August 27, 2021

Handbook on Corporate Governance in India

[Cross-posted from the Oxford Business Law Blog]

By Afra Afsharipour and Manali Paranjpe

Corporate governance reforms in India have undergone a significant overhaul since the late 1990s. In 2000, the Securities and Exchange Board of India (SEBI) introduced the first set of comprehensive corporate governance reforms via Clause 49 of the listing agreement of stock exchanges. Over the next decade, after much debate, voluntary guidelines and lessons learnt through the Satyam scandal in 2009, the Companies Act, 1956 was repealed and replaced by a new set of laws under the Companies Act, 2013. The passage of the 2013 Act was followed by new rules thereunder as well as separate SEBI administered regulations for listed companies.

Since the release of the previous edition of our Handbook on Corporate Governance in India, the country has witnessed significant regulatory changes with continuous refinement of corporate governance standards. Notably, in October 2017, the SEBI formed the Committee on Corporate Governance headed by Uday Kotak (the Kotak Committee) to undertake a comprehensive review of extant corporate governance norms in India. The committee considered several aspects of corporate governance, including corporate purpose and stakeholder interests, and focused on the business realities of Indian corporations, including the dominance of controlling-stockholders. The SEBI’s amended listing regulations reflect many of the recommendations of the Kotak Committee. More recently, in early 2021, the corporate social responsibility (CSR) framework in India has also been significantly amended.

Our Handbook on Corporate Governance in India: 2021 Edition provides a comprehensive study of corporate governance in India. The introductory chapters trace the development of India’s corporate governance regime and examine the nature of ownership and control at Indian companies. Concentrated ownership, often referred to as promoter control, is widespread in corporate India. While concentrated ownership may benefit the corporation and its stakeholders by providing, inter alia, commitment to the performance and growth of the company, it may also lead to exploitation of power. This edition of the Handbook analyzes ownership and control in corporate India through case studies that explore recent challenges faced by Infosys Ltd. and Tata Sons Ltd., two of India’s largest firms. Concentrated ownership and the use of complex group company structures also create the potential for abusive related party transactions that erode value for minority shareholders. With several amendments since passage of the 2013 Act, India’s substantive legal framework for regulating related party transactions has now converged toward international standards. 

The subsequent chapters of the Handbook delve into the extant corporate governance regime for listed companies, highlighting the key regulatory changes. In the chapter on directors’ duties and board practices, we look into the changing board composition at listed Indian companies. The Handbook presents data indicating the direct correlation between company and board size, for example, certain large companies having as many as ten directors on their boards.

The chapter also highlights how board dynamics have changed at listed Indian companies over the years with women directors and independent directors being onboarded. For example, the Handbook notes that for listed companies in certain sectors (healthcare and information technology), 53 to 55 percent of the board is independent, and that all of the NIFTY 500 companies have one woman director on their boards as mandated by SEBI.

The Handbook addresses the duties and responsibilities of Indian boards and explains director liabilities under Indian law. The Handbook takes a broad perspective on corporate governance, addressing interactions between boards and shareholders, as well as minority and controlling shareholders. Given the growing focus on corporate social responsibility, the Handbook examines the key regulatory changes and debates in India and provides a detailed review of the development of sustainability and responsible business practice norms in India.

The Handbook covers legal duties and their enforcement, as well as ethics and risk management issues. India has strengthened its statutory framework governing ethics through reforms such as recent amendments to the Prevention of Corruption Act, 1988, the SEBI’s insider trading regulations and the introduction of the National Guidelines on Responsible Business Conduct. The Handbook’s case study of ethical challenges faced by ICICI Bank illustrates the necessary framework for regulating ethical conduct at companies. 

Effective corporate governance includes a robust framework for risk management, including board oversight of risk management systems. While the 2013 Act sets forth a limited risk management framework, the SEBI listing regulations include a risk management mandate for listed companies. Accordingly, a company may put in place Enterprise Risk Management (ERM) systems to identify, analyze and evaluate risks, as well as to address cognitive biases in the corporate culture that undermine risk assessment. The Handbook’s case study of the IL&FS Ltd. crisis explicates the shortcomings of ineffective risk management systems. 

Several chapters address the current legal framework related to board committees—the nomination and remuneration committee (NRC), the audit committee and the corporate social responsibility committee. While SEBI has recently reviewed its mandate on the composition of the nomination and remuneration committee, the Handbook notes that for NIFTY 500 companies, on an average, 80 percent of the directors on the NRC are independent.

Further, except companies in the financials and materials sectors, all NIFTY 500 companies have an independent NRC chairperson.

Given the rise of institutional and other non-controlling shareholders, the Handbook provides an analysis of shareholder participation, activism, and rights under Indian law. The Handbook’s final chapter includes an analysis of the institutional framework and mechanisms for enforcement of corporate governance norms in India. The 2013 Act and the SEBI listing regulations provide several mechanisms by which shareholders may monitor companies as well as enforce their rights. Activism by institutional investors also plays an important role in developing corporate governance standards. Regulatory measures such as the introduction of proxy advisers, facilities for e-voting, and the introduction of class actions can enable non-promoter shareholders to assert their rights. Stewardship codes can encourage institutional investors to focus on companies’ long-term goals and actively monitor public companies on material matters. Collectively, under the 2013 Act, the SEBI listing regulations, and the Insolvency and Bankruptcy Code, several regulatory bodies have been entrusted with the functions of overseeing the enforcement of corporate governance norms in India. Class action suits, newly introduced under the 2013 Act, allow the National Company Law Tribunal wide powers to grant relief to aggrieved shareholders. 

The analysis in the Handbook demonstrates that corporate governance in India continues to evolve as Indian boards face increasingly complex risks, such as the COVID-19 pandemic, and an expanded regulatory environment. To achieve effective governance, boards must strike a balance between the company’s purpose and operations, while following the highest standards of business ethics and a complex regulatory regime. Through this Handbook, we have highlighted issues that in our view need to be deliberated upon to mitigate future challenges to effective corporate governance.

Afra Afsharipour is Senior Associate Dean for Academic Affairs and Professor of Law at University of California, Davis School of Law.

Manali Paranjpe is Research Associate with The Conference Board in India.

August 23, 2021

Comparative Corporate Governance

[Cross-posted from the Columbia Law School Blue Sky Blog]

By Afra Afsharipour and Martin Gelter

With the increasing internationalization of law and legal scholarship, comparative corporate governance has seen a burgeoning volume of research from a practical, theoretical, and empirical perspective. Practically speaking, both internationally and within individual countries, most corporate governance research deals with the interaction between board members, officers, and shareholders, primarily in large, publicly traded corporations. Much of the literature is preoccupied with reducing conflicts of interest between shareholders and management and consequently minimizing agency cost, vindicating the narrow finance perspective. Given the predominance of controlling shareholders around the globe, the literature increasingly focuses on conflicts between controlling and minority shareholders. In a comparative or international context, research also often considers all groups whose interests are affected by corporate activities and who have some degree of influence on corporations, such as creditors and employees.

In an introductory chapter to Comparative Corporate Governance, we frame the book within a broad perspective on corporate governance and cover legal duties and their enforcement, as well as the balance of powers generated by the institutional setup. Nevertheless, the interests of other “stakeholders” are very much present.

Fundamental Issues in Comparative Corporate Governance

We begin with an overview of the intellectual history of comparative corporate law and governance. During the past three decades, the volume of comparative law scholarship has grown, and the methods have shifted from the traditional functionalism represented by venerable treatises toward greater methodological variation. Maribel Sáez and María Gutiérrez put the different currents in the literature into a historical perspective. They suggest that this field has been rebranded repeatedly, moving from “comparative corporate law” through “comparative corporate governance” to “law and finance” and finally to the “theory and empirics of comparative corporate law.” Corporate law scholarship started with the doctrinal “Continental European” approach to law, but subsequently developed into a truly international field, often adopting English as its lingua franca. Comparative corporate governance then infused economic thinking into the field. Lastly, “law and finance” added a causal and empirical perspective.

In corporate law, an economic perspective dominates, and the field was further invigorated by a law and finance perspective. Not surprisingly, comparative scholarship often takes an economic view and emphasizes the incentives set by law and the interest groups whose economic interests have shaped the law across jurisdictions. Accordingly, contributions in the book address the difficult question of methodology. Vikramaditya Khanna’s chapter surveys the law and finance literature and its implications for economic development. He tackles the question of causation – does strong investor protection facilitate economic growth and developed capital markets, or do interest groups with a stake in the market lobby for strong corporate law? He suggests that “there is good evidence for a growth to law causation story and some evidence for a law to growth causation story.”

Christopher Bruner’s chapter tackles the difficult question of comparative methodology. He contrasts functionalism with contextualism, which emphasizes jurisdictional differences. Contextualists often assume a high degree of difference that cannot be eliminated because of the difficulties involved in legal transplantation. However, contextualism often fails to provide a theory for differences. Choice of method is thus typically a function of the intended audience, placing a premium on methodological self-awareness and careful calibration of one’s claims.

Other chapters give specific examples for the core debates. An example is the widely discussed, but controversial topic of convergence in corporate governance. Martin Gelter’s chapter looks at the role of interest groups, specifically the accounting industry, and suggests that it has promoted or inhibited convergence depending on the national context and its respective local incentives. Li-Wen Lin’s chapter examines the convergence debate through the lens of the legal regime on executive compensation in six jurisdictions, including the United States, the United Kingdom, Germany, Japan, India, and China. The chapter shows that, not only have the legal rules restricting the board’s power over executive pay begun to diverge in Western countries, but also directors’ power over executive pay has varied widely when one assesses the legal regime in leading Asian jurisdictions.

Corporate Purpose and Sustainability

In recent years, the debate about the proper role of the corporation in law and society has often been described as the “corporate purpose” or as the “shareholder-stakeholder” debate, but its ancient roots go back over a century. Writing in 1917, German industrialist and politician Walther Rathenau expressed deep concern about the role of short-term shareholders who expected firms to produce returns at the expense of long-term development and the public interest. The Berle-Dodd debate of 1931 in the U.S. prefigured many of the arguments of subsequent decades, serving as a template for recurring corporate purpose debates to this day. The “corporate purpose” debate has again gained traction in recent years. Two chapters tackle the debate about corporate purpose from very different perspectives.

Barnali Choudhury and Martin Petrin  survey discussions on both corporate purpose and short-termism. While directors have the freedom to consider interests besides those of shareholders, as a matter of practice, most firms continue to focus on a narrow corporate purpose. They argue that this narrow vision is conducive to short-termist corporate activities and suggest several possible reforms to allow U.S. and UK firms to advance from a shareholder ideology to a broader perspective. Cynthia Williams’ chapter reviews developments relating to CSR and ESG. Williams argues that institutional investors are emphasizing ESG partly because of younger investors’ increasing interest in topics such as climate change and economic inequality, and also because the connection between companies’ better management of ESG issues and better financial performance is becoming well-established. Internationally, there is the possibility that countries with less developed social welfare systems may require a greater degree of voluntary CSR to maintain the legitimacy of the corporate governance system. Ownership structures and the predominant types of investors appear to have an impact on sustainability outcomes as well.

The Board of Directors and Its Duties

The book then turns to substantive topics in corporate governance, starting with the central players in internal corporate governance in most jurisdictions: the board of directors. National legislation provides important differences in the structure of the board, with the U.S. one-tier model and the German two-tier structure often seen as exemplars. Jean du Plessis’s chapter provides a broad survey of different types of board structures used around the world. The chapter then explores the nuances of board composition rules in various jurisdictions, including the UK, Germany, the Netherlands, China, and Japan. Despite practical differences, for publicly traded corporations in most jurisdictions, the ultimate management power is embedded in the board of directors, increasingly dominated by independent directors. Furthermore, the board of the modern public company typically is vested with a monitoring or oversight role. Klaus Hopt and Patrick Leyens argue that rather than settling on a particular board model, the law should allow corporations flexibility in the choice of a board model. They stress that focusing on the specific governance strategies available in a variety of situations, such as takeovers or related party transactions, demonstrates that boards can address the types of agency problems that arise in corporate governance in similar ways, regardless of the choice of board model. The board as an institution may also be used to hold the corporation accountable to non-shareholders, particularly employee stakeholders. It is only with employee-codetermination as a governance strategy that one needs a two-tier board model. Darren Rosenblum’s chapter tackles the issue of representation on the board, focusing on gender diversity. The chapter addresses the types of intervention models used in different jurisdictions, from the hard statutory mandates of Norway to the soft quotas and disclosure mandates in some common law jurisdictions, including the UK and Canada. Policy interventions face several challenges as diversity continues to play a prominent role in corporate governance debates.

Several chapters in the book address issues that go to the heart of board responsibilities. Marco Corradi and Geneviève Helleringer examine the duty of loyalty from a comparative perspective, including both self-dealing transactions under both common law (namely the U.S. and UK) and civil law regimes (focusing on continental Europe), as well as corporate opportunity rules. They note the tensions between the evolution of the law governing self-dealing transactions at the European level as well as the generally less advanced development of corporate opportunity rules in civil law jurisdictions.

Carsten Gerner-Beuerle examines the diffusion and convergence of the duty of care and the business judgment rule. After demonstrating how both are similarly formulated across common law and European civil law countries, the chapter compares the application of the Delaware business judgment rule with its German counterpart to show that even similarly formulated rules differ in actual operation because of underlying local norms and narratives. Virginia Harper Ho’s chapter analyzes risk oversight and risk management as core elements of the board’s monitoring role. Across jurisdictions, fiduciary duties are used to hold boards accountable for carrying out their monitoring role. Increasingly complex risk management and oversight responsibilities are now derived from and affected by multiple sources, including other regulatory regimes, market actors, and institutions, that have expanded risk regulation.

In addition, the book covers directors’ duties in times of change, specifically in the context of mergers and acquisitions (M&A). Afra Afsharipour argues that, with respect to friendly takeovers, the U.S. and UK approach corporate governance concerns and the balance of power between the board of directors and shareholders in increasingly divergent ways. The UK restrains director power in friendly M&A deals, including recent rules that constrain the power of directors to negotiate deal protection mechanisms. Delaware law provides wide latitude to directors to negotiate and design M&A deals and, due to recent changes to Delaware jurisprudence, provides little opportunity for shareholders to check management conflicts through litigation. According to Andrew Tuch’s chapter, management buyouts (MBOs) raise the quintessential type of conflicts in M&A transactions because they involve the board or officers of the target firm acting as owners of the buyer. While the UK’s no-conflict rule is often viewed as more severe than the U.S. fairness rule in regulating MBOs, in practice the rules operate in ways more similar than they seem at first glance. The chapter thus asserts that both the US and UK may not effectively prevent fiduciary misconduct early in the MBO deal process.

The Increasingly Complex Taxonomy of Shareholders

Much of corporate governance concerns itself with balancing conflicts and power between shareholders and managers, as well as among between controlling and non-controlling shareholders. Shareholders are not a monolithic group, ranging from the state, hedge funds, and institutional investors to family groups and individuals. Turning to the dramatic increase in institutional investors around the globe, Assaf Hamdani and Sharon Hannes analyze the governance implications of this rise against the background of the growing influence of activist hedge funds. In widely held companies, institutional investors can determine the outcome of shareholder votes, including director elections. Nevertheless, country-specific regulations, political sentiments and social norms affect the extent to which institutional investors will actually wield their power. By contrast, in jurisdictions with predominantly controlled companies, institutional investors’ ability to influence governance remains limited, but institutional investors are gaining power in countries, such as Israel, that are experiencing a shift from concentrated to dispersed ownership.

Minority shareholders are not homogeneous, both within and across jurisdictions, in their makeup, goals, and actions. Umakanth Varottil argues that the expanding schism among heterogenous types of minority shareholders creates agency problems, allowing one type of minority shareholder to affect the interests of others. The chapter analyzes the goals and actions of two types of institutional investors – activist hedge funds and passive funds – to show the potential conflicts among these shareholders. Legal tools, such as fiduciary duties and stewardship responsibilities, can address such conflicts.

The past two decades have experienced significant changes in capital market structures around the world, resulting in a reassessment of shareholder power and participation in corporate governance, and debates about the degree to which the law can and should provide shareholders with a voice and facilitate greater shareholder protection. Sofie Cools analyzes the transformation of shareholder power by comparing the use of shareholder proposals by shareholders of U.S. public companies with the relative lack of such proposals in Europe. Focusing on Delaware, France, Germany, Belgium, and the Netherlands, she argues that private ordering through shareholder proposals in U.S. companies is closing the gap in substantive shareholder power that has existed between the U.S. and Europe. The chapter also casts doubt on empirical comparisons of the frequency of shareholder proposals in the U.S. and Europe by highlighting how differences in ownership structures and the goals of shareholder proposals in the U.S. complicate such comparisons.

Gaia Balp and Marco Ventoruzzo focus on the rules governing the duties of controlling shareholders to minority shareholders in the U.S., Germany, and Italy. Despite differences in laws and enforcement mechanisms, the principles are functionally quite similar. Duties applying in situations such as related party transactions, sale of a control stakes, and access to privileged information are in the end similar because loyalty underpins the standards and rules for controllers’ conduct. Sang Yop Kang contrasts controlling shareholder power in corporate groups with single corporations operating various business lines. Differences arise in risk-sharing (cash-flow stabilization), control/voting leverage, and tunneling. Controllers may be more inclined to establish corporate groups than single corporations with different business lines (although controllers’ preference for the corporate-group form is not always absolute).

Enforcement of Corporate Law

Directors’ and shareholders’ duties would be irrelevant in practice if they were not enforceable. Not surprisingly, there are big international differences in this regard. The U.S. is often thought to be the country where corporate and securities laws are most vigorously enforced. This is in part due to an entrepreneurial plaintiffs’ bar, whose existence is owed largely to the American rule in civil procedure (where each party pays its own cost) and the possibility of contingency fees, which induce plaintiffs’ attorneys to bring class actions as well as derivative suits. Alan Koh and Samantha Tang’s chapter explores private litigation in corporate law. It provides a detailed taxonomy of the various types of lawsuits and their functions in the Anglo-Commonwealth jurisdictions (UK, Australia, Singapore, Hong Kong, New Zealand), the U.S., Germany, and Japan. The chapter considers key factors furthering and limiting such suits, including cost structure, length of the litigation, and possible outcomes. Besides derivative litigation, which involves remedies from which the company itself benefits, the chapter looks closely at direct suits, which have received less attention in the literature. The taxonomy encompasses monetary and non-monetary remedies and looks at oppression and withdrawal, appraisal rights, and injunctions, as well as litigation challenging the validity of shareholder decisions. Besides the U.S., there are jurisdictions where litigation has become common, such as in Japan in the area of derivative litigation, as well as in Canada, Australia ,and Israel in securities law. In all cases, cost rules have become favorable to lawsuits.

The other aspect of enforcement is the public side, i.e., enforcement by securities regulators, which relies largely on financial endowment and qualified staff. Pierre-Henri Conac’s chapter looks specifically at the enforcement of corporate governance rules, including corporate governance codes. His chapter encompasses both private shareholder litigation as well as enforcement by regulators and stock exchanges, focusing mainly on European jurisdictions, the United States, and Brazil. The chapter argues that private enforcement should be the main legal method of enforcement, but that public regulation should serve as a stopgap that remedies the deficiencies of the private model.

Conclusion

The literature shows that the comparative picture remains more complex than as portrayed by the original “law and finance” debate. This is particularly true given growing concerns around the globe with issues of sustainability and corporate purpose. However, we also can see increasing convergence in some areas, such as directors’ and shareholders’ duties as well as the enforcement of corporate law. Convergence is not universal, as the example of accounting shows. The continuing evolution of corporate governance debates means that a comparative approach to corporate governance will long prove to be insightful in understanding and analyzing corporate law generally.

This post comes from Afra Afsharipour, a professor and senior associate dean for academic affairs at UC Davis School of Law, and Martin Gelter, a professor at Fordham University School of Law and Research Member of the European Corporate Governance Institute. It is based on their introductory chapter to “Comparative Corporate Governance,” available here.

May 11, 2021

The Evolution of Risk Management Oversight by Indian Boards

[Cross-posted from IndiaCorpLaw]

 

By Afra Afsharipour & Manali Paranjpe

 

Across the globe, the focus on effective risk management has intensified over the past two decades as major corporations have experienced risk management failures due to excessive financial risk taking, environmental catastrophes, accounting and corruption scandals, and the like. The monitoring of risks is a significant priority for corporate managers and boards, as well as for regulators and investors. As the OECD states, “while risk-taking is a fundamental driving force in business and entrepreneurship, the cost of risk management failures is still often underestimated. . . . Corporate governance should therefore ensure that risks are understood, managed, and, when appropriate, communicated.”

 

The board of directors lies at the core of effective risk management. Directors are not responsible for the everyday management of risk. However, the board plays a critical role in overseeing and guiding the risk policy of a company, and in ensuring that appropriate systems of control are in place. Since the 2008 financial crisis, expectations around the board’s risk oversight responsibilities have become heightened as companies face increasingly complex business, regulatory and political environments. Thus, national legislation and corporate governance guidelines and codes by leading international organizations have evolved to stress the role of the board of directors in risk oversight.

 

In our article, forthcoming in the National Law School of India Review, we analyze India’s evolving framework for board oversight of risk management. With the transformation of corporate governance practices in India, the legal and regulatory regimes governing risk management have progressed to largely resemble international standards, with an emphasis on the risk oversight function of boards. The Companies Act, 2013 addresses the board’s risk oversight responsibilities. For listed companies, the Securities and Exchange Board of India (SEBI) has issued regulations that require the largest listed companies to form a risk management committee. The emphasis on the board’s oversight of risk management is in line with the corporate governance transformations that have taken place in India which increasingly stress a monitoring role for directors.

 

Despite the shift in the regulation of risk management, studies and surveys suggest that risk management has yet to become a priority at many Indian companies. Furthermore, recent high profile risk management crises highlight the importance, and challenges, of board oversight of corporate risk. While India’s legal framework for board oversight of risk has evolved, two recent crises — the collapse of IL&FS and management failures at ICICI Bank — demonstrate the barriers that directors of Indian companies continue to face in overseeing increasingly complex risks. Our article uses both crises as case studies to reflect on risk management lessons for boards of Indian firms more generally.

 

In addition to corporate crises, the COVID-19 pandemic has brought the issue of board oversight of risk management to the forefront. India as a nation was underprepared to prevent, detect and respond to a pandemic, and the crisis has been a significant one for nearly every board of directors in India. In such a crisis, companies with good governance and risk management systems may be better able to address stakeholder concerns than companies whose boards have not prepared for such calamities.

 

As companies face increasing risk complexity, boards must continually assess the structure of a company’s risk management policies and procedures. Not only are boards charged with overseeing an increasingly complex set of risks, but directors of Indian firms, particularly independent directors, face a variety of barriers in effectively overseeing risk management. Most Indian firms are controlled companies, with board members beholden to controllers and management for access to information. Limited access to independent external advisors such as lawyers, consultants, accountants, and the like, as well as significant dependence on management for obtaining information on business plans, strategies and risk preparedness of the company, can hamper the ability of boards to adequately monitor the company’s risk management policies and procedures. These issues intensify in boards with many outside independent directors.

 

Nevertheless, the barriers faced by directors of Indian firms are not insurmountable. The article’s case study of how the board of Infosys, one of India’s leading technology companies, addressed red flags raised by whistleblowers, illustrates how an empowered board can respond to risk management issues effectively. Actions by the Infosys board provides lessons on how transparent processes and clarity regarding the company’s investigation process allowed the board to assess, identify and manage risks raised by serious allegations. Furthermore, following the crisis, the Infosys board undertook additional steps to strengthen and revise its applicable policies. By responding and taking charge of the governance challenge facing the company, the Infosys board was able to prevent further harm to stakeholder interests as well as its own reputation.

 

Drawing lessons from these case studies, the article concludes with suggestions on how to further enhance the board’s risk oversight function. Stronger governance, more robust risk management strategies and capable board leadership and oversight will make priceless contributions to both Indian companies and to the Indian economy.


[Afra Afsharipour is Senior Associate Dean for Academic Affairs & Professor of Law at UC Davis School of Law and Manali Paranjpe a Research Associate at The Conference Board, India]


February 5, 2021

Lessons from India's struggle with corporate purpose

By Afra Afsharipour

[Cross-posted from the CLS Blue Sky Blog]

The escalating debate over corporate purpose is not confined to developed economies in the West. Rapidly developing economies in nations like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the centerpiece of discussions about corporate governance reforms in India. In a new book chapter, I discuss the lessons that can be learned from India’s experience with corporate purpose.

For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry of Corporate Affairs (MCA) have approached stakeholderism, CSR, and sustainability as part of corporate strategic planning and a company’s business policies under the oversight of the board of directors. In 2013, India enacted the new Companies Act. The act altered the fiduciary responsibilities of boards of directors, with Section 166 providing that directors must “act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.” The act also imposed mandatory CSR responsibilities on corporate boards with a comply or explain approach toward CSR spending. More recently, there have even been efforts to make this approach mandatory. And in 2019, the MCA issued yet another set of National Guidelines for Responsible Business Conduct to encourage Indian businesses to reflect on their purposes and to contribute towards wider development goals while seeking to maximize their profits. In addition to the MCA, the Securities and Exchange Board of India (SEBI), the nation’s securities regulator, has also required substantial additional sustainability disclosures by the largest listed companies.

The success of India’s multi-pronged initiatives has been mixed. The CSR provisions of the Companies Act have led to a large increase in philanthropy. However, philanthropic spending is unevenly distributed. Moreover, the promise and future of the CSR requirement of the Companies Act is uncertain, particularly considering the economic impact of the COVID-19 pandemic. Similarly, the stakeholder provisions of the Companies Act suffer from lofty rhetoric unmatched by either practice or legal remedies for stakeholders. SEBI’s disclosure rules have significantly increased transparency for the largest Indian companies. With greater disclosures, stakeholders are positioned to engage with companies more effectively and meaningfully about their social responsibilities beyond profits. Nevertheless, mandatory CSR, a stakeholder-oriented approach to corporate law, and additional sustainability disclosures have made little dent in India’s massive inequality, poverty, corruption, or pollution.

It is not surprising that India has struggled so intensely with a stakeholder-oriented approach to corporate purpose. The ownership structure of Indian firms plays a significant role in challenging the stakeholder-driven corporate purpose efforts in India. Controlling shareholders (referred to as promoters in the Indian context) are the most powerful players in corporate India. For many promoter families, shareholder wealth maximization aligns directly with their own interests. In addition, the philanthropy approach of India’s CSR provisions provides promoters with a philanthropic glow that aligns with the promoter’s self-interest.

Concentrated ownership can also create opportunities for stakeholderism to transform into mutually beneficial relationships between the government and powerful promoters. In the Indian context, the government has used private firms to promote its policy objectives of development and growth. But private firms have also been used as an instrument of rent extraction for political purposes. For example, companies are increasingly contributing CSR funds into the Prime Minister’s Relief Fund, but there is little transparency in how such funds are spent. Furthermore, there are concerns that contributions to government-controlled funds undermine the work of non-governmental organizations.

Many experts argue that promoter power has expanded significantly post-economic liberalization with greater links between political and business elites. Powerful promoters are often the biggest funders of political campaigns. Business elites are deeply involved in political decisions and policy making, serving on a variety of parliamentary committees that recommend important policy decisions for the government. Furthermore, a number of prominent industrialists have entered politics, primarily through serving in the upper house of Parliament (Rajya Sabha). In controlled companies, companies’ CSR policies may inevitably reflect the interests of promoters, including their political interests and aspirations, as well as their views on social reality and values.

The Indian experience presents an important perspective to the corporate purpose debate from a country where firms are dominated by controlling stockholders. In a country where politics and business are deeply intertwined, and where powerful controlling stockholders have an outsized role, stakeholderism may make little headway. Instead, the Indian approach to stakeholderism provides an environment where corporations can use their CSR efforts and corporate purpose rhetoric to curry political favor with the state, while the state can use stakeholderism to politically signal that it values society, even in the face of rising inequality, pollution, and persistent poverty.

January 15, 2021

Lessons From India's Struggles With Corporate Purpose

[Cross-posted from Oxford Business Law Blog]

By Afra Afsharipour

The escalating debate over corporate purpose is not confined to Western developed economies. Rapidly developing economies like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the center of discussions about corporate governance reforms in India. In this book chapter, forthcoming in the Research Handbook on Corporate Purpose and Personhood (2021), I discuss the lessons that can be learned from India’s experience with corporate purpose.


For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry of Corporate Affairs have approached stakeholderism, CSR and sustainability as part of corporate strategic planning and a company’s business policies under the oversight of the board of directors. In 2013, India enacted a new Companies Act. The Act altered the fiduciary responsibilities of the board of directors, with Section 166 of the Act providing that directors must ‘act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.’ The Act also imposed mandatory CSR responsibilities on corporate boards with a comply or explain approach toward CSR spending. More recently, there have even been efforts to transform this comply or explain approach to CSR spending into a mandatory one. And in 2019, the Ministry of Corporate Affairs issued yet another set of National Guidelines for Responsible Business Conduct to encourage Indian businesses to reflect on their purpose and to contribute towards wider development goals while seeking to maximize their profits. In addition to the Ministry of Corporate Affairs, the Securities and Exchange Board of India, the nation’s securities regulator, has also stepped in to require substantial additional sustainability disclosures by the largest listed companies.


The success of India’s multi-pronged initiatives has been mixed. The CSR provisions of the Companies Act have led to a large increase in philanthropy. However, while domestic philanthropic giving has increased significantly, it is unevenly distributed. Moreover, the promise and future of the CSR requirement of the Companies Act is uncertain, particularly with the economic impact of the COVID-19 pandemic. Similarly, the stakeholder provisions of the Companies Act suffer from lofty rhetoric unmatched by either practice or legal remedies for stakeholders. The Securities and Exchange Board of India’s disclosure rules have significantly increased transparency for the largest Indian companies. With greater disclosures, stakeholders are positioned to engage with companies more effectively and meaningfully about their social responsibilities beyond profits. Nevertheless, mandatory CSR, a stakeholder-oriented approach to corporate law, and additional sustainability disclosures have made little dent in India’s massive inequality, poverty, corruption and pollution.


It is not surprising that India has struggled so intensely with a stakeholder-oriented approach to corporate purpose. The ownership structure of Indian firms plays a significant role in challenging the stakeholder-driven corporate purpose efforts in India. Controlling shareholders (referred to as promoters in the Indian context) are the most powerful players in corporate India. For many promoter families, shareholder wealth maximization aligns directly with their own interests. In addition, the philanthropy approach of India’s CSR provisions provides promoters with a philanthropic glow that aligns with the promoter’s self-interest.


Concentrated ownership can also create opportunities for stakeholderism to transform into mutually beneficial relationships between the government and powerful promoters. In the Indian context, the government has used private firms to promote its policy objectives of development and growth. But private firms have also been used as an instrument of rent extraction for party and political purposes. For example, companies are increasingly contributing CSR funds into the Prime Minister’s Relief Fund, but there is little transparency in how such funds are spent. Furthermore, there are concerns that contributions to government-controlled funds undermine the work of non-governmental organizations.


Many experts argue that promoter power has expanded significantly post-economic liberalization with greater links between political and business elites. Powerful promoters are often the biggest funders of political campaigns. Business elites are deeply involved in political decisions and policy making, serving on a variety of parliamentary committees that recommend important policy decisions for the government. Furthermore, a number of prominent industrialists have entered politics, primarily through serving in the upper house of Parliament (Rajya Sabha). In controlled companies, companies’ CSR policies may inevitably reflect the interests of promoters, including their political interests and aspirations, as well as their views on social reality and values.


The Indian experience presents an important perspective for the corporate purpose debate from a country where firms are dominated by controlling stockholders. In a country where politics and business are deeply intertwined, and where powerful controlling stockholders have an outsized role, stakeholderism may make little headway. Instead, the Indian approach to stakeholderism provides an environment where corporations can use their CSR efforts and corporate purpose rhetoric to curry political favor with the state, while the state can use stakeholderism to politically signal that it values society, even in the face of rising inequality, pollution and persistent poverty.

September 17, 2020

Corporate governance in negotiated takeovers: The changing comparative landscape

[Cross-posted from the Oxford Business Law Blog]

By Afra Afsharipour

Takeover transactions raise significant corporate governance questions about the allocation of decision-making power among firm participants, whether and to what extent participants are constrained in their exercise of decision-making power, and whether and to what extent participants can be held accountable for their decisions. Public company M&A deals, especially, involve complex steps and contracts, and are transactions that unfold over time. This timeline involves a variety of decisions for the board of each company, and the ultimate decisions made by the board can be subject to shareholder voting or acceptance. The rules designed to address corporate governance in takeovers often reflect the ownership structure prevalent in a particular jurisdiction, but they also reflect the political power of interest groups that influence the law. The result is thus a mishmash of rules that attempt to balance both concerns about ownership structure and the desires of powerful interest groups.

In a forthcoming book chapter, I consider how corporate governance concerns are reflected in the law’s approach to regulating friendly takeovers, ie acquisitions by third party bidders that are negotiated and supported by the management of the target company. Two countries with similar capital markets and institutional frameworks, the US and UK, approach these corporate governance concerns and the balance of power between the board of directors and shareholders in increasingly divergent ways. I argue that while the UK approach to friendly takeovers constrains director power, the US approach continues to maintain and reinforce the centrality of director decision-making.

The UK is characterized by ex-ante rules that constrain managerial power and favor shareholder voice, whether deals are done via a takeover or some other structure such as a scheme of arrangement. For both structures, UK rules provide a significant voice, through voting rights or otherwise, for target shareholders. In a departure from the US model, in acquisitions of a significant size shareholders of UK bidder firms also have voting rights that constrain bidder boards. Furthermore, while the US takes a board-centric approach to director power in erecting takeover barriers, the Takeover Code limits the ability of directors to diminish or ‘frustrate’ shareholder power through takeover defenses. Significantly for friendly deals, in 2011 the UK revised its takeover rules to also dramatically constrain the power of directors to negotiate deal protection mechanisms. A key principle in the UK’s approach to friendly takeovers is constraint on director power and negotiating leverage. The shareholder-centric approach of the UK in many ways reflects the power of institutional investors who have been central to the drafting and design of the Takeover Code.

In balancing corporate governance concerns in friendly takeovers, the US has historically emphasized the interplay between ex ante protections (ie disclosure and shareholder voice) and ex post policing (ie litigation) in ways that reflect a director-centric approach. Shareholder voice is more constrained than in the UK. Not only is the voting threshold lower for shareholder voting in M&A deals, but bidder shareholders are often deprived of voting rights even in significant transactions. While shareholders may have a voice, the transaction is controlled by management. Management controls the timing and negotiation of the deal, as well as the information upon which shareholders rely in deciding whether to approve the matter or to tender in their shares. The shareholders’ vote on a deal hinges on the structure of the deal as designed by directors, including the deal protection provisions of the transaction. Unlike in the UK, directors of US firms have wide latitude to design deal protection measures. In fact, over the past decade, deal protection mechanisms have become stronger in the US with a proliferation and expansion of a variety of mechanisms that provide management with tools to protect its preferred deal.

Cognizant of management control and their conflicting incentives in negotiating takeovers, Delaware law has historically provided target shareholders two avenues to hold directors accountable through the courts—fiduciary duty litigation and appraisal rights. Over the past decade both avenues have been eroded by new doctrine. Shareholders seeking to pursue a claim for breach of fiduciary duties in a friendly takeover can file a suit for a preliminary injunction seeking to bring forth additional disclosure or to modify the merger agreement, particularly deal protection measures. Since the mid-2010s, however, the Delaware courts have tightened the standard for preliminary injunctions in merger cases, thus limiting shareholders’ ability to pursue fiduciary-based claims. Through the Corwin case and its progeny, the Delaware courts have also limited ex-post judicial review of board decisions in third-party takeovers. These decisions were a systematic move by the Delaware Courts to place limits on the wave of merger-related litigation sweeping its courts.

Under Delaware law, in certain takeovers, stockholders are entitled to an appraisal right; that is to refuse to accept the consideration offered and instead turn to the courts to determine the fair value of their shares. Appraisal was long seen as a limited remedy, but in the last decade appraisal actions gained steam with sophisticated investors acting as dissenting shareholders. The increase in appraisal actions led to a trio of important decisions by the Delaware Supreme Court.  These decisions place great emphasis on the agreed-to deal price as the ‘fair value’, substantially weakening appraisal as a remedy. The courts’ deference to deal price is driven by many of the same considerations that have driven limitations on fiduciary duty litigation in friendly takeovers.

Overall, Delaware jurisprudence now emphasizes the value of ex ante methods—such as deal process or deal-requirements like shareholder voting—to address corporate governance concerns. The shifts in Delaware have been depicted as elevating governance and procedure over costly and uncertain litigation. Some commentators have even argued that these moves recognize increased shareholder power in the US and bring Delaware closer to the UK model where the primary role of the target board is ensuring a stockholder vote.

I argue, however, that once we take into account the authority that boards have in designing a deal and putting into place a wide variety of deal protection mechanisms, the move toward expanding the value of ex ante shareholder voice and devaluing ex-post litigation in reality maintains and reinforces management power in Delaware. This is not surprising. The Delaware approach to takeovers, with courts as the arbiter of corporate governance disputes, has long been concerned with maintaining the centrality of board decision-making. And when that centrality came under attack with the rise in fiduciary duty and appraisal litigation, the courts responded to the significant management backlash to these rising trends by reverting to the pro-manager approach of Delaware jurisprudence. Thus, Delaware maintains the deference given to board decisions and continues to insulate director decisions on deal protection from second-guessing by shareholders or courts. Similarly, the turn in appraisal jurisprudence reflects judicial faith in deal process as designed by boards and management. While the US litigation regime now appears to elevate the value of a shareholder vote in friendly deals, this vote is in the context of deals that have been designed through a plethora of deal protection mechanisms to tie the hands of shareholders and leave them stuck with the deal as presented by management.

The primacy of directors under the US regime becomes even more pronounced when one compares that regime with the UK’s, which places significant constraints on the board’s ability to negotiate deal protection devices. The question remains open, however, as to which system is better for the corporation and its shareholders.

Afra Afsharipour is Senior Associate Dean for Academic Affairs & Professor of Law at the UC Davis School of Law.

April 10, 2019

Enhanced Scrutiny on the Buy-Side

[Co-written with the Hon. J. Travis Laster and cross-posted from Harvard Law School Forum on Corporate Governance and Financial Regulation]

Editor’s Note: Afra Afsharipour is Senior Associate Dean for Academic Affairs and professor of law at UC Davis School of Law; The Honorable J. Travis Laster is vice chancellor of the Delaware Court of Chancery. This post is based on their recent article, published in the Georgia Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

Empirical studies of acquisitions consistently find that public company bidders often overpay for targets, imposing significant losses on bidder shareholders. Research also indicates that the losses represent true wealth destruction in the aggregate and not simply a wealth transfer from bidder shareholders to target shareholders.

Numerous studies have connected bidder overpayment with managerial agency costs and behavioral biases that reflect management self-interest. Agency theorists in law, management, and finance argue that agency costs explain bidder overpayment—that is management pursues wealth-destroying acquisitions at the expense of shareholders. Numerous studies provide evidence that acquisitions offer significant benefits to bidder management—particularly bidder CEOs—in the form of increased compensation, power, and prestige. For example, studies have found that CEOs are financially rewarded for acquisitions in the form of large, new options and grants, but are not similarly rewarded for other types of major transactions. A second, complementary contributor to bidder overpayment is behavioral bias, such as overconfidence and ego gratification. Managers may overestimate their ability to price a target accurately or their ability to integrate its operations and generate synergies. They may also get caught up in the competitive dynamic of a bidding contest, leading to the winner’s curse. Studies have shown that social factors can undermine decision making and lead to poor acquisitions. These factors include the existence of extensive business or educational ties between the managers of the bidder and target firms, the presence of fewer independent directors on the bidder’s board, and the desire to keep up with peers.

For purposes of corporate law, these concerns implicate the behavior of fiduciaries—the officers and directors of the acquiring entity—and raise questions about whether those fiduciaries are fulfilling their fiduciary duties.

Beginning in the 1980s, to address circumstances that present a high risk of self-interest, the Delaware courts began to develop an intermediate standard of review known as enhanced scrutiny. The situations evaluated in these cases did not encompass the flagrant self-dealing often observed in traditional duty of loyalty cases, but instead involved the potential risk of soft conflicts and fiduciary self-interest. Much of Delaware’s enhanced scrutiny jurisprudence was developed through scrutiny of decisions by sell-side fiduciaries. We argue that the enhanced scrutiny framework has become a means of screening for improperly motivated actions “when the realities of the decision-making context can subtly undermine the decisions of even independent and disinterested directors.” (Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011)).

In the article, we expand on three primary reasons to extend enhanced scrutiny to decisions of buy-side fiduciaries. Most importantly, the core conflict-derived rationale that supports applying enhanced scrutiny to actions by sell-side fiduciaries applies equally on the buy-side M&A scenarios. The decision to undertake a significant acquisition differs from other routine business judgments taken by directors and officers. As in the sell-side scenario, acquisitions are often large transactions that are plagued by subtle personal interests that affect the decision-making process. Empirical evidence suggests that in acquisitions, particularly significant acquisitions, the business judgment of boards is contaminated by the interests of managers on whom boards of directors rely. The board’s judgment is even more contaminated in public company acquisitions where the potential for realization of the value of the transaction is uncertain, but the prestige and compensation connected with purchasing another public company is high.

In addition, the sell-side concern that contingently compensated advisors may magnify the confounding incentives faced by senior managers applies to the buy-side as well. Like potential sellers, potential acquirers regularly hire investment bankers under contingency fee arrangements, which gives the bankers powerful financial incentives to pursue and close deals. Unlike on the sell-side, where the acquisition of a client and the resulting disappearance of a source of business may mitigate the advisor’s eagerness to support a sale, similar relationships on the buy-side reinforce the financial incentive. A longstanding advisor’s personal relationship with management may give the advisor additional reason to support an acquisition that management favors, particularly if a successful acquisition may lead to a bigger company that will purchase more companies in the future.

The real-world decision-making context in which boards operate also supports extending enhanced scrutiny to buy-side decisions. At present, there is reason to suspect that without a jurisprudential prod like enhanced scrutiny, directors may not be sufficiently involved in the buy-side acquisition process—just as they were less involved in the sell-side acquisition process before the systemic shock of cases such as Van Gorkom and Revlon. Descriptive accounts indicate that boards are reluctant to become deeply involved in acquisitions, preferring to leave the process in the hands of management and their advisors, with the board restricting itself to advisory and oversight roles. Although the board theoretically retains ultimate approval authority, once management and its advisors begin to feel committed to a deal and have expended significant resources to move forward on a transaction, abandoning plans can be quite difficult.

Although doctrinally coherent, we caution that extending enhanced scrutiny to the buy-side presents several concerns. Most significantly, applying enhanced scrutiny to buy-side decisions would open the door to well-documented stockholder litigation pathologies that have undermined the effectiveness of the sell-side regime. In recent years, the Delaware courts have strived to lessen the impact of these pathologies. One powerful intervention has been to lower the standard of review from enhanced scrutiny to the business judgment rule if the transaction receives fully informed stockholder approval. Logically, this innovation also would apply to bidder fiduciaries.

It seems likely, therefore, that a principal consequence of applying enhanced scrutiny to bidder decisions would be to induce more buy-side stockholder votes. There are substantial reasons to believe that buy-side stockholder votes would be an effective tool to limit the bidder overpayment phenomenon. And recent empirical literature finds that voting by stockholders can provide an important counterbalance to guard against the self-interest and biases that lead to bidder overpayment.

On balance, extending enhanced scrutiny to decisions by buy-side fiduciaries should lead to a superior regime in which stockholders can provide a meaningful check on bidder overpayment.

The complete article is available for download here.

 

November 11, 2017

How U.S. and UK Deal Structures Protect Minority Shareholders

By Afra Afsharipour

[Cross-posted from The CLS Blue Sky Blog]

Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets.

 

In a recent book chapter, I focus on how deal structures affect the protection of minority shareholders in two common law jurisdictions, the U.S. and the UK. I discuss the three most-commonly used methods of effecting a takeover in these jurisdictions—tender offers, schemes of arrangement, and triangular mergers—and assesses both the theoretical and empirical literature on their impact on minority shareholders. In each jurisdiction, lawmakers, regulators and courts have attempted to design rules to address harm to minority shareholders under various deal structures. These rules often result in different rights for shareholders of bidders and targets, and vary among transaction structures, even when economically similar transactions are undertaken. While the UK takeover regime focuses on ex ante regulation, the U.S. system uses some ex ante regulation but places significant emphasis on ex post policing through the courts.

 

First focusing on the U.S., I address the two most commonly-used deal structures for takeovers of U.S. public companies—a one-step triangular merger and a two-step transaction involving a tender offer followed by a merger. Target shareholders are provided with a say under both structures, either through a vote or through the decision to sell their shares. In addition, several aspects of the securities laws and tender offer rules, for example the best price rule or extensive disclosure rules for tender offers, were specifically designed to lessen the likelihood of abuse of minority target shareholders.

 

In the U.S., the courts also play an important policing role in regulating the parties’ behavior in takeovers. Target minority shareholders regularly seek redress for any harm through the courts, either through ex post fiduciary duty litigation or appraisal litigation. U.S. law, however, does little to address harm to bidder shareholders. Management can structure takeovers to exclude bidder shareholders from any decision-making role in acquisitions. Moreover, bidder shareholders cannot meaningfully seek any redress through the courts.

 

An acquisition of a UK public company takes place through the acquisition of shares in the target by the bidder either through an offer (similar to a U.S. tender offer) or through the nearest UK analogue to a U.S.-style merger, a “scheme of arrangement.” While the economic substance of these transactions is similar in the U.S. and UK, the steps that must be followed and the methods of minority shareholder protection are quite different. Unlike the U.S., where hostile takeover activity is difficult, the UK is much more non-protectionist and holds shareholder primacy as a core value. Several of the rules implementing the principles of the UK takeover regime, including the mandatory bid rule and the sell-out rule, are designed to protect minority shareholders.

 

Over the past decade, schemes of arrangement have become a commonly used acquisition structure in friendly transactions in the UK. UK law treats schemes quite differently from takeover bids. In a scheme, a significant majority of the shareholders of each class can bind the minority, including any dissident shareholders, so long as the scheme is subsequently sanctioned by the court. Some have argued that minority protection in the scheme context should be greater than that in the traditional bid/takeover context since in a scheme even dissenting shareholders are forced to sell once the scheme has been approved. Nevertheless, there is a strong argument that protection for minority shareholders is built into the structure of the scheme itself – namely the 75 percent majority requirement for shareholder approval, the court’s sanction, and the opportunity for full exit rights.

 

Two other major differences exist among deal structures prevalent in the U.S. and the UK. The UK listing rules expressly contemplate a vote for bidder shareholders in substantial acquisitions. Furthermore, unlike the U.S., where courts play an important role in protecting minority shareholders, courts in the UK do not play a decisive role in most transactions, even in schemes which they formally must approve. The appraisal remedy is not available in the UK, and there is little chance of corporate directors being sued in connection with a takeover.

 

The chapter then surveys the empirical literature on takeovers to assess whether differences in legal rules governing different deal structures translate into a quantifiable impact on minority shareholders. The answers to this question are somewhat unclear and need further empirical enquiry to determine which of the tools used in the U.S. and UK regimes better protect minority shareholders. Nevertheless, a few insights are suggested by the empirical research. First, despite the differences in each jurisdiction’s regime, target shareholders gain in takeover transactions in both jurisdictions, and in the U.S. these gains are higher in tender offers than in mergers. Second, research suggests that the UK’s takeover rules better protect bidder shareholders in large transactions than does U.S. regulation, which largely deprives bidder shareholders of a role in acquisition transactions. Finally, the research on U.S. transactions suggests that different legal treatment of economically similar acquisition structures may make a difference to minority shareholders.

 

The comparisons and literature review raise several research questions. The empirical inquiry into UK takeover transactions is quite sparse. For example, no studies empirically explore whether minority shareholders in the UK gain more or less from schemes of arrangement than from takeover bids. Also, do bidder shareholders in the UK gain or lose more in schemes or takeover bids? The empirical inquiry exploring the differences in regulatory approaches in the U.S. and UK is also sparse. For example, it may be useful to further examine which of the tools used in the U.S. and UK regimes better protect minority shareholders. There is also a need for more literature on costs of the regulatory framework imposed by both jurisdictions and whether such regulations can be translated to other countries, as well as a need for further exploration into the institutions needed to implement these regulatory structures. Further inquiry into these issues can help lawmakers determine what features of takeover regulation could be best used by other jurisdictions contemplating takeover regulations.

 

This post is based on my most recent book chapter, “Deal Structure and Minority Shareholders,” available here.


January 20, 2017

Serving as Visiting Scholar at National Chiao-Tung University in Taiwan

I had the honor of serving as a visiting scholar at National Chiao-Tung University, Taiwan during the week of January 8th. My visit was coordinated by Professor Chien-Chung Lin, who has twice visited UC Davis School of Law to present papers at the American Society of Comparative Law (ASCL), Younger Comparativists Committee (YCC) Workshop on Comparative Business and Financial Law. Taiwanese corporate law scholars such as Professor Lin have been doing excellent work especially in the area of comparative corporate law, so I was very much looking forward to interacting with some of them.

I began my visit with a fabulous lunch organized by Professor Lin and our own UC Davis JD student, Oscar Yang (himself a 2016 graduate of our LLM program). Oscar and Professor Lin had graciously invited leading Taiwanese lawyers for the lunch, including Prosecutor Jawyang Huang, Taipei District Prosecutors Office. Mr. Huang has been a visiting scholar at Yale University School of Law and was Oscar's supervisor in the Office of Trade Negotiations, in charge of WTO dispute settlement cases. We were joined by two of Oscar's former colleagues who were both fabulous company, Ms. Jenny Van, Senior Legal Adviser in Office of Trade Negotiations and Mr. Jason Lai, Secretary to the Director-General of Bureau of Foreign Trade.  It was a terrific lunch at one of Taipei's most popular restaurants, Din Tai Fung. After the lunch Mr. Huang gave me a fascinating tour of the Taipei Judicial Building, where I was able to observe a few trials that were being conducted. The efficiency and order at the judicial building was quite impressive.

After the first day in Taipei, Professor Lin took me to Hsinchu, one of the educational centers of Taiwan. The city has several prestigious universities, including National Chiao Tung University and National Tsing Hua University. Hsinchu is also an economic and technology hub in Taiwan with an impressive science and technology industrial park. The science and technology park is home to hundreds of high technology companies including world-renowned firms in the semiconductor space such as TSMC and UMC. Professor Lin gave me a tour of the technology park and given my prior corporate practice experience in the semiconductor space I was quite excited to see the place!

In Hsnichu, I gave three lectures at the two law schools there.

  1. Redefining Corporate Purpose: An International Perspective, at the Institute of Law for Science & Technology, College of Technology Management, National Tsing Hua University in Hsinchu, Taiwan.
  2. Deal Structure and Minority Shareholders, at the School of Law at National Chiao-Tung University, Taiwan
  3. Legal Transplants in the Law of the Deal: M&A Agreements in India at the School of Law at National Chiao-Tung University, Taiwan


Lecturing at NTHU

My visit to National Tsing Hua University was coordinated by Professor Robert Tsai, who is trained as an attorney in both Taiwan and the U.S. The lectures were well-attended, and the audience of professors and law students asked excellent questions.

I also had the opportunity to visit the Taiwan Stock Exchange to learn more about the significant corporate governance initiatives undertaken in Taiwan. I had an informative meeting at the Taiwan Stock Exchange with Mr. Joe Tsun Cheng (Senior Vice President, Corporate Governance Department) and Ms. Tracy Chen (Associate, Corporate Governance), as well as meeting Mr. Lih Chung Chien, Senior Executive Vice President of the Taiwan Stock Exchange. At the meeting we exchanged views on corporate governance initiatives undertaken in Asia, and I detailed some of my scholarly work on the trajectory and possible outcomes of the corporate governance reforms undertaken in India over the last decade. I really enjoyed the intellectual engagement with the professors, lawyers and law students I had the privilege to meet.

Professor Lin had also kindly arranged many opportunities for me to experience the beauty and culture of Taiwan, including visits traditional tea houses, temples and the CKS Memorial Hall and Liberty Square, an afternoon at beautiful hot springs outside of Taipei, a culinary adventure with law students at one of Taipei's fabulous night markets, a tour of the National Palace Museum, several informative walks around the different districts in Taipei, and more delicious meals than I can count.  I could easily have spent weeks enjoying all that Taiwan has to offer from its vibrant coffee culture to its elegant tea houses and lush country side, all topped off by the generous hospitality and friendliness of its people.

If it is not already clear, the trip to Taiwan was truly inspiring, and I look forward to future visits!

January 20, 2016

Launch of the Handbook on Corporate Governance in India

This week has been one filled with excitement, education and some jet lag.  I have been involved in a whirlwind of activity connected with the launch of the Handbook on Corporate Governance in India which I have authored. The handbook has been a labor of love for me over the past several years as India has significantly transformed the laws and regulations concerning corporate governance practices of Indian companies. I have intended for the handbook to serve as a useful tool for those involved in the corporate governance field in India, including Board members, in-house counsel, corporate secretaries and other advisors such as auditors, outside counsel, investment banks and proxy advisory firms. The handbook is unique in that it collates the issues and practices from various areas of corporate governance and presents it in a consolidated and comprehensive manner. One of my goals was for the handbook to capture both the academic research in this field as well as the latest legal developments in India in an era of rapid shifts. The handbook discusses the changes enacted in the Companies Act, 2013 and the Companies Amendment Act in early 2015, as well the flurry of rules made by the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

For the launch, we had an event in Delhi in a room filled with various luminaries, former government officials and many members of boards of directors from well-known listed companies in India.  We have had two similar events in Mumbai, one in North Mumbai and one in the South (if you have ever been in Mumbai traffic, you know well why there needed to be launch events in both locations). Like the Delhi events, the Mumbai events were attended by members of boards of directors from prominent Indian companies who came together both to learn and to contribute to the discussion on how to move Indian corporate governance forward. I am happy to report that the handbook and the discussions we had were all quite well-received.

It's been an eye opening experience talking to those who deal with corporate governance challenges (and opportunities) day to day. I came away from these events even more inspired to dive into research related to governance issues in the Indian landscape.

For more information, here is the press release about the handbook.