The article in the url below dives pretty deep into the weeds of U.S. corporate law, but it is potentially an important step in the direction of tighter corporate governance (increasing the burdens placed on a firm's board of directors) and against one of the few remaining 'rights' that shareholders possess. Specifically, the article covers a recent decision in U.S. federal court:
"In a little-noticed December ruling in a case involving a failed 2014 leveraged buyout, Jed S. Rakoff, a federal judge in the Southern District of New York, threw some sand into the otherwise well-lubricated gears of what has been a 40-year financial bonanza. It's about time we started asking tough questions about the ramifications of loading up companies with huge amounts of debt they will surely have difficulty repaying."
Specifically, because the board's decision to sell the company knowingly placed the firm with a debt load that was likely to force it into bankruptcy, the judge held that the board had been "reckless" in its decision and are therefore liable:
"In other words, Judge Rakoff said in his ruling, officers and directors had better think twice before agreeing to sell a company to a buyout firm. What had for decades been considered a virtue — selling a company for a market-clearing price to the benefit of existing shareholders — might have become a vice. Judge Rakoff's decision 'has the potential of really blowing up,' said Brian Quinn, a law professor at Boston College."
The facts of the case, in the opinion of the judge, mean that the directors are not protected by the business judgment rule:
"Judge Rakoff … said [the board] could not take cover behind the business judgment rule, which usually protects directors from being held accountable for past business decisions so long as they were made in 'good faith.'"
The author of the article, who was a former investment banker (specializing in M&A), argues that this case has implications beyond the specific facts (in spite of idiosyncrasies that suggest it might have limited influence) because it challenges the long-held 1986 decision by the Delaware Supreme Court known as 'Revlon.' Revlon applies as precedent during the sale of a firm and is important because it establishes the burden on directors during the sale to seek the highest price possible for shareholders, irrespective of the wishes of other stakeholders in the firm. This recent decision suggests this may no longer be the case:
"The ruling has the potential to hold accountable those responsible for allowing otherwise solvent companies to be sold into circumstances that would soon enough cause their bankruptcy. … In the wake of Judge Rakoff's ruling, Big Law quickly sought to warn clients that officers and directors of companies needed to be more vigilant about who they agree to sell a company to and what the buyer plans to do with it. The days of just selling a company to the highest bidder regardless of the consequences — the legal standard on Wall Street since the Delaware Supreme Court decided the so-called Revlon case in 1986 — might just be over."
If so, then this case would be another nail in the coffin of the idea that 'shareholder democracy' has any substantive meaning in the U.S.
Take care
David
David Chandler
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The End of Private Equity
By William D. Cohan
March 1, 2021
The New York Times
Late Edition – Final
A19
