Imagine a world where public shareholders serve as active owners instead of passive investors. That is precisely what SRZ’s Eric Fogel tried to envision as once ivory-clad companies like Adelphia, Enron and Worldcom became dominoes of corporate malfeasance. Disturbed by the trend and determined to reverse it, Eric enlisted colleague and fellow SRZ shareholder David Addis in his quest to explore legal strategies for prohibiting institutional corruption and restoring investor confidence. Recently the prestigious Delaware Journal of Corporate Law published the result of their collaboration, “Public Company Shareholders Acting as Owners: Three Reforms—Introducing the ‘Oversight Shareholder.’”

Ensuring greater accountability by the people entrusted to administer public companies is the authors’ goal. “Our topic is timely considering the collapse of Enron and the crisis at WorldCom,” says coauthor Ed Harris, former SRZ associate and now Visiting Professor of Law at Chicago-Kent College of Law, citing the lack of transparency in corporate governance as one problem with oversight. “Policy makers and the investing public are eager to find new ways to increase accountability to the owners of public companies—i.e. the shareholders.” Indeed, the authors hope to stimulate public discussion with their proposals and consider the Delaware Journal the perfect forum for engaging legislators and legal scholars in the debate. “Our reforms could help reinstate desperately needed accountability,” says Ed, “and restore confidence in the market for publicly traded securities.”

In their article the authors identify three structural impediments that intimidate public shareholders and suggest ways to eliminate these obstacles. Eric, who for many years has represented both public and private businesses, says, by way of background: “In private companies the owners act like owners—asking questions and holding the managers and board members accountable. In public companies, however, investors have been enculturated over the decades to remain passive.” In certain companies, in the absence of accountability, “managers and vanity boards of directors have run amok with blank checks,” he says, adding, “there is no reason—legally, structurally or substantively—why larger, long-standing shareholders of public companies should not involve themselves in oversight and the responsibilities of ownership.”

"My coauthors and I are not anti-management or anti-board," cautions Eric, "rather, we are pro checks and balances and pro good corporate governance."

This concept of the oversight shareholder, says Eric, “coalesced in the summer of 2002,” as the press increasingly exposed the depth of fiscal misconduct in U.S. corporations. He and his coauthors propose safe harbors to the securities laws that would allow investors who have held one percent or more of a public company’s shares for at least six months to “probe without fear of incurring liability.” Such reforms would protect the oversight shareholder from insider trading allegations, “controlling person” liability and the high cost of filing proxy statements to communicate with other investors.

“Coincidentally,” says Eric, “after the Delaware Journal accepted our article for publication, the Securities and Exchange Commission proposed regulations that would permit more-than-one-percent shareholders to nominate director candidates,” rendering the article increasingly timely.

“Corporate governance,” adds Ed, “is also a central issue among certain members of Congress and will undoubtedly remain an important topic with the press.”

Should Eric Fogel succeed in his mission, the reforms he and his colleagues outline in their article will land on the agenda of an influential legislator, a fitting way to advance the discussion and expedite its result. If you would like a copy of the Delaware Journal article e-mailed to you, kindly contact Eric at efogel@SchuylerRoche.com.

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