Academic journal article University of Toronto Faculty of Law Review

Golden Leash Arrangements: A Legal and Policy Analysis

Academic journal article University of Toronto Faculty of Law Review

Golden Leash Arrangements: A Legal and Policy Analysis

Article excerpt

  I   INTRODUCTION                                          51  II   THE CASE OF GOLDEN LEASHES                            52 III   THE SHAREHOLDER FRANCHISE                             54  IV   THE PRIMA FACIE LEGALITY OF GOLDEN LEASHES            58       I. Conflicts of Interest and the Fiduciary Duty       59       II. Director Independence                             66   V   GOLDEN LEASHES AND THE PUBLIC INTEREST                73       POWER       I. The Public Interest Power                          74       II. Inherently Abusive Golden Leash Arrangements      77       III. Use of the Public Interest Power in Connection   83            with Post-Election Transactions       IV. Limits of the Public Interest Power               84  VI   POLICY RECOMMENDATIONS                                87 VII   CONCLUSION                                            88 

I INTRODUCTION

It is common practice for activist shareholders proposing a slate of dissident nominee directors to pay their dissident nominees a flat fee and to indemnify them for legal liability in consideration for standing election. (1) In several recent proxy contests, however, activists have entered into special compensation arrangements with their dissident nominees under which they have agreed to provide their nominees a share of the profits realized on their position in the target company after a fixed period of time, should the nominee be elected.

These arrangements, commonly referred to as "golden leashes", have given rise to several criticisms. Some have referred to the tactic as "egregious" and called for corporations to institute by-laws that would disqualify nominee directors party to these special compensation arrangements from standing for election. (2) Others have concluded that "if this nonsense is not illegal, it ought to be". (3) This article argues that the concerns motivating these responses are sufficiently serious to merit attention from securities regulators. However, given the fundamental importance of the ability of shareholders to elect directors, golden leashes should remain prima facie legal and only attract regulatory intervention under certain conditions.

Part 2 presents a case study of the 2012-2013 proxy contest between (ana Partners, LLC ("Jana") and Agrium Inc. ("Agrium") in which [ana entered into golden leash agreements with its dissident nominees. The facts of this case will inform the legal analysis put forth in Parts 4 and 5.

Part 3 outlines the statutory right of shareholders to vote on the corporation's board of directors, including via proxy contests. In so doing, Part 3 advances a theory of the corporation that is premised on the ability of shareholders to exercise their rights of enfranchisement. Given the importance of the shareholder franchise in corporate affairs, any regulatory rule or corporate by-law that limits this right should be treated cautiously.

Part 4 considers the common theoretical and policy objections to golden leash arrangements, and supplements this discussion with an analysis of these arrangements from a legal perspective. Part 4 concludes that, even if golden leashes do not appear to breach positive law, they raise concerns of sufficient seriousness to merit their scrutiny.

Although corporate governance in general and proxy contests in particular have historically been the domain of corporate law, Part 5 argues that intervention by securities regulators is justified in light of their concerns regarding the shareholder franchise and investor protection. Part 5 further argues that the public interest power is uniquely well-suited to facilitate such intervention, since it affords regulators the means of protecting investors without impacting the shareholder franchise in the way an outright ban on golden leashes would.

Part 6 offers two normative policy recommendations for securities regulators to supplement the role of the public interest power in matters relating to golden leashes. …

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