Itai Fiegenbaum has posted an interesting paper, The Geography of MFW-Land (October 11, 2016), Delaware Journal of Corporate Law (DJCL), available at SSRN: https://ssrn.com/abstract=2850900, which argues that:
In a highly celebrated decision, the Delaware Supreme Court concluded that positive approval by both a special board committee of disinterested directors and an informed and uncoerced majority of minority stockholders justifies de-escalation of the standard of review for going private mergers with a controlling stockholder. Prior to the MFW decision, Delaware case law declined to provide a ratification avenue that results in a deferential standard of review for these types of transactions.
While helpful, the decision lacks any reference to the multitude of other factual situations that compel heightened judicial review. Thus, business planners are left pondering whether MFW created a ratification procedure that encompasses all manner of controlling stockholder transactions. Into this void, a Chancery Court decision recently opined that the MFW framework applies to all controlling stockholder transactions.
This article argues that the intuitive application of the MFW framework to all controlling stockholder transactions is misguided. Neither the text of the Supreme Court's decision nor its context justify an expansive reading of MFW's holding. A critical look at the policy arguments espoused by the Supreme Court exposes their limitations when applied to other types of transactions. The unavoidable conclusion is that the borders of "MFW-Land" are much narrower than they appeal.
So claims the opening sentence of a CLS blog post by a trio of University of Florida economists, albeit with subsequent qualifications:
A well-functioning independent board of directors is a pillar of effective corporate governance. ...
A large body of academic literature has also highlighted the importance of board independence and has explored its effects on various measures of firm performance. Despite the strong push for greater director independence, the observed links between board independence and firm performance are often quite weak. Moreover, corporate fraud and misconduct still remain a significant problem in Corporate America (KPMG Forensic Integrity Survey, 2005-2006, 2009, and 2013) even after a decade of significant regulatory efforts that were designed to promote a board’s oversight function through director independence.
The post-SOX regulatory environment rests on the conventional wisdom that board independence is an unalloyed good. As the preceding sections demonstrated, however, the empirical evidence on the merits of board independence is mixed. Accordingly, even though there is some reason to think independent board members are finally becoming properly incentivized and, as a result, more effective, the clearest take-home lesson from the preceding analysis is still that one size does not fit all. ...
The post-SOX standards, however, strap all listed companies into a single model of corporate governance. By establishing a highly restrictive definition of director independence and mandating that such directors dominate both the board and its required committees, the new rules fail to take into account the diversity and variance among firms. The new rules thus satisfy our definition of quack corporate governance. The one size fits all model they mandate should be scrapped in favor of allowing each firm to develop the particular mix of monitoring and management that best suits its individual needs. Unfortunately, as we will see throughout our review of the post-crisis federal regulatory scheme, neither Congress nor the SEC has given any deference to the principle of private ordering.
... according to three top-notch plaintiffs’ lawyers who talked to me on background, a series of recent decisions from the Delaware Supreme Court and Chancery Court has made it much tougher for investors to police corporate boards and advisers, to block shareholder votes on deals involving a single bidder and to recover damages for disclosure violations if shareholders have voted in favor of a merger. The net effect of this recent precedent, they said, is to encourage shareholders to file M&A class actions in federal court, alleging violations of federal disclosure laws, rather than bringing fiduciary duty suits in Delaware.
These lawyers weren’t even talking about Chancery Court’s celebrated 2015 crackdown on “deal tax” settlements. You probably remember that Delaware judges acted in concert to squelch M&A class action settlements in which corporations received broad releases from shareholder claims in exchange for additional, often immaterial, proxy disclosures.
Chancery Court’s refusal to sign off on six- or seven-figure fees for plaintiffs’ lawyers who negotiated disclosure-only settlements has already sharply reduced the number of M&A challenges filed in Delaware. According to a Cornerstone Research study published this summer, nearly two-thirds of all deals valued at more than $100 million still provoked shareholder litigation, but that’s way down from the 2013 peak of 94 percent – and shareholder lawyers are much more likely to file investor suits outside of Delaware. (Thus explaining Time Warner’s new forum selection clause.)
For all of the attention paid to the clampdown on disclosure-only settlements (including by me!), the Delaware Supreme Court’s 2015 opinion in Corwin v. KKR may turn out to have been a more important disincentive for shareholder lawyers to sue in Chancery Court. In the Corwin decision, written by Chief Justice Leo Strine, the state supreme court held that if a deal is approved by “fully informed, uncoerced” shareholders, the board’s actions during the sale process should be reviewed under the extremely forgiving business judgment standard. Effectively, the Corwin ruling spelled the end of post-closing damages claims in deals shareholders voted to approve.
The answer, they say, may be to stop litigating M&A challenges as fiduciary duty cases in Delaware and instead start asserting violations of federal securities law, which, after all, prohibits corporations from making false or misleading proxy filings.
I assume that exclusive forum bylaws that tried to keep such cases out of federal courts would run afoul of the securities law provisions giving federal courts exclusive jurisdiction over federal securities law claims. In which case, the onus will be on federal courts to make use of the tools given them by the PSLRA to prevent a new generation of deal tax litigation.
Andrew Verstein has written a really interesting article about reciprocal insurance exchanges (I know, who would think there was anything interesting to say about them, but he pulled it off). He's given a summary on the Oxford corporate law blog:
The viability of reciprocal insurance problematizes the entity-essentialism now dominant in the corporate law community and elsewhere. Without any entity, reciprocals were somehow able to secure or foreswear the supposedly essential functions that entities provide. It turns out that creative applications of contract law, agency law, and insurance law sometimes suffice to support broad coordination. How? An enterprise’s many patrons can appoint a common person (the ‘attorney-in-fact’) to act as their agent – authorizing the agent to quickly sign multifarious contracts in their names. Liability can be limited and prioritized within those contracts. These limitations are binding on third parties because insurance regulation puts potential creditors on constructive notice of these agreements. Entity-like functions follow, but sans entity.
My article ‘Enterprise Without Entities’ therefore questions the unique importance of entities, but it does not necessarily undermine all arguments of entity theorists. To the contrary, the fact that reciprocals seek and find many of the core functions provided by entities underscores the importance of those functions. Reciprocals have used agency law to overcome transaction costs, and they have alloyed contract law and insurance regulation to structure a pattern of creditors’ rights. Entity essentialism is therefore honored in the breach.
I suspect that when I was a pre-teen I internalized a model of adult behaviour that is familiar to anyone under 30 today mostly from TV shows like Mad Men. Men wore suits and hats and went out to work, women wore dresses and stayed home to raise kids, the trappings of material success included cars and maybe a black and white television and a vacuum cleaner (a luxury item in 1950s UK) and air travel was exotic. ...
So if you're slouched in front of your laptop wearing a hoodie and joggers while listening to 80s bubblegum pop on a streaming audio channel, and if you've got a collection of bobble-heads or models of the Starship Enterprise on your desk, and your kids (assuming you have any) are wearing retro fashions that remind you of photos of your parents back when they were dating, relax: you are not a failure!
Your Publicly Available (Scholarly and Other Papers) and Privately Available Papers on SSRN as of 17 October 2016 have:
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Your Author Statistics as of 10/01/2016 (out of 321,551 authors in SSRN, based only on Publicly Available, Downloadable Papers)
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In Jerome K. Jerome's novel Three Men on the Bummel, which I recommend quite highly as a classic of Victorian humor by the way, the narrator explains why so many people find journalism an attractive profession:
Of all games in the world, the one most universally and eternally popular is the game of school. You collect six children, and put them on a doorstep, while you walk up and down with the book and cane. We play it when babies, we play it when boys and girls, we play it when men and women, we play it as, lean and slippered, we totter towards the grave. It never palls upon, it never wearies us. Only one thing mars it: the tendency of one and all of the other six children to clamour for their turn with the book and the cane. The reason, I am sure, that journalism is so popular a calling, in spite of its many drawbacks, is this: each journalist feels he is the boy walking up and down with the cane. The Government, the Classes, and the Masses, Society, Art, and Literature, are the other children sitting on the doorstep. He instructs and improves them.
I'm often reminded of that quote when reading The Economist, which seems to take joy in instructing its readers. And, despite my cavils with its political direction these days, I admit that it remains a formidable instructor. Yet, as the saying goes, even mighty Homer nods.
A case in point is this week's story on Mexican-US trade, in which the author tries to make a case for Americans to embrace free trade across that border:
Cross-border trade boosts jobs. Theodore Moran and Lindsay Oldenski of the Peterson Institute find that between 1990 and 2009, a 10% increase in employment at US firms’ Mexican operations was associated with a 1.3% increase in their US workforce. Granted, the new jobs tend to be for skilled workers, and some unskilled ones lose out. But everyone benefits from lower prices. If an American family saves $100 buying a washing machine made in Mexico and uses that money to go to the cinema, it supports the jobs of the ticket-seller, the cinema manager “and maybe even Brad Pitt”, argue Mr Wilson and Mr Wood.
Let's pick that apart. First. a whopping 10% increase in a company's Mexican employment translates into a minuscule 1.3% in its US employment. BFD. (Of course, absolute numbers matter but they're not provided.)
Second, The Economist has no problem with high-paying blue collar manufacturing jobs going south of the border, because American citizens will be able to get a job collecting tickets at the movie theater (presumably at minimum wage with no benefits). And, of course, as the Economist earlier instructed us:
Technological progress seems to be boosting opportunities for automation all the time, and at some point firms will cross the threshold beyond which it makes sense to replace labour with capital rather than invest in more productive labour. Amazon's fulfillment centres generate tens of thousands of jobs, many at or near minimum wage. Maybe a higher minimum wage will lead to better pay without much of an employment effect. Or maybe Amazon will accelerate the deployment of warehouse robots. Maybe a higher minimum wage will boost pay at fast-food restaurants. Or maybe it will lead the restaurants to get seriousabout automation.
Our movie theater ticket taker would seem to be at particular risk. As for Brad Bitt, moreover, even his job could be endangered by CGI automation.
Look, I get the theory of free trade. I got an A in Econ 101 largely by spitting it back to my true believer professor. But I worry a lot about the sustainability of blue collar jobs in the American economy as it is pressured by unfair trade from dictatorships/managed economies like China, unpatriotic American CEOs who ditch their countrymen to save a buck, and tech titans making automation ever more viable.
Supposedly, of course, blue collar Americans will land new high paying jobs in tech. Or so tech titans and others in what Christopher Lasch called the New Elite, keep telling us. But, as the Wall Street Journal reported this week, that is not going to happen:
The technology revolution has delivered Google searches, Facebook friends, iPhone apps, Twitter rants and shopping for almost anything on Amazon, all in the past decade and a half.
What it hasn’t delivered are many jobs. Google’s Alphabet Inc. and Facebook Inc. had at the end of last year a total of 74,505 employees, about one-third fewer than Microsoft Corp. even though their combined stock-market value is twice as big. Photo-sharing service Instagram had 13 employees when it was acquired for $1 billion by Facebook in 2012.
Hiring in the computer and chip sectors dove after companies shifted hardware production outside the U.S., and the newest tech giants needed relatively few workers. The number of technology startups fizzled. Growth in productivity and wages slowed, and income inequality rose as machines replaced routine, low- and middle-income, human-powered work.
Marc Zuckerberg, Tim Cook, Sergey Brin and Larry Page don't give a damn about their fellow Americans. Nor does the rest of the Davos elite and the journalists who live to instruct them. And that's why Donald Trump and Bernie Sanders heterodox take on trade has captured the support of so many Americans.
It's also why the outrage industry Adrian Wooldridge derides in this week's Economist is likely to persist. It's not just the supply side factors on which his Schumpeter column focused, important as they are and as cogent as his assessment of them is, but it's also the demand side. As long as the working class is angry and the elite class does nothing but drink champagne on their private jets en route to Davos, there is going to be a market for outrage.