Spring Meeting: Current Events and Emerging Issues in Corporate Governance

Our next event was a panel discussing recent key court decisions and issues that affect the balance of power between boards and shareholders.  The panel was comprised of Scott Winter, Innisfree M&A Incorporated; David Webber, Associate Professor of Law, Boston University; Blake Rohrbacher, Richards, Layton & Finger, P.A.; and Steven Haas, Hunton & Williams.  

First, the following question was posed: Whether the 3-year 3% proxy access rule (“3-3 Rule”) will open the floodgates to a vast increase in the number of proxy fights?  The discussion indicated that the answer is unknown.  One commentator took the position that the advantages of running a proxy contest on your own, such as controlling the solicitations and seeing the results, rather than through the company, outweighed the costs; thus not increasing the number of contests.  In contrast another commentator indicated that large institutional investors would avail themselves of the new rule and begin affecting Board membership.  Additionally, even though the 3-3 Rule has been stayed pending challenge, Delaware Section 112 allows companies to amend its bylaws to grant proxy access to shareholders. 

 

Secondly, the panel discussed the recent Airgas decision, upholding the use of a poison pill, discussed here.  A compelling question was raised as a hypothetical: 

• Based on the facts presented in Airgas and after the Board valued the company at $78 a share, would it have been a breach of their fiduciary duty to drop the poison pill to allow shareholders to accept the $70 a share bid?

The breach of fiduciary duty argument was that the Board intentionally and knowingly dropped the poison pill, which is to the detriment of shareholders. This would rebut the Business Judgment Presumption and fail the Entire Fairness test because by allowing shareholders to accept an unfair price that the Board, and independent bankers, had determined was an unfair price.

The argument in defense suggested that you could not hold the Board liable for breach of fiduciary duty for removing the poison pill and allowing shareholders to decide what is best for them.  However, no consensus was reached and we invite our followers to comment and let us know what you think of the hypothetical.