International In-house Counsel JournalVol. 5, No. 19, Spring 2012, 1

Global Corporate Contumaciousness with Respect toValuations – The Grey Area of Corporate Law

DR. KISHORE VAANGAL President, Sumanas Commerce, India

Section One - PREFACEGlobal corporate governance is primarily meant to be asystem fostering methodological processes, systematicregulations and astute initiatives for the benefit of theinternational community of shareholders and stakeholders,and global corporate governance needs to be characterized bythe zealous participation of activist shareholder andstakeholder groups. In the WTO era, it has to be implicitlyrecognized that there would be increased competition and lawmakers would have to realize that legislation would have tobe in accordance with the WTO agreement read along with thetraditional system of legal treaties negotiated by thestates respectively. In effect, global corporate governancecan be ascribed to mean the adoption of systematic-processesin entities and these processes are to be guided by theBoard’s policy stipulations, financial-situation, rules,procedures and norms that regulate the processes for thewelfare of the of global shareholder/ stakeholder, andpresently, they differ vastly from country to country1.Implementation, compliance, enforcement, efficaciousness andeffectiveness of the existing corporate governancemechanisms are woefully deficient, and these providedplausible reasons for the collapse of large entities acrossthe globe in recent times. The reliance on effete laws andthe multiplicity of regulatory-mechanisms have complicatedthe scenario terribly, and the fact of the matter remainsthat most corporate law principles which govern the globalcorporate governance regime have their origins in effetelaw, and rather ironically, they are emblematic ofcontemporary international corporate governance practice.2

The central-premise of this paper quintessentially follows a1 Virginia Journal of International Law, Vol. 50-3: Online Symposium by the Editors of the Virginia Journal of International Law.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

International In-house Counsel JournalVol. 5, No. 19, Spring 2012, 2well-determined course and in effect it gets to state thateffete corporate law and faulty corporate governancemechanisms that were in place led to catastrophic results,and that effete law has to give way to meaningfullegislation globally (like CA 2006) and only then willrulemaking in international corporate law become meaningfuland proficient. Therefore, the examination is primarilydirected at exploring effete corporate law and theinternational corporate governance mechanisms that have beenin place in the realm of corporate rule-making andthereafter to advocate seminal guidelines andrecommendations that would be on a much firmer legalreasoning. Moreover, it argues that much emphasis should beput on having quality boards and legislative effort shouldbe directed at ensuring the same as the corporate fiascoesof the recent past would necessitate and highlight therequirement of having quality boards. The emphasis, howeverought not to be one that results in a ‘highly over-regulatedand under-enforced regimes’ and therefore there is arequirement to have a system wherein there ought to besensible legislative dictates and the emphasis would have tobe on sagacious implementation of the apposite regulationsin place. The paper advocates a premise that essentiallyarticulates that efficacious implementation is plausiblewith well-developed systems and that good systemsnecessarily ensure comprehensive compliance even whilst itensures robust growth.3 Compliance is easily effectuatedwhen there are cogent board strictures in place, and bydoing so, legal obligations would be well satisfied. Thisline of legal-reasoning is also justified by the fact thatit would make entities responsible for their wrongful actsand eventually board-accountability and transparency wouldbecome much acclaimed as legal concepts. This is especiallytrue of multi-national entities, and it needs to be stressedthat it would be rather easy to theorize that accountabilityand transparency norms have to be upheld – however, it wouldbe much more difficult to implement, as entities would beinclined to find ways to by-pass the regulations in place.

2 Romano, Roberta, Corporate Law and Corporate Governance. Industrial andCorporate Change, Vol.5, No.3 (1996) (Oxford University Press).3 The Relation Between Firm-Level Corporate Governance and Market Value: A

Study of India Posted by R. Christopher Small, Co-editor, HLS Forum onCorporate Governance and Financial Regulation, on Wednesday June 16, 2010

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Therefore, this paper inherently proposes to examine,scrutinize and develop a sensible mechanism whereby entitiesacross the board could implement a pragmatic globalcorporate governance system and essentially one that upholdspristine standards in terms of upholding the letter andspirit of the laws even whilst ensuring protection ofshareholder/stakeholder interests – therefore, the paperwould elementally enunciate and explicate on the processesthat would have to be evolved in any effort towardsupholding a pristine system of corporate governance and indoing so uses an exemplar pertinent to valuations in atakeover/investment setting4 – this would be the finalconclusion.

Section 2 - THE STATE OF AFFAIRS with respect to GLOBALCORPORATE GOVERNANCE: THE USEFULNESS OF CA 2006Presently, a model piece of legislation, the CA of 2006encapsulates the main duties of Directors, and thelegislative enactment enunciates on the need to upholdseminal corporate governance practices5. Critics of previouscorporate governance mechanisms can now take succour in thefact that there are highly efficient mechanisms in place andin effect corporate governance mechanisms could in certitudebe made more adaptable to meet new exigencies and board-roomsituations. This implies a peremptory dictate that would ineffect make the boards of entities very much accountable,and there would be a requirement for the boards to enunciateon legal instruments – developing codes of practice thatdefine processes (as part of a transactions-audit doctrine),passing appropriate resolutions, making sensible andworkable recommendations, evolving necessary guidelines,making declarations and in essence ensuring that pristinestandards are upheld. In short, developing the rubric underwhich corporate governance practices are effectuatedperspicaciously, the CA of 2006 provides for a cogent wayforward to tackle contumacious issues in corporate law andthe fact remains that the enactment is technically superiorand the quality of the enactment can be readily decipherable4 Bebchuk, Lucian A. and Hamdani, Assaf, The Elusive Quest for GlobalGovernance Standards (2009). University of Pennsylvania Law Review, Vol.157, pp. 1263-1317, 2009; Harvard Law and Economics Discussion Paper No.633. Available at SSRN: http: //ssrn. com /abstract = 1374331

5 Sections 170 – 177 of the CA 2006. For further reading - Financial Reporting Council, The Combined Code on Corporate Governance, June 2006

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from the number of pristine principles articulated by it. Ithas already had its effect in many international merger andacquisition initiatives effectuated by British entities andissues pertinent to valuations have been perceptivelyhandled. In evolving a good corporate governance mechanism, it isessential for the directors to recognize that they have bothfiduciary duties and duties of care and skill and they owe aduty to the company. Nevertheless, whilst they undergo long-term and complex negotiations involving a takeover or inmaking an informed choice with respect to an investment,then a special factual situation is established, and as anatural corollary, they would be accountable to theshareholders or the primary stakeholders . Extending thelogic, directors are indeed accountable with respect todeciding on the appropriate valuation technique even whilstit would be their collective prerogative to justify the sameto the stakeholders6. Much stakeholder value is created whena takeover is effectuated in a proper manner and at ajustifiable price. Hence, in light of this argument, itbecomes that much more of an obligation for the board ofdirectors to evolve apposite and binding guidelines and theresolutions that they get to pass must demonstrate thegeneral adherence to certain pristine principles. It has tobe inferred that when these guidelines are followed, thetakeover/investment situation can be handled with muchalacrity. In practice, it can provide evidence of meetingstandards of reasonableness even though there may be somestakeholders who would explicitly oppose the decisions. Thisprovides support for the proposition that the legal natureof the corporate governance mechanism would also be incompliance with the conformist doctrine of rule-making.Indeed, duties enunciated by CA 2006 may also mature intocustomary international-corporate-law norms as they arereflective of commonplace happenings, and from that point ofview,they uphold the doctrine of reasonableness. Thisdoctrine is particularly applicable to understanding the6 Enlightened Shareholder Value and the New Responsibilities of Directors – a concept propagated Professor Paul L Davies whilst delivering a Lecture on the 4th of October, 2005 and Professor Paul L Davies was Cassel Professor of Commercial Law at the London School of Economics and Political Science at the time he delivered the lecture. The lecture was delivered at the University of Melbourne LawSchool. (the inaugural WE Hearn Lecture).

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obligations of directors as their collective decisions canbe open to more than one viewpoint and a good corporategovernance mechanism would ensure that rational expectationsare upheld and hence it has also been referred to as thereasonable expectations doctrine.

Section 3 - GLOBAL CORPORATE GOVERNANCE AND VALUATIONSApproaches to Valuations (Based on actual case studies inthe realty industry)There are generally a few elemental approaches tovaluation7. The first, and the much glorified, and perhapszealously touted one is referred to as the Discounted CashFlow Method. This method quintessentially relates the valueof the realty-transaction to the present value of theexpected future cash flows pertinent to the transaction. Thesecond approach is called Relative Valuation, and itestimates the value of a realty initiative by elementallylooking at the pricing of comparable assets and this processis gone through whilst juxtaposing fundamental coordinateslike that of estimated earnings, prognostic projectionspertinent to sales, cash-flows & fixed and variable costs.Discounted Cash Flow Valuations:Valuations in the realty industry, as far as emergingmarkets go, have been scrutinized under the Discounted CashFlow system to a large extent and under the Discounted CashFlow method, the value of a realty-initiative, is incertitude, the present value of the expected cash flows,discounted back at the rate that in effect reflects therisks associated with the cash flows, and quintessentially,there are but three inputs that are required to be dealtwith in the VALUATION process. The inputs relate to expectedcash flow, the time-lines associated with the cash flow andthe rate of discount associated with the risks of these cashflows8. The discount associated with the risks are ofelemental significance and in valuing realty-initiativesdiscount rates used pertinent to the cash flow must reflectthe inherent risks involved with higher-risk cash flows

7 Modigliani and M. Miller, ‘The Cost of Capital, Corporation Finance and The theory of Investment’, American economic review 48 ( 1958 ) 261 – 297.

8 P O Brien, “ Analysts’ Forecasts as Earnings Expectations, Journal of Accounting & Economics 10 1998, pages 53-83.

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having a higher discount rate. There are essentially twoaspects pertinent to assessing risks – one is from thetraditional debt-angle and what is of consequence here isthe sheer ability to pay back – the other aspect isrelatable to analyzing risk from a perspective that probesinto variations as between the actual returns and theexpected returns, as in essence, the actual returns from areality-initiative can be really different from the expectedreturns and the greater the variation, the greater the riskinvolved. Discounted Cash Flow Valuation elementallynecessitates that the board thoroughly comprehends theunderlying realty-transaction, and when there is only asuperficial understanding, the valuation can go completelyastray. It has been observed that as far as emerging marketsare concerned Discounted Cash Flow valuations could have aninherent flaw in valuing Realty-initiatives as elementallyassumptions play a determining role, and as a naturalcorollary, if the market prices of land parcels were to risedisproportionately to their earnings’ potential and cashflows, Discounted Cash Flow models are likely to find thepricing of the realty-initiative overvalued and in theprocess market perceptions would be given the go by. Thefact also remains that the Discounted Cash Flow valuationscan be manipulated to generate estimate of values that inessence had no rational relation to the intrinsic value.There is a lot more to be gone through with respect toarriving at an appropriate valuation than what theDiscounted Cash Flow Model has to proffer and one ought tonecessarily source out as much information as required inestimating growth rates and growth potential of the area orof the initiative itself when it comes to developmentalinitiatives like that of Special Economic Zones. Also,Discounted Cash Flow models may well find every developmentin an area to be overvalued, and in almost all emergingmarkets, where zoning laws are not very strict, and whereyou can in effect have an apartment block next to an SpecialEconomic Zone, such highly generalized valuations on anarea-wise basis may well be misleading. A board may beeasily led to believe that all developmental initiatives inan area are overvalued, and the actual reality may be quietdifferent – such a hackneyed approach would not portend wellfor the shareholder/stakeholders, and in certitude, it would

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elementally be against the pristine precepts of astutecorporate governance. In particular, the shortcomings of the DCF model arerelatable to its assumptions and DCF valuations canfluctuate wildly. The three critical inputs – that of cashflow forecasts, the discount rates and the perpetuity growthrates – if they are really wide off the mark, the valuegenerated for the realty-entity would not be any truereflection at all, and herein rests the major disadvantageof using the DCF model especially for valuations of realty-entities in emerging markets. Issues can get to be ‘tricky’and when due-diligence reports on the realty-entity lack‘visibility’, the prognostics with respect to future sales(based on past-experiences and projects available on hand)could be built on flimsy ground, and hence, the valuationscould become whimsical. In effect, if the inputs whilstvetting out any realty-initiative are ‘garbage’, then theoutput would obviously be very similar, and the fact of thematter remains that whilst it is readily recognized thatforecasting cash flows a few years into the future is reallyhard enough, pushing results into eternity (as what therealty-entities do in emerging markets) is a nearimpossibility. Therefore, as the capability and ability tomaintain high objective standards is an elemental pre-requisite in any endeavour aimed at producing good-forwardlooking projections, the DCF method is found wanting due tothe aforementioned. Moreover, the DCF analysisquintessentially requires astute monitoring and constantforensic-auditing because, by its very definition, the modelis not built in stone9. In effect, if the realty-entity wereto deliver disappointing results or if interest rates wereto fluctuate in a bizarre manner or if customers default interms of payments, then the boards would have to necessarilymake appropriate adjustments with reference to theinputs/assumptions after much deliberation, and all thiswould have to be effectuated with clearly spelt outtimelines - staying on with time-horizons, the DCF modelessentially has been found ineffectual for short-termventures defined as three years and less and if any realty-entity looks inexpensive after taking the assumptions intoconsideration, then it is well worth investing in. 9 J G Cragg and B G Malkiel, ‘ The Consensus & Accuracy of Predictions of the Growth of Corporate Earnings, ‘ Journal of Finance 23, 1968: 67 – 84.

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For emerging markets, it has been observed that thealternate approach would be more pragmatic as essentiallythe method incorporates solutions to the ‘tricky areas’ thathave been previously mentioned. In emerging markets,valuation-exercises have to adopt models that are moresensitive to market issues and it would be best to havepragmatic approaches. Relative Valuation - Basis of Approach An alternate approach is entirely relatable to adopting ahighly pragmatic system that allows for much juxtaposition,in that, in RELATIVE VALUATION, the value underlying arealty transaction is analyzed from a comparativeperspective. Inherently this approach has two integralfacets and the first one deals with the notion of studyingcomparable realty initiatives, and from a PE fundperspective, it would imply those realty initiatives thathave a similar potential in terms of value-addition, cashflows, risks, time-lines, developmental patterns, zoningissues, costs of construction and infrastructure developmentcosts. In this model other market participants featurepredominantly and as markets in most developing countriesmove in decipherable patterns, PE funds would be much betteroff adopting the RELATIVE VALUATION model. As a matter offact, the simplicity with which the valuation exercise isgone through under the Relative Valuation model presents astrong case for its adoption, especially in markets likethose prevalent in emerging markets. In the case of Realassets, it is extremely important that valuations reflectthe reality and in order to attain such results the sensibleway out lies in adopting realistic and pragmaticprocesses10. In particular, the method of Relative Valuation, proffers asystem where in effect the value of a realty-transaction isbased pretty much on the value of how similar asset classesare priced. The elemental aspect pertains to identifyingsimilar realty-transactions and arriving at their marketvalues in a highly professional and pragmatic way in keepingwith transaction- functionality. Valuation and valuationmethodology are crucial to the very functioning of PE funds,and these funds elementally are almost entirely dependent on

10 J H Vander Weide and W T Carleton, ‘Investor Growth Expectations: Analysts vs History, Journal of Portfolio Management 14: 78 – 83

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valuation-analysis for studying the viability of investingin a project or not, and the fact remains that valuationmethodology ought to pay heed to both the intrinsic value ofthe underlying assets as well as potential growth patterns. Section 4 - ENFORCING CORPORATE LAW OBLIGATIONS: PATTERNS OFCOMPLIANCE AND ROLE OF THE BOARD OF DIRECTORSThe CA of 2006 stipulates direct legal sanctions for non-compliance with provisions of the enactment and theconsequences may include civil and / or criminal prosecutionor that of damaged reputation. The CA of 2006 directly getsto enunciate on the prime duties of the board of directorsand a cardinal duty revolves around working for the successof the entity. It is important to have a pragmatic corporategovernance mechanism in place so as to ensure astutemonitoring whilst engaging in a valuations-exercise and asthe directors would have to promote the success of theentity, a good corporate governance mechanism would be anenabling tool. As an illustrative exemplar, such effectivedirection can be provided by the board under the aegis ofthe duties as stipulated in Sections 170-177 of the CA 2006,and therefore, from a valuations-perspective, there would becertainly be closer monitoring and realistic scrutiny whilstone such exercise is underway. Rejection of atakeover/investment initiative ought to be based on clearand cogent premises as a rejection could also denote anopportunity lost11. A good corporate governance mechanismwill have to necessitate compliance with corporate law, andgiven the fact that takeovers/investments are being mainlyfinanced by Private Equity funds, valuations assume thatmuch more importance. A. Imposing responsibility on due-diligence teams: avoidingpotential disasters.The fact is that board of directors of entities across theglobe do form a refocused echelon of participants incorporate law and presently they are formally recognized assuch. If an entity has ever been involved in a significanttransaction, whether in the form of a takeover, or in a newbusiness combination, a public offering of securities orsoliciting investments from PE funds, the board would have11 For a general reaing: Balakrishnan, S. and M. P. Koza, 1993, “Information asymmetry, adverse selection, and joint ventures”, Journal of Economic Behaviour and Organization, 20:99–117

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ushered in a sensible due diligence process. Although thedue diligence process can be time consuming and sometimesoverwhelming, especially for a target / investee companyunfamiliar with the process, it is a crucial component ofany significant corporate transaction and the board has aresponsibility to ensure significant performance12. Duediligence is essentially the investigation of a target /investee entity through reviewing documents and interviewingpersons with knowledge about the entity. For the buyer of abusiness or an investor taking up a significant equity stakein an entity, the due diligence investigation will attemptto reveal all material facts and potential liabilitiesrelating to the target business or entity. There are varioussub-categories of due diligence, including business duediligence, legal due diligence, accounting due diligence andeven “special” due diligence. This paper’s focus is on thelegal due diligence process, generally from the perspectiveof valuations relatable to a target / investee entity, andin essence there are five paradigms of investee entities.The recognition is important as each has its own bearing onvaluation-issues. The investee entity could be a listedentity, a family owned and run entity, a financialinstitution, an investment-banking entity and a state ownedentity13. Whilst engaging in a legal due-diligence exercise,it would be observable that many investee entities will notfit one paradigm perfectly. Nevertheless, it would have tobe recognized that it would be impractical to developdifferent corporate governance tools for every conceivabletype of entity and hence corporate governance tools centricto valuations could be used in tandem. The summary provided below would be helpful for the board ofa target / investee company in understanding how toefficiently navigate the legal due diligence process andgenerally what to expect. Why Is Legal Due Diligence Necessary?Some of the primary reasons for conducting legal duediligence are outlined below.

12 MacAvoy, Paul (1998) The Active Board of Directors and improved performance of the Large Publicly Traded Corporation’, Columbia Law Review, June, Vol.98/5.

13 E Fama and M Jensen, ‘Separation of Ownership and Control’, 1983, 26 Journal of Law and Economics.

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Better Understand Your Business. Legal due diligence isnecessary to give the buyer/ PE investor the informationthat it needs to learn about the target entity and tostructure the acquisition of the entity or to effectuate astrategic investment in the target entity. In addition,legal due diligence will help the acquiring/investmententity’s board to become better acquainted with the targetentity so that they can communicate effectively with thetarget entity’s board in matters pertinent to structuringthe transaction and they can do so under the rubric of acorporate governance progressive matrix.Help to Value the Target Company. The acquiring/investingentity would use the information decciphered in the legaldue diligence process to determine how much to pay for thetarget entity/how much to invest in the investee entity. Inaddition to carefully examining obvious indicators of valuesuch as the target / investee entity’s cash flows andbalance sheet, the board of directors would in essence beable to elementally examine, scrutinize and look out formore subtle indicators of value or potential liabilities inthings such as the target / investee entity’s organizationaldocuments and important contracts (e.g., is the entityrestricted in how or where it operates its business orsubject to unusual pricing terms or the existence of anycontingent liabilities), the lawsuits to which the target /investee entity is a party, insurance policies benefitingthe target / investee entity, employee benefit and laborarrangements, potential environmental claims, intellectualproperty owned or used by the target / investee entity andrights or obligations under earn-outs or indemnificationprovisions.Help in Drafting the Relevant Documentation - Theinformation that is culled out perceptively in the legal duediligence process will be helpful for both the boards whilstthey instruct their professionals in drafting andnegotiating the merger or acquisition or investmentagreement and related collateral agreements. Thisinformation will be particularly helpful in allocating riskwhen drafting the target / investee entity’s representationsand warranties, pre-closing promises and the post-closingindemnification rights of the acquiring/investing entity.Further, the target entity would in all probability need toprepare a disclosure schedule and the schedule has to be

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delivered at the time the primary transaction agreement isexecuted – in effect, the schedule is required to discloseexceptions to the representations and warranties made by thetarget / investee entity in the agreement. The informationgathered in the legal due diligence process will be helpfulfor the board of the target / investee entity in preparingthe disclosure schedules, and furthermore, if thetransaction includes a securities component, thisinformation will be very helpful in ably drafting adisclosure document that may need to be delivered to theboard of the acquiring / investing entity.Help with reference to Identifying Impediments to Closing.In the legal due diligence process, the boards of both theentities will attempt to identify everything that musthappen before the transaction can close. For example, focuswill be on the target / investee entity’s organizationaldocuments so that the acquiring / investing entity’s boardcould in certitude determine the shareholder and otherapprovals required to complete the transaction. Furthermore,much attention would be paid to issues pertinent to thetarget / investee entity’s contracts, including assignmentclauses, permits and licenses in order to determine whetherthe transaction is contractually prohibited or whetherspecific consents are required14. That apart, the board ofthe acquiring/investing entity would have to examineregulatory requirements in order to determine if anygovernmental approvals are required even whilst the target /investee entity’s debt instruments, capital leases, andrepayment requirements would have to be studied.Furthermore, if the transaction is structured as a sale ofthe target entity’s assets, it is likely that the board ofthe target entity would be required to seek consent from theother parties with respect to the contracts and this wouldhave to be gone through before assigning the contracts tothe acquirer. If the transaction is structured as a sale ofthe target entity’s shares, consent will only be required ifthe “assignment” is defined broadly to include a change ofcontrol transaction (common in real estate leases). If the

14 Under section 447 of the CA 2006, the Secretary of State may authorise an investigator from the CIB to require a company to make comprehensive disclosures about various documents and the investigator may ask for information that he believes to be pertinent. Section 447 can be effectuated when the company fails to make appropriate disclosures.

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transaction is structured as a merger, whether consent isrequired or not may depend on whether it is a forward mergerin which case the legal existence of the target entityceases and seeking consents may be advisable, and if it is acase of a reverse merger, then as the legal existence of thetarget entity continues, seeking consents would notrequired.Moreover, the legitimate expectations of the respectiveshareholders can be characterized by saying that an astutecorporate governance mechanism must protect expectations andnot just the rights involved15. Legitimate expectations is apublic law phrase and with reference to the board and theirduties pertinent to the due-diligence exercise, it wouldcertainly denote that the average shareholder canlegitimately expect that the board would have handled allmatters specific to the due-diligence exercise in a rationalway and that the exercise itself is based on logicalapproaches. In a way, Section 994 of the CA of 2006 codifiesthis concept.

Section - 5 TRANSACTIONS-DOCTRINE, SHAREHOLDER PROTECTIONAND LEGAL DUTIES OF THE BOARD

As it was mentioned earlier, initiatives in corporategovernance effectuated by the board are meant to regulatethe conduct of the entity’s affairs and corporate governanceinitiatives necessarily have to be enabling in that theyshould help the entity make significant progress.

A. Corporate governance and shareholder activism 16 as away to address inadequate compliance by the boards -implications for the point of view of realty-entities. One of the most interesting developments ofrecent vintage involves the evolution of proactiveshareholder-activist groups, and post LehmanBrothers, they seem to be getting rather zealous intheir workings. By definition, shareholder activismwould mean and denote acts done by shareholders tofurther their cause in that it is the way in which

15 Pricewaterhouse Coopers, 1999. Audit Committees, Good Practice for Meeting Market Expectations

16 Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021, 1045-46 (2007)

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they get to assert their rights as owners of theentity. They do so to influence the behavior of theentity, and in essence, activism encapsulates a rangeof actions that include private discussions, publiccommunication with corporate boards, caucusing withthe managerial dispensation, press campaigns, plannedand coordinated activity in keeping with the bestinterests of the entity, e-ways of engaging in publicdiscourse, articulating shareholder resolutions andseeking the removal of directors, should thesituation so warrant. Shareholder activism could alsobe directed against another group of largeshareholders and it could also be a collaborativeinitiative. Studies across Europe have suggested thatentities with active shareholders are more likely tobe successful in the long run and the fact remainsthat their mere presence can alleviate boardroomslackness. In times of recession such as the present,such groups can provide for much alacrity especiallywith reference to allowing boards to take bolderdecisions in the larger interests of the entity.Critiques however attribute shareholder activism withrowdiest sentiment and even go to the extent ofdeeming it an extortion-scheme that causes immenseharm to the entity. This line of reasoning has beenextended by some radical observers who have statedthat ‘shareholder activism’ is a euphemism foruninformed, disruptive, troublesome, unruly andpopulist ranting that has no laudable objective. Inessence, there is a general disagreement about howmuch power shareholders should delegate to corporateboards, and as a corollary, when does directshareholder action become necessary. In emergingmarkets, organized labor tends to use shareholderactivism as a capitalist tool in the class struggle,and in more mature markets, research on shareholderactivism indicates that shareholder activism hasfocused much on activism by institutional investorsin that with overt activism efforts, they endeavor toenhance the entity’s performance17. There is howeversome amount of evidence to substantiate the fact that

17 Chee Keong Low, A Roadmap for Corporate Governance in East Asia, 25 NW. J. INT’L L. & BUS. 165, 185-86 (2004)

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shareholder activism does prompt changes in thefunctioning of entities due to changes in governancestructures, and new players like the hedge funds,because they use ingenious financial instruments likederivatives, desperately require zealous activistgroups amongst their shareholders. In keeping withthe aforementioned, studies have suggested that inconsidering takeovers or investments in realty-entities, it would be really very prudent to developa transaction-doctrine, essentially a doctrine thatprovides the board-committee overseeing thetransaction with appropriate instructions withreference to handling the transaction sagaciously,and from the point of view of shareholder activism,it provides the activist with a reference code inmatters pertinent to how the transaction waseffectuated18. Read with reference to Section 172 ofthe CA of 2006, the transaction-doctrine would be anenabling tool in the efforts of the directors topromote the success of an entity. As far as realty-entities and the valuation-exercises associated withit go, it would be really very necessary to giveshareholders greater power and appropriate changescould be effectuated in the governance provisions.Recent research in India has stressed on the need forshareholders to be given the power to participateproactively with respect to making major businessdecisions and investment choices and the researchalso raises seminal questions on the fiduciary dutiesthat would crop up alongside the increased power ofshareholders. In the United States, there is a ratherpiquant situation in that even when a proposalreceives a majority vote from shareholders, theproposals do not actually bring forth any change with

18 A transaction-doctrine approach would in certitude bring forth a much decentralised approach and that would enable the directors’ of the acquiring-entity to very closely observe deal-implementation, and the corporate-constitution of the acquiring-entity ought to be enabling in terms of coming up with the transactions-doctrine. Transaction Governanceis elementally a system of controls that helps the committee of directorseffectively manage, administer, and in effect direct economic resources towards targeted ends. The doctrine provides for the blueprint of the deal as conceived by the directors. If an entity succeeds in efficaciously deploying its economic resources, such corporate successes are certainly attributable to a good corporate governance mechanism.

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respect to seminal issues like those involved in avaluation-exercise whilst effectuating takeovers ormaking strategic investments. This is because changesto the certificate of incorporation require approvalsof both the board and the shareholders, and legalacademicians and corporate policy-makers want thischanged and the reason they want it changed isnecessitated by the dictate that a certificate ofincorporation is a contract to which shareholders aredeemed to be parties by virtue of their ownership ofshares. Nevertheless, a strange situation arises whenit is realized that a contract can be changed withouta party’s consent (any individual shareholder).Thepresent law that states that approvals of bothparties are required, and hence, it leads to aquixotic situation. Whilst the majority ofshareholders assent a proposal with respect to say,endorsing a valuation-exercise, they do not owe anyduty but the board does. If a majority of theshareholders has the power to effectuate the proposalinto reality and to bring forth changes, then theboards’ duties are heightened, especially from agovernance standpoint. As a corollary, dissentingshareholders will tend to lose the protectionprovided, at least theoretically, by the board’s dutyto act in the best interest of the entity and ALL theshareholders and in this context, it has to berecognized that the board’s fiduciary duties are theonly protection as far as minority shareholders’ go.Therefore, in situations wherein if the majorityshareholders gain the power to act in a legallybinding way by effectuating an amendment to thecorporate charter, then the majority shareholdersshould also be put in the same position as directorsand they would in effect have to act in a fiduciarycapacity. A viable option rests in applying thepristine concepts of the law of contracts in thatshareholders wanting to change the corporate charter(memorandum and articles of association in UK Law)would have to necessarily be acting in good faith andtheir dealing would have to be fair and above boardin keeping with the highest and best interests of theentity. Hence, it could be viewed that this rule

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would inherently recognize that the majorityshareholders would be exercising a contractual right,and thereby, their actions might affect otherparties.

B. Corporate governance and company ratings - a criticalissue when it comes to valuations pertinent torealty-entities is that of the ratings enjoyed by theentity. Now assuming that the ratings are done in afair and equitable way, the tool that could get anentity good-ratings is that of the corporategovernance mechanism. As an illustrative exemplar, insituations where a private-equity fund wants toeffectuate investments in a realty-entity, the firstimpressions of the investor with respect to theinvestee entity are formed by the available ratingsat the initial stage and a rating that is assigned bya leading institution is bound to address the initialquery of the investor - the likelihood that theinvestor would be able to get back good returns onthe investments in a timely manner. At one end of thespectrum, the investee-entity would be rated based onthe general well-being of the realty-entity and theprobability of the realty-entity doing well - furtheralong the continuum, in terms of the investee-entity’s ability to provide for good returns, severalfactors will be at play and these would include therisk-factors, and at the end of the exercise, theinstitution would provide for a rating. It has beengenerally observed that when good corporategovernance mechanisms are in place, the entities getgood ratings, and as far as valuation-exercises go,good ratings help the private equity funds to make aninformed choice19. Therefore, in performing legalanalysis, the institution that gets to provide forthe rating would have to elementally scrutinize thecorporate governance mechanisms in place, and theinstitution would have to develop criteria related torating the corporate governance mechanisms. It shouldbe noted however that the institution shouldconstantly scrutinize the criteria as well, and one

19 Barney, J.B. & Hansen, M.H., 1994, “Trustworthiness: Can it be a sourceof competitive advantage?”, Strategic Management Journal, 15(S2): 175- 203.

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of the causes of the economic mayhem since 2007 hasbeen the faulty-ratings provided by some of theseleading rating-institutions, and therefore, some ofthe entities that were rated highly ended up as no-performers at all20. The goal of a rating-institutionshould be to provide for an authentic portrayal of anentity’s standing with respect to its processes,performance and prognostics, and when an entityengages in a valuation-exercise, a good rating systemwould be a great enabler.

C. Corporate governance and codes-of- procedure - Theline of reasoning that has been articulated much inthis paper has been one that has enunciated on theneed for corporate jurisprudence to incorporate asensible system that allows for apposite valuations,and with M & A/ Investment transactions slated toincrease in substantial numbers as the WTO era ushersin borderless markets, the efforts of lawmakers,regulators and boards must be aimed at theelimination of corporate corruption, eradicatingunethical conduct and in bringing forth appropriatecorporate governance mechanisms that would beworkable and more importantly meetshareholder/stakeholder expectations21. Thetransaction-doctrine method, quintessentially aseminal corporate governance initiative, provides amechanism for the boards to ensure compliance withregulations even as it serves as an instructive-guideto the board-committee overseeing the transactionwith a code-of-procedure. The transactions-doctrine,as it is a code-of-procedure, is quintessentially acorporate-percept, and one by which the board clearlypredicates the processes that must be adhered towhilst effectuating a transaction. The code-of-procedure explicates in pragmatic terms with respectto effectuating the policy of the board and it is anearnest attempt at self-regulation as well. In

20 There is a dire need to make reports every three months enunciatingmajor transactions and explicating on share holding patterns – Report ofthe High Level Group of Company Law Experts on a Modern RegulatoryFramework for Company Law in Europe ( Brussels, November 4, 2002), ChII.3.

21 Pricewaterhouse Coopers, 1999. Audit Committees, Good Practice for Meeting Market Expectations

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effect, the transaction doctrine as a code-of-procedure is an effort to create an efficacious legalframework that would vigorously and pragmaticallyaddress regulatory issues, legal barriers, issuesrelatable to corporate social responsibility and incomplying with board resolutions in the matters underconsideration. Hence, it is a seminal corporategovernance tool, and increasingly, I believe thatmajor entities around the globe would resort toevolving transaction-doctrines as a way to empoweringtheir board-committees with proper proceduralguidelines22. From the perspective of theshareholders/ stakeholders, the codes-of-procedurewould serve as a hedge against corrupt practices evenwhilst it would help in the cause of value-creationand in so far as handling contentious issues that maycrop up in the future, it would serve as documentaryevidence. Realty-entities that would adopted suchpractices would stay clear of corruption and calumnyand as far as UK entities are concerned, sections 170-177 are indeed suggestive of the need to develop atransaction-doctrine whilst effectuating an merger oracquisition initiative or whilst contemplating aninvestment.

Section – 6 FINAL REMARKSThere are indeed many contumacious areas when it comes tovaluations and it is vitally important from an entityperspective to develop sensible corporate governanceguidelines. Evidence illustrates that many entities havegone under due to faulty valuations in takeover situationsor in situations involving investments by private-equityfunds. Bad-valuations are an outcome of Bad Corporate22 Schneider-Lenne, Dr. Ellen, 1992. ‘The Governance of Good Business’ - Stockton Lecture.The acquiring/investing entity must develop on a number of elemental principles. The transactions-doctrine as part of the corporate constitution would inherently have to provide for much guidance with respect to operational-details and in providing for ways that would uphold transparency and accountability norms in keeping with the prime objectives of the entity. This way, the investee entity would also be familiar with the ground-rules and codes-of-procedure as encapsulated in transaction-doctrines serve a very useful purpose. As a matter of fact, in countries which encourage two-tier boards, this system has proved to be indispensable and transactions are effectuated with least calumny.

20 Dr. Kishore Vaangal

Governance Mechanisms and the foregoing enunciation justprovides for a confirmation in terms of the need, importanceand significance for developing pragmatic approaches withrespect to handling valuation issues and as valuations are aprimarily a subject of takeover/securities law, it wouldnecessarily have to be an important duty of the board tohave perspicacious corporate governance initiatives in placein order to control and scrutinize the processes involved ina valuation-exercise most efficaciously.

***Dr. Kishore Vaangal is an internationally acclaimedentrepreneur, management evangelist and ethicist and hasseveral advanced accreditations to his credit from some ofthe most prestigious global academic institutions. Inaddition, he is a Fellow Member of the Institute ofProfessional Accountants (Australia), the CharteredManagement Institute (UK) and the Royal Institute ofChartered Surveyors even whilst being a member of theEuropean Corporate Governance Institute. His exposure as astrategic entrepreneur, business analyst and governanceprofessional spans more than two decades and over the yearshe has also astutely advised entities globally in the areasof private equity funding, the dynamics of emerging marketsand in evolving perspicacious methods of risk-management.The industry verticals that he specializes in are that ofinfrastructure, oil and gas, high-technology and investmentbanking. A recent publishing initiative in a highly complexarea of corporate governance law titled “EffectuatingAcquisition Initiatives” has received worldwide adulationand the work is considered to be a seminal piece ofliterature in so far as mergers and acquisitions in theglobal oil and gas industry is concerned.

Dr. Vaangal is the President of Sumanas Commerce (Chennai,India), an entity dedicated to effectuating entrepreneurialventures perspicaciously, even whilst, he is also the ChiefOperating Officer of Transcendental  Capital LLC ( Delaware,USA), an entity dedicated to eventuating on M & A deals, PEFunding and in providing for governance services at theglobal level. He truly believes in fostering inclusivegrowth, promoting compassionate capitalism, advancingpristine ecological causes/sustainable development,advocating human rights and in zealously crusading on CSR

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issues. He features prominently in Marquis Who’s Who of theWorld and can be contacted at:

e.corporategovernance@gmail.com or a.global.thought.leader@gmail.com

BibliographyLegislation & ReportsThe nature of the FSMA 2000 makes it out to be an enablingstatue providing for an elemental framework for the systemof financial regulation. Rule making powers of the FSA arecentral to the whole system.Financial Reporting Council, The Combined Code on CorporateGovernance, June 2006. The legal framework is created by the CA of 2006, theEnterprise Act, 2002 and the EC Merger ControlRegulation139/2004 OJ L24/1.Institute of Chartered Accountants, 1999. ImplementingTurnbull, Centre for Business Performance.BooksM. Maher and T Anderson, ‘Corporate Governance: Effects onfirm performance and Economic growth’.John C Coffee Jr, Gatekeepers (Oxford:OUP, 2006), especiallyChapters 5. As an illustration, if the Chairman of an entitywere to ensure true Auditor Independence then muchtransparency is ensured provided the auditor is alsocompetent. See For a general overview read The New Global Investor, byRobert Monks, 2001. Oxford, Capstone, relatable toinvestments... Et al;Wilson, Ian (2001). The New Rules of Corporate Conduct,Westport CT: Quorum Books, 83. Demb, Ada and Neubauer, F Friedrich, 1992. The CorporateBoard, Oxford: Oxford University PressArgote, L. ,1999, “Organizational learning: Creating,retaining, and transferring knowledge”, Norwell, MA: KluwerBowen William, (1994), inside the Boardroom, New York. JohnWiley and Sons.

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Carver, John, and Miriam Carver. Reinventing Your Board.Rev. ed. Jossey-Bass, 2006 Adrian Cadbury – Corporate Governance & Chairmanship – APersonal View. Oxford University Press – Chapters 3-5. Shultz, Susan. The Board Book. AMACOM, 2005 – Chapter 4.A guide to researching the Sarbannes _ Oxley act of 2002 –Advanced Legal Research; George R. Jackson.P Birnie and A. Boyle, International Law and the Environment(2nd edn, Oxford University Press, New York, 2001)Stephen Graw, An Introduction to the Law of Contract, 3rd

edition, The Law Book Company Limited.Paul L Davies, Principles of Modern Company Law, 8th

edition, Sweet & Maxwell, South Asian edition. Aswath Damodaran, Damodaran on Valuation, 3rd edition, JohnWiley & Co. New York.