Q&A – Gustavo Bruckner

Gustavo F. Bruckner leads Pomerantz’s Corporate Governance practice group, enforcing shareholder rights and litigating against corporate actions that harm shareholders.

Monitor: What is a shareholder derivative case?

Gustavo Bruckner: Whether an investor owns one share or one million shares, they are an owner of that company. The company itself is just a legal creation, an inanimate object that cannot respond when it is harmed or wronged. But a shareholder, as an owner, can take action on behalf of the company to remedy that harm. And that’s what a shareholder derivative action is. It’s usually directed against the officers and directors who sit at the top of the company and wouldn’t otherwise take action against themselves.

M: One share versus one million shares… Is weight given to that in court in corporate governance cases?

GB: The other side often tries to make it an issue. There was a recent hearing where a shareholder owned a fractional share of Tesla in one account and many more in another. Tesla argued that the shareholder didn’t own enough to review its books and records. The Vice Chancellor of Delaware’s Chancery Court shut down that argument very quickly. There are jurisdictions where you need to own a certain minimum threshold of the shares to pursue derivative litigation – 5% in Nevada, for example – but not in Delaware, which is the most common forum for these kinds of actions. The law does not specify a minimum; the only thing the law specifies is the ownership stake at the time the litigation is brought. For the most part, one share or a million shares is the same under the law.

M: #MeToo issues like sexual harassment are sensitive matters to the victims involved. How do you maintain discretion and confidentiality?

GB: Our goal is not to promote ourselves. Our goal is to forcefully and effectively represent our institutional and individual clients. If the best way to address the misconduct, remedy the harm, and bring about change is to do it privately, then we will do so. And we’ve had many, many such resolutions. No one will ever know except the parties involved that Pomerantz, on behalf of its clients, caused those changes. It won’t appear in any court docket or in the news. But we cause real substantive, meaningful change through our prosecutions and through the cudgel of litigation.

M: This misconduct is often hidden from public view. How can shareholders gain insight into concealed wrongdoing?

GB: It sometimes comes to our attention through aggrieved parties or whistleblowers. Stockholders may reach out to us based on their feeling that something just doesn’t pass the smell test. And I’ve even had more than one experience where a competitor has said that a situation is worthy of investigation. When you’ve been doing this long enough, you know what doesn’t seem right.

M: What do you foresee being the most important governance matter facing corporations over the next decade?

GB: There are several things at play. We mentioned fractional investing earlier. Robinhood and other similar services have democratized investing even further so shareholder ownership will continue to evolve and look very different from the past. This is already leading to very strong pushes for activism in areas such as climate change, diversity, executive compensation and social action. Companies will have to figure out how to balance the need to maximize stockholder profit while also achieving the social goals of its ownership. Often, maximizing profit for shareholders is at direct odds with achieving ESG goals. And then there are the rules governing corporate behavior. We are already seeing a couple of instances where corporations are trying to avoid or preempt state oversight by adopting bylaws that limit the kinds of actions that can be brought. That may be something that will come to a head in the next few years.

M: On the topic of executive compensation, can you speak to the importance of clawbacks?

GB: The clawback is a tool that every corporation should avail itself of when there is harm caused by executive misconduct but, for a multitude of reasons, companies refuse to both adopt and implement clawback and fallback policies. They claim that if they adopt policies that are too strong, they won’t be able to attract the best and brightest executives. That seems ridiculous to me. Are you recruiting from the white-collar section of the prison to hire your executives? We’re intentionally pretty forceful in looking at clawback policies whenever we investigate a company for misconduct. Many clawback policies only kick in if there’s a financial statement. The largest securities action of the last five or so years was Petrobras. There was no financial restatement in that, so that situation would not have allowed shareholders to go after company executives even after decidedly corrupt and illegal behavior.

M: Over the course of your career, what is the most important corporate governance reform that you have achieved?

GB: It’s actually confidential, but what I can say is that Pomerantz sent a litigation demand to a major entertainment company after reports of sexual harassment. As a result, we were able to negotiate reforms that included formation of a special committee of the company’s board and creation of a Fair Employment Practices Group, along with complete retraining of all of their U.S. employees. The company also agreed to institute increased opportunities for reporting of harassment via the web and phone and we required that reports of harassment reached the highest levels at the company. I am quite proud of this one, feeling it has made a difference for the people there.