Friday, August 28, 2009
Microsoft's Word Patent Appeal
An appeals court just set the hearing date for Microsoft's appeal of an injunction against them selling new products of Word for September 23, 2009. HP and Dell are filing amicus briefs on Microsoft's behalf, arguing the injunction would hurt business.
Preferred vs. Common
Professor Stephen Brainbridge wrote a terrific blog on In Re: Trados Incorporated Shareholder Litigation, No. 1512-CC (July 24, 2009), analyzing the duties a director owes to preferred shareholders vis a vis common shareholders. The court held that directors owe duties to common shareholders are common law in nature, where preferred shareholders are usually contractual in nature. If common shareholders and preferred shareholders have divergent interests, directors should favor common law shareholders.
Monday, August 3, 2009
iPhone Threat to National Security
Apple has argued that if you jailbreak their iPhone it could be used as a weapon for mass technological destruction to bring down every cell tower in the United States.
Schmidt resigns from Apple board
Google CEO Eric Schmidt resigned from Apple's board of directors citing a conflict of interest. And that has nothing to do with the Federal Trade Commission's investigation of Apple-Google collusion in the marketplace.
Tuesday, July 28, 2009
Insider Trading
We've had the Second Circuit finally speak in SEC v. Dorozhko regarding the liability of people who owe no fiduciary duty to the source of the information who steals inside information and makes a profit off of it. The Second Circuit held "[T]he Supreme Court has in a number of opinions carefully established that the essential component of a § 10(b) violation is a breach of a fiduciary duty to disclose or abstain that coincides with a securities transaction.”
One of the interesting aspects of the case is the subtle shift from the fiduciary base theory of US v. O'Hagan to a property rights approach. To quote the quoteable Steven Bainbridge in his blog post about the case: "If a law student had written the Dorozhko, I’d give him a D (and only because I never ever fail anybody). It is not an interpretation of O’Hagan. It is the creation of an entirely new version of misappropriation liability., carved out of whole cloth and without any regard for precedent. It may be right on policy, but isn’t that for the Supreme Court to decide."
This theory also goes with the recent dismissal of the complaint against Mark Cuban for insider trading as well.
One of the interesting aspects of the case is the subtle shift from the fiduciary base theory of US v. O'Hagan to a property rights approach. To quote the quoteable Steven Bainbridge in his blog post about the case: "If a law student had written the Dorozhko, I’d give him a D (and only because I never ever fail anybody). It is not an interpretation of O’Hagan. It is the creation of an entirely new version of misappropriation liability., carved out of whole cloth and without any regard for precedent. It may be right on policy, but isn’t that for the Supreme Court to decide."
This theory also goes with the recent dismissal of the complaint against Mark Cuban for insider trading as well.
Wednesday, July 1, 2009
Dutch Treat
The Dutch Supreme Court recently held that if a director of a company commits a tort towards a company's creidtor, and is therefore personally liable towards that creditor, if the director enters into an obligation on behalf of the company while he knew or reasonably should have known that the company would not - or not within a reasonable period - be able to fulfill its obligation and would not offer recourse for the damage suffered by the creditor as a result of the malperformance, unless the director is able to show that he personally did not make a sufficiently serious mistake in this respect. www.thedefiningtension.com I just wanted to remind everyone that American law is very different in that in the United States directors do not act as agents of a corporation.
More on Shareholder Access
The ABA just proposed amendments to the Model Business Corporation Act that seem to do a better job with respect to shareholder access to proxy nominations. They will be published shortly in the August edition of the Business Lawyer. Essentially, the amendments will provide for companies to provide their own procedures to allow shareholder access.
Tuesday, June 16, 2009
Below is a letter sent to the SEC with regards to their newest rule proposal allowing shareholders to nominate directors on the company's proxy statement:
Ms. Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Security and Exchange Commission
Re: File Number S7-10-09
To Whom It May Concern:
I would like to take this opportunity to comment on the Security and Exchange Commission’s proposed rules regarding shareholder nominations for the Board of Directors. Although I am an attorney this letter is being sent on my own individual behalf and neither on behalf of my firm, nor any particular client.
The SEC’s proposed rule would allow shareholders to nominate directors and require the company to include such nominations on its proxy statements. Although noble in its efforts to the proposal is troubling in several aspects.
First, the boards of directors of corporations in the United States of America have essentially two functions, namely, as an advisor to the executive management of the corporation and as a monitor on behalf of the shareholders. These duties may be in tension at times or namely when the board feels that the executive management of a corporation is not performing on behalf of shareholders, and on the flip side, whereas management has a vested interest in the long term success of the corporation, shareholders do not. The SEC’s proposed rule would favor a huge swing in Board responsibility toward a monitoring activity of a board rather than serving as advise and counsel to management. Such a swing could exacerbate adverse and confrontational roles between Boards and management, where the board of directors becomes more interested in the short terms goals of the shareholders than long term goals of management. This is especially true in that the proposed rules allow shareholders with as little as one percent, (including shareholders aggregating their shares to reach the one percent threshold who are more likely to be pro-holder activists and special interest holders).
Second, the SEC’s role may be overlapping with existing state laws. By way of example, Delaware General Corporate Law, Section 112, provides certain procedures for shareholders to include in the corporation solicitation of proxies their own nominees and slate for directors. Historically, the federal government has left states to determine the internal affairs of the corporation recognizing that the internal affairs of the corporation regulation allow states to compete for various state businesses. The SEC’s entry into the internal governance market may put some states that compete with Delaware at a significant disadvantage if this proposal were to be adopted.
Third, the rules proposed by the SEC provide that only certain significant shareholders or groups of shareholders would be allowed to nominate directors. Shareholders of the size proposed by the Security and Exchange Commission already have significant direct and indirect participation in management. Such a rule simply would not benefit ordinary investors whose investments do not quality under the rules.
Fourth, I am troubled with the priority system if there are more shareholder nominations than slots available. The current rule as it is stated would allow the shareholders who get to the company first their nominations to be put on the proxy regardless of size. This is counter-productive to the shareholder democracy movement which would require the SEC’s rule to allocate director nominations spots according to size by way of example, a long term institutional investor holding in excess of five percent of a company’s equity would be subject to smaller shareholders who can run faster with their director nominations. This system will create an incentive for routine election contests rather than facilitate smooth an orderly corporate governance.
Lastly, this will only serve as an adverse affect on the valuation of companies because of the additional restrictions imposed by the commission. One major example is that shareholders would be required to certify that they are not holding their stock for the purposes of taking control of the company or gain more than a minority representation of the Board of Directors. By removing the possibility of the opportunity of changing control of the company, the commission would create a chilling effect on valuation of companies, in that in a company’s valuation there may be albeit however small, some percentage for possible takeover bids.
Overall, I would strongly urge the commission to reconsider this rule proposal because of the foregoing reasons.
Sincerely,
Joel McTague
Ms. Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Security and Exchange Commission
Re: File Number S7-10-09
To Whom It May Concern:
I would like to take this opportunity to comment on the Security and Exchange Commission’s proposed rules regarding shareholder nominations for the Board of Directors. Although I am an attorney this letter is being sent on my own individual behalf and neither on behalf of my firm, nor any particular client.
The SEC’s proposed rule would allow shareholders to nominate directors and require the company to include such nominations on its proxy statements. Although noble in its efforts to the proposal is troubling in several aspects.
First, the boards of directors of corporations in the United States of America have essentially two functions, namely, as an advisor to the executive management of the corporation and as a monitor on behalf of the shareholders. These duties may be in tension at times or namely when the board feels that the executive management of a corporation is not performing on behalf of shareholders, and on the flip side, whereas management has a vested interest in the long term success of the corporation, shareholders do not. The SEC’s proposed rule would favor a huge swing in Board responsibility toward a monitoring activity of a board rather than serving as advise and counsel to management. Such a swing could exacerbate adverse and confrontational roles between Boards and management, where the board of directors becomes more interested in the short terms goals of the shareholders than long term goals of management. This is especially true in that the proposed rules allow shareholders with as little as one percent, (including shareholders aggregating their shares to reach the one percent threshold who are more likely to be pro-holder activists and special interest holders).
Second, the SEC’s role may be overlapping with existing state laws. By way of example, Delaware General Corporate Law, Section 112, provides certain procedures for shareholders to include in the corporation solicitation of proxies their own nominees and slate for directors. Historically, the federal government has left states to determine the internal affairs of the corporation recognizing that the internal affairs of the corporation regulation allow states to compete for various state businesses. The SEC’s entry into the internal governance market may put some states that compete with Delaware at a significant disadvantage if this proposal were to be adopted.
Third, the rules proposed by the SEC provide that only certain significant shareholders or groups of shareholders would be allowed to nominate directors. Shareholders of the size proposed by the Security and Exchange Commission already have significant direct and indirect participation in management. Such a rule simply would not benefit ordinary investors whose investments do not quality under the rules.
Fourth, I am troubled with the priority system if there are more shareholder nominations than slots available. The current rule as it is stated would allow the shareholders who get to the company first their nominations to be put on the proxy regardless of size. This is counter-productive to the shareholder democracy movement which would require the SEC’s rule to allocate director nominations spots according to size by way of example, a long term institutional investor holding in excess of five percent of a company’s equity would be subject to smaller shareholders who can run faster with their director nominations. This system will create an incentive for routine election contests rather than facilitate smooth an orderly corporate governance.
Lastly, this will only serve as an adverse affect on the valuation of companies because of the additional restrictions imposed by the commission. One major example is that shareholders would be required to certify that they are not holding their stock for the purposes of taking control of the company or gain more than a minority representation of the Board of Directors. By removing the possibility of the opportunity of changing control of the company, the commission would create a chilling effect on valuation of companies, in that in a company’s valuation there may be albeit however small, some percentage for possible takeover bids.
Overall, I would strongly urge the commission to reconsider this rule proposal because of the foregoing reasons.
Sincerely,
Joel McTague
2008 Delaware Year in Review
The Harvard Law School Forum on Corporate Governance has a terrific review of developments in Delaware in 2008 which you can find here.
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