECTIONS: QUESTIONS AND ANSWERS ON ISS 2006 VOTING POLICY, at 3 (December 2005), available at http://www.issproxy.com/pdf/FAQMVPolicy2006.pdf.
285. Capital One Financial Corporation, SEC No-Action Letter, 2006 WL 129325, at *1 (Jan. 12, 2006).
286. See Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, SEC Rel. No. 34-20091, 48 Fed. Reg. 38218 (Aug. 23, 1983).
287. See also Texaco, Inc., SEC No-Action Letter, 1991 WL 178690 (Mar. 28, 1991) ("a determination that the Company has substantially implemented the proposal depends on whether its particular policies, practices and procedures compare favorably with the guidelines of the proposal."). In the context of majority voting proposals,
288. see Bristol-Myers Squibb Company, SEC No-Action Letter, 2005 WL 372277 (February 14, 2005), where a stockholder proposal for a "simple majority vote" was properly excluded as "substantially implemented" under Rule 14a-8(i)(10) where the registrant was engaged in the process of removing supermajority voting provisions from its governing documents. Compare KeySpan Corporation, SEC No-Action Letter, 2006 WL 626123 (March 7, 2006).
289. See Wachtell, Lipton, Rosen, & Katz Client memo (white paper), Majority Voting - A Look Back at the 2006 Proxy Season, at 1 (June 12, 2006), available at http://www.realcorporatelawyer.com/pdfs/wlrk061306_02.pdf.
290. See infra Section VII. B. 1.
291. DEL. CODE tit 8, § 216 (2007).
292. By way of contrast, New York law uses as its metric a much simpler "votes cast" denominator. See Bank of New York Co. v. Irving Bank Corp., 531 N.Y.S.2d 730 (N.Y. Sup. Ct. 1988), aff'd, 533 N.Y.S.2d 411 (N.Y. App. Div. 1988); N.Y. BUS. CORP. LAW § 614(a) (McKinney 2003).
293. Licht v. Storage Technology Corp., Civ. A. 524-N, 2005 WL 1252355, at *1 (Del.Ch. May 6, 2005) (quoting R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS O RGANIZATIONS § 7.25, at 7-51 (2004) ("[I]n determining whether a [shareholder] proposal has passed in a circumstance where the vote is required "a majority of the shares present and entitled to vote on the subject matter," abstentions... are to be treated as shares present and "entitled to vole on the subject matter." Applying that standard, an abstention would be counted as a "no" vote....")).
294. Berlin v. Emerald Partners, 552 A.2d 482, 494 (Del.1988) ("Delaware law expressly recognizes the right of the corporation to rely upon record ownership, not beneficial ownership, in determining who is entitled to notice of and to vote at the meetings of stockholders. Therefore, from the perspective of the Delaware corporation, a broker who is the stockholder of record has the legal authority to vote in person or by proxy on all matters. Nevertheless, the relationship between a broker, who is the "record owner," and the beneficial owner is governed by the rules of the various stock exchanges... The shares represented by a limited proxy cannot be considered as part of the voting power present on a nondiscretionary proposal from which power has been withheld by crossing it out or otherwise.") (Citations omitted).
295. The Chancery Court has applied the test outlined in Berlin to interpret the "entitled to vote" language in Delaware Code section 216. See Hammersmith v. Elmhurst-Chicago Stone Co., Civ. A. No. 10,837, 1989 WL 99129, at *3 (Del Ch. Aug. 17, 1989).
296. North Fork Bancorpation., Inc. v. Toal, 825 A.2d 860 (Del. Ch.2000), aff'd, Dime Bancorporation, Inc. v. North Fork Bancorporation, Inc., 781 A.2d 69.3 (Del. 2001).
297. Id. at 866.
298. See supra Section VI.B.
299. See NYSE Report, supra note 180, The Report mentions that elimination of affirmative broker votes would have had a profound effect on the outcomes of majority withhold vote campaigns. However, it stands to reason that the calculation, if it omitted the double whammy effect of Berlin v. Emerald Partners, significantly underestimated the consequences of the alteration to Exchange Rule 452.
300. Licht, 2005 WL 1252355, at *3.
301. Institutional Investors and other activists will also have an incentive to monitor those arrangements, or propose their own alternatives. One company that seems to have implemented majority voting without qualification is Allstate, which announced that their previous majority voting policy would be replaced with a bylaw and their supermajority voting requirement for bylaw amendments would be removed. Press Release, Allstate Corp. Announcement of Corporate Governance Improvements, Feb. 20, 2007, available at http://media.allstate.com/categories/7-news-releases/releases/ 3901-allstate-announces-corporate-governance-improvements.
302. Although this article is skeptical of Lipton's arguments against any form of empowerment, it certainly recognizes that Lipton remains the unequivocal leader in corporate governance advising. Lipton's model documents for approval of a majority voting bylaw (one that gives board discretion in accepting the resignation, but that is included in the bylaws and also requires board disclosure of the reason for declining acceptance of that resignation) are instructive. See Wachtell white paper, supra note 213, at 1.
303. Pfizer Inc. Corporate Governance Principles, available at http://www.pfizer.com/pfizer/are/mn_investors_corporate_principles.jsp. Professors Sjostrom and Kim contrast Pfizer's plurality plus policy, where plurality votes determine the election but failure to achieve a majority vote requires resignation submission after being elected, with Intel's majority plus bylaw (see infra note 228) where failure to achieve a majority vote requires an incumbent to tender their resignation and resulted in no re-election. For purposes of this article, the distinction is ignored as the effect on incumbent directors and the presence of board discretion is the same. See William Sjostrom & Young Sang Kim, Majority Voting for the Election of Directors, (Feb. 24, 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962784.
304. See Simpson, Thacher & Bartlett, LLP, Majority Voting in Director Elections: A Look Back and A Look Ahead, at 4 (Aug. 4, 2006), available at http://www.stblaw.com/content/publications/pub560.pdf; Intel Corporation Bylaw, Article III, Section 1 (Jan. 17, 2007), available at http://www.intel.com/intel/finance/docs/bylaws.pdf.
305. Council of Institutional Investors, Majority Voting Primer, at 6-7 (Feb. 27, 2006), available at http://www.cii.org/policies/ MajorityVotingPrimer.pdf.
306. Simpson, Thacher & Bartlett, LLP, Majority Voting in Director Elections: A Look Back and A Look Ahead, at 4 (Aug. 4, 2006), available at http://www.stblaw.com/content/publications/pub560.pdf.
307. Indeed, some have openly stated that they will push for recommend voting for an alternative bylaw in the event that a company has adopted the Pfizer approach. Id.
308. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).
309. Article II C Bylaws of the General Electric Company, available at http://www.ge.com/en/citizenship/govcomp/bylaws/index.htm.
310. See Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971).
311. General Dynamics, Notice of Annual Meeting and Proxy Statement 2006, Mar. 31, 2006, at 38, available at http://www.sec.gov/Archives/edgar/data/ 40533/000119312506069331/ddef14a.htm#tx18358_15.
312. Wachtell white paper, supra note 213, at A-2.
313. See General Dynamics Proxy Statement, supra note 235, at 39.
314. DEL. CODE tit 8, § 141(b) (2007).
315. See Hollinger Intern., Inc. v. Black, 844 A.2d 1022 (Del. Ch.2004), aff'd, 872 A.2d 559 (Del. 2005) where the Chancery Court states: Stockholders are invested by § 109 with a statutory right to adopt bylaws. By its plain terms, § 109 provides stockholders with a broad right to adopt bylaws "relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. This grant of authority is subject to the limitation that the bylaws may not conflict with law or the certificate of incorporation. Traditionally, the bylaws have been the corporate instrument used to set forth the rules by which the corporate board conducts its business. To this end, the DGCL is replete with specific provisions authorizing the bylaws to establish the procedures through which board and committee action is taken.While there has been much scholarly debate about the extent to which bylaws can-consistent with the general grant of managerial authority to the board in § 141(a)-limit the scope of managerial freedom a board has, e.g., to adopt a rights plan, there is a general consensus that bylaws that regulate the process by which the board acts are statutorily authorized. This includes the extent and manner in which the board shall act through committees. Indeed, before the recent Bylaw Amendments, the International Bylaws heavily regulated the corporations committee procedures.
316. Id. at 1078-79 (citations and footnotes omitted, emphasis in original). See also Frantz Mfg. Co. v. EAC Industries, 501 A.2d 401, 407 (Del. 1985) ("The bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws... A bylaw that is inconsistent with any statute or rule of common law, however, is void; see Kerbs v. California Eastern Airways, Inc., 90 A.2d 652, 659 (Del. 1952), and bylaws must be reasonable in their application, Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971); State v. Jessup & Moore Paper Co., 77 A. 16 (Del. 1910).") (some citations omitted).
317. Jones Apparel Group, Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845-53 (Del. Ch. 2004).
318. Under the so called equal dignities doctrine, "the general theory of the Delaware General Corporation Law is that action taken under one section of that law is legally independent, and its validity is not dependent upon, nor to be tested by the requirements of other unrelated sections under which the same final result might be obtained by different means." Orzek v. Englehart, 195 A.2d 375, 378 (Del, 1963). This idea has been applied to bylaw amendments in Chesapeake Corp. v. Shore, 771 A.2d 293, 346 (Del. Ch. 2000).
319. Professor Coffee explores four dimensions that seem to indicate whether a bylaw restricting the power of the board might be upheld, See John C. Coffee, Jr., The Bylaw Battlefield: Can Institutions Change the outcome of Corporate Control Contests?, 51 U. MIAMI L. REV. 605 (1997). Those are (i) "Ordinary vs. Fundamental" - courts are more likely to allow bylaws that affect fundamental changes to the corporation, but not day-to-day business decisions, (ii) "Affirmative Orders vs. Constraints" - courts prefer that shareholders restrain boards from certain actions by requiring shareholder approval than mandating that they take specified actions, (iii) "Procedure vs. Substance" - bylaws necessarily codify and express the corporation's "housekeeping" and procedural rules, but rarely address specific substantive decisions, and (iv) "Corporate Governance vs. Business Decisions" - bylaws are most viable where they generally re-allocate authority between shareholders and boards than when they affect specific instances of that authority. Id. at 613-15.
320. Thought unclear, directors may have the authority to unilaterally eliminate bylaws not otherwise protected by the DGCL. See Gen. DataComm Indus. Inc. v. State of Wis. Invest. Board, 731 A.2d 818, 821 (Del. Ch. 1999) (noting, in the context of a motion for expedited proceedings, that "the question of whether a stockholder-approved bylaw can be repealed by a board of directors with such authority has not clearly been answered by a Delaware Court. However, the Supreme Courts decision in Centaur Partners and the views of a learned commentator (Professor Lawrence Hamermesh) suggest that the affirmative answer may be the correct one."). See Am. Int'l Rent a Car, Inc. v. Cross, No. 7583, 1984 WL 8294, at *3 (Del. Ch. May 9, 1984) (Berger, VC) ("If a majority of American International's stockholders in fact disapproved of the Board's amendment of the bylaw, several recourses were, and continue to be, available to them. They could vote the incumbent directors out of office. Alternatively, they could cause a special meeting of the stockholders to be held for the purpose of amending the bylaws and, as part of the amendment, they could remove from the Board the power to further amend the provision in question.") (emphasis added).
321. Professors Coates and Faris consider the issue in some depth. John Coates & Bradley C. Faris, Second-Generation Shareholder Bylaws: Post Quickturn Alternatives, 56 BUS. LAW. 1323 (2001). In their view, the "best argument in response is that Section 109(a) of DGCL reserves to the shareholders the residual authority to adopt, amend, and repeal bylaws. If the shareholders' residual authority under Section 109(a) is to mean anything, the argument would go, it must mean that the shareholders may adopt a bylaw that is beyond board repeal." Id. at 1368. However, they also argue that courts would likely find a non-repeal provision unenforceable, despite this argument. Id. Nonetheless, they believe that a similar restriction on repeal, such as a unanimous vote provision, would be evaluated in the same way as any other limiting provision, and thus could be upheld. Id. at 1356. They also note possible ways to uphold a no-repeal provision, either by arguing that the repeal of the bylaw is a violation of fiduciary duty, or that it is a Blasius like disenfranchisement of the shareholders. Id. at 1369. Cf. Larry Hamermesh, Corporate Democracy and Stockholder-Adopted By-laws: Taking Back the Street?, 73 TUL. L. REV. 409, 469-70 (1998) (arguing that a bylaw which purports to limit a directors ability to amend the bylaw is highly suspect under Delaware corporate law).
322. Hollinger Int'l Inc. v. Black, 844 A.2d 1022, 1078 (Del. Ch. 2004), aff'd, 872 A.2d 559 (Del. 2005).
323. See supra notes 58-61 and accompanying text.
324. DEL. CODE tit 8, § 216 (2007).
325. EDWARD P. WELCH, ANDREW J. TUREZYN & ROBERT S. SAUNDERS, FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 141.5 at GCL-IV-202 (5th ed. 2007). See also Bruch v. Nat'l Guarantee Credit Corp., 116 A. 738, 741(Del Ch. 1922).
326. DEL. CODE tit. 8, § 223(d) (2007)
327. ISS Report, supra note 31, at 15.
328. Id.
329. The term stalking horse originally derived from hunting wildfowl. Sportsmen observed that birds flee on the approach of humans, but tolerate the presence of other animals, such as horses. Hunters would approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within range, Animals trained for this purpose are called stalking horses. The phrase has also come to include a candidate put forward to mask another candidate. See WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY, at 2221 (1993).
330. See Sjostrom and Kim, supra note 227.
331. Sjostrom and Kim, supra note 227, at 43-45.
332. See generally Conlisk, supra note 124.
333. See Usha Rodrigues, The Seductive Comparison of Shareholder and Civic Democracy, 63 WASH. & LEE L. REV. 1389 (2006), Rodrigues argues that three factors make the comparison difficult, that (i) investing in a corporation is voluntary, (ii) representative democracy is limited in corporations, and (iii) the shareholder vote is largely an empty exercise. Id. at 1398-1401. The fact that shareholders can sell their shares is not without cost, especially for long term investors who want a stable and diversified portfolio, and the lack of shareholder voting power is descriptive. Rodrigues offers no predictions of how shareholder power might be enhanced, nor does it provide a normative answer to whether it should be enhanced.
334. See also Professor Henry Manne, Editorial, The Corporate Democracy Oxymoron, WALL ST. J., January 2, 2007.
335. See Blasius, 564 A.2d at 659 ("The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.").
336. See generally Colleen A. Dunlavy, Social Conceptions of the Corporation: Insights From the History of Shareholder Voting Rights, 63 WASH. & LEE L. REV. 1347 (2006).
337. See General Dynamics Proxy Statement, supra note 235, at 39 ("This proposal would require that director nominees receive the support of a majority of votes cast to be elected. For a number of compelling reasons, plurality voting is the prevailing standard for the election of federal, state and local officials as well as for directors in U.S. public companies. Our Company elects its directors by a plurality standard for the same reasons that democracies use plurality standards.").
338. Nicholas R. Miller, Voting, available at http://research.umbc.edu/ -nmiller/RESEARCH/VOTING.htm (reprinted in 4 THE NEW PLAGRAVE: A DICTIONARY OF ECONOMICS 826-30 (John Eatwell, Murray Milgate, and Peter Newman, eds.,1988) (citing Kenneth O. May, A Set of Independent Necessary and Sufficient Conditions for Simple Majority Rule, 20 ECONOMETRICA 680 (1952))).
339. Id. at 827.
340. Id.
341. Id.
342. Id.
343. Indeed, some would argue that hidden voting is dangerous. See Hu & Black, supra note 148.
344. See, e.g., the Disney withhold vote campaign. Paul R. LaMonica, Eisner Out as Disney Chair, CNN MONEY, Mar. 4, 2004, available at http://money.cnn.com/2004/03/03/news/companies/disney/index.htm. Professor Romano argues that voting confidentiality has no effect on results either.
345. See Roberta Romano, Does Confidential Proxy Voting Matter?, Yale ICF Working Paper No. 02-29; Yale L.& Econ. Res. Paper No. 265, available at http://ssm.com/abstract=325640.
346. See supra text accompanying notes 162-67 for an analysis concerning a "first strike capability" for institutional shareholders.
347. See Miller, supra note 260, at 827.
348. For the seminal work on why voting systems are incapable of meeting all necessary criterion at once, see Kenneth Arrow, A Difficulty in the Concept of Social Welfare, 58 J. POL. ECON. 328 (1950).
349. Also of interest are the various systems of tournament elimination used in sports playoffs, not analyzed in this context in light of the excessive cost they would require for corporate elections.
350. Opponents of any change in corporate elections would doubtless add a sixth criterion involving fiduciary duty-that the voting scheme cannot result in election of a director that would put his own interest before that of the corporation and fellow shareholders. Such a criterion is not included for two reasons: such a risk is not directly related to the form of the election, and it is also more properly addressed in the fiduciary duty strictures of shareholder derivative suits.
351. SEC Press Release, SEC Votes to Adopt E-Proxy Rule Amendments and Propose Mandatory Model, supra note 193.
352. There is a substantial body of scholarship on the political economy of multi-choice decisions that holds that altering the choices available will also alter the ordinal ranking preferences among the choices presented. See, e.g., Peter C., Fishburn & Steven J. Brams, Paradoxes of Preferential Voting, 56 MATHEMATICS MAGAZINE 207 (1983) (Describing the "Condorcet Paradox," where collective preferences of voters could be cyclic, meaning they change with the alternatives presented, even if the preferences of individual voters are not. This is paradoxical, because it means that majority wishes can be in conflict with each other. When this occurs, it is because the conflicting majorities are each made up of different groups of individuals. In other words, the winner of the vote depends on candidates' preferences for candidates who were not selected.). I admit that this is a drawback to my proposal, but it should be compared to political economy problems of absolute plurality voting, For more on rationality in voting methods, see DONALD SAARI, CHAOTIC ELECTIONS!: A MATHEMATICIAN LOOKS AT VOTING (2001).
353. If the SECs proxy access proposal requiring a specified percentage of shareholders to propose a bylaw is approved, see supra note 173, shareholders could propose a bylaw that implements IRV for contested elections. For Delaware corporations, that bylaw would presumably be protected from board alteration by Delawares majority voting amendment to the DGCL, see supra note 9 and accompanying text, because use of IRV would arguably specify the "votes necessary" to elect the director. Under the other iteration of the SECs proposal, see supra note 173, the SEC could exempt firms that have adopted IRV from being affected by a proxy access rule. See Verret, Comment Letter, supra note 177.
354. Martin Lipton & Steven A. Rosenblum, Election Contests in the Company's Proxy: An Idea Whose Time Has Not Come, 59 BUS. LAW. 67, 83 (2003).
355. See ISS Report, supra note 31.
356. Id.
357. See Bebchuk v. CA, Inc., 902 A.2d 737 (Del. Ch. 2006). Though Professor Bebchuk's move for a declaratory judgment declaring his bylaw proposal legal in the Delaware Chancery Court was dismissed for lack of ripeness, id. at 744-45, this doesn't mean that such challenges will not be likely once such bylaws are approved.
358. See supra Section VII.A., "Mechanical Issues in Tallying the Voting Outcome."
359. Made more difficult by the provisions in Rule 14a-8 that a shareholder proposal to the corporate proxy cannot exceed 500 words. SEC Rule 14a-8 (17 C.F.R. § 240.14a-8 (2007)).
360. 280, See supra Section VI.
361. 281, See Andrew Ross Sorkin, Private Firms Lure CEOs with Top Pay, N.Y. TIMES, Jan. 8, 2007, § A, at 1.
362. In other words, rattling the saber loses its effectiveness when your opponent knows you can't afford to pay for the war.