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As advisors and boards continue to weigh the implications of the Moelis decision nullifying a stockholder agreement, wrestling with the question of where the buck stops, the board or the controlling shareholders, Harvard Law Professor Lucian Bebchuk has critiqued the move by the Delaware Bar to facilitate new legislation to “fix” Moelis through amendments to the Delaware General Corporation Law (DGCL). We wrote this with Axios’ Smart Brevity style in mind.
WHY IT MATTERS: As readers know, Delaware as a state and a corporate jurisdiction is under intense scrutiny as a result of a set of recent decisions and was castigated at Tulane in March for what the bar is viewing as a lack of predictability. Bebchuk is brilliant, highly influential and an intellectual thorn in the side of the corporate bar.
FEELING GROOVY: Bebchuk, channeling a certain song questions in a new note out why the rush, noting that the case is currently on appeal and the Delaware Supreme Court is set to rule this year. He believes the bill has not received scrutiny and input from other interested parties, including “institutional investors, scholars, and all others who have an interest in effective stockholder protections and good corporate governance in Delaware companies,” he wrote. (Sounds like a topic for his next Governance Roundtable, a Chatham-House rules confab that attracts issuers, investors and advisors.)
WHO GOT THE POWER: Beyond the timing question, he disagrees that the proposed amendment is the right step to take given that, in his view, it subverts the power of a board of directors and is overreaching. “Institutional investors and their beneficial investors would be adversely affected by the legislation and would do well to oppose it strongly,” he wrote.
CHANCERY/SHMANCERY: He also notes that Delaware law is largely determined and decided by judges, not by legislative bodies, and this law undermines that principle. In this case, he believes the amendment would have a broad effect “on how governance arrangements can be made and changed.”
THE LAW (Chicken) OR THE MARKET (Egg): He also takes aim at the argument that the law has to fall into line with “market practice” by private parties, an argument made by the law’s advocates. “In some situations, private players might have incentives to take actions that would adversely affect corporate and stockholder value rather than serve them. In such situations, the law should constrain rather than fall in line with the choices of market participants.”
For those who know Professor Bebchuk, he is predictably provocative, opinionated and never boring.
Have a great holiday weekend,
GPP team
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