The Delaware Supreme Court’s decision upholding a private company’s right to change its by-laws so that the cost of attorney fees in a derivative or similar shareholder lawsuit would be borne by the loser continues to make news. CFO.com noted that since the May 8, 2014 opinion was issued, six small companies have adopted similar provisions.
Another recent development in Delaware corporate law involves the August 1, 2013 effective date of amendments to the Delaware General Corporation Law, which allows entities to incorporate as a public benefit corporation. Georgetown University law professor Alicia E. Plerhoples discussed this new corporate form which requires managers to produce a public benefit and balance shareholders’ financial interests with the best interests of stakeholders materially affected by the corporation’s conduct. Plerhoples’ article includes a legal analysis of the statutory requirements for public benefit corporations and compares them to those required of traditional for benefit corporations. She highlights two features of public benefit corporations: the adoption of stakeholder governance management and pursuit of a public benefit.
The application of Georgia state law to the business judgment rule was the subject of a blog posted by Kevin LaCroix of D&O Diary. LaCroix’s blog related how the Georgia Supreme Court recently applied Georgia’s business judgment rule to actions taken by the officers and directors of a failed, FDIC-insured bank. LaCroix notes, “while the Court found that the rule insulates directors and officers from claims of negligence concerning the wisdom of their judgment, it does not foreclose negligence claims against them alleging that their decision making was made without deliberation or the requisite diligence, or in bad faith.”
Karen K. Nelson of Rice University and Adam C. Pritchard of the University of Michigan Law School summarized for the Harvard Law School Forum on Corporate Governance and Financial Regulation in their recent paper on risk disclosure. The paper compares the voluntary approach provided by the safe harbor provision for forward- looking statements contained in the Private Securities Litigation Reform Act against the mandatory risk disclosure required by the SEC’s addition of Item 1A to Form 10-K. The authors write: “Overall, our findings suggest managers respond to high ex ante litigation risk with risk factor disclosures designed to reduce the expected costs of litigation. In contrast, low risk firms perceiving little net benefit to disclosure did not provide meaningful risk factor disclosure until compelled to do so by the SEC. Understanding risk factor disclosures is important to managers and legal counsel responsible for formulating a disclosure strategy, to regulators and courts charged with evaluating the quality of these disclosures, and to investors interested in assessing the risks posed by firms.”
University of Texas law professor Henry T.C. Hu has also recently addressed mandatory public disclosure. His paper, which was summarized in the HLS Forum, comments on the potential for conflict between the disclosure required by the SEC and that by banking regulators such as the Federal Reserve Board. Hu notes, “Two sets of regulators with widely divergent ends now explicitly have full authority over the same informational territory as a formal matter. In the long run, the structure of the new morphology of public information may be unsustainable. As bank regulators extend their regulatory march to cover disclosure requirements to capital adequacy and liquidity risks, the bank regulator system might, in effect, come to dominate public disclosure as to bank risks. The chances of this increase if the SEC does not quickly modernize its risk disclosures.”