I am still out in the field and on assignment in Palo
Alto at the Stanford
Law School Directors' College. The keynote speaker on the first full day of
the event was Myron
Steele, the Chief Justice of the Delaware Supreme Court. Later in the
morning, SEC Enforcement Director Robert Khuzami presented
what the conference organizers called a "short shot." Both speakers'
presentations were thoughtful and interesting.
Chief Justice Steele's presentation addressed his concern
about "the significant intrusion of the federal government into corporate
governance." The problem with the changes that both SOX and Dodd-Frank are
bringing about is that the new federal statutory standards were enacted without
proper appreciation of the possible "unintended consequences" and without a
proper "cost/benefit analysis."
Steele suggests that the Congress adopted the changes
even though they were "missing an analytic basis" for the change. Steele
described this approach as "faith-based corporate governance," because the
changes were imposed on "faith that changing the corporate governance will
result in better corporate governance." Rather than basing the changes on
empirical proof that a certain practice would produce better governance, the
changes were "dictated by the politics of the hour."
Steele's position is that "the federal government
shouldn't have a role in corporate governance of state-chartered system." A
state-based approach is preferable, according to Steele, because it allows
different companies to choose and it allows experimentation, because what works
for some may not work for others.
As examples of the alternatives available at the state
level, Steele contrasted the approach of two other states, North Dakota and
Nevada, with that of Delaware. The critical distinction, Steele asserted is the
legal system that is available in Delaware, which provides "predictability,
clarity and consistency." The Delaware legal system provides reassurance to
directors that if they act in the best interests of the corporation, then they
won't have to worry about "some bizarre result."
Steele said that if he had to describe the Delaware
judiciary in two words, they would be "prudence" and "reasonableness" - that
is, that the courts would be "prudent" in their review and the courts
would apply a "reasonableness" test in their application of the laws. He said
that the test of every judicial doctrine in Delaware comes down to that single
word - reasonableness.
In answer to a question from the audience, Steele
referred to the conduct of the Airgas board taken during the course of the
recent attempt of Air Products for a hostile takeover of the company. After
Airgas had first rejected Air Products buy out offer, Air Products had managed
to bring about the election of a short slate of new directors to the Airgas
Board. The reconstituted Airgas board then took up the question whether the
date for the next director election should be accelerated, which theoretically
could have allowed Air Products to control a majority of the Airgas board and
then to have the Airgas poison pill provision set aside. However, the newly constituted
board, included the short slate of Air Products designees, declined the
election date change and also continued to reject the Air Products offer.
Steele said that the Airgas board's performance "renewed
his faith and confidence in the boards of publicly traded companies" because
the newly elected board members did not come onto the Airgas board as "shills"
for the would-be acquirer. Rather, when they took their seat on the Airgas
board, they took their duties to Airgas seriously.
Khuzami on the SEC Whistleblower Rules:
Robert Khuzami's presentation essentially amounted to a defense of the approach
the SEC took in the recently released Dodd-Frank
whistleblower rules. Khuzami began by noting that under Dodd-Frank, the
payment of the whistleblower bounties is not discretionary, as the statutory
provision "requires" the SEC to pay a reward when a whistleblower's information
results in a fine or penalty meeting the statutory requirements.
Khuzami noted that the Commission received a large volume
of comments about the SEC's proposed rules and that many commentators were
concerned that the rules will create incentives such that whistleblowers will
report "out" rather than "up," which could create prevent companies from
remediating problems themselves. Although the Commission staff met frequently
and discussed these concerns at length, in the end the decision was made not to
include a requirement that whistleblowers would have to report their
information internally first in order to qualify for the bounty, because such
an absolute requirement would be inconsistent with Dodd-Frank itself, as the
statute has no requirement that whistleblowers report internally first. The
Commission was concerned that requiring internal reporting first might "chill"
whistleblowers from coming forward, particularly where the person to whom the
whistleblower might have to report the information is involved in the
However, the Commission recognizes great value in
internal compliance, and therefore adopted an approach that, rather than
requiring internal reporting, provides incentives for internally reporting.
First the final rules give a whistleblower a "120-day grace period," within
which the whistleblower might first report to the company and have the
measurement date for determining whether or not the whistleblower was first to
report to the SEC related back to the date of the internal report. Also, if the
whistleblower reports to the company and the company accumulates information
and then self-reports to the SEC, the whistleblower will get the benefit of the
entire package of information reported in order to determine whether or not the
other bounty requirements had been met.
Khuzami emphasized that the Commission did not want to
undermine internal compliance efforts and processes, so there are certain types
of whistleblowers who are disqualified from the bounty, including attorneys and
internal compliance offices, as well as those who obtained those who obtained
their information in violation of the law.
Khuzami said that the Commission and its staff are going
to remain attentive and if what they see requires further changes. As for the
Commission's ability to handle the whistleblower reports, he expressed
confidence that the Commission could handle the reports, although he added that
he does not expect a "huge flood" of reports.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
For more information about LexisNexis
products and solutions connect with us through our corporate site.