Author:Mihalik, Andrew

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

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

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

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

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

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

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

Part 6 offers two normative policy recommendations for securities regulators to supplement the role of the public interest power in matters relating to golden leashes. First, disclosure of these arrangements should be mandated. Second, the regulatory definition of director independence should be amended to account for directors party to golden leashes.


The recalcitrant nature of proxy contests--and the occasionally questionable tactics used to wage them--have historically provoked feelings of disdain and unease towards them. (4) Discussing the relationship between the rise of proxy contests in the 1960s and the ascent of so-called "non-establishment" Manhattan law firms during the same period, Malcolm Gladwell quotes the explanation of a proxy advisory service that a fictional attorney provided his partner's wife, in the novel The Scarlet Letters: "Face it, my dear, your husband and I are running a firm of shysters." (5)

Since then, proxy contests have become more common, if not more widely accepted. (6) On occasion, however, novel tactics employed by dissident shareholders in the course of proxy contests harken back to historical feelings of discomfort. One such tactic, according to Dealbook's Steven Davidoff Solomon, has forced investors to ask, "Would you pay a director tens of millions for fantastic performance? Welcome to the newest trend in activist investing." (7)

This new innovation is the activist practice of entering into special compensation arrangements with its dissident nominees. (8) The activist agrees to provide its nominees with premium incentive compensation based on the net gain on its position in the target company over a given period of time, should its nominees be elected. Such arrangements are thought to help activists recruit the best candidates to stand election and to incentivize them to improve corporate performance if elected. (9)

Historically, activists--typically hedge funds--would pay their dissident nominees a flat fee (usually in the range of $50,000) and indemnify them from legal liability for agreeing to stand for election. (10) Not all observers find impropriety or controversy in regard to this practice. (11) The new special compensation arrangements, however, have several unique features that are a source of discomfort for some, as the arrangements: (i) may provide significantly higher compensation than what a director would normally receive for his or her services on the target board; (ii) specify a time horizon under which elected dissident directors may seek to maximize value, as opposed to focusing on the long-term health of the company; and (iii) link the pay of the dissident director to the profits of the activist, as opposed to the operational success of the company. Obviously, these arrangements have the potential to tie the interests of the elected nominees to the activist that nominated them. As such, they have been christened "golden leashes".


In 2012, New York-based hedge fund Jana disclosed a significant equity position in Alberta-incorporated Agrium, a large manufacturer of agricultural products and supplier of fertilizer. The corporation generated revenues of $15.7 billion in the financial year ended December 31, 2014, and its shares trade on the New York and Toronto stock exchanges.

Also in 2012, Jana initiated a proxy contest to elect five members to Agrium's twelve-member board of directors. In its proxy statement, Jana disclosed that each of its nominees would receive a flat fee of $50,000 for agreeing to stand election. (12) However, in addition to this flat fee, Jana disclosed that it would pay its nominees, distributed between the four of them, a further 2.6% of Jana's net gain on its position in Agrium within a three-year period, should its nominees win election (the "Jana Agreement"). (13)

In its own proxy solicitation materials, Agrium attacked the golden leash arrangements by arguing that it undermined the Jana nominees' independence and created perverse incentives for the Jana nominees to privilege short-termism at the expense of greater long-term value. (14) Two influential proxy advisory services, Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis"), assessed the contest and came to divergent conclusions. While ISS endorsed two of Jana's nominees and saw no adverse impact on director independence as a result of the golden leashes, Glass Lewis pointed to potential conflicts created by the arrangements in endorsing the incumbent Agrium board. (15) Agrium's incumbent directors ultimately defeated the Jana dissident slate (though for reasons arguably unrelated to the golden leash arrangement). (16)



Despite the control directors and appointed management exert over a given corporation's business and affairs, (17) they are not typically the equity owners of the corporation. This role belongs to shareholders. (18) It is widely recognized that so-called agency costs arise when ownership and control are bifurcated. According to the well-known theory of the firm advanced by Adolf Berle and Gardiner Means, the separation of ownership and control "produces a condition where the interests of the owner and ultimate manager may, and often do, diverge". (19) On one hand, shareholders are interested in the maximization of the firm's value, while on the other, directors and managers may be motivated by personal interests that may not align with shareholders' aims. (20)

According to Michael Jensen and William Meckling, these divergent interests tend to lead to agency costs, which are (i) costs that shareholders, as principals, incur to ensure that directors and managers, as the principals' agents, act in the principals' best interests, and (ii) costs incurred on the basis of agents' decisions that are not in the best interests of the principal. (21) As such, in corporations defined by a separation of ownership and control, agency costs arise where the interests of directors and officers and those of shareholders do not align, and where shareholders must monitor, and stand ready to remedy, the effects of such misalignment. (22)

Corporate governance--and the role of the board in overseeing corporate governance--works to mitigate agency costs. According to agency theorists, where internal and external controls work to harmonize agency conflicts and divergent interests resulting from...

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