Corporations: Delaware’s New Competition: The Creeping Federalization of American Corporate Law
Saturday, Nov. 14
10:45 a.m. – 12:15 p.m.
State Room

• Prof. Stephen M. Bainbridge, William D. Warren Professor of Law, University of California, Los Angeles School of Law
• Mr. Cornish F. Hitchcock, Hitchcock Law Firm PLLC
• Mr. David A. Katz, Partner, Wachtell, Lipton, Rosen & Katz
• Prof. Roberta Romano, Oscar M. Ruebhausen Professor of Law and Director, Yale Law School Center for the Study of Corporate Law
• Moderator: Hon. Thomas M. Hardiman, U.S. Court of Appeals, Third Circuit

Corporations: Delaware’s New Competition: The Creeping Federalization of American Corporate Law

Saturday, Nov. 14 – Hayes Edwards and Joel G. Miller

10:45 a.m. – 12:15 p.m.

State Room

Moderator: Hon. Thomas M. Hardiman, U.S. Court of Appeals, Third Circuit

Prof. Stephen M. Bainbridge, University of California, Los Angeles School of Law

For last 200 yrs in US, corporations have been subject to state governance

Incorporation in one state does not preclude from doing business in another state

This results in competitive federalism, there is competition to attract the most number of corporations

Many regard this as a race to the bottom, by offering managers laws to enrich themselves at expense of investors

Others suggest the race is to minimize needed capital

Others deny that there is a race at all

Delaware has attracted many corporations

Delaware faces a new competitor in the federal government

Corporate governance remained in state control until 2002

Federal control and regulation has increased under Obama Admin

Substantial possibility that there will be permanent federal intrusion into corporate governance

The issues in play, then, are:

1 Say on pay

2 Shareholder access and ability to nominate directors

3 Mandates for majority voting

4 Creation of non-executive chairmen

5 Classified boards of directors

6 Compensation

Bottom line is the environment of horizontal competition between states is being replaced by vertical competition, primarily between the federal government and Delaware

As Fed more willing to intrude in this way, are we more likely to see more efficienct rules or less efficient rules that allow less free for companies

More after the jump.

Mr. Cornish F. Hitchcock, Hitchcock Law Firm, PLLC

I may be the designated heretic on the panel today.

My approach to these federal issues may be different

States moved to fill the gaps following decrease in federal regulation

The Fed gov’t has displaced state law in antitrust, IRC

I view state corporate law preeminent only as Congress allows

Delaware: has won the race, retired crown, and not given it back

Would you choose the current model if starting over?

Delaware has smaller population than 50 counties, yet has become the standard in this area

My goal here today is not to say that Del law is bad or should be replaced by fed statute,

But let’s look at it and see

The tension is that state government doesn’t want to adjust for fear of losing revenue, but in the shadow of the possibility that the fed government may institute a standard statute

More useful to look at issues on own merits and determine as whether appropriate under state or federal law, rather than assuming that state law is necessarily preferable

Mr. David A. Katz, Wachtell, Lipton, Rosen & Katz

-My difficulty with the current federal legislation is that it takes a step in the wrong direction

-It’s a reaction to the financial disaster, but it will hurt the ability of US companies to compete today

-Board of directors is responsible for oversight, and investors trust managers to work with capital

We’re moving toward a shareholder-centric approach

In the past there was the ability to change the board of directors, but investors didn’t have a voice in day-to-day decisions

Taking away the power of directors under new

SEC proposal allows shareholders to nominate directors for

Trying to micromanage will result in a short-term focus rather than a long-term focus

The financial crisis is at least partly due to the focus on quarterly profits and short-term interests

-The corporate system of the states allows corporations to choose, but the shareholders always have the option of replacing the board of directors

-SHs have always been able to replace directors, but what corporate governance movement wants is to give SHs corporate proxy statement, which would take away directors’ power over longer term to make necessary decisions.  Micromanaging their decisions will create a short-term focus→ this is the problem w/ federal legislation.

-Intrusion of federal legislation is unwarranted and dangerous

Later proposals have softened, but still interfere to much

Further empowering shareholder activists will create short-term pressure and encourage making same bad decisions that led to current crisis

Federal standards will be too broad to account for identities of individual corporations

Prof. Roberta Romano, Yale Law School Center for the Study of Corporate Law

I think it’s not correct to think of Fed Gov’t and Delaware as competitors, but more of a question of what roles are

1 Improved incentives for Promoters:

-Someone issuing capital can compete better in a regime that investors prefer

-They will bear the cost of poor regimes

-If there are multiple regimes to choose from, they will choose the one that investors would prefer

2 Improved incentives for Regulators

-If we have more than one regulator, there is incentive to choose regulation that investors prefer

-States that get more investors can be assumed to have regimes that investors prefer

-The government less likely to know what investors want than what the investors themselves know

3 Innovation

Regulatory arbitrage helps in terms of experimentation and innovation

4 What state law looks like

There’s a great deal of conformity across the states without the government centralizing

Can’t get customization in a central, standardized system

State legislators can react more quickly to correct than Congress

How often has it happened that investors have replaced the board of directors? How well does this work in practice?

Prof. Stephen M. Bainbridge

Director Primacy

I start with the premise that the corporation is not a thing capable of being owned, but a network of contracts

We get a system in which the ability of shareholders to remove a director is not a requirement

The shareholder franchise as basis for legitimacy

The corporation is not a democracy

The idea that we have to have shareholders as able to control the corporation is flawed

Institutional investors attempting to fundamentally change the nature of governance fundamentally misunderstand their role

In some sense you can’t disentangle the federalism debate from the debate

It’s hard to remove directors, but I think that’s a good thing

Mr. Cornish F. Hitchcock

It is very difficult to remove the director.

It is very difficult for shareholders to do so, and they may even lack the power

If you want to do it, you have to run a slate and a lot of investors can’t do that

It’s not worth the time and investment

It’s difficult as a matter of law and practicality

Mr. David A. Katz

I think the bottom line is that shareholder access will turn into a special interest competition, which won’t cost people anything

It’s relatively easy to find support with the corporation if you have a good plan

There’s a real cost to have a proxy contest, but a limited number of them is a good thing

Empowering special interest groups will be a distraction and will take away from the longer-term perspective of the corporation

Prof. Roberta Romano

There have been several studies of hedgefund activism, and there has been success in electing

This is a cost issue about who’s going to bear the cost of a proxy fight

Electronic proxies could make it more efficient

It’s not bad to make people bear the costs of their proxy fights

-It’s good to make people spend their money in proxy fights

It’s good to have people have some financial stake in their efforts

**Best and worst of provisions in currently pending legislation

Prof. Stephen M. Bainbridge

I’m reminded that Chris Dodd is writing this new legislation, who wrote much of legislation that led to meltdown. This is Congress that Barney Frank is driving, who was guardian angel of Fannie and Freddie’s, who prevented meaningful reform in the past

I don’t trust the people who are running this legislation

I much more trust the people writing Delaware corporate law are much more reliable

Throwing together this hodgepodge of half-backed ideas that have been

-Anything that fundamentally empowers shareholders above where they are now is a bad idea

-Can organize by consensus, or authority

-Consensus does not work where stakeholders have different goals and access to information

-You need a board of directors that is cohesive and has equal interest and access to information

-Empowering shareholders limits power of directors

-Limiting the power of directors will make corporate decision making more cumbersome

Mr. Cornish F. Hitchcock

Provision in legislation would provide legal protection for SEC’s ability to enforce a rule on pay limits, golden parachutes.  There are nits I could pick with most provisions on policy grounds, but I am in favor of them.

Mr. David A. Katz

I don’t like any of the provisions at all

-Shareholder advisory votes at the end of the day won’t be very meaningful. In the UK they have not had an impact. This dialogue goes on already and will not harm the system that much

-Mandating separation of chairman and CEO is one size fits all, but most boards work effectively according to their own needs

By mandating a single standard we’d be moving in the wrong direction

-“Independent directors” have lack of relationship and expertise to the corporation

-Limiting positive cross-polinization by preventing ability to be on multiple boards

-Increased legislation will limit leaders’ ability to focus on strategy and instead they’ll be focusing on meeting a legislative checklist

Prof. Roberta Romano

Worry about unintended consequences

-Example, incentive compensation increases following limits on cash compensation

I would feel more comfortable if already in state law or if they were optional