by Chris SwiecickiThree Kinds of Conflicts Where a Corporate Lawyer is Essential
“Corporate law” is a broad category involving all legal issues of establishing, managing, and operating a corporate entity. But at the same time, it is a highly specialized area of practice. Out of the 1.3 million attorneys in the American Bar Association, less than 15,000 are classified as corporate lawyers. Within this group, there are specialties within the specialty. For example, an attorney might focus their practice on a niche such as mergers and acquisitions or intellectual property.
So what is corporate law, exactly? At its core, the discipline is about business relationships and the contracts that define them. What does a corporate lawyer do? While the job description can cover a lot of ground, in essence, they advise companies on their legal rights and responsibilities in regard to those contractual relationships.
What Is Corporate Law?
The basis of all corporate law lies in mandatory and default provisions that create a framework for how every corporation operates. Mandatory rules are non-negotiable and all corporations must conform. Default rules are exactly that: the practice that is followed unless the parties forming the company provide an alternative way of doing things. Default provisions can not, of course, violate federal, state, or local laws.
For example, a commonly accepted practice is that a merger can be approved by a majority vote of all outstanding shares. A corporation can opt instead to require 60%, 75%, or some other amount.
An example of a mandatory provision is the rule that all publicly traded companies must provide regular detailed financials in a prescribed format. It is not something a corporation can avoid.
These new rules are spelled out in a corporate charter, also known as articles of incorporation. Articles of incorporation are fundamentally a contract between the company, its shareholders, and the incorporating state.
What does a corporate lawyer do to help with these issues? They can assist with corporate governance, which is the system of rules, processes, and practices that guide a company. They iron out the details and spell out exactly how the business will be structured and operated.
In creating this framework, corporate lawyers anticipate the conflicts that may arise among the various stakeholders. They can then ensure that the corporate charter is clear and fair to all parties involved.
The Three Relationships That Result in Corporate Conflict
While a corporate entity can be seen as having a single goal, the corporate structure includes stakeholders with conflicting interests in the business. For example, a company might have managers whose main focus is productivity and efficiency. Meanwhile, the company’s employees value good working conditions, fair pay, and generous benefits. Creditors want to be paid in full and on time. And shareholders hope for ever-increasing profits.
All of these objectives can define a successful company. But few corporations can accomplish all of these things without a push and pull between stakeholders. It is the job of a corporate attorney to interpret corporate law and help the business resolve these conflicts when they arise.
It’s worth noting that corporate lawyers are not on the side of the shareholders or the employees. Instead, they represent the corporate entity itself. They handle these three common conflicts with the best interests of the company in mind.
1. Managers vs. Shareholders
Shareholders of any company are by nature concerned with the return on their investment, and associated tax implications. This is sometimes at odds with corporate management who may be willing to sacrifice some short-term profits in favor of growing the business or maintaining its competitive edge.
For example, the management team at a manufacturing company may be in favor of a large capital investment in new automated technology. The price tag is high and it could take two to three years before its full benefit is felt in the bottom line. The shareholders are not willing to see their dividends suffer and are against the purchase.
A corporate lawyer can help negotiate the dispute between the two groups and help them come to an agreement that will be in the best interests of the company.
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2. Controlling vs. Minority shareholders
Companies with majority shareholders and minority shareholders can be prone to conflict. Not only do minority shareholders have less control than those with controlling interest, nor do they have the protection of a contract like employees, vendors, or creditors do.
In one notable case (Halpin v Riverstone National, Inc.) minority shareholders won a class action lawsuit against majority shareholders who voted to proceed with a merger without including the minorities in the vote.
The remedy for this would have been to include explicit provisions in a company’s articles of incorporation. Corporate law is generally written to add protections by either empowering minority parties or limiting the advantages given to majority shareholders. For example, minority shareholders might be given special voting powers, reserving a certain number of seats on the board for them, or assigning veto powers or key committee roles.
When the rules are broken, or if there is no specific language addressing a situation, litigation may be necessary.
3. Shareholders vs. Non-Shareholders
There are several groups of stakeholders who are not shareholders. These parties include employees, vendors, creditors, and even the community where the corporation does business. The nature of these parties’ roles with the company can be a source of conflict with shareholders.
A good example of this is a case brought against IBM by its employees in the early 2000s. Lou Gerstner was credited with rescuing IBM with massive layoffs and overhauling its pension plan to help cut costs. Not only were shareholders thrilled, but Gerstner walked away from the job in 2002 with an annual salary of over $1.5 million and a pension of more than $1.1 million.
When an executive’s compensation comes at the expense of its employees, it is a clear conflict of interest. The employees won the case and the company agreed to pay $320 million in a settlement to current and former employees.
While this is an extreme case, corporate law deals with any conflict between a company’s stakeholders. The law lays out the rules for all to follow and corporate lawyers interpret the law so the parties can come to a consensus that benefits the wellbeing of the business as a whole.
A Corporate Lawyer is an Asset
Whether a company is big enough to employ in-house counsel or an entire legal department or is small and just needs occasional legal advice, finding an experienced attorney is a must.
These legal professionals are indispensable when drawing up a corporate charter and deciding on issues of corporate governance. Once a company is established, they can advise on all contractual and legal matters involving the various stakeholders, and resolve conflicts as they arise.
The firm of Swiecicki & Muskett Attorneys at Law has extensive experience in corporate law, particularly in the areas of compliance and taxation. Contact Christopher Swiecicki to discuss your company’s needs.
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by Chris SwiecickiWhat is a “Poison Pill” in Corporate Law?
When a larger company tried to take over the company owning the St. Louis Post-Dispatch in 2022, corporate lawyers showed Lee Enterprises how to fight back. They crafted a poison pill defense, or shareholders rights plan, to kill the unsolicited offer from Alden Global Capital. The defense worked, and Lee still owns the Post-Dispatch and 22 other papers.
Corporate lawyers often recommend poison pills for defense against corporate raiders. Sometimes the acquirer backs off. Other times, the targeted company and the acquirer reach a favorable agreement.
How Do Poison Pills, Shareholder Rights Plans, Work?
Poison pills reduce the appeal of a takeover by either making the deal too expensive for the bidder or by creating negative side-effects of a takeover.
As corporate raiders begin buying up shares, corporate lawyers work closely with the targeted company to determine the specifics of the poison pill and when to launch it. For example, a board may stipulate that a shareholders rights plan take effect when the acquiring entity gains 20% of the company’s shares.
Most shareholders rights plans include a stipulation that they can be changed or negated by the board. Thus, the board is forcing the acquirer to negotiate directly with them, which will have a positive position for bargaining.
Corporate lawyers use a variety of ways to launch poison pills including:
- Preferred stock plan: A company issues a dividend of preferred stock to shareholders. These shareholders may use special voting rights when a company tries to takeover by buying a large quantity of shares.
- Flip-in: Many companies include a provision in their charter or bylaws establishing a threshold for buying stock. Before the acquiring entity nears the ceiling, usually between 20 and 50%, the targeted company starts selling stock at a discount to its existing shareholders. This dilution of the company’s stock may prevent the hostile takeover.
- Flip-over: When a company employed a flip-in poison pill and was not able to avoid a hostile takeover, there is another defense mechanism to try: A flip-over poison pill. The shareholders of the targeted company buy up stock at a discount. In doing so, they dilute the shares of the acquiring company’s existing shareholders. This is only possible if a section of the bylaws spells out the legality of the maneuver.
- Back-end plan (also known as a note purchase rights plan): A back-end plan gives shareholders of the targeted company the opportunity to exchange their stock for either cash or other securities at a higher value if the acquiring company gains a majority of the company stock. This strategy may diminish the acquiring company’s interest in purchasing the existing shareholders’ stock.
- Golden handcuffs: Corporate lawyers also may recommend a golden handcuffs poison pill. Many executives have lucrative deals rewarding them when they hit goals and/or stay with the company for a certain period. The “handcuffs” often include deferred compensation and employee stock options. A golden handcuffs poison pill defense removes the vesting and performance requirements. Then, the executives may cash out and leave the company. This often makes the target less desirable to the acquirer who need the executives to lead the company after they take over.
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Pros and Cons of Poison Pill Defense Strategies
The ultimate success of a poison pill defense strategy reveals itself years down the road. Boards will consider whether the goals of both companies were met and whether they are still being met when analyzing the success of the shareholders rights plan.
For many companies, the poison pill is a negotiation tactic that succeeds in either 1) preventing a hostile takeover or 2) laying the foundation for a favorable merger. While developing the shareholder rights plan, or poison pill, the company finds a way to dictate the terms of the takeover. The poison pill’s benefits may include:
- The targeted company identifies potential acquisitions.
- Higher premiums for shareholders.
- Slowing the speed of a corporate raid.
In the short term, a poison pill can hurt the valuation of many shares. The decrease in value will affect the company’s constituencies in different ways:
- Shareholders may receive a financial loss when the value of their shares declines.
- Corporate executives who also own part of the company may or may not lose their position, power, or money during a takeover.
- Lower and mid-level employees may be laid off.
Corporate Lawyers Guide Companies Threatened by a Takeover
If another company is positioning itself to get majority ownership in your company, contact the Swiecicki-Muskett law firm. Managing partner Christopher Swiecicki will guide you in developing a poison pill, or another strategy, to lead your company through a hostile takeover proactively and cost-effectively.
Christopher developed his expertise in corporate law as both in-house and outside legal counsel. Today, he provides senior-level counsel to C-suite executives, in-house legal teams, and business owners. He is on the faculty of Washington University in St. Louis School of Law where he teaches business acquisitions (M&A) courses.
Contact the Swiecicki-Muskett law firm at 636-778-0209 or email Chris@SwiecickiLaw.com.