Storming the Castle
James Morphy, the head of Sullivan & Cromwell’s vaunted M&A practice, arrives to take his place around 4:45, and already there’s a packed house. More than half of the students in attendance should be figuring out a way to cleverly introduce themselves and pass along their resume. But instead of looking like the fox in the hen house, he seems a little geared up. He is no stranger to Harvard, but perhaps curious that tonight feels more like a jam session than a law school lecture. A large man in a tan corduroy jacket wanders in as everyone takes their seat. The students wonder which of those in the mosh pit is Marty Lipton, head of Wachtell Lipton’s deal practice for whom ESTEEMED even rendered in big capital letters is insufficient. The one, the only, the creator of the poison pill, the leading dealmaker in America Marty Lipton. That’s a little better. “There weren’t so many people in this class last night when it was just me,” Clark says of the less-well attended “New Realities of Stockholder Activism for M&A Defenses,” which entailed reading not just four scholarly articles (one by Strine), but also two ABA papers. The reigning dean emeritus is just tonight’s opening act; a Jesuit Dean Martin, he knows what he is and is not. “But I’ll get over it.” On this night, Clark will prove the protector of the first to speak. This used to be a pulpit reserved for the likes of these two. So old school. Professor Lucian Arye Bebchuk – a lovely professor known as the Elvis Presley of shareholder activism and whose partial full title is “The William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics and Finance and Director of the Program on Corporate Governance at Harvard Law School,” begins to explain how he came to challenge the corporate bylaws of CA (the former Computer Associates, one of the world’s largest independent software companies). The constraints of this story cannot encompass Professor Bebchuk’s academic accomplishments. At a minimum you must know he was awarded four degrees from Harvard (LL.M. and S.J.D. from Harvard Law School and M.A. and Ph.D. from Harvard Economics Department). His CV is 11 pages long, and he has written hundreds of scholarly and business articles. He has been a leading voice for reform of executive pay, writing the highly influential Pay for Performance. He is an extraordinarily accomplished and kind individual who in months to come will face down the nation’s largest companies – AIG, Bauch & Lomb, Bristol Myers Squibb, Chevrol, El Paso, Time Warner and Disney – over their treatment of shareholders. But this evening, Bebchuk has been assigned the role of rodeo clown in bright and baggy pantaloons – the protagonist embodying all the values of pure academia that have fallen out of favor because of those far less talented than he. And, rather than facing one 3,000-pound bull with very large and pointy horns who is pissed because he’s been caged while having female swine scent sprayed in his general vicinity, tonight Bebchuk will face Marty Lipton. And Jim Morphy. And Jay Lorsch of Harvard Business School. All of whom were personally involved in the Computer Associates case. And none of whom is wearing a “Bill Lerach for president” t-shirt. On the upside, it’s not like Lipton, Lorsch and Morphy dislike Bebchuk any more than a pack of elephants dislikes a single gnat on the small toenail of the least-favored female in the pack. Just another dreary night at Harvard Law School. Bebchuk explains that as a shareholder of CA, he proposed an anti-poison pill bylaw amendment that was rejected by the company’s board. A poison pill arguably allows management to override the best interest of shareholders by preventing them from accepting premium buyout offers. Under Bebchuk’s proposal, CA could only adopt a poison pill by a unanimous board vote that would have to be reaffirmed unanimously each year. He brought suit in Delaware Chancery Court, seeking declaratory judgment that his proposed bylaw was valid. Vice Chancellor Lamb found the case not ripe for that extreme remedy, but wrote a decision overturning decades of practice by Delaware practitioners and the Securities and Exchange Commission, which excluded bylaws limiting the use of poison pills. So Bebchuk went to the shareholders … and his proposal got 41 percent of the shareholder vote … and …. Shit … is Morphy about to charge? His head is down, he’s looking intent, and … “I want to compliment Lucian on his bylaw … which is thoughtful,” says Morphy. “But that doesn’t mean it’s legal.” A little horn to the torso never got Bebchuk down. And the damn cowboys just keep waving the swine scent ever closer to the flaring nostrils of Lorsch and Lipton. And Bebchuk starts thinking of a way to hide inside the barrel for the clown. It’s got to open, he says, seeking a seam. But first, may I say, that CA was forced to adopt a new poison pill, that shareholders were entitled to redeem. He is proud that he enhanced shareholder value, by revolutionizing the voice that shareholders can bring against entrenched management’s use of a poison pill. Lipton invented the poison pill and takes this assault on his Mona Lisa as well as can be expected. “It is very disturbing that a small group of law and business school professors, led by Professor Bebchuk, and aided and abetted by corporate raiders and activist hedge funds that benefit from joining the cabal, equate immediate stockholder wealth and maximization with the national good,” Lipton said in a two-page statement after Bebchuk filed suit. Undeterred, Bebchuk commends Morphy, counsel to CA, and Lorsch, one of its board members, for their roles in adopting the new pill. “Many of Marty’s clients might also include such provisions,” Strine leans back and taunts. “How can you possibly be against less board entrenchment and increased shareholder value,” an apparently sincere Clark asks. “These are lofty ideas and issues,” Morphy responds. “I’m dragging you down to the weeds, which is what lawyers do on a daily basis.” And then the next gate lock is lifted, and Lorsch doesn’t even bother romping around the ring. You know, usually, the bull comes out and runs around a little, “Gee, aren’t I big, aren’t I magnificent? Aren’t I an independent director of CA, and aren’t I really annoyed?” Yes, the board heard the shareholders, sort of. “And if we didn’t do something about it, Lucian would be back. He’s a very large shareholder. What is it you own Lucian?” Right, that would be 140 shares. But who’s counting? Lorsch points to the new touchstone of legal education – context, the currency of the realm – which has replaced precedent. Here was CA’s board facing a CEO who had just been sentenced to prison, the company was operating under a deferred prosecution agreement, creating operational issues, and 60 percent of its traded equity was owned by institutions. The board’s reality was that the Bebchuk proposal was “something it could get off the table.” Activism has gotten worse, Lorsch says, because of index funds, which can only work on the theory a rising tide lifts all boats. “Directors worry about their reputation, find it annoying and don’t think it has much to do with running the company,” he said. And then the bull in the tan corduroy comes blasting through, the third latch so many shreds of parsed steel. “Lucian and I totally and completely disagree,” Lipton declares. Prancing about is so for pussies. A horn to the heart is so much more efficient. “Lucian is thoughtful and brilliant, but Lucian, Lucian has never really met a board of directors that he trusts and he thinks the key to proper functioning of a corporation is to give shareholders a stick to club the board of directors into doing what shareholders or a group of shareholders at the moment what they think it should do.” “While I respect Lucian’s statistics, I reject them completely.” And, by the way, Lucian – that’s right, just stay in your barrel a moment more, while I teach the kiddies a few lessons about the poison pill. Now in 1980, Seagram made a bid for St. Joseph Lead, which its board of directors felt valued the company inadequately. The way corporate law was practiced at the time, St. Joseph had just 10 days to come up with an injunction or another bidder. That was particularly difficult because 20 institutional shareholders owned a little more than 50 percent of the stock. The board accepted an alternate bid from Fluor for not an adequate value (although the bid was higher than that placed by Seagram’s). After that semi-debacle, Lipton starting thinking there had to be something a board of directors could do in a situation short of going to its shareholders. The poison pill “wasn’t designed to entrench management … It was designed to rest in the business judgment of the board of directors what should be done,” Lipton said. And that’s how the poison pill was born, which Lipton went on to deliver in plentiful doses to corporate America, preventing lord knows how many unwanted progeny. What Lipton is concerned about these days is the tremendous pressure on all companies to show a steady increase in quarter by quarter earnings and the impact of that short-term thinking on long term value. “Companies and economies are creating a short term outlook, not making investments that long term will benefit that company and the economy as a whole,” he intones. What’s at stake in the games Bebchuk is playing, Lipton warns, is simply the American economy. “What’s being attempted here is extremely ill advised.” Peeking, quietly, is it ok to come out? … Bebchuk ventures… “Being in the ivory tower, statistics are the only thing I can offer. Of the companies that broke a staggered board, we found they on average produced a positive return.” “I tr tr … tru……” Trust would be what we’re aiming for here. “You couldn’t say it, you couldn’t say trust,” Morphy says. And it seems true given subsequent events that Bebchuk thinks there’s a lot that can be reformed in the boards of Corporate America. “It’s an issue of accountability and incentives,” Bebchuk answered. “I don’t know any better way than to look at the data.” “The constitution of the USSR looked good on paper, but I wouldn’t want to move there,” says Strine. “We’ve moved so far in the direction of time to shop and compare and then presentation but what is the stopping point?” Clark intercedes, pointing out the value of scholarship and statistics in guiding corporations and improving legal structures. Perhaps Lucian could be given a seat on the board, and then if he wrecks things, “we’ll see how long it takes ‘til Bill Lerach sues him too,” Strine suggests. A pantomime, to be sure, and a sign of the stand-off not just between America’s shareholders and those charged with running its corporations, but also perhaps between the past and future of America’s corporate law. The Semester is Over February 2007: Grades came in at the middle of last month. Despite the calm and distance of the holidays, the familiar apparatus of reaction set in place the instant I saw the e-mail. My fingers shook and I felt the rush of all that teetering ambivalence as I clicked to open the link. Please, I asked somebody, God, whoever guards the hereafter. God, really. Or a being or entity like God, though of course, a Godlike being can be known by various names and images. But I digress. I know there are competing points of view. Please, God, no poor reviews, I asked, even as I hoped for something exceptional. “Our corporate law is not static. It must grow and develop in response to, indeed in anticipation of evolving concepts and needs.” The Unocal decision noted that decades ago with respect to the practice of corporate law. Never before has anyone applied that philosophy at this level to the education of the nation’s future lawyers. I can’t help but wonder after my years here, in a lovely campus overlooking a snowfall in Harvard Yard, if the world is ready for a change in the education of corporate lawyers, the future kings of the realm. Whatever can be said of its past failings, it produced a league of practitioners that made American corporate law the envy of the world. Still, change is due. The law is the same and not the same all at once. And never has it been this exciting, I think, viewing my reviews. Our reviews. I wonder if Leo’s seen these yet, I think tilting my chin down and sideways as I look out the window. Never has it changed like this. At least at Harvard.* Page: 5 of 5 pages for this article « First < 3 4 5
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