Corporate Governance

The Race to the Bottom and Shareholder Accessibility to Information: Norfolk County Retirement v. Jos. A Bank Clothier (Part 1)

By J. Robert Brown

In teaching about the race to the bottom in a class on corporate law, its easy to point to instances where state law became so weak and so unable to protect the interests of shareholders that Congress had to step in and federalize the area.  This happened, for example, in 1934 in connection with the inadequate disclosure regime that had developed under state law. 

At the time, most states did not require that companies provide any meaningful information to their shareholders (the NYSE and a few states did require an annual report).  Instead, shareholders had to go and ask for it under state law inspection rights.  The use of inspection rights added costs and provided plenty of opportunity for management to resist and not provide the needed information.  As a result of the failure of state law to require adequate disclosure, Congress, in the Exchange Act, gave to the newy created Securities and Exchange Commission, the job of fashioning a disclosure system for public companies.  The SEC received the authority to require periodic reports and proxy disclosure.  In other words, the disclosure provisions of the Exchange Act were a direct response to the race to the bottom.

In many ways, little has changed.  Shareholders of private companies are still largely limited to inspection rights if they want information.  In addition, shareholders of public companies sometimes want to examine matters in greater detail than what the company has disclosed.  To do so, they must invoke their inspection rights.  In this regard, Delaware courts have evidenced considerable hostility towards shareholders seeking information.  They have imposed unnecessary pleading hurdles and, even when shareholders succeed in gaining access, rarely awarded fees, forcing shareholders to absorb the costs of vindicating their rights.

With all of that in mind, we turn to the most recent example of the approach used by Delaware courts to limit shareholder access to information.  The matter arose in Norfolk County Retirement System v. Jos. A. Bank Clothiers, Inc., Civil Action No. 3443-VCP (Del. Ch. Feb. 12, 2009).  We will discuss the case in the next post.  As usual, we have posted the opinion and the primary material on the DU Corporate Governance web site.  

Primary materials have been posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 17, 2009 (boomark / email).