The Activist Investor Blog
The Activist Investor Blog
What is Private Ordering?
It’s a hot concept in corp gov these days. So, we thought we’d explain it a little, and set forth some views about how to think about it.
It refers to a long-standing legal concept in which individual parties agree on how to police an activity, instead of relying on government regulation. It can apply to all sorts of activities - for example, development of information technology and the Internet, and the rules for standardizing structures and processes in online affairs.
To activist investors, it refers to how shareholders agree, with each other and with company management, on how corp gov will work at a given portfolio company. They do so instead of relying on states, Congress, and the SEC to prescribe corp gov principles as law and regulation.
This is different than self-regulation. When an industry self-regulates, it promulgates its own standard rules that apply to all parties (companies, consumers). Private ordering defines specific rules for each individual situation, in this case each individual company.
In the corp gov world, private ordering can apply to just about any part of company bylaws. Most recently, bylaw provisions for forum selection and litigation costs have stoked the debate about whether state corporate law and regulation or agreement among shareholders and management should prevail.
It also applies to the debate over proxy access, among other areas that fall within Federal jurisdiction. Recall how proxy access started as a strict SEC regulation requiring access on specific terms, pursuant to the Dodd-Frank Act. The SEC also allowed shareholders to propose different proxy access terms, in a bylaw amendment or non-binding resolution. A friendly judge vacated the regulations, but let stand the part that allowed shareholders to propose some form of proxy access for that company.
We note that regulation and private ordering sit at the two ends of a continuum of choices, rather than as the only two choices. We (the investing public) can decide to regulate something that won’t work for private ordering. We can leave to private ordering something else that is too expensive or complicated to regulate. We can regulate lightly, and leave some elements of a subject to private ordering. The possibilities are endless.
We rather like the idea of private ordering. For many significant subjects, like proxy access, we’d leave the specific structure to shareholders. Less regulation is better than more, and shareholders should have the opportunity to tailor the rules themselves.
This assumes, though, that we shareholders can in fact so tailor the rules. These days, we really can’t. Companies have made it difficult to propose rules, promote our position in proxy materials, and solicit votes. The typical problems in nominating and electing directors also apply. So, true private ordering of most corp gov ideas is really just a distant dream.
Companies of course prefer private ordering to law and regulation, until they don’t. They longed for private ordering for proxy access. They happily allowed the SEC to allow shareholder proposals and bylaw amendments for proxy access while fighting in court to overturn the regulations. Now, they pay close attention when their advisors promote ways to thwart those very proposals and amendments.
When it works, private ordering makes a great deal of sense, especially for arcane and complicated corp gov ideas. It doesn’t work often enough, so we will still need the SEC.
Tuesday, September 29, 2015