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1
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54249086805
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John Bogle, the person responsible for much of the success of the Vanguard mutual fund complex, an important champion of index investing, and a respected commentator on matters of corporate governance, estimates that approximately 74 percent of the stock of U.S. corporations is now held by financial intermediaries. John C. Bogle, Reflections on Toward Common Sense and Common Ground?, 33 J. CORP. L. 31, 31 (2007).
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John Bogle, the person responsible for much of the success of the Vanguard mutual fund complex, an important champion of index investing, and a respected commentator on matters of corporate governance, estimates that approximately 74 percent of the stock of U.S. corporations is now held by financial intermediaries. John C. Bogle, Reflections on "Toward Common Sense and Common Ground?," 33 J. CORP. L. 31, 31 (2007).
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2
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1442308181
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In earlier work with my colleague William B. Chandler III, I dwelled at greater length on the federal-state relationship in American corporate and securities law. See William B. Chandler III & Leo E. Strine, Jr., The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. PA. L. REV. 953(2003) [hereinafter Chandler & Strine, Preliminary Rejections].
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In earlier work with my colleague William B. Chandler III, I dwelled at greater length on the federal-state relationship in American corporate and securities law. See William B. Chandler III & Leo E. Strine, Jr., The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. PA. L. REV. 953(2003) [hereinafter "Chandler & Strine, Preliminary Rejections"].
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3
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54249108143
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See id. at 1005.
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See id. at 1005.
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4
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54249120972
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In two earlier works, I commented more generally on the nature of Delaware's approach to corporate law. See Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face, 30 DEL. J. CORP. L. 673 (2005);
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In two earlier works, I commented more generally on the nature of Delaware's approach to corporate law. See Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face, 30 DEL. J. CORP. L. 673 (2005);
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5
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0347710187
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Delaware's Corporate-Law System: Is Corporate America Buying an Exquisite Jewel or a Diamond in the Rough? A Response to Kahan & Kamar's Price Discrimination in the Market for Corporate Law, 86
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Leo E. Strine, Jr., Delaware's Corporate-Law System: Is Corporate America Buying an Exquisite Jewel or a Diamond in the Rough? A Response to Kahan & Kamar's Price Discrimination in the Market for Corporate Law, 86 CORNELL L. REV. 1257 (2001).
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(2001)
CORNELL L. REV
, vol.1257
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Strine Jr., L.E.1
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6
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54249160201
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The Fundamental Rights of the Shareholder, 40
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noting that twenty-nine states have constituency statutes in effect, See, e.g
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See, e.g., Julian Velasco, The Fundamental Rights of the Shareholder, 40 U.C. DAVIS L. REV. 407, 463 (2006) (noting that twenty-nine states have constituency statutes in effect).
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(2006)
U.C. DAVIS L. REV
, vol.407
, pp. 463
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Velasco, J.1
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7
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0036018212
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The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150
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See
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See Guhan Subramanian, The Influence of Antitakeover Statutes on Incorporation Choice: Evidence on the "Race" Debate and Antitakeover Overreaching, 150 U. PA. L. REV. 1795, 1817 (2002).
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(2002)
U. PA. L. REV
, vol.1795
, pp. 1817
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Subramanian, G.1
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8
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54249144123
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MISS. CODE ANN. § 79-4-8.30(f) (West 2001) (constituency statute);
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MISS. CODE ANN. § 79-4-8.30(f) (West 2001) (constituency statute);
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9
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54249164706
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MISS. CODE ANN. §§ 79-27-1 to 79-27-11 (West 2001) (control share acquisition statute).
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MISS. CODE ANN. §§ 79-27-1 to 79-27-11 (West 2001) (control share acquisition statute).
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10
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54249085543
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MASS. GEN. LAWS ANN. ch. 156D, § 8.30 (West 2005) (constituency statute);
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MASS. GEN. LAWS ANN. ch. 156D, § 8.30 (West 2005) (constituency statute);
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11
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54249156706
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MASS. GEN. LAWS ANN. ch. 156B, § 50A (West 2005) (staggered boards as a default provision).
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MASS. GEN. LAWS ANN. ch. 156B, § 50A (West 2005) (staggered boards as a default provision).
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12
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22544453008
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Delaware's Politics, 118
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See, e.g
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See, e.g., Mark J. Roe, Delaware's Politics, 118 HARV. L. REV. 2491 (2005);
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(2005)
HARV. L. REV
, vol.2491
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Roe, M.J.1
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13
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0346961398
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Delaware's Competition, 117
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Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588 (2003).
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(2003)
HARV. L. REV
, vol.588
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Roe, M.J.1
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14
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54249167660
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Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C, Supp. V 2005
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Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C. (Supp. V 2005)).
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54249146606
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See Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. CORP. L. 1, 4 (2007) [hereinafter Strine, Toward Common Sense].
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See Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. CORP. L. 1, 4 (2007) [hereinafter "Strine, Toward Common Sense"].
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54249162029
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Section 401(k) is the provision in the U.S. Internal Revenue Code that provides favorable tax treatment for funds invested for retirement purposes. I.R.C. § 401(k) (West 2002 & Supp. 2008). As a general matter, American workers must invest their 401(k) funds in a choice of mutual funds selected by their employer. Workers generally cannot invest 401(k) funds in the stock of particular companies.
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Section 401(k) is the provision in the U.S. Internal Revenue Code that provides favorable tax treatment for funds invested for retirement purposes. I.R.C. § 401(k) (West 2002 & Supp. 2008). As a general matter, American workers must invest their 401(k) funds in a choice of mutual funds selected by their employer. Workers generally cannot invest 401(k) funds in the stock of particular companies.
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18
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33646415078
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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, 1765 (2006) [hereinafter Strine, True Corporate Republic].
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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, 1765 (2006) [hereinafter "Strine, True Corporate Republic"].
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19
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33645140387
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Some Skepticism About Increasing Shareholder Power, 53
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For a rich discussion of the conflicts of interest among various types of stockholders, see
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For a rich discussion of the conflicts of interest among various types of stockholders, see Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. REV. 561 (2006).
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(2006)
UCLA L. REV
, vol.561
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Anabtawi, I.1
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54249158896
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For a provocative analysis that recognizes this problem, see Jennifer S. Taub, Able but Not Willing: The Failure of Mutual Fund Advisers to Advocate for Shareholders' Rights 5 (Oct. 2007), http://ssrn.com/abstract=1066831 ([W]e should shift our focus from empowerment of shareholders to the empowerment of the underlying equity investors. (emphasis in original)).
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For a provocative analysis that recognizes this problem, see Jennifer S. Taub, Able but Not Willing: The Failure of Mutual Fund Advisers to Advocate for Shareholders' Rights 5 (Oct. 2007), http://ssrn.com/abstract=1066831 ("[W]e should shift our focus from empowerment of shareholders to the empowerment of the underlying equity investors." (emphasis in original)).
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54249147061
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Because index funds all target a return tracking their market index, they compete almost exclusively on cost. See, e.g., Fidelity Investments, Advertisement, N.Y. TIMES, Apr. 27, 2008, at BU3 (full-page advertisement with this heading: A better choice for indexing? Attention Vanguard Index Fund Owners: Fidelity has index funds with lower expenses. (Up to 58 percent lower).). Moreover, index funds are not managed by investment experts focused on the quality of the portfolio companies but by persons expert in undertaking trading strategies that will allow the funds to produce results that track the market index as closely as possible.
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Because index funds all target a return tracking their market index, they compete almost exclusively on cost. See, e.g., Fidelity Investments, Advertisement, N.Y. TIMES, Apr. 27, 2008, at BU3 (full-page advertisement with this heading: "A better choice for indexing? Attention Vanguard Index Fund Owners: Fidelity has index funds with lower expenses. (Up to 58 percent lower)."). Moreover, index funds are not managed by investment experts focused on the quality of the portfolio companies but by persons expert in undertaking trading strategies that will allow the funds to produce results that track the market index as closely as possible.
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54249153923
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See, e.g., FIDELITY INVESTMENTS, PROSPECTUS, SPARTAN U.S. EQUITY INDEX FUND 7 (April 29, 2008) (Statistical sampling techniques attempt to match the investment characteristics of the index and the fund by taking into account such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth.). That endgame has nothing to do with reading annual reports, analyst commentary, and considering whether portfolio corporations have strategies to make money from fundamentally sound economic transactions and disclose their affairs in a clear and understandable manner.
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See, e.g., FIDELITY INVESTMENTS, PROSPECTUS, SPARTAN U.S. EQUITY INDEX FUND 7 (April 29, 2008) ("Statistical sampling techniques attempt to match the investment characteristics of the index and the fund by taking into account such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth."). That endgame has nothing to do with reading annual reports, analyst commentary, and considering whether portfolio corporations have strategies to make money from fundamentally sound economic transactions and disclose their affairs in a clear and understandable manner.
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54249124686
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See Robert C. Illig, What Hedge Funds Can Teach Corporate America: A Roadmap for Achieving Institutional Investor Oversight, 57 AM. U. L. REV. 225, 266 (2007) (Because they seek only to mirror market performance, [index] funds cannot be expected to engage in oversight activities or other activist trading strategies.); id. at 334 (Public equity fund managers remain passive in their investment philosophy because they are paid not to monitor but to cut costs.).
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See Robert C. Illig, What Hedge Funds Can Teach Corporate America: A Roadmap for Achieving Institutional Investor Oversight, 57 AM. U. L. REV. 225, 266 (2007) ("Because they seek only to mirror market performance, [index] funds cannot be expected to engage in oversight activities or other activist trading strategies."); id. at 334 ("Public equity fund managers remain passive in their investment philosophy because they are paid not to monitor but to cut costs.").
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54249156704
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See also John C. Coffee, Jr, Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REV. 1277, 1352-53 1991, Coffee notes that indexed investors are disinclined to be active monitors because of their emphasis on cutting costs, but suggests that it would be rational for them to become active monitors because, given their long-term focus and large stakes in particular companies and economies of scale [that they have] in reaching [economy-wide] voting decisions, they could justify expending substantial costs to improve corporate governance as that would result in better long-term financial performance. He reasons that [i]f monitoring is, rational for the institution but does not occur, the most logical diagnosis is that an agency problem exists
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See also John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REV. 1277, 1352-53 (1991) (Coffee notes that "indexed investors are disinclined to be active monitors" because of their emphasis on cutting costs, but suggests that it would be rational for them to become active monitors because, given their long-term focus and large stakes in particular companies and "economies of scale [that they have] in reaching [economy-wide] voting decisions," they could justify expending substantial costs to improve corporate governance as that would result in better long-term financial performance. He reasons that "[i]f monitoring is . . . rational for the institution but does not occur, the most logical diagnosis is that an agency problem exists.").
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See Robin Greenwood & Michael Schor, Investor Activism and Takeovers 2-9 (July 2007), http://ssrn.com/abstract=1003792 (arguing that hedge funds have been effective and primarily interested in pushing relatively small companies into a sale (even at less than a full price) for the sake of obtaining a one-time profit, and that hedge funds have comparatively little incentive or proven capacity to cause corporations to adopt corporate governance or business strategy changes that will produce better long-term results).
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See Robin Greenwood & Michael Schor, Investor Activism and Takeovers 2-9 (July 2007), http://ssrn.com/abstract=1003792 (arguing that hedge funds have been effective and primarily interested in pushing relatively small companies into a sale (even at less than a full price) for the sake of obtaining a one-time profit, and that hedge funds have comparatively little incentive or proven capacity to cause corporations to adopt corporate governance or business strategy changes that will produce better long-term results).
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54249122878
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In a recent essay, I mused about some ideas that might ensure better alignment between the interest of end-user investors and financial intermediaries: [I]t might be useful to control this form of agency as well and to ensure that institutional investors' conduct is better aligned with the best interests of long-term investors. Given the mountains of 401(k) money that American workers, as a practical matter, will entrust to these firms for generations, the utility of considering measures to guarantee greater alignment seems self-evident to anyone who has listened to corporate law scholars beat the agency cost drum. Avenues for exploration could include requirements for institutional investors (in particular, index funds) to: locus on indicators ot possible fraud or firm failure in making investment and voting decisions, align the compensation incentives of their management personnel with the investment horizons of long-term investors, and vote on mergers in a manner that takes into acc
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In a recent essay, I mused about some ideas that might ensure better alignment between the interest of end-user investors and financial intermediaries: [I]t might be useful to control this form of agency as well and to ensure that institutional investors' conduct is better aligned with the best interests of long-term investors. Given the mountains of 401(k) money that American workers, as a practical matter, will entrust to these firms for generations, the utility of considering measures to guarantee greater alignment seems self-evident to anyone who has listened to corporate law scholars beat the agency cost drum. Avenues for exploration could include requirements for institutional investors (in particular, index funds) to: locus on indicators ot possible fraud or firm failure in making investment and voting decisions, align the compensation incentives of their management personnel with the investment horizons of long-term investors, and vote on mergers in a manner that takes into account whether the fund owns shares of both parties to the merger. In tandem with this could be the consideration of requirements prohibiting mutual and pension funds from utilizing proxy voting recommendations services unless those services publicly disclose: (1) the revenues they receive from public companies and institutional investors, and the nature of the work that generates those revenues; and (2) the process used by them to develop their corporate governance ratings for corporations and directors, including the specific criteria and weighting they use to calculate the specific ratings given to corporations and directors. . . . . . .[Additional. . . strategy might well be considered. That would involve ideas to raise revenue by addressing short-term trading strategies. These could involve higher capital gains taxes on stock held for less than two years or a very small percentage tax on securities trades. By these means, the budget and social investment chasm that threatens our long-term economic vitality could be narrowed in a livable way that also has the utility of providing a comparative advantage to institutional investors who act like investors, rather than gamblers. Strine, Toward Common Sense, supra note 11, at 17-18.
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54249101888
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See, e.g., DEL. CODE ANN. tit. 8, § 144 (2001) (insulating by stockholder vote a conflict transaction from being voidable solely because it was a conflict transaction); id. § 251 (2001 & Supp. 2006 & Supp. 2008) (requiring stockholder approval of mergers); id. § 271 (2001 & Supp. 2006) (requiring stockholders to approve a sale of substantially all assets); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 895-902 (Del. Ch. 2003) (discussing the historical use of the ratification doctrine in Delaware corporate law).
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See, e.g., DEL. CODE ANN. tit. 8, § 144 (2001) (insulating by stockholder vote a conflict transaction from being voidable solely because it was a conflict transaction); id. § 251 (2001 & Supp. 2006 & Supp. 2008) (requiring stockholder approval of mergers); id. § 271 (2001 & Supp. 2006) (requiring stockholders to approve a sale of substantially all assets); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 895-902 (Del. Ch. 2003) (discussing the historical use of the ratification doctrine in Delaware corporate law).
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For example, federal law and the stock exchanges were the driving forces behind the requirements that public companies have an audit committee with outside directors, publish certified financial statements, and maintain certain controls regarding compliance with laws. See, e.g., Melvin A. Eisenberg, The Board of Directors and Internal Control, 19 CARDOZO L. REV. 237, 242-43, 254-55 (1997) (observing that the Foreign Corrupt Practices Act § 102, 15 U.S.C. § 78m(b) (2000 & Supp. V 2005), made having reliable internal controls, including those governing compliance with laws, a requirement for companies whose stock is registered under the Securities Exchange Act of 1934);
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For example, federal law and the stock exchanges were the driving forces behind the requirements that public companies have an audit committee with outside directors, publish certified financial statements, and maintain certain controls regarding compliance with laws. See, e.g., Melvin A. Eisenberg, The Board of Directors and Internal Control, 19 CARDOZO L. REV. 237, 242-43, 254-55 (1997) (observing that the Foreign Corrupt Practices Act § 102, 15 U.S.C. § 78m(b) (2000 & Supp. V 2005), made having reliable internal controls, including those governing compliance with laws, a requirement for companies whose stock is registered under the Securities Exchange Act of 1934);
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0013204251
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Paul G. Mahoney, The Exchange as Regulator, 83 VA. L. REV. 1453, 1466 (1997) (stating that the New York Stock Exchange (NYSE) required audited annual financial statements for listed companies even before the Securities Exchange Act of 1934 was enacted);
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Paul G. Mahoney, The Exchange as Regulator, 83 VA. L. REV. 1453, 1466 (1997) (stating that the New York Stock Exchange ("NYSE") required audited annual financial statements for listed companies even before the Securities Exchange Act of 1934 was enacted);
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54249152468
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Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1, 52 (1993) (noting that in 1977, the SEC, through a rule change in the NYSE listing requirements, mandated that listed companies have audit committees composed solely of independent directors).
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Joel Seligman, The New Corporate Law, 59 BROOK. L. REV. 1, 52 (1993) (noting that in 1977, the SEC, through a rule change in the NYSE listing requirements, mandated that listed companies have audit committees composed solely of independent directors).
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See Letter from Richard L. Trumka, Sec'y-Treasurer, Am. Fed'n of Labor & Cong. of Indus. Orgs., to Jonathan G. Katz, Sec'y, U.S. Sec. & Exch. Comm'n (May 15, 2003), http://www.sec.gov/rules/petitions/petn4-491.htm (Request for Rulemaking to Permit Shareholder-Nominated Director Candidates to Appear in Corporate Proxy Statements and Proxy Cards) [hereinafter AFL-CIO, Rulemaking Petition]. See also Chandler & Strine, Preliminary Reflections, supra note 2, at 999-1001 (article first circulated in late 2002 - questioning whether the director election process was the forgotten element to reform);
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See Letter from Richard L. Trumka, Sec'y-Treasurer, Am. Fed'n of Labor & Cong. of Indus. Orgs., to Jonathan G. Katz, Sec'y, U.S. Sec. & Exch. Comm'n (May 15, 2003), http://www.sec.gov/rules/petitions/petn4-491.htm ("Request for Rulemaking to Permit Shareholder-Nominated Director Candidates to Appear in Corporate Proxy Statements and Proxy Cards") [hereinafter "AFL-CIO, Rulemaking Petition"]. See also Chandler & Strine, Preliminary Reflections, supra note 2, at 999-1001 (article first circulated in late 2002 - questioning whether the director election process was the "forgotten element to reform");
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32
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17144371741
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Investors Seek Proxy Election Reform
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discussing the proposed reforms and citing the article by Chancellor Chandler and me, Feb. 17, at
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Phyllis Plitch, Investors Seek Proxy Election Reform, L.A. TIMES, Feb. 17, 2003, at C3 (discussing the proposed reforms and citing the article by Chancellor Chandler and me);
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(2003)
L.A. TIMES
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Plitch, P.1
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33
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0036600250
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William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr, The Great Takeover Debate: A Meditation on Bridging the Conceptual Divide, 69 U. CHI. L. REV. 1067, 1072-74 (2002, suggesting reform to the corporate election system, Citigroup, Inc, SEC No-Action Letter, 2003 WL 328268, at *3-8 (Jan. 31, 2003, stating that the SEC Division of Corporation Finance would not recommend enforcement action against Citigroup for omitting the American Federation of State, County and Municipal Employees' Rule 14a-8 proposal to amend Citigroup's bylaws to allow a stockholder or stockholder group owning 3 percent or more of the company's common stock to have their director nominees included on the company's proxy statement, Press Release, U.S. Sec. & Exch. Comm'n, Commission to Review Current Proxy Rules and Regulations to Improve Corporate Democracy Apr. 14, 2003, explaining that the SEC had decided not to review the SE
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William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., The Great Takeover Debate: A Meditation on Bridging the Conceptual Divide, 69 U. CHI. L. REV. 1067, 1072-74 (2002) (suggesting reform to the corporate election system); Citigroup, Inc., SEC No-Action Letter, 2003 WL 328268, at *3-8 (Jan. 31, 2003) (stating that the SEC Division of Corporation Finance would not recommend enforcement action against Citigroup for omitting the American Federation of State, County and Municipal Employees' Rule 14a-8 proposal to amend Citigroup's bylaws to allow a stockholder or stockholder group owning 3 percent or more of the company's common stock to have their director nominees included on the company's proxy statement); Press Release, U.S. Sec. & Exch. Comm'n, Commission to Review Current Proxy Rules and Regulations to Improve Corporate Democracy (Apr. 14, 2003), http://www.sec.gov/news/press/2003-46.htm (explaining that the SEC had decided not to review the SEC Division of Corporation Finance's Citigroup No-Action Letter and that it had instructed the Division to review the current proxy rules);
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see generally Damon A. Silvers & Michael I. Garland, The Origins and Goals of the Fight for Proxy Access, in SHAREHOLDER ACCESS TO THE CORPORATE BALLOT (Lucian Bebchuk ed., publication postponed indefinitely), http://www.sec.gov/spotlight/dir- nominations/silversgarland022004.pdf.
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see generally Damon A. Silvers & Michael I. Garland, The Origins and Goals of the Fight for Proxy Access, in SHAREHOLDER ACCESS TO THE CORPORATE BALLOT (Lucian Bebchuk ed., publication postponed indefinitely), http://www.sec.gov/spotlight/dir- nominations/silversgarland022004.pdf.
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AFL-CIO, Rulemaking Petition, supra note 21
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AFL-CIO, Rulemaking Petition, supra note 21.
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See, e.g., Letter from Sean Harrigan, President, Cal. Pub. Employees' Ret. Sys., to Jonathan Katz, Sec'y, U.S. Sec. & Exch. Comm'n (Dec. 5, 2003), http://www.sec.gov/rules/proposed/s71903/calpers120503.htm (File No. S7-19-03) (suggesting that the SEC would establish triggers for access to companies' proxy cards); see generally Div. of Corp. Fin., U.S. Sec. & Exch. Comm'n, Summary of Comments: In Response to the Commission's Proposed Rules Relating to Security Holder Director Nominations (Mar. 5, 2004), http://www.sec.gov/rules/extra/s71903summary.htm (providing a detailed list of the suggested specific event triggers at the text of the summary accompanying notes 163-72).
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See, e.g., Letter from Sean Harrigan, President, Cal. Pub. Employees' Ret. Sys., to Jonathan Katz, Sec'y, U.S. Sec. & Exch. Comm'n (Dec. 5, 2003), http://www.sec.gov/rules/proposed/s71903/calpers120503.htm (File No. S7-19-03) (suggesting that the SEC would establish triggers for access to companies' proxy cards); see generally Div. of Corp. Fin., U.S. Sec. & Exch. Comm'n, Summary of Comments: In Response to the Commission's Proposed Rules Relating to Security Holder Director Nominations (Mar. 5, 2004), http://www.sec.gov/rules/extra/s71903summary.htm (providing a detailed list of the suggested specific event triggers at the text of the summary accompanying notes 163-72).
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See Security Holder Director Nominations, Exchange Act Release No. 34-48626, 68 Fed. Reg. 60784, 60787 (proposed Oct. 23, 2003) (to be codified at 17 C.F.R. pts. 240, 249 & 274) (trial balloon of then-Chairman Donaldson) [hereinafter Security Holder Director Nominations]. See also Strine, True Corporate Republic, supra note 13, at 1776-77.
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See Security Holder Director Nominations, Exchange Act Release No. 34-48626, 68 Fed. Reg. 60784, 60787 (proposed Oct. 23, 2003) (to be codified at 17 C.F.R. pts. 240, 249 & 274) (trial balloon of then-Chairman Donaldson) [hereinafter "Security Holder Director Nominations"]. See also Strine, True Corporate Republic, supra note 13, at 1776-77.
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54249134935
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In 2003 and 2004, key institutional investor organizations, corporate representatives, the SEC, and members of the Delaware bench and bar participated in important public discussions about director election reform at, among other forums, the Harvard Law School, the University of Delaware, and the International Corporate Governance Network. During these conferences, the potential and legally untested utility of election reform bylaws were discussed by, among many others, Vice Chancellor Lamb and me. In that context, the barriers to presenting election related by laws using Rule 14a-8 were a frequent part of the discussion. See Symposium on Corporate Elections at Harvard Law School 96-104, 110-11 (Oct. 3, 2003, transcript available at http://ssrn.com/abstract=471640, hereinafter Harvard Symposium, Roundtable at the University of Delaware on Shareholder Access to the Company Proxy: Accountability Creator or Boardroom Bomb? 37-45 Nov. 18, 2003, transcript on file wi
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In 2003 and 2004, key institutional investor organizations, corporate representatives, the SEC, and members of the Delaware bench and bar participated in important public discussions about director election reform at, among other forums, the Harvard Law School, the University of Delaware, and the International Corporate Governance Network. During these conferences, the potential and legally untested utility of election reform bylaws were discussed by, among many others, Vice Chancellor Lamb and me. In that context, the barriers to presenting election related by laws using Rule 14a-8 were a frequent part of the discussion. See Symposium on Corporate Elections at Harvard Law School 96-104, 110-11 (Oct. 3, 2003) (transcript available at http://ssrn.com/abstract=471640) [hereinafter "Harvard Symposium"]; Roundtable at the University of Delaware on Shareholder Access to the Company Proxy: Accountability Creator or Boardroom Bomb? 37-45 (Nov. 18, 2003) (transcript on file with The Business Lawyer) [hereinafter "Delaware Roundtable"]; Stephen Davis, Global Eye: Retiring the Rubber Stamp, FIN. TIMES, Dec. 13, 2004, at 6;
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STEPHEN DEANE, ISS INST. FOR CORPORATE GOVERNANCE, MAJORITY VOTING IN DIRECTOR ELECTIONS: FROM THE SYMBOLIC TO THE DEMOCRATIC 6-15, 18 (2005), available at http://issproxy.com/ pdf/MVwhitepaper.pdf. Throughout the long debate, there were also discussions of American Bar Association corporate law committees among key constituents, during which Delawareans observed that the use of bylaws to effectuate election reform had yet to be tested. Indeed, this course of discussions is likely what led to the SEC inviting both Vice Chancellor Lamb and me to participate in the 2007 Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law. See infra note 28.
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STEPHEN DEANE, ISS INST. FOR CORPORATE GOVERNANCE, MAJORITY VOTING IN DIRECTOR ELECTIONS: FROM THE SYMBOLIC TO THE DEMOCRATIC 6-15, 18 (2005), available at http://issproxy.com/ pdf/MVwhitepaper.pdf. Throughout the long debate, there were also discussions of American Bar Association corporate law committees among key constituents, during which Delawareans observed that the use of bylaws to effectuate election reform had yet to be tested. Indeed, this course of discussions is likely what led to the SEC inviting both Vice Chancellor Lamb and me to participate in the 2007 Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law. See infra note 28.
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See DEL. CODE ANN. tit. 8, § 09(a) (2001) (After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote, or, in the case of a nonstock corporation, in its members entitled to vote; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body by whatever name designated. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws.).
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See DEL. CODE ANN. tit. 8, § 09(a) (2001) ("After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote, or, in the case of a nonstock corporation, in its members entitled to vote; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body by whatever name designated. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws.").
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See, e.g., Harvard Symposium, supra note 25, at 103-04 (Jack Coffee) (suggesting that the Delaware courts would likely uphold the use of bylaw amendments to set procedures for shareholder voting); Delaware Roundtable, supra note 25, at 38 (A. Gilchrist Sparks) (stating that a bylaw that would proportionally reimburse management and insurgents for their proxy solicitation costs could be adopted without stating who, the shareholders or the board, could adopt it). See also infra note 28 (citing several scholarly articles that discuss what shareholders could likely achieve via bylaw amendments).
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See, e.g., Harvard Symposium, supra note 25, at 103-04 (Jack Coffee) (suggesting that the Delaware courts would likely uphold the use of bylaw amendments to set procedures for shareholder voting); Delaware Roundtable, supra note 25, at 38 (A. Gilchrist Sparks) (stating that a bylaw that would proportionally reimburse management and insurgents for their proxy solicitation costs could be adopted without stating who, the shareholders or the board, could adopt it). See also infra note 28 (citing several scholarly articles that discuss what shareholders could likely achieve via bylaw amendments).
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The SEC's exclusion of bylaw proposals that issuers' counsel, rather than the highest court of a state, had concluded were invalid had the practical effect of preventing any resolution by state courts of the validity of those bylaws because institutional investors have generally been unwilling to push bylaws outside the Rule 14a-8 process. See, e.g, Harvard Symposium, supra note 25, at 110; Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law 82-83 (May 7, 2007, unofficial transcript available at http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707. pdf, hereinafter First Roundtable Transcript, Of course, there is a rich body of work by distinguished scholars on the extent to which stockholders of Delaware corporations can use bylaws to address subjects like takeover defenses, the electoral process, and executive compensation. That debate centers on the relationship between section 109(b) of the Delaware General Co
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The SEC's exclusion of bylaw proposals that issuers' counsel, rather than the highest court of a state, had concluded were invalid had the practical effect of preventing any resolution by state courts of the validity of those bylaws because institutional investors have generally been unwilling to push bylaws outside the Rule 14a-8 process. See, e.g., Harvard Symposium, supra note 25, at 110; Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law 82-83 (May 7, 2007) (unofficial transcript available at http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707. pdf) [hereinafter "First Roundtable Transcript"]. Of course, there is a rich body of work by distinguished scholars on the extent to which stockholders of Delaware corporations can use bylaws to address subjects like takeover defenses, the electoral process, and executive compensation. That debate centers on the relationship between section 109(b) of the Delaware General Corporation Law ("DGCL"), which states that "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, 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," and section 141(a), which states that the corporation shall be managed by or under the direction of the board, except insofar as the DGCL or the corporation's certificate provides to the contrary. DEL. CODE ANN. tit. 8, §§ 109(b), 141(a) (2001).
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Readers interested in these questions can usefully consult the following articles: Lawrence A. Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws. Taking Back the Street?, 73 TUL. L. REV. 409 (1998);
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Readers interested in these questions can usefully consult the following articles: Lawrence A. Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws. Taking Back the Street?, 73 TUL. L. REV. 409 (1998);
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John C. Coffee, Jr., The Bylaw Battlefield: Can Institutions Change the Outcome of Corporate Control Contests?, 51 U. MIAMI L. REV. 605 (1997);
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John C. Coffee, Jr., The Bylaw Battlefield: Can Institutions Change the Outcome of Corporate Control Contests?, 51 U. MIAMI L. REV. 605 (1997);
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Brett H. McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, 3 BERKELEY BUS. L.J. 205 (2005).
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Brett H. McDonnell, Shareholder Bylaws, Shareholder Nominations, and Poison Pills, 3 BERKELEY BUS. L.J. 205 (2005).
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Exchange Act Rule 14a-8, 17 C.F.R. § 240.14a-8 (2008).
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Exchange Act Rule 14a-8, 17 C.F.R. § 240.14a-8 (2008).
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Professor Roberta Romano eloquently explained this idea at the 2007 Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law. She stated: I think in some sense, the view of this by corporations as democracy is inept, because in democracy, we think of things as one person/one vote, and it is people's visions of the good. Whereas, corporations are not really a polity, and they are there to serve as engines of efficiency in terms of the allocation of resources and the production of goods and services, and the concept of that is one share/one vote and not one person/one vote, because we think the more financial interest you have in the firm, the more likely your voting will be for increasing the value of the firm and with the other investors. The thresholds of 14a-8 is really like an one person/one vote, because you can have a trivial investment and you have the same equal access to using everyone else's resources in the proxy statement as those who have a large b
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Professor Roberta Romano eloquently explained this idea at the 2007 Roundtable Discussions Regarding the Federal Proxy Rules and State Corporation Law. She stated: I think in some sense, the view of this by corporations as democracy is inept, because in democracy, we think of things as one person/one vote, and it is people's visions of the good. Whereas, corporations are not really a polity, and they are there to serve as engines of efficiency in terms of the allocation of resources and the production of goods and services, and the concept of that is one share/one vote and not one person/one vote, because we think the more financial interest you have in the firm, the more likely your voting will be for increasing the value of the firm and with the other investors. The thresholds of 14a-8 is really like an one person/one vote, because you can have a trivial investment and you have the same equal access to using everyone else's resources in the proxy statement as those who have a large block. First Roundtable Transcript, supra note 28, at 50.
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Rule 14a-8(a), 17 C.F.R. § 240.14a-8(a) (2008). Although stockholders are allowed to make mandatory proposals, [a]fter more than four [now six] decades of experience and modification, the consensus understanding of the typical rule 14a-8 proposal is that it is advisory or precatory in nature. See Patrick J. Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 GA. L. REV. 97, 101 (1988).
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Rule 14a-8(a), 17 C.F.R. § 240.14a-8(a) (2008). Although stockholders are allowed to make mandatory proposals, "[a]fter more than four [now six] decades of experience and modification, the consensus understanding of the typical rule 14a-8 proposal is that it is advisory or precatory in nature." See Patrick J. Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 GA. L. REV. 97, 101 (1988).
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See also RISKMETRICS GROUP, 2007 POSTSEASON REPORT: A CLOSER LOOK AT ACCOUNTABILITY AND ENGAGEMENT 5 (Oct. 2007), available at http://www.riskmetrics.com/pdf/2007PostSeasonReportFINAL. pdf (observing that only 2 percent of the shareholder proposals that appeared on proxy statements during the 2007 proxy season were binding).
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See also RISKMETRICS GROUP, 2007 POSTSEASON REPORT: A CLOSER LOOK AT ACCOUNTABILITY AND ENGAGEMENT 5 (Oct. 2007), available at http://www.riskmetrics.com/pdf/2007PostSeasonReportFINAL. pdf (observing that only 2 percent of the shareholder proposals that appeared on proxy statements during the 2007 proxy season were binding).
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See Rule 14a-8(i), 17 C.F.R. § 240.14a-8(i) (2008). The full list of the thirteen substantive bases for exclusion is: (1) improper under state law; (2) violation of law; (3) violation of proxy rules; (4) personal grievance; special interest; (5) relevance; (6) absence of power/authority; (7) management functions; (8) relates to election; (9) conflicts with company's proposal; (10) substantially implemented; (11) duplication; (12) resubmissions; and (13) specific amount of dividends. Id.
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See Rule 14a-8(i), 17 C.F.R. § 240.14a-8(i) (2008). The full list of the thirteen substantive bases for exclusion is: (1) improper under state law; (2) violation of law; (3) violation of proxy rules; (4) personal grievance; special interest; (5) relevance; (6) absence of power/authority; (7) management functions; (8) relates to election; (9) conflicts with company's proposal; (10) substantially implemented; (11) duplication; (12) resubmissions; and (13) specific amount of dividends. Id.
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In section 211 of the DGCL, the statute says that an annual meeting of stockholders shall be held for the election of directors and that stockholders may transact [a]ny other proper business at the annual meeting. DEL. CODE ANN. tit. 8, § 211b, 2001, The annual meeting undoubtedly provides stockholders an annual chance to ask questions and make statements of reasonable length, but the term proper business would seem to stop far short of giving a stockholder a right to demand a vote on a non-binding resolution when such resolutions are never mentioned in the statute or most corporate charters or bylaws. Rather, what would clearly be a proper exercise of that stockholders' right is the timely proposal of a bylaw addressing a subject that section 109 identifies. See id. § 109. But the SEC has used the lack of any state law on non-binding stockholder plebiscites to justify its own creation of such a device
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In section 211 of the DGCL, the statute says that "an annual meeting of stockholders shall be held for the election of directors" and that stockholders may transact "[a]ny other proper business" at the annual meeting. DEL. CODE ANN. tit. 8, § 211(b) (2001). The annual meeting undoubtedly provides stockholders an annual chance to ask questions and make statements of reasonable length, but the term "proper business" would seem to stop far short of giving a stockholder a right to demand a vote on a non-binding resolution when such resolutions are never mentioned in the statute or most corporate charters or bylaws. Rather, what would clearly be a proper exercise of that stockholders' right is the timely proposal of a bylaw addressing a subject that section 109 identifies. See id. § 109. But the SEC has used the lack of any state law on non-binding stockholder plebiscites to justify its own creation of such a device. In fact, the SEC encourages the submission of non-binding proposals by including the following note after the subsection of Rule 14a-8 stating that a shareholder bylaw may be excluded if it is improper under state law: Depending on the subject matter, some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise. Rule 14a-8(i)(1), 17 C.F.R. § 240.14a-8(i)(1) (2008).
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Rule 14a-8(J)(2)(iii), 17 C.F.R. § 240.14a-8(J)(2)(iii) (2008) (requiring that a company file a supporting opinion of counsel with the SEC if it seeks to exclude a shareholder proposal via a reason based on matters of state or foreign law); SEC Staff Legal Bulletin No. 14B (CF) (Sept. 15, 2004), http://www.sec.gov/interps/legal/cfslb14b.htm (In submitting such an opinion of counsel, the company and its counsel should consider whether the law underlying the opinion of counsel is unsettled or unresolved and, whenever possible, the opinion of counsel should cite relevant legislative authority or judicial precedents regarding the opinion of counsel. (emphasis added)).
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Rule 14a-8(J)(2)(iii), 17 C.F.R. § 240.14a-8(J)(2)(iii) (2008) (requiring that a company file a "supporting opinion of counsel" with the SEC if it seeks to exclude a shareholder proposal via a reason "based on matters of state or foreign law"); SEC Staff Legal Bulletin No. 14B (CF) (Sept. 15, 2004), http://www.sec.gov/interps/legal/cfslb14b.htm ("In submitting such an opinion of counsel, the company and its counsel should consider whether the law underlying the opinion of counsel is unsettled or unresolved and, whenever possible, the opinion of counsel should cite relevant legislative authority or judicial precedents regarding the opinion of counsel." (emphasis added)).
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Through cooperation, Delaware and the SEC have recently provided a new option to address future questions like this. Last year, a Delaware constitutional amendment became effective when the second leg passed the legislature. See 76 Del. Laws ch. 37 (S.B. 62) (May 3, 2007). That amendment authorizes the Delaware Supreme Court to answer questions from the SEC regarding issues of state law. DEL. CONST. art. IV, § 11. This expression of public policy might be thought to ripen disputes between issuers and stockholders about the validity of proposed bylaws, given that the Delaware Constitution now reflects the public policy determination that answering such questions in a timely fashion is in the public interest.
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Through cooperation, Delaware and the SEC have recently provided a new option to address future questions like this. Last year, a Delaware constitutional amendment became effective when the second leg passed the legislature. See 76 Del. Laws ch. 37 (S.B. 62) (May 3, 2007). That amendment authorizes the Delaware Supreme Court to answer questions from the SEC regarding issues of state law. DEL. CONST. art. IV, § 11. This expression of public policy might be thought to ripen disputes between issuers and stockholders about the validity of proposed bylaws, given that the Delaware Constitution now reflects the public policy determination that answering such questions in a timely fashion is in the public interest.
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Am. Fed'n of State, County & Mun. Employees (AFSCME) v. Am. Int'l Group, Inc., 462 F.3d 121, 126 (2d Cir. 2006) (quoting Proposed Amendments to Rule 14a-8 Relating to Proposals to Security Holders, Exchange Act Release No. 34-12598, 41 Fed. Reg. 29982, 29984 (proposed July 7, 1976) (to be codified at 17 C.F.R. § 240.14a-8)).
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Am. Fed'n of State, County & Mun. Employees ("AFSCME") v. Am. Int'l Group, Inc., 462 F.3d 121, 126 (2d Cir. 2006) (quoting Proposed Amendments to Rule 14a-8 Relating to Proposals to Security Holders, Exchange Act Release No. 34-12598, 41 Fed. Reg. 29982, 29984 (proposed July 7, 1976) (to be codified at 17 C.F.R. § 240.14a-8)).
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Id. at 129-30 (We therefore interpret the election exclusion as applying to shareholder proposals that relate to a particular election and not to proposals that, like AFSCME's, would establish the procedural rules governing elections generally.).
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Id. at 129-30 ("We therefore interpret the election exclusion as applying to shareholder proposals that relate to a particular election and not to proposals that, like AFSCME's, would establish the procedural rules governing elections generally.").
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60
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Shareholder Proposals, Exchange Act Release No. 34-56160, 72 Fed. Reg. 43466 (proposed Aug. 3, 2007) (to be codified at 17 C.F.R. pt. 240) [hereinafter Nazareth Proposal].
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Shareholder Proposals, Exchange Act Release No. 34-56160, 72 Fed. Reg. 43466 (proposed Aug. 3, 2007) (to be codified at 17 C.F.R. pt. 240) [hereinafter "Nazareth Proposal"].
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See id. at 43470; see also Securities Exchange Act of 1934 § 13(d, 15 U.S.C. § 78m(d, 2000, Exchange Act Rule 13d-1, 17 C.F.R. § 240.13d-1 (2008, providing the rule for who must file Schedules 13D and 13G, Exchange Act Schedules 13D & 13G, 17 C.F.R. § 240.13d-101, 102 2008
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See id. at 43470; see also Securities Exchange Act of 1934 § 13(d), 15 U.S.C. § 78m(d) (2000); Exchange Act Rule 13d-1, 17 C.F.R. § 240.13d-1 (2008) (providing the rule for who must file Schedules 13D and 13G); Exchange Act Schedules 13D & 13G, 17 C.F.R. § 240.13d-101, -102 (2008).
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See Nazareth Proposal, supra note 41, at 43474 ([W]e are proposing a new Rule 14a-17 that would provide that the existing disclosure requirements for solicitations in opposition (either for a short slate or for a majority of board seats) would apply to nominating shareholders and their nominees under any shareholder nomination procedure.). See also Exchange Act Regulation 14A, 17 C.F.R. §§ 240.14a-1 to 240.14a-17 (2008) (regulation for proxy contestants).
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See Nazareth Proposal, supra note 41, at 43474 ("[W]e are proposing a new Rule 14a-17 that would provide that the existing disclosure requirements for solicitations in opposition (either for a short slate or for a majority of board seats) would apply to nominating shareholders and their nominees under any shareholder nomination procedure."). See also Exchange Act Regulation 14A, 17 C.F.R. §§ 240.14a-1 to 240.14a-17 (2008) (regulation for proxy contestants).
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Shareholder Proposals Relating to the Election of Directors, Exchange Act Release No. 34-56161, 72 Fed. Reg. 43488, 43493 (proposed Aug. 3, 2007) (to be codified at 17 C.F.R. § 240.14a-8) [hereinafter Atkins Proposal].
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Shareholder Proposals Relating to the Election of Directors, Exchange Act Release No. 34-56161, 72 Fed. Reg. 43488, 43493 (proposed Aug. 3, 2007) (to be codified at 17 C.F.R. § 240.14a-8) [hereinafter "Atkins Proposal"].
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Press Release, U.S. Sec. & Exch. Comm'n, SEC Votes to Codify Longstanding Policy on Shareholder Proposals on Election Procedures (Nov. 28, 2007), http://www.sec.gov/news/press/2007/2007-246.htm [hereinafter SEC Votes to Codify Longstanding Policy Press Release].
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Press Release, U.S. Sec. & Exch. Comm'n, SEC Votes to Codify Longstanding Policy on Shareholder Proposals on Election Procedures (Nov. 28, 2007), http://www.sec.gov/news/press/2007/2007-246.htm [hereinafter "SEC Votes to Codify Longstanding Policy Press Release"].
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Id. (If the Commission did nothing, then there would be no clear and authoritative interpretation of our rules.); Christopher Cox, Chairman, U.S. Sec. & Exch. Comm'n, Statement Concerning Bylaw Proposals to Establish Director Nomination Procedures (Nov. 14, 2007), http://www.sec.gov/ news/testimony/2007/ts111407cc.htm ([W]e are committed to having a clear rule in place for the coming proxy season.) [hereinafter Statement Concerning Bylaw Proposals].
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Id. ("If the Commission did nothing, then there would be no clear and authoritative interpretation of our rules."); Christopher Cox, Chairman, U.S. Sec. & Exch. Comm'n, Statement Concerning Bylaw Proposals to Establish Director Nomination Procedures (Nov. 14, 2007), http://www.sec.gov/ news/testimony/2007/ts111407cc.htm ("[W]e are committed to having a clear rule in place for the coming proxy season.") [hereinafter "Statement Concerning Bylaw Proposals"].
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Statement Concerning Bylaw Proposals, supra note 48. Further increasing the uncertainty, according to Chairman Cox, was the recent U.S. Supreme Court decision in Long Island Care at Home, Ltd. v. Coke, 127 S. Ct. 2339 (2007), in which the Court addressed the standard for reviewing an agency's interpretation of its own regulations. See Statement Concerning Bylaw Proposals, supra note 48. He believed that the Court in Long Island Care cast doubt on the Second Circuit's decision in AFSCME. See id. (As a result of [Long Island Care], it is more likely today that even a Second Circuit court would uphold the agency's longstanding interpretation of our proxy access rule.).
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Statement Concerning Bylaw Proposals, supra note 48. Further increasing the uncertainty, according to Chairman Cox, was the recent U.S. Supreme Court decision in Long Island Care at Home, Ltd. v. Coke, 127 S. Ct. 2339 (2007), in which the Court addressed the standard for reviewing an agency's interpretation of its own regulations. See Statement Concerning Bylaw Proposals, supra note 48. He believed that the Court in Long Island Care cast doubt on the Second Circuit's decision in AFSCME. See id. ("As a result of [Long Island Care], it is more likely today that even a Second Circuit court would uphold the agency's longstanding interpretation of our proxy access rule.").
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SEC Votes to Codify Longstanding Policy Press Release, supra note 47
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SEC Votes to Codify Longstanding Policy Press Release, supra note 47.
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Id
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Id.
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Annette L. Nazareth, Comm'r, U.S. Sec. & Exch. Comm'n, Speech by SEC Commissioner: Opening Statement - Shareholder Proposals Relating to the Election of Directors (Nov. 28, 2007), http://www.sec.gov/news/speech/2007/ spch112807aln.htm [hereinafter Nazareth Speech].
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Annette L. Nazareth, Comm'r, U.S. Sec. & Exch. Comm'n, Speech by SEC Commissioner: Opening Statement - Shareholder Proposals Relating to the Election of Directors (Nov. 28, 2007), http://www.sec.gov/news/speech/2007/ spch112807aln.htm [hereinafter "Nazareth Speech"].
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Id.
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Id
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Id.
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Id, citing COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION 93 Nov. 30, 2006, available at http://www.capmktsreg.org/pdfs/11. 30Committee_Interim_ReportREV2.pdf [hereinafter COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, The Committee on Capital Markets Regulation is a blue-ribbon committee whose stated purpose is to explore a range of issues related to maintaining and improving the competitiveness of the U.S. capital markets. COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, at vii. Specifically, its objective is to recommend policy changes that should be made, or areas of research that should be pursued, to preserve and enhance the balance between efficient and competitive capital markets
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Id. (citing COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION 93 (Nov. 30, 2006), available at http://www.capmktsreg.org/pdfs/11. 30Committee_Interim_ReportREV2.pdf [hereinafter "COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT"]). The Committee on Capital Markets Regulation is a blue-ribbon committee whose stated "purpose is to explore a range of issues related to maintaining and improving the competitiveness of the U.S. capital markets." COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, at vii. Specifically, its "objective is to recommend policy changes that should be made, or areas of research that should be pursued, to preserve and enhance the balance between efficient and competitive capital markets and shareholder protection." id.
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Nazareth Speech, supra note 52
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Nazareth Speech, supra note 52.
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See, e.g, Press Release, Cal. Pub. Employees' Ret. Sys, CalPERS Urges U.S. Senate Committee to Protect Shareowner Access to Corporate Election Ballots; Seeks Strong Message to SEC About Proposed Rule Change (Nov. 14, 2007, http://www.calpers.ca.gov/index.jsp?bc=yabout/press/pr-2007/nov/calpers- urges- us-senate.xml (asking the U.S. Senate Banking Committee to urge the SEC to leave the AFSCME Rule in place after it became clear that the SEC was likely to adopt the Atkins Proposal, Press Release, AFL-CIO, Statement of AFL-CIO President John Sweeney on SEC Attack on Investor Rights (Nov. 28, 2007, http://www.aflcio.org/mediacenter/prsptm/pr11282007a.cfm The SEC should be responding by moving aggressively to protect investors, rather than taking away our rights, Investors have every reason to fear after today that they face a Commission that will ignore their views and act against their interests, Press Release, Cal. Pub. Employees Ret. Sys, CalPERS
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See, e.g., Press Release, Cal. Pub. Employees' Ret. Sys., CalPERS Urges U.S. Senate Committee to Protect Shareowner Access to Corporate Election Ballots; Seeks Strong Message to SEC About Proposed Rule Change (Nov. 14, 2007), http://www.calpers.ca.gov/index.jsp?bc=yabout/press/pr-2007/nov/calpers-urges- us-senate.xml (asking the U.S. Senate Banking Committee to urge the SEC to leave the AFSCME Rule in place after it became clear that the SEC was likely to adopt the Atkins Proposal); Press Release, AFL-CIO, Statement of AFL-CIO President John Sweeney on SEC Attack on Investor Rights (Nov. 28, 2007), http://www.aflcio.org/mediacenter/prsptm/pr11282007a.cfm ("The SEC should be responding by moving aggressively to protect investors, rather than taking away our rights. . . . Investors have every reason to fear after today that they face a Commission that will ignore their views and act against their interests."); Press Release, Cal. Pub. Employees Ret. Sys., CalPERS Assails SEC Rollback of Investor Rights - Denounces Action to Deny Shareowner Access to Corporate Ballots (Nov. 28, 2007), http://www.calpers.ca.gov/index.jsp?bc=/ about/press/pr-2007/nov/calpers-assails-rollback.xml ("In effect, the Commission has turned back the clock on corporate democracy by withdrawing a shareowner right that is taken for granted in other developed countries."); Posting of Lynn E. Turner to Harvard Law School Corporate Governance Blog, http://blogs.law.harvard.edu/corpgov/2007/12/17/heroes-and-villains/ (Dec. 17, 2007, 19:51 EST) ("Heroes and Villains") ("By passing the non-access rule, three of the four current Commissioners have only served to increase the likelihood of open warfare, and perhaps litigation, between shareholders and management."). See also Press Release, Chris Dodd, U.S. Sen. for Conn., Statement of Senator Dodd, Chairman of Senate Banking Committee, on SEC Vote on Proxy Access (Nov. 28, 2007), http://dodd.senate.gov/ index.php?q=node/4149 (expressing his concern about the effect of the SEC's adoption of the Atkins Proposal on shareholder rights and stating that he would hold Chairman Cox to his promise to revisit the issue in 2008); Press Release, Congressman Barney Frank, Chairman, H. Comm. on. Fin. Servs., Frank Statement on SEC Action to Restrict Proxy Access (Nov. 28, 2007), http://www.house.gov/apps/ list/press/financialsvcs_dem/press112807.shtml ("The amendments to the Commissions proxy rules will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns, by effectively precluding shareholders from proposing changes to director election procedures. I believe the Commission should have waited until it was at full membership and was able to deal comprehensively with the issue of proxy access.").
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E.g., Press Release, U.S. Chamber of Commerce, Chamber Supports SEC Action to Curb Abuse of Proxy Process (Nov. 28, 2007), http://www.uschamber. com/press/releases/2007/november/07-200. htm (The United States Chamber of Commerce today applauded action by the U.S. Securities and Exchange Commission (SEC) that clarifies its longstanding interpretation of proxy access rules and prevents special interest groups from abusing the proxy process.); Posting of John Carney to Deal-breaker Blog, http://www.dealbreaker.com/2007/11/ sec_nixes_proxy_access_proposa.php (Nov. 28, 2007, 16:12 EST) (SEC Nixes Proxy Access Proposal) (Ordinary shareholders can breath[e] a little easier that this attempted power grab has failed.).
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E.g., Press Release, U.S. Chamber of Commerce, Chamber Supports SEC Action to Curb Abuse of Proxy Process (Nov. 28, 2007), http://www.uschamber. com/press/releases/2007/november/07-200. htm ("The United States Chamber of Commerce today applauded action by the U.S. Securities and Exchange Commission (SEC) that clarifies its longstanding interpretation of proxy access rules and prevents special interest groups from abusing the proxy process."); Posting of John Carney to Deal-breaker Blog, http://www.dealbreaker.com/2007/11/ sec_nixes_proxy_access_proposa.php (Nov. 28, 2007, 16:12 EST) ("SEC Nixes Proxy Access Proposal") ("Ordinary shareholders can breath[e] a little easier that this attempted power grab has failed.").
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See, e.g., Roberta Romano, Less Is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 YALE J. ON REG. 174, 181 n.18 (2001) (citing earlier scholarship concluding that Rule 14a-8 was not advantageous from a cost-benefit perspective and suggesting that the introduction of institutional investors with higher levels of ownership and whose proposals attain higher support levels does not alter the cost-benefit conclusion, that subsidizing the proposal process is inefficacious).
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See, e.g., Roberta Romano, Less Is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 YALE J. ON REG. 174, 181 n.18 (2001) (citing earlier scholarship concluding that Rule 14a-8 was not advantageous from a cost-benefit perspective and suggesting that "the introduction of institutional investors with higher levels of ownership and whose proposals attain higher support levels does not alter the cost-benefit conclusion, that subsidizing the proposal process is inefficacious").
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Even commentators who support invigorating the corporate election process have raised questions about the need for proxy access. For example, Professor Gordon has argued that the emergence of both the ability to solicit proxies through e-mail and the concentration of votes in most corporations among a relatively discrete number of institutional holders has rendered the issue of getting direct access to the company's own proxy card trivial. Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 VAND. L. REV. 475, 487-91 2008
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Even commentators who support invigorating the corporate election process have raised questions about the need for proxy access. For example, Professor Gordon has argued that the emergence of both the ability to solicit proxies through e-mail and the concentration of votes in most corporations among a relatively discrete number of institutional holders has rendered the issue of getting direct access to the company's own proxy card trivial. Jeffrey N.
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See RISKMETRICS GROUP, supra note 31 at 6, 31 (noting that there were 174 social proposals that went to vote during the first half of 2007 but also thirty-seven for majority vote in director elections, forty-one for advisory vote on executive pay, thirty-four for board declassification, thirty-eight for pay for performance, and forty for an independent board chairperson).
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See RISKMETRICS GROUP, supra note 31 at 6, 31 (noting that there were 174 social proposals that went to vote during the first half of 2007 but also thirty-seven for majority vote in director elections, forty-one for advisory vote on executive pay, thirty-four for board declassification, thirty-eight for pay for performance, and forty for an independent board chairperson).
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See Randall S. Thomas & James F. Cotter, Shareholder Proposals in the New Millennium: Shareholder Support, Board Response, and Market Reaction, 13 J. CORP. FIN. 368, 378-82 (2007) (surveying shareholder proposals during the 2002-2004 proxy seasons and noting that the percentage of majority supported shareholder proposals that received a positive response from the board increased from 15 percent in 2002 to 50 percent in 2004);
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See Randall S. Thomas & James F. Cotter, Shareholder Proposals in the New Millennium: Shareholder Support, Board Response, and Market Reaction, 13 J. CORP. FIN. 368, 378-82 (2007) (surveying shareholder proposals during the 2002-2004 proxy seasons and noting that the percentage of majority supported shareholder proposals that received a positive response from the board increased from 15 percent in 2002 to 50 percent in 2004);
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Yonca Ertimur, Fabrizio Ferri, & Stephen R. Stubben, Board of Directors' Responsiveness to Shareholders: Evidence from Shareholder Proposals 2 (Harvard Business School Working Paper Series, Mar. 2008, http://ssm.com/abstract=816264 (The emergence of MV shareholder proposals as an important driver of governance change calls for a better understanding of the frequency, determinants and consequences of boards' decisions to implement these proposals. To address this question, we analyze a sample of 620 governance-related, non-binding MV shareholder proposals between 1997 and 2004. In terms of frequency, we find that 193 of these proposals i.e, 31.1, were implemented within one year from the majority vote. The rate of implementation has increased dramatically after 2002, doubling to more than 40%, See also Posting of L. Reed Walton to Risk & Governance Blog, Feb. 26, 2008
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Yonca Ertimur, Fabrizio Ferri, & Stephen R. Stubben, Board of Directors' Responsiveness to Shareholders: Evidence from Shareholder Proposals 2 (Harvard Business School Working Paper Series, Mar. 2008), http://ssm.com/abstract=816264 ("The emergence of MV shareholder proposals as an important driver of governance change calls for a better understanding of the frequency, determinants and consequences of boards' decisions to implement these proposals. To address this question, we analyze a sample of 620 governance-related, non-binding MV shareholder proposals between 1997 and 2004. In terms of frequency, we find that 193 of these proposals (i.e., 31.1%) were implemented within one year from the majority vote. The rate of implementation has increased dramatically after 2002, doubling to more than 40%."). See also Posting of L. Reed Walton to Risk & Governance Blog, http://blog.riskmetrics.com/2008/02/investors_push_for_proposal_ad.html (Feb. 26, 2008) ("Investors Push for Proposal Adoption") ("According to Risk-Metrics Group data, more than 40 companies have made changes in response to majority-supported resolutions last year. At least 115 proposals won 50 percent shareholder support or greater in 2007, but that number may grow as companies with fourth-quarter meetings continue to report voting results."); Posting of L. Reed Walton to Risk & Governance Blog, http://blog.riskmetrics.com/2007/10/nonbinding_proposals_defeateds.html (Oct. 12, 2007) ("Non-Binding Proposals Defended") (citing data on the number of shareholder proposals withdrawn and the votes received for the remaining shareholder proposals to support its conclusion that "companies have become more willing to engage with resolution proponents" while "[a]t the same time, investors have continued to give strong support to shareholder proposals that go to a vote"). The activist shareholder pressure to remove takeover defense mechanisms has had a material effect in the last five years. "In the S&P 500, for example, poison pills currently are in effect at only 29% of companies, as compared to 60% in 2002, while classified boards currently exist at only 36% of companies, as opposed to 61% in 2002." David A. Katz & Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, Corporate Governance Update: Do Corporate Governance Ratings Fail to Make the Grade? 3 & n.8 (Jan. 24, 2008), http://www.realcorporatelawyer. com/pdfs/Co?orate%20Govemance%20Update% 20- %20Do%20Corporate%20Governance%20Ratings%20Fail%20to%20Make%20the%20Grade.pdf (citing statistics from www.sharkrepellant.net). One recent empirical analysis suggests that precatory shareholder proposals have played a material role in the voluntary dismantling of classified boards.
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Mira Ganor, Why Do Managers Dismantle Staggered Boards?, 33 DEL. J. CORP. L. 149, 185, 187 (2008) (finding a statistically significant connection between precatory resolutions and the management decision to destagger).
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Mira Ganor, Why Do Managers Dismantle Staggered Boards?, 33 DEL. J. CORP. L. 149, 185, 187 (2008) (finding "a statistically significant connection between precatory resolutions and the management decision to destagger").
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Ralph Waldo Emerson, Self-Reliance, reprinted in 2 THE COMPLETE WORKS OF RALPH WALDO EMERSON 43. 57 (Edward W. Emerson ed., 1903) (A foolish consistency is the hobgoblin of little minds. . . .).
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Ralph Waldo Emerson, Self-Reliance, reprinted in 2 THE COMPLETE WORKS OF RALPH WALDO EMERSON 43. 57 (Edward W. Emerson ed., 1903) ("A foolish consistency is the hobgoblin of little minds. . . .").
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The so-called endowment effect would likely come into play if the SEC sought to take away a tool that institutional investors have so long enjoyed. See Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 CORNELL L. REV. 608, 625 (1998) (describing the endowment effect as the fact that individuals will often place a higher value on an entitlement if they own it than if they do not);
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The so-called "endowment effect" would likely come into play if the SEC sought to take away a tool that institutional investors have so long enjoyed. See Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 CORNELL L. REV. 608, 625 (1998) (describing the endowment effect as the fact that "individuals will often place a higher value on an entitlement if they own it than if they do not");
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Duncan Kennedy, Cost-Benefit Analysts of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401 (1981, exploring the same effect but referring to it as the offer-asking problem, One might suspect that the endowment effect would be particularly strong because 'the [SEC, since 1942, has provided security holders of public companies subject to its proxy regulations a right to have their proposals presented to the issuer's security holders at large and to have proxies with respect to such proposals solicited at little or no expense to the security holder, Roosevelt v. E.I. Du Pont de Nemours & Co, 958 F.2d 416, 422 (D.C. Cir. 1992, emphasis added, quoting Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Exchange Act Release No. 34-19135, 47 Fed. Reg. 47420, 47421 proposed Oct. 26, 1982, to be codified at 17 C.F.R. pt. 240, footnote omitted
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Duncan Kennedy, Cost-Benefit Analysts of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 401 (1981) (exploring the same effect but referring to it as the "offer-asking" problem). One might suspect that the endowment effect would be particularly strong because "'the [SEC], since 1942, has provided security holders of public companies subject to its proxy regulations a right to have their proposals presented to the issuer's security holders at large and to have proxies with respect to such proposals solicited at little or no expense to the security holder.'" Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992) (emphasis added) (quoting Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Exchange Act Release No. 34-19135, 47 Fed. Reg. 47420, 47421 (proposed Oct. 26, 1982) (to be codified at 17 C.F.R. pt. 240) (footnote omitted)).
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Many of the advocates for having the states make corporate law justify this position in large measure because of the regulatory competition among the various states that allows for more private ordering and experimentalism in the Brandeisian sense. See ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 14-31 (1993);
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Many of the advocates for having the states make corporate law justify this position in large measure because of the regulatory competition among the various states that allows for more private ordering and experimentalism in the Brandeisian sense. See ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 14-31 (1993);
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State Law, Shareholder Protection and the Theory of the Corporation, 6
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Ralph K. Winter, Jr., State Law, Shareholder Protection and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 273-76 (1977).
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Winter Jr., R.K.1
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See also
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See also Stephen M. Bainbridge, Director Primacy and Shareholder Disempowerment, 119 HARV. L. REV. 1735, 1742-44 (2006).
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, pp. 1742-1744
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Bainbridge, S.M.1
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Already, Delaware has taken substantial action to address the desire of institutional investors to move away from plurality voting. See DEL. CODE ANN. tit. 8, § 216 (2001 & Supp. 2006, A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors, See also id. § 141b, A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. A resignation which is conditioned upon the director failing to receive a specified vote for reelection as a director may provide that it is irrevocable, If the AFSCME Rule were embraced by the SEC, one can imagine further consideration of state law changes and important bylaw drafting questions, such as the threshold
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Already, Delaware has taken substantial action to address the desire of institutional investors to move away from plurality voting. See DEL. CODE ANN. tit. 8, § 216 (2001 & Supp. 2006) ("A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors."). See also id. § 141(b) ("A resignation is effective when the resignation is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. A resignation which is conditioned upon the director failing to receive a specified vote for reelection as a director may provide that it is irrevocable."). If the AFSCME Rule were embraced by the SEC, one can imagine further consideration of state law changes and important bylaw drafting questions, such as the threshold and durability of support particular bylaws should receive, whether enhanced ownership requirements should be required of proponents, and whether new disclosure requirements should be imposed on proponents.
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For a scholarly argument that this aspect of the Nazareth Proposal was overbroad, see Gordon, supra note 60, at 479-80 (contending that most shareholder proposals, such as proposals on social issues or precatory corporate governance resolutions, would not be made without the subsidy provided by Rule 14a-8 because the cost of distributing a separate proxy for such proposals would not be cost-effective for the proposing investors). As Gordon notes, the SEC could require any person who actually nominates a slate using a proxy access mechanism adopted by bylaw to meet the proxy contestant disclosure requirements at that time. Id. at 490-91.
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For a scholarly argument that this aspect of the Nazareth Proposal was overbroad, see Gordon, supra note 60, at 479-80 (contending that most shareholder proposals, such as proposals on social issues or precatory corporate governance resolutions, would not be made without the subsidy provided by Rule 14a-8 because the cost of distributing a separate proxy for such proposals would not be cost-effective for the proposing investors). As Gordon notes, the SEC could require any person who actually nominates a slate using a proxy access mechanism adopted by bylaw to meet the proxy contestant disclosure requirements at that time. Id. at 490-91.
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The increased activism of certain investors, and the conflicts of interest among various kinds of investors, have inspired two scholars to call for an expansion of traditional fiduciary duty law to subject activist investors to potential liability when their activism unfairly benefits themselves to the detriment of the corporation and its other investors. See Iman Anabtawi & Lynn A. Stout, Fiduciary Duties for Activist Shareholders, 60 STAN. L. REV. 1255, 1293-1303 (2008).
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The increased activism of certain investors, and the conflicts of interest among various kinds of investors, have inspired two scholars to call for an expansion of traditional fiduciary duty law to subject activist investors to potential liability when their activism unfairly benefits themselves to the detriment of the corporation and its other investors. See Iman Anabtawi & Lynn A. Stout, Fiduciary Duties for Activist Shareholders, 60 STAN. L. REV. 1255, 1293-1303 (2008).
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Rule 14a-8(b)(1), 17 C.F.R. § 240.14a-8(b)(1) (2008).
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By comparison, the obstacles to gaining access to the ballot in the political arena are far more substantial. To place an initiative on the ballot in California, 433,971 signatures must be collected. California Secretary of State, Elections, How to Qualify an Initiative, http://www.sos.ca.gov/elections/ elections_h.htm (last visited June 11, 2008, In Pennsylvania, a fee of $200 and 24,666 signatures are required to run for statewide office. Commonwealth of Pennsylvania Department of State, Elections, Instructions for Filing as a Political Body Candidate; 2008 General Election, http://www.dos.state.pa.us/elections/lib/elections/010_running_for_offic e/2008/ 2008_instructions_for_filing_as_a_political_body_candidate.pdf last visited June 11, 2008, In Delaware, the fees for candidates running for statewide office shall not exceed 1 percent of the total salary for the entire term in office for which the candidate is filing, see DEL. CODE ANN
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By comparison, the obstacles to gaining access to the ballot in the political arena are far more substantial. To place an initiative on the ballot in California, 433,971 signatures must be collected. California Secretary of State, Elections, How to Qualify an Initiative, http://www.sos.ca.gov/elections/ elections_h.htm (last visited June 11, 2008). In Pennsylvania, a fee of $200 and 24,666 signatures are required to run for statewide office. Commonwealth of Pennsylvania Department of State, Elections, Instructions for Filing as a Political Body Candidate; 2008 General Election, http://www.dos.state.pa.us/elections/lib/elections/010_running_for_office/2008/ 2008_instructions_for_filing_as_a_political_body_candidate.pdf (last visited June 11, 2008). In Delaware, the fees for candidates running for statewide office shall not exceed 1 percent of "the total salary for the entire term in office for which the candidate is filing," see DEL. CODE ANN. tit. 15, § 3103 (1999 & Supp. 2006), and typically have been as much as 1 percent.
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RiskMetrics Group, has bylaws, for example, that give its investors the opportunity to influence its governance through the inclusion of stockholder nominated directors on the company's proxy, but only if the stockholder or group of stockholders has owned at least 4 percent of the company's common stock for at least two years. RiskMetrics Group, Inc
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The parent company of ISS Governance Services, at, Jan. 24
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The parent company of ISS Governance Services, RiskMetrics Group, has bylaws, for example, that give its investors the opportunity to influence its governance through the inclusion of stockholder nominated directors on the company's proxy, but only if the stockholder or group of stockholders has owned at least 4 percent of the company's common stock for at least two years. RiskMetrics Group, Inc., Registration Statement (Form S-1/A), at 114 (Jan. 24, 2008).
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The idea of social proposals has become complicated by the increasing dominance of institutional investors among the stockholder base of public operating companies. How money managers trained at Harvard Business School, the Wharton School, or the Owen Graduate School of Management are supposed to bring to bear their conscience on controversial social questions is a subject for an article unto itself. A recent debate between Fidelity Investments and its stockholders is suggestive of both the problem and a theoretical solution. Last year, Fidelity sold a significant portion of its holdings in PetroChina, a company targeted by human-rights activists for its ties to Sudan's rulers and thus the crisis in Darfur. Fidelity was vocal in declaring that its decision to sell shares of PetroChina was not a response to the criticism of human-rights activists. Anne Crowley, Fidelity's spokesperson, explained: Our funds have a fiduciary responsibility to act in the financial interests of
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The idea of social proposals has become complicated by the increasing dominance of institutional investors among the stockholder base of public operating companies. How money managers trained at Harvard Business School, the Wharton School, or the Owen Graduate School of Management are supposed to bring to bear their "conscience" on controversial social questions is a subject for an article unto itself. A recent debate between Fidelity Investments and its stockholders is suggestive of both the problem and a theoretical solution. Last year, Fidelity sold a significant portion of its holdings in PetroChina, a company targeted by human-rights activists for its ties to Sudan's rulers and thus the crisis in Darfur. Fidelity was vocal in declaring that its decision to sell shares of PetroChina was not a response to the criticism of human-rights activists. Anne Crowley, Fidelity's spokesperson, explained: Our funds have a fiduciary responsibility to act in the financial interests of their investors, in keeping with the investment policies for each fund. This is not Fidelity investing its own money, this is Fidelity investing the money of millions of people. [The situation in Darfur] is a matter to be properly resolved by the governments of the world and the United Nations. And we truly hope they will do what is right. Ross Kerber, Fidelity Says It Did Not Divest for Darfur - Firm Insists Decisions Based on Financials, Not Activist Pressure, BOSTON GLOBE, May 17, 2007, at D1. The response of Fidelity stockholders was to submit shareholder proposals on the issue. The SEC denied Fidelity's no-action request on excluding those proposals. Sue Asci, Activists Push 'Genocide-Free Investing' Resolution - SEC Gives the Group Thumbs-up on Proxies, INV. NEWS, Feb. 18, 2008, at 20. In spring 2008, shareholders of several Fidelity funds were able to vote on a shareholder proposal to establish "oversight procedures to screen out investments in companies that, in the judgment of the Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity." Fidelity Contrafund, Definitive Proxy Statement (Form 14A) (Feb. 29, 2008). The funds' directors recommended against the adoption of that proposal. Id.
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In 2007, the United Kingdom's Financial Services Authority implemented a thorough going regulatory scheme requiring a stockholder controlling 3 percent or more of a listed company's total voting rights to make substantial disclosures of all direct and indirect investments in that company within two trading days of reaching that threshold. Financial Services Authority, The Full Handbook, Disclosure Rules and Transparency Rules §§ 5.1.2, 5.8.3 (U.K, http://fsahandbook.info/FSA//handbook/DTR/5.pdf last visited June 11, 2008, requiring disclosure within four trading days in the case of a non-U.K. issuer and two trading days in all other cases, Moreover, whenever the stockholder changes its ownership by 1 percent in either direction, the stockholder must update its disclosures no later than two trading days thereafter. Id. Arguably, the U.K. requires fuller and more prompt disclosure than is required in the United States under Exchange Act Rule 13, when Rul
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In 2007, the United Kingdom's Financial Services Authority implemented a thorough going regulatory scheme requiring a stockholder controlling 3 percent or more of a listed company's total voting rights to make substantial disclosures of all direct and indirect investments in that company within two trading days of reaching that threshold. Financial Services Authority, The Full Handbook, Disclosure Rules and Transparency Rules §§ 5.1.2, 5.8.3 (U.K.), http://fsahandbook.info/FSA//handbook/DTR/5.pdf (last visited June 11, 2008) (requiring disclosure within "four trading days in the case of a non-U.K. issuer and two trading days in all other cases"). Moreover, whenever the stockholder changes its ownership by 1 percent in either direction, the stockholder must update its disclosures no later than two trading days thereafter. Id. Arguably, the U.K. requires fuller and more prompt disclosure than is required in the United States under Exchange Act Rule 13, when Rule 13 is considered as a whole. At a recent program at Harvard Law School, two prominent activist investors suggested that they could live with the U.K. approach, particularly if that were accompanied by an end to the "purpose"-driven distinction that now separates filers under Rule 13g from those who file under Rule 13d. Posting of Robert Jackson to Harvard Law School Corporate Governance Blog, http://blogs.law.harvard.edu/corpgov/2008/01/ 02/hedge-fund-activism/(Jan. 2, 2008, 18:51 EST) ("Hedge Fund Activism") (providing a summary and link to a video of the program). In that regard, these investors also noted that the antitrust statute has now become a tripwire for activist investors even in situations that raise no genuine antitrust concerns because it requires a filing when an investor buys a stake of $63.1 million. See 15 U.S.C § 18a (2000); Federal Trade Commission, Bureau of Competition, Filing Fee Information, http://www.ftc.gov/bc/hsr/filing2.shtm (last visited June 11, 2008) (listing the current transactional thresholds). Interestingly, the hedge fund industry in England has welcomed consideration of even greater disclosure and transparency requirements for large investors. HEDGE FUND WORKING GROUP, HEDGE FUND STANDARDS: FINAL REPORT 96-98 (Jan. 2008). The greater disclosure that the industry acknowledged was a legitimate subject for consideration included disclosure of derivative positions and disclosure in response to the concerns about activist investors borrowing stock to vote at shareholder meetings, an issue that has generated recent attention from corporate law scholars and practitioners. See Henry T. C. Hu & Bernard Black, Equity and Debt Decoupling and Empty Voting II: Importance and Extensions, 156 U. PA. L. REV. 625, 640-42 (2008);
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The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79
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Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811, 814-22 (2006);
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Hu, H.T.C.1
Black, B.2
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Shaun Martin & Frank Partnoy, Encumbered Shares, 2005 U. ILL. L. REV. 775, 777-80 (2005, Memorandum from Theodore N. Mirvis, Adam O. Emmerich & Adam M. Gogolak, Wachtell, Lipton, Rosen & Katz, Beneficial Ownership of Equity Derivatives and Short Positions, A Modest Proposal to Bring the 13D Reporting System into the 21st Century 1 (Mar. 3, 2008, Two current events have heightened the focus on disclosure and transparency requirements related to derivative positions. The June 2008 decision in CSX Corp. v. Children's Investment Fund Management (UK) LLP elided an answer to whether Rule 13d's beneficial ownership definition covers the long side of cash-settled total return equity swaps, but nevertheless illustrates the utility of a deep examination of those issues in light of evolving market practices. See No. 08 Civ. 2764 (LAK, slip op. at 77-81 S.D.N.Y. June 11, 2008, In July 2008, the United Kingdom's Financial Services Authority e
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Shaun Martin & Frank Partnoy, Encumbered Shares, 2005 U. ILL. L. REV. 775, 777-80 (2005); Memorandum from Theodore N. Mirvis, Adam O. Emmerich & Adam M. Gogolak, Wachtell, Lipton, Rosen & Katz, Beneficial Ownership of Equity Derivatives and Short Positions - A Modest Proposal to Bring the 13D Reporting System into the 21st Century 1 (Mar. 3, 2008). Two current events have heightened the focus on disclosure and transparency requirements related to derivative positions. The June 2008 decision in CSX Corp. v. Children's Investment Fund Management (UK) LLP elided an answer to whether Rule 13d's beneficial ownership definition covers the long side of cash-settled total return equity swaps, but nevertheless illustrates the utility of a deep examination of those issues in light of evolving market practices. See No. 08 Civ. 2764 (LAK), slip op. at 77-81 (S.D.N.Y. June 11, 2008). In July 2008, the United Kingdom's Financial Services Authority examined those issues and determined that it would "require disclosure of cash-settled and other derivative contracts, on an aggregated basis with ownership of actual common stock, at the 3% level." Memorandum from Theodore N. Mirvis, Adam O. Emmerich, William Savitt & David E. Shapiro, Wachtell, Lipton, Rosen & Katz, De-Coupling of Ownership, Economic and Voting Power in Public Companies - The UK's Financial Services Authority (FSA) Moves Decisively to Close the Gap 1 (July 3, 2008).
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See supra note 62
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See supra note 62.
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Office of the Clerk, U.S. House of Representatives, Final Vote Results for Roll Call 244 (Apr. 20, 2007), http://clerk.house.gov/evs/2007/roll244.xml (indicating that H.R. 1257, the Shareholder Vote on Executive Compensation Act, passed with a vote of 269-134).
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Office of the Clerk, U.S. House of Representatives, Final Vote Results for Roll Call 244 (Apr. 20, 2007), http://clerk.house.gov/evs/2007/roll244.xml (indicating that H.R. 1257, the Shareholder Vote on Executive Compensation Act, passed with a vote of 269-134).
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Shareholder Vote on Executive Compensation Act, H.R. 1257, 110th Cong. § 2 (2007, The say on pay bill requires a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the [SEC's] compensation disclosure rules. Id. This shareholder vote addresses the broad disclosure of executive compensation in annual proxy statements, including the Compensation Discussion and Analysis section that the SEC mandated via new rules adopted before the start of the 2007 proxy season. See Executive Compensation and Related Person Disclosure, Securities Act Release No. 33-8732A, 71 Fed. Reg. 53158, 53160 (Sept. 8, 2006, Executive Compensation Disclosure, Securities Act Release No. 33-8765, 71 Fed. Reg. 78338, 78340-41 & n.25 Dec. 29, 2006, to be codified at 17 C.F.R. pts. 228 & 229
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Shareholder Vote on Executive Compensation Act, H.R. 1257, 110th Cong. § 2 (2007). The "say on pay" bill requires "a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the [SEC's] compensation disclosure rules." Id. This shareholder vote addresses the broad disclosure of executive compensation in annual proxy statements, including the Compensation Discussion and Analysis section that the SEC mandated via new rules adopted before the start of the 2007 proxy season. See Executive Compensation and Related Person Disclosure, Securities Act Release No. 33-8732A, 71 Fed. Reg. 53158, 53160 (Sept. 8, 2006); Executive Compensation Disclosure, Securities Act Release No. 33-8765, 71 Fed. Reg. 78338, 78340-41 & n.25 (Dec. 29, 2006) (to be codified at 17 C.F.R. pts. 228 & 229).
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Shareholder Vote on Executive Compensation Act, S. 1811, 110th Cong. (2007).
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Shareholder Vote on Executive Compensation Act, S. 1811, 110th Cong. (2007).
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Avi Salzman, McCain Seeks Shareholders' Say on Pay, BUS. WK., June 10, 2008, http://www.businessweek.com/bwdaily/dnflash/ content/jun2008/db20080610_480485.htm; Say on Pay in America: Fair or Foul?, ECONOMIST.COM, June 12, 2008, http://www.economist.corn/ business/displaystory.cfm?story_id=11543754.
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Avi Salzman, McCain Seeks Shareholders' Say on Pay, BUS. WK., June 10, 2008, http://www.businessweek.com/bwdaily/dnflash/ content/jun2008/db20080610_480485.htm; Say on Pay in America: Fair or Foul?, ECONOMIST.COM, June 12, 2008, http://www.economist.corn/ business/displaystory.cfm?story_id=11543754.
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At a recent debate over say on pay, Professor and former SEC Commissioner Harvey Goldschmid acknowledged that the case for issue-specific votes becomes weaker if stockholders have a greater ability to elect a new board. Program at the Institute for Law and Economics at the University of Pennsylvania on Say on Pay: A Positive Contribution to Corporate Effectiveness and Accountability or an Unprincipled and Costly Incursion into Director Authority, Mar. 4, 2008, webcast available at
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At a recent debate over "say on pay," Professor and former SEC Commissioner Harvey Goldschmid acknowledged that the case for issue-specific votes becomes weaker if stockholders have a greater ability to elect a new board. Program at the Institute for Law and Economics at the University of Pennsylvania on Say on Pay: A Positive Contribution to Corporate Effectiveness and Accountability or an Unprincipled and Costly Incursion into Director Authority? (Mar. 4, 2008) (webcast available at http://www.law.upenn.edu/ academics/institutes/ile/calendararchive07-08.html).
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See American Corporate Governance: Hail, Shareholder!, ECONOMIST, June 2, 2007, at 65, 65 ([H]arried managers may conclude that the best approach is to adopt corporate-governance reforms that increase shareholder democracy and so give them a stronger mandate. If shareholders are able to elect directors and hold them properly accountable for their performance, then they should be more willing to let them get on with the job.).
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See American Corporate Governance: Hail, Shareholder!, ECONOMIST, June 2, 2007, at 65, 65 ("[H]arried managers may conclude that the best approach is to adopt corporate-governance reforms that increase shareholder democracy and so give them a stronger mandate. If shareholders are able to elect directors and hold them properly accountable for their performance, then they should be more willing to let them get on with the job.").
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See Julian Velasco, Taking Shareholder Rights Seriously, 41 U.C. DAVIS L. REV. 605, 662, 664 (2007) (suggesting that, [c]onsistent with their right to elect directors, shareholders should be permitted to nominate director candidates but that shareholder say on pay is not a proper subject for shareholder action because [ulnder state corporate law, directors have responsibility for setting officers' salaries, and shareholders do not have any say on the matter).
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See Julian Velasco, Taking Shareholder Rights Seriously, 41 U.C. DAVIS L. REV. 605, 662, 664 (2007) (suggesting that, "[c]onsistent with their right to elect directors, shareholders should be permitted to nominate director candidates" but that shareholder "say on pay" is not a proper subject for shareholder action because "[ulnder state corporate law, directors have responsibility for setting officers' salaries, and shareholders do not have any say on the matter").
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See also Robert B. Thompson, Shareholders as Grown-ups: Voting, Selling, and Limits on the Board's Power to Just Say No, 67 U. CIN. L. REV. 999, 1018 (1999) (placing the right to propose and pass mandatory bylaws that will control executive compensation at the very far end of the shareholder primacy and direct democracy spectrum); see generally Coates & Faris, supra note 28, at 1352-53 (putting forth a guide for determining whether a particular shareholder-adopted bylaw would be permissible under Delaware law).
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See also Robert B. Thompson, Shareholders as Grown-ups: Voting, Selling, and Limits on the Board's Power to "Just Say No," 67 U. CIN. L. REV. 999, 1018 (1999) (placing "the right to propose and pass mandatory bylaws that will control executive compensation" at the very far end of the shareholder primacy and direct democracy spectrum); see generally Coates & Faris, supra note 28, at 1352-53 (putting forth a guide for determining whether a particular shareholder-adopted bylaw would be permissible under Delaware law).
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Notably, the U.K. mandate for an annual non-binding vote on executive compensation was inspired, at least in part, by a desire to relieve the political pressure on Parliament to address the issue of executive compensation. See Stephen Davis, Does 'Say on Pay' Work? Lessons on Making CEO Compensation Accountable 9-14 (Yale School of Management, The Millstein Center for Corporate Governance and Performance, Policy Briefing No. 1 [Draft], 2007), http://millstein.som.yale.edu/Davis_Say_on_Pay_Policy_Briefing.pdf. Undoubtedly, the U.K. mandate also plays into the American discussion of this issue.
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Notably, the U.K. mandate for an annual non-binding vote on executive compensation was inspired, at least in part, by a desire to relieve the political pressure on Parliament to address the issue of executive compensation. See Stephen Davis, Does 'Say on Pay' Work? Lessons on Making CEO Compensation Accountable 9-14 (Yale School of Management, The Millstein Center for Corporate Governance and Performance, Policy Briefing No. 1 [Draft], 2007), http://millstein.som.yale.edu/Davis_Say_on_Pay_Policy_Briefing.pdf. Undoubtedly, the U.K. mandate also plays into the American discussion of this issue.
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For example, in 1994, section 162(m) of the U.S. Internal Revenue Code was adopted, and it requires that executive compensation in excess of $1,000,000 per year be performance based, approved by the board compensation committee, and approved by a majority stockholder vote in order for it to be deductible by the company. I.R.C § 162(m, 2000 & Supp. V 2005, Moreover, the SEC approved stock exchange rules adopted in 2003 requiring stockholder votes on stock option plans. See Self-Regulatory Organizations, Exchange Act Release No. 34-48108, 68 Fed. Reg. 39995 (July 3, 2003, Even earlier, the NYSE had required stockholder votes on certain transactions, such as transactions involving the issuance of a certain percentage of the corporation's outstanding shares, when state law did not require such a vote. See NYSE, INC, NYSE LISTED COMPANY MANUAL § 312.03c, 2008, requiring shareholder approval if an issuance of secur
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For example, in 1994, section 162(m) of the U.S. Internal Revenue Code was adopted, and it requires that executive compensation in excess of $1,000,000 per year be performance based, approved by the board compensation committee, and approved by a majority stockholder vote in order for it to be deductible by the company. I.R.C § 162(m) (2000 & Supp. V 2005). Moreover, the SEC approved stock exchange rules adopted in 2003 requiring stockholder votes on stock option plans. See Self-Regulatory Organizations, Exchange Act Release No. 34-48108, 68 Fed. Reg. 39995 (July 3, 2003). Even earlier, the NYSE had required stockholder votes on certain transactions, such as transactions involving the issuance of a certain percentage of the corporation's outstanding shares, when state law did not require such a vote. See NYSE, INC., NYSE LISTED COMPANY MANUAL § 312.03(c) (2008) (requiring shareholder approval if an issuance of securities constitutes either 20 percent of the number of shares or 20 percent of the voting power of all shares);
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Norris Darrell, The Use of Reorganization Techniques in Corporate Acquisitions, 70 HARV. L. REV. 1183, 1193 n.44 (1957) (noting that this rule was in the 1956 NYSE Listed Company Manual). The controversial Time-Warner merger dynamics were influenced in no small measure by this NYSE requirement. See Paramount Commc'ns Inc. v. Time Inc., C.A. Nos. 10866, 16070, 10935, 1989 WL 79880, at *14 (Del. Ch. 1989), aff'd, 571 A.2d 1140, 1146 (Del. 1990).
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Norris Darrell, The Use of Reorganization Techniques in Corporate Acquisitions, 70 HARV. L. REV. 1183, 1193 n.44 (1957) (noting that this rule was in the 1956 NYSE Listed Company Manual). The controversial Time-Warner merger dynamics were influenced in no small measure by this NYSE requirement. See Paramount Commc'ns Inc. v. Time Inc., C.A. Nos. 10866, 16070, 10935, 1989 WL 79880, at *14 (Del. Ch. 1989), aff'd, 571 A.2d 1140, 1146 (Del. 1990).
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See Robert B. Thompson & Paul H. Edelman, Corporate Voting 19 (working paper, 2008) (on file with The Business Lawyer) (There are times when voting will work better than judging in addressing decision-making within the corporation. One example is executive compensation, an area in which judges seemingly have never been comfortable reviewing and have not developed any understandable principles to guide judicial review).
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See Robert B. Thompson & Paul H. Edelman, Corporate Voting 19 (working paper, 2008) (on file with The Business Lawyer) ("There are times when voting will work better than judging in addressing decision-making within the corporation. One example is executive compensation, an area in which judges seemingly have never been comfortable reviewing and have not developed any understandable principles to guide judicial review").
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See Strine, Toward Common Sense, supra note 11, at 13 (In the context of a larger reform to create a rationally balanced system of corporate accountability, it might be worth considering the admittedly large step of permitting stockholders to adopt non-repealable bylaws requiring that employment contracts of top executives be subject to stockholder approval.).
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See Strine, Toward Common Sense, supra note 11, at 13 ("In the context of a larger reform to create a rationally balanced system of corporate accountability, it might be worth considering the admittedly large step of permitting stockholders to adopt non-repealable bylaws requiring that employment contracts of top executives be subject to stockholder approval.").
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See COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, supra note 55, at 93, 107, 10 (commenting on the U.K. system but declining to make any recommendation, See also Companies Act, 2006, ce. 6 & 9, §§ 420-22, 439-40 (Eng, available at httpy/www.opsi.gov.uk/ acts/acts2006/pdf/ukpga_20060046_en.pdf (requiring a non-binding shareholder vote on a listed company's remuneration report at its annual general meeting, Directors' Remuneration Report Regulations, 2002, S.I. 2002/1986, §§ 234B, 241A, Schedule 7A (U.K, available at http://www.opsi.gov.uk/si/ si2002/uksi_20021986_en.pdf (statutory instrument first mandating the rule, Corporations Act, 2001, § 250R (Austl, available at http://requiring a non-binding shareholder vote on a listed co
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See COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT, supra note 55, at 93, 107, 10 (commenting on the U.K. system but declining to make any recommendation). See also Companies Act, 2006, ce. 6 & 9, §§ 420-22, 439-40 (Eng.), available at httpy/www.opsi.gov.uk/ acts/acts2006/pdf/ukpga_20060046_en.pdf (requiring a non-binding shareholder vote on a listed company's remuneration report at its annual general meeting); Directors' Remuneration Report Regulations, 2002, S.I. 2002/1986, §§ 234B, 241A, Schedule 7A (U.K.), available at http://www.opsi.gov.uk/si/ si2002/uksi_20021986_en.pdf (statutory instrument first mandating the rule); Corporations Act, 2001, § 250R (Austl.), available at http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilationl.nsf/0/ D5087CD577B2B403CA2570C 200011F96/$file/Corps2001Vol1WD02.pdf (requiring a non-binding shareholder vote on a listed company's remuneration report at its annual general meeting); Corporations Act, 2001, § 250R (Austl.), available at http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1. nsf/0/C13C582617A31 FB4CA2573B70003109D/$file/ Corps2001Vol02_283AA601DJ_WD02.pdf (stating the requirements for the remuneration report). In addition to the 2001 Corporations Act requirement for a non-binding vote on the remuneration report, companies listed on the Australian Securities Exchange must obtain shareholder approval before issuing securities under an employee incentive scheme. See ASX Listing Rules § 10.14 (Oct. 24, 2005), available at www.asx.com.au/ListingRules/chapters/ Chapter10.pdf. There is reason to be cautious about making too much of the fact that the U.K. experience with "say on pay" has not been disruptive. In contrast to U.S. investors, U.K. institutional investors are far more likely to hold their shares for a meaningful time period and to have a longstanding relationship with the corporations in which they invest.
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Cynthia A. Williams & John M. Conley, An Emerging Third Way? The Erosion of the Anglo-American Shareholder Value Construct, 38 CORNELL INT'L L.J. 493, 499, 537 (2005).
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See Strine, Toward Common Sense, supra note 11, at 13 n.2; see also Robert B. Reich, Editorial, Don't Count on Shareholders, AM. PROSPECT, Apr. 2007, at 52 expressing the same skepticism, If Congress's intention is to goad corporations toward policies that promote income equality, good working conditions, and domestic employment, a more rational approach would be to require issuers to disclose information relevant to those concerns. For example, one could imagine a requirement that issuers disclose information about the growth in remuneration and benefits to top executives over time in comparison to the median wage and benefit package paid to the corporation's employees, along with information disclosing the size of the corporation's workforce, the percentage of the workforce that is employed full-time, the percentage of employees provided with health insurance, and the percentage of the workforce located in the United States. Although it
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See Strine, Toward Common Sense, supra note 11, at 13 n.2; see also Robert B. Reich, Editorial, Don't Count on Shareholders, AM. PROSPECT, Apr. 2007, at 52 (expressing the same skepticism). If Congress's intention is to goad corporations toward policies that promote income equality, good working conditions, and domestic employment, a more rational approach would be to require issuers to disclose information relevant to those concerns. For example, one could imagine a requirement that issuers disclose information about the growth in remuneration and benefits to top executives over time in comparison to the median wage and benefit package paid to the corporation's employees, along with information disclosing the size of the corporation's workforce, the percentage of the workforce that is employed full-time, the percentage of employees provided with health insurance, and the percentage of the workforce located in the United States. Although it is doubtful that voting capital would care about those metrics, information of that kind would be of interest to citizens wanting to know the impact that particular corporations have on their employee constituencies. In fact, in Europe, some nations are now requiring issuers to make disclosures about the effect their policies have on the nation, such as by requiring that corporations disclose information about the environmental impact of their operations. See Williams & Conley supra note 88, at 503-10 (describing the social reporting mandates of various nations); Companies Act, 2006, c. 46, § 417(5)(b) (Eng.) (requiring that a quoted company disclose, to the extent necessary to understand the company's business, information about environmental matters, the company's employees, and social and community issues).
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