Article

Would Changes in the Rules for Director Selection and Liability Help Public Companies Gain Some of Private Equity’s Advantages?

Scott J. Davis

Head of the US Mergers and Acquisitions Group, Mayer Brown LLP; Lecturer in Law, The University of Chicago Law School

I want to thank my colleagues Charles Wu, Nina Flax, and Daniel Horwood for their assistance on this Article and Jessica Waller, one of my students, whose paper was a helpful resource. I also want to thank Robert Helman and Frederick Thomas for their comments.

It is widely believed that companies owned by private-equity sponsors have significant advantages over public companies. Among the advantages of private equity cited by commentators are: (1) better governance and a greater willingness to take risks, (2) the ability to focus on long-term issues and a more stable shareholder base, (3) the ability to attract better management talent, (4) creating a sense of urgency, (5) the ability to use leverage more effectively, (6) avoiding the costs imposed by the Sarbanes-Oxley Act, and (7) freedom from shareholder suits. It would be helpful if public companies could gain some of these advantages. This Article examines whether changes in existing legal rules governing how public company directors are chosen and the extent to which public company directors can be held liable for damages if they do not have a conflict of interest would be likely to increase the ability of public companies to obtain some of the benefits that companies owned by private-equity sponsors appear to have. My conclusion is that, while changing the rules for selecting directors would not be worthwhile, a reduction in the potential liability of directors for damages in situations in which they do not have a conflict of interest would be likely to increase the ability of public companies to mirror the effectiveness of private-equity portfolio companies without creating other problems that would be unacceptable.

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