November 11, 2014

Permutations of Fee-Shifting Bylaws

Right after I read Keith Bishop’s blog about how Senator Blumenthal has written a letter to the SEC asking the agency to investigate fee-shifting bylaws – specifically Alibaba’s bylaws – I read this note from “The Activist Investor”:

We heard of an interesting new innovation in corporate bylaws this week. As we noted earlier, the bylaws constitutes a sort of contract among shareholders, executives, and directors. We noted two new ways that bylaws can limit how shareholders sue a company. This most recent innovation requires a shareholder to obtain approval from a minimum number of other shareholders to sue the company. Last month, Imperial Holdings amended its bylaws to require consent from shareholders holding at least 3% of the outstanding shares for such a lawsuit.

Some notable aspects, then:
– The requirement pertains only to derivative lawsuits
– The company BoD approved the amendment without a shareholder vote, so we don’t know what investors think of this
– The person behind the innovation is Phil Goldstein, BoD Chair and a significant investor at Imperial, but also a prominent activist investor with a speciality in closed-end funds
– Imperial is domiciled in Florida, not a hotbed for corporate law, so we’ll need to see what Delaware legislators and courts think of this.

On the one hand, in the news release Phil mentions the morass of expensive derivative lawsuits that benefit mostly attorneys, and certainly not most aggrieved investors. We deplore this as much as anyone. On the other hand, we have a thoughtful, outspoken activist investor who seemingly allows a BoD to limit shareholder rights, worse yet without a shareholder vote.

On second thought, it does show that we investors can think and act reasonably. The bylaw amendment doesn’t preclude derivative lawsuits, but only demands that enough shareholders agree they will benefit. Have to say we like this.