Lucian Bebchuk, shareholder activist

Lucian Bebchuk is the Townsend Professor of Law, Economics and Finance at the Harvard Law School, and Director of Harvard’s Program on Corporate Governance. Much more importantly for present purposes, he’s also the owner of 140 shares of CA, Inc. stock. In that capacity he wants to amend the CA bylaws to require that a shareholder rights plan be adopted or amended by unanimous director vote and will expire no later than a year after amendment or adoption, unless the stockholders have ratified the plan.

Bebchuk is suing in Delaware for a declaratory judgment as to the validity of the proposed bylaw. The SEC has declined to say it would take no action as to CA’s omission of a shareholder proposal to adopt the bylaw pending the Delaware decision. 

Gordon Smith has a good discussion of the case, and I have more.

As Gordon discusses, there’s a live question as to whether the shareholders can adopt a bylaw under Section 109 of the Delaware corporation law.  Section 141(a) empowers the directors to manage the company.  Section 109 says the bylaw must not be inconsistent with law, and 141(a) says the director power is except as otherwise provided in the chapter.  So is the 109 bylaw power subject to 141(a), or is 141(a) subject to the bylaw power?  We seem to have a loop.

The shareholders probably can amend the bylaws to require a unanimous director vote under 141(b).  The question here is whether they can restrict the board’s power to enter into plans that last more than a year.

As Gordon notes, in Unisuper, Chancellor Chandler upheld an alleged contract between shareholders and a board limiting the board’s power to use a poison pill. However, as I discussed here and here, that case really turned on whether a limitation on the board’s power under 141(a) had to be in the certificate or could be embodied in an informal agreement.  There was no bylaw amendment, so no issue about the relationship between 109 and 141(a).  Moreover, the board arguably ceded its power to the shareholders in Unisuper, whereas in the CA case, the shareholders are trying to wrest it. This more directly implicates the question of who should run the company.

The policy question really turns on how much you want the shareholders to be able to meddle in the management of the firm.  That seems to be a no-brainer – they’re the owners, right?  Except that there are conflicts among the shareholders, and the shareholders as a whole might prefer to give the power to the managers rather than to empower activist shareholders who could be anybody - - even a Harvard law professor.

Well, you might say, that’s ok in general, but not when it comes to directors entrenching themselves through a shareholder rights plan.  On the other hand, the directors do have a fiduciary duty regarding management and sale of the company.  So is it better to tie the directors’ hands or to turn them loose, subject to their fiduciary duty?  That's not a no-brainer.

For some discussions of this issue, see Coates & Faris, Second-Generation Shareholder Bylaws: Post-Quickturn Alternatives, 56 Bus. Law. 1323 (2001); Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 Cardozo L. Rev. 511 (1997); Macey, The Legality and Utility of the Shareholder Rights Bylaw, 26 Hoftstra L. Rev. 835 (1998); Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws:  Taking Back the Street?  73 Tulane L. Rev. 409 (1998).

The other question here concerns procedure.  As Gordon points out, Bebchuk wants the court to render an opinion about the validity of a bylaw that hasn’t been adopted.  Although Bebchuk is a shareholder, the court may view this as an attempt to inject the court into an academic controversy.  This would be similar to the reaction VC Strine had to Elliott Weiss’s fee intervention in the Cox Communications case. As I discussed regarding that case:

the court was somewhat disturbed by the fact that the objection to the fee was being pressed as a matter of general policy by an otherwise disinterested objector – Professor Elliot J. Weiss, who had written on class action abuse in general, and on the specific abuse in this case. . . . . [T]he court refused to deny a fee despite its concern that the complaint was meritless because this would necessitate a detailed hearing, all on behalf of someone who hadn’t been injured.

This is not to say that the court should turn down a complaint from a shareholder just because the shareholder is also a law professor, even a Harvard law professor.  But the court might balk where the shareholder is a law professor who is raising an issue as to the validity of a bylaw amendment that the company hasn’t passed.  Who knows what other questions law professors might have?  Do judges really want to relive their law school days?