Corporate Governance

Berger v. Pubco: What does Pubco mean for ?federalism? ? the federal-state line in regulating corporate affairs?

By Faith Stevelman

As many commentators have noted (with different views of its import), federal laws and regulations and especially the Sarbanes Oxley Act (along with changes they inspired in stock exchanges' regulations), taken cumulatively, are impinging on territory once safeguarded to corporate internal affairs and hence state corporate law. The seemingly imminent passage of federal laws speaking to acceptable financial risk and leverage, executive compensation limits and shareholder proxy access would appear to be the last shoe(s) to drop in the story of how we ended up with federal minimum standards in corporate law. (As I will argue soon at a Michigan State University law symposium on narrative in corporate law: Winter won the academic debate in regard to the efficacious effect of market discipline and the superfluity of federal regulation of corporate governance, but Cary has carried field, to corporate academics great surprise.)

So what is Pubco's relevance to this evolving federalism phenomenon and its implications for Delaware corporate law? First, Pubco is a top quality example of meticulous reasoning and careful analysis from the Delaware Supreme Court. In terms of tone, method, reflectiveness and comprehensiveness, it's exactly what we want from the highest court in the nation's first state of corporate law and the kind of decision that commentators point to when they seek to justify Delaware's preeminence in the field. It's an example of why race to the toppers point to Delaware's expert judiciary and defend the propriety of managers choosing Delaware. It stops short of being a rallying cry for minorities in short form mergers, but it's a brave decision nevertheless; it could have been a lot worse for minorities. (Recall that in the 70s the SEC came close to promulgating tough substantive requirements for freezeouts which would have dwarfed the development of corporate doctrine in this area -- and there's always the chance that controversy may ignite again, especially with market prices being as low as they are. )

 Second on this federalism issue, though Pubco's minority shares were sporadically traded over the counter, the company was not required to make SEC filings or provide an Information Statement, consistent with Rule 14e-3. How this could be true is perhaps obvious to others, but then I thought I knew this stuff pretty well. (OTC markets are now counted as exchanges, no?)

Pubco is a reminder that M&A isn't only about public companies; and the informational protections of the federal securities law are not universally applicable to protect shareholders in these deals -- even in cases where the company has shares traded OTC! State corporate law has a hugely important role to play where shareholders' need for information is not so protected.  

And this movement to protect shareholders' fiduciary rights in unlisted/closely held firms is important for Delaware too. If franchise fees and revenues from public companies wane, Delaware will have more at stake in (and may indeed gain from) refining the scope and application of fiduciary disclosure duties in unlisted and closely held companies. The story of Delaware's preeminence features prominently in many Corporations courses, where the focus on public  companies commonly persists, but for obvious reasons there's more talk about LLPs and LLCs, and a "Business Associations" (plural) view, consistent with evolving market dynamics. This has implications for Delaware's future stature in "corporate" law.

Full post as published by The Race to the Bottom on August 06, 2009 (boomark / email).