www.TheDefiningTension.com

[No. 18] A "Dissenting Opinion" on the Concurring Opinions Blog

Early 2009, then Vice-Chancellor Strine of the Delaware Chancery Court issued the - by now well-known - opinion in the AIG derivative suit case, that contains many instructive pages on let's say good corporate law and governance practices. I highlighted the case here.  Over three years passed. Then Lawrence Cunningham wrote this post about the opinion, the other day.

Civil Trial Judge Excesses and Leo Strine’s AIG Slur

posted by Lawrence Cunningham

Should civil trial courts describe the pleadings alleging wrongdoing in criminal terms? In reading large numbers of opinions in corporate cases over the years, I can recall only one judge who did so.  The judge was Leo Strine, an otherwise-obscure figure known among corporate law devotees because of his seat on the Delaware court that hears many business disputes among corporate interests.

In a shareholder lawsuit, Strine was evaluating whether the plaintiffs’ lawyers had alleged a link between their general claim that a corporation lacked adequate internal controls and their further claim that two corporate directors, in particular, knew of this.  Strine acknowledged that making the link between a general failure of internal control and someone’s personal knowledge, and therefore culpability, requires a fair amount of detailed specifics.  The defendants had challenged the plaintiff’s complaint as deficient in this regard.  Strine then wrote the following (the snide style appears in the original, as I am quoting this literally):

“But here? Really? The Complaint fairly supports the assertion that AIG’s Inner Circle led a—and I use this term with knowledge of its strength—criminal organization.”

The prejudicial quality of this calculated and intemperate statement is obvious. It was also gratuitous, because it is beyond the relevant jurisdiction, experience and pleadings.  According to lawyers and participants in the case, the statement crystalized Strine’s biased attitude throughout the case and others he oversaw involving the same people.  All arose out of the corporate power struggle of March 2005 in which the board of American International Group, under pressure from Eliot Spitzter, ousted Hank Greenberg, its chairman and chief executive of forty years (and leader of what Strine maliciously called the “Inner Circle”).

In addition to being substantively inflammatory, Strine’s gratuitous comment was dangerous because of its timing. Strine published that statement in February 2009, in a case that was trivial in terms of the stakes for Greenberg.  It was just four months before a civil trial would begin in New York federal court where Greenberg fought his former company over $20 billion worth of property. 

As it turned out, Greenberg won the $20 billion case, following a three-week jury trial, though the jury deliberated for only half a day and the judge, Jed Rakoff, said the plaintiffs did not come close to making out a case. Even so, Strine’s reckless comments could have biased those jurors too.  Strine should not have written those words.  It would have sufficed to say the pleadings met the required standard.  He should expunge the invective from the record or at least apologize for it.  Strine would also do well generally to abandon the snide, malicious, gratuitous style of writing on display in this opinion, which is injudicious and unbecoming.

The case was In re American International Group Shareholders’ Derivative Litigation, 965 A.2d 673 (Strine, Delaware Chancery, February 10, 2009).

Ehm. Ok. Wow. I'm not sure where all this comes from, but I sympathize with Max Kennerly's comment on this, well, slur?

You’ve grossly misread the meaning of that quote.

The question on a motion to dismiss is if the plaintiff’s alleged facts — assumed to be true — state a viable claim for relief. Strine’s point was that the facts alleged did far more than state a viable claim: they were so strong as to allege criminal activity. Strine was thus lambasting the defense lawyers for wasting the court’s time in filing a motion to dismiss that obviously could not be granted on the facts alleged.

Do you think defense lawyers should be praised for filing frivolous motions? That judges should remain absolutely silent when lawyers file wasteful, unnecessary motions that obviously cannot be granted?

[No. 17] Distribution of Profit in the Health Sector

A few days ago a long expected proposal for legislation was published that will make it possible, if adopted, for certain health organisations such as hospitals to distibute profits to its shareholders or members.  

Dit wetsvoorstel is een uitwerking van het voornemen uit het Regeer- en Gedoogakkoord om gereguleerde winstuitkering mogelijk te maken voor aanbieders van medisch-specialistische zorg (algemene en categorale ziekenhuizen en zelfstandige behandelcentra). Hierdoor zullen zij beter in staat zijn om financiering in de vorm van risicodragend vermogen aan te trekken. De regering is van oordeel dat daardoor de kwaliteit, dienstverlening en doelmatigheid van de medisch-specialistische zorg zal verbeteren. Aan de andere kant erkent de regering dat het ongeclausuleerd toestaan van winstuitkering ook kan leiden tot extra risico’s voor de kwaliteit, betaalbaarheid en doelmatigheid van zorg. Daarom zijn in het Regeer- en Gedoogakkoord randvoorwaarden neergelegd. Ten eerste mag geen winst uitgekeerd worden gedurende de eerste drie jaar na het moment van investeren. Ten tweede mag pas winst worden uitgekeerd na een positieve beoordeling van vooraf gestelde minimumkwaliteitseisen door een onafhankelijke toezichthouder. Ten derde mag pas winst worden uitgekeerd na een positieve beoordeling van de financiële reserves. Door de wijze waarop deze voorwaarden in dit wetsvoorstel worden ingevuld, is een balans gevonden tussen het borgen van de publieke belangen enerzijds en het behoud van de investeringsbereidheid anderzijds.

The Bill includes a definition of distribution of profits.

Onder het uitkeren van winst wordt verstaan het uitkeren van winst als vergoeding voor het ter beschikking stellen van eigen vermogen door privaatkapitaalverschaffers. Winstuitkering is geregeld in boek 2 van het Burgerlijk Wetboek (BW) (art. 2:53 BW voor coöperaties, art. 2:105 BW voor de nv, en art. 2:216 BW voor de bv). In afwijking op het BW wordt niet geacht onder het verbod van winstuitkering te vallen de inkoop van eigen aandelen of vermindering van het geplaatst kapitaal.

However, academic hospitals are not permitted to distibute profit.

In dit wetsvoorstel worden academische ziekenhuizen vooralsnog uitgesloten van de mogelijkheid tot het uitkeren van winst. De meeste academische ziekenhuizen zijn publiekrechtelijke rechtspersonen op grond van de Wet op het hoger onderwijs en wetenschappelijk onderzoek (WHW) en worden sterk gereguleerd door de minister van Onderwijs, Cultuur en Wetenschap. Voor deze academische ziekenhuizen is het op grond van hun publiekrechtelijke grondslag niet mogelijk om winst uit te keren. De overige academische ziekenhuizen hebben een verplichte rechtsvorm, namelijk de stichting of de vereniging, die het uitkeren van winst ook niet toestaat.
Naast bovenstaande juridisch belemmeringen, bestaan er ook inhoudelijke bezwaren tegen het toestaan van winstuitkering bij academische ziekenhuizen. Zij hebben enkele aanvullende functies naast het aanbieden van reguliere medisch-specialistische zorg. Onder deze functies vallen het doen van wetenschappelijk onderzoek en innovatieonderzoek, het ontwikkelen van nieuwe vormen van zorg en het verzorgen van de opleiding tot arts. Academische ziekenhuizen krijgen voor deze taken een vergoeding in de vorm van de academische component (AC). Deze geldstroom is vooralsnog niet duidelijk te scheiden van de bekostiging van geleverde zorg via zorgverzekeraars. Om te voorkomen dat een deel van de academische component bedoeld of onbedoeld wordt uitgekeerd aan aandeelhouders, kiest de regering er voor de academische ziekenhuizen uit te sluiten van de mogelijkheid om winst uit te keren.
Overigens concurreren academische ziekenhuizen bij het aanbieden van reguliere medisch-specialistische zorg met andere aanbieders. In tegenstelling tot deze aanbieders, krijgen academische ziekenhuizen geen mogelijkheid om winst uit te keren. Dat kan een ongelijk speelveld opleveren. Dat hoeft geen probleem te zijn omdat een «gemengd systeem» van naar winst strevende aanbieders met private investeerders en aanbieders zonder private investeerders goed kan functioneren (zie paragraaf 1.3). De regering verwacht daarom dat academische ziekenhuizen door de naar winst strevende aanbieders worden geprikkeld om ook hun doelmatigheid en kwaliteit te verbeteren.

The explanatory notes are very worthwhile to read as the proposal covers entrepreneurship and the legal boundaries to it. Also, John Elkington's three P's seem to fit in here. People, planet and profit.

[No. 16] Ajax: Court of Appeal Decision

The Court of Appeal in Amsterdam last Tuesday overturned the appointment of Louis van Gaal as CEO of Ajax, a victory for supervisory board member Johan Cruyff in his fight against Van Gaal's role with the club. The ruling (LJN: BV3011) was the latest twist in the boardroom battle between Cruyff and the four other supervisory board members at the four-time European champion footbal club Ajax.

The Court of Appeal concluded that the other four board members deliberately put Cruyff offside by appointing Van Gaal and another director, Martin Sturkenboom, in November 2011 without adequately consulting Cruyff. Apparantly, the meeting of the members of the supervisory board was announced in the morning, without mentioning that it would include a vote on Van Gaal as CEO, and took place that same day in the afternoon. Cruyff, who was in Barcelona, was unable to attend and was completely surprised (and shocked) to hear Van Gaal was voted in. Following the court ruling, the four members of the supervisory board have announced they will step down. Just today, I read it is rumoured that former Dutch national team goalkeeper, who also played for Ajax, Juventus, Manchester United and Fulham (see 2012 post 15), Edwin van der Sar might fill in one of the vacant seats. Currently, Van der Sar is doing a master's degree in International Sport Management at (I am not joking) the Johan Cruyff Institute for Sport Studies. I guess that makes him a perfect candidate!      

As corporate law enthusiast and football fan I will write a more detailed piece about this football drama for one of the legal journals. For now, I stop, as I have had enough football for one day.

[No. 15] UK: Fulham Footbal Club, Arbitration and Unfair Prejudice

I just read an interesting 2011 UK court decision regarding the important question whether arbitration blocks an unfair prejudice proceeding. The Court of Appeal case concerned a dispute between a premier league football club and the first and second defendants, the chairman of the Football Association Premier League Ltd and the company itself, that was covered by arbitration clauses in the rules of the company and the Football Association.

The Court of Appeal dismissed the appeal by the petitioner, Fulham Football Club Ltd, regarding the decision of Vos J [2010] EWHC 311 (Ch) on 1 December 2010 granting the first and second defendants, the Football Association and its chairman, a stay of the proceedings brought by the club, in order to allow arbitrations under the relevant arbitration clauses to proceed.

The judge, Patten LJ, said Fulham had petitioned the court complaining that the chairman had broken the rules and acted improperly in connection with the purchase by Tottenham Hotspur FC from Portsmouth City FC of Peter Crouch, the England full-back, for whom Fulham FC had also bid. The judge mentioned that no express provision in the Arbitration Act 1996 or the Companies Act 2006 excluded arbitration as a possible means of determining the dispute. The court was obliged by section 9(4) of the 1996 Act to grant a stay unless satisfied that the arbitration agreement was null and void, inoperative or incapable of being performed. The shareholders in FAPL were the clubs which were members for the time being of the Premier League, so disputes and the scope for relief were likely to be limited. The determination of whether there had been unfair prejudice or unconscionable behaviour was capable of being decided by an arbitrator who would have the power to grant the relief Fulham sought. As Patten LJ said:

Section 994 gave shareholders "an optional right to invoke the assistance of the court in cases of unfair prejudice ... there is nothing in the scheme of these provisions which, in my view, makes the resolution of the underlying dispute inherently unsuitable for determination by arbitration on grounds of public policy".

[No. 14] Proposol for a European Foundation

The European Commission published a proposal for a Council Regulation for a European Foundation that will have legal personality. It is obliged to have a public benefit purpose and must have a cross-border dimension to its objectives or an objective to carry out activities in at least two Member States. Profits are to be used for the pursuit of a public benefit purpose and at the time of incorporation the value of its assets must be at least 25,000 euros. A European Foundation can be set up (1) from scratch, (2) by converting a national foundation into a European Foundation or (3) through a (national or cross-border) merger of national foundations.

The European Foundation acquires legal personality upon its registration in a Member State. The draft Council Regulation also contains rules regarding involvement of employees and volunteers. Remarkably, the FE will be supervised by the supervisory authority of the Member State where it is registered in order to benefit from the procedures already developed at national level. The Regulation sets minimum, but powerful, supervisory powers to guarantee adequate powers for supervisory authorities across the EU. Far reaching is that for example the supervisory authority will have the right to:

1. inquire into the affairs of the European Foundation and, for that purpose, require the directors and employees of the Foundation to make available all necessary information and evidence;

2. appoint an independent expert to inquire into the affairs of the Foundation at the expense of the Foundation where there is evidence of financial impropriety, serious mismanagement or abuse;

3. issue warnings to the governing board and order the governing board to comply with the statutes of the Foundation, the Regulation and the applicable national law where there is evidence to the contrary;

4. dismiss or propose the dismissal of a member of the governing board to a competent court;

5. decide to wind up the Foundation or propose the winding up to a competent court.

The good news is that the European Foundation will be able to transfer its registered office from one Member State to another, without having to wind up or to create a new legal entity and without affecting any right or obligation which existed before the transfer. Furthermore, the European Foundation can also convert itself into a public benefit purpose entity under national law. Thus, after converting a national foundation into a Europe Foundation, or following a merger of two foundations (which can be from the same Member State or from different Member States), the European Foundation can reregister itself in another Member State and following that, convert itself into a national foundation under the laws of that Member State. Concluding, the regulation, if adopted, is a much wellcomed improvement.

[No. 13] The Janus Head of Corporate Law Revisited

In a very interesing post, the Glom's Gordon Smith writes that he doesn't often "hear law professors talking systematically about the use of law for strategic purposes" (also see Steve B here).

"The laws of economics explain how people make money. But another kind of law -- written by legislatures, bureaucracies, and courts -- often determines who gets what share."

Make the Rules or Your Rivals Will by Richard Shell is a book about law and strategy. Law professors teach and write about topics like public choice, agency capture, rent seeking, etc., but I don't often hear law professors talking systematically about the use of law for strategic purposes.

We tend to organize our thinking around doctrinal areas and around various legal skills. The systematic study of law and strategy seems different. It is not defined by a particular subject matter or set of skills. Even when we talk about law more generally, we generally do not analyze it through the lens of strategy. 

In simplest terms, the study of law and strategy views the world from the perspective of a business and asks: how can we use law to gain a competitive advantage? This question ought to be of interest to lawyers, but does any law school teach a class on law and strategy?

Hmm, perhaps the fact that my 2010 inaugural lecture The Janus Head of Corporate Law (i.e., (i) facilitating and (ii) regulating entrepreneurship) was published in Dutch - and not in English - has explanatory power as to why he missed it. Here's the abstract (in Dutch I'm afraid).

Ondernemerschap is een complexe zaak. De ondernemer moet via innovatieve activiteiten waarde zien te creëren, maar tegelijkertijd tussen vele regels en wetten manoeuvreren in een globaliserende wereld die steeds meer vergt, waarbij bovendien de foutentolerantie van de buitenwacht sterk afneemt. Intussen wordt het ondernemingsrecht in toenemende mate onvoorspelbaar, omdat rechtsvragen steeds vaker aan de hand van de wisselende omstandigheden van het geval beantwoord dienen te worden door de rechter, waarbij deze zich bij voorkeur beperkt tot een zaaksgebonden beslissing. Voor ondernemers is het belangrijk dat het ondernemingsrecht transparant is. Rechters hebben hierin een belangrijke taak: niet zozeer de wetgever, maar zíj moeten vooral het voor de dagelijkse praktijk relevante ondernemingsrecht gestructureerder gaan vormgeven, door de donkere plekken van het recht met dagelijkse relevantie voor de praktijk waar nodig en mogelijk uit te lichten.

I would be happy though to cross the Atlantic and pay a visit, to discuss things law and strategy (in English no less).

[No. 12] Shareholder Exit and Fair Price

Under Dutch corporate law, shareholders of a corporation with a 'closed'  structure - typically so-called ' BV's' - who either (i) want to force another shareholder to exit (combined with a share transfer and payment of a fair share price) or (ii) want to force an exit of themselves (ditto), can make use of a statutory regime enabling him to do so provided certain conditions are met (the "geschillenregeling").

This regime is not very popular, for more than one - good - reason; one of them being that this type of litigation can take years and years before the forced exit has taken place. Because of these hick-ups, the regime has been 'under construction' for some years now as part of the make-over of the statutory provisions on BV's. Hopefully as per July 1, 2012 the new regime will be in place, making things easier (and the regime more popular in use).

Anyway, under the current regime the Supreme Court has rendered only a handful of decisions. Last Friday the court added one, in a rather peculiar case that concerned a no. (ii) scenario: a shareholder who wants to force an exit of himself (combined with a share transfer and payment of a fair share price). Two short comments, limited to the current regime.

1. The Supreme Court basically decides that the lower court, when setting the fair price of the shares to be paid to the shareholder who exits (by choice) as per s. 2:343 DCC when the shareholders have already agreed to transfer the shares and pay a certain share price (anticipating the outcome of the case),  can factor in damage suffered by this shareholder -  due to the difference between (i) the advance payment of the share price (when the shares were transferred) and (ii) the higher share price as finally set by the court - by adding compensation fixed at the rate of statutory interest. The circumstance that the shareholder did not specifically ask for this interest is of no relevance here, as this mechanism - according to the court - is subsumed within s. 2:343 DCC.

Art. 2:340 lid 1 strekt ertoe dat de rechter, met inachtneming van het deskundigenbericht, zelfstandig de vergoeding vaststelt die voor de overgenomen aandelen verschuldigd is. Bij een redelijke toepassing van het in art. 2:343 BW kan de rechter bij de vaststelling van hetgeen in een geval als het onderhavige verschuldigd is rekening houden met het nadeel dat de eiser gedurende de periode tussen de overdracht van de aandelen en de definitieve vaststelling van de waarde daarvan lijdt door het gemis van het verschil tussen de vastgestelde waarde en het hem bij wijze van voorschot betaalde bedrag, en een forfaitaire vergoeding voor dat nadeel opnemen ter hoogte van de wettelijke rente. De omstandigheid dat [verweerder] geen wettelijke rente gevorderd heeft, behoefde de ondernemingskamer dus niet te weerhouden van toekenning van die vergoeding.

2. The Supreme Court also clarifies that, because of the language of s. 2:343(3) DCC, the court's decision as to the price cannot be made enforceable provisionally (i.e., pending a possible appeal).

Uit de tekst van art. 2:343 lid 3 ("nadat hem een afschrift van het onherroepelijk geworden vonnis als bedoeld in artikel 340 lid 1 is betekend") volgt dat een vonnis of arrest waarbij de te betalen prijs wordt vastgesteld niet uitvoerbaar bij voorraad kan worden verklaard. Uit die bewoordingen vloeit immers voort dat de wederzijdse prestaties eerst opeisbaar zijn nadat de uitspraak onherroepelijk is geworden. Uitvoerbaarheid bij voorraad is met deze wettelijke regeling niet verenigbaar.