I've created a public list of business law professors at US law schools that I follow: https://t.co/9Lu23dl1iO— Stephen Bainbridge (@ProfBainbridge) January 27, 2015
I've also created a public list of non-business US law school professors who I follow: https://t.co/X9au9ZTZ7S— Stephen Bainbridge (@ProfBainbridge) January 27, 2015
SEC Rule 14a-8(i)(7) provides that a shareholder proposal need not be included in the company's proxy materials if the proposal relates to a matter of "ordinary business." The idea is to keep shareholders from using proposals to micromanage companies. But Jim Hamilton notes that:
The National Association of Manufacturers (NAM) has filed an amicus brief in support of Wal-Mart Stores, Inc.'s appeal regarding a shareholder proposal on gun sales. Wal-Mart has appealed a district court decision holding that a shareholder proposal concerning the sale of certain guns should have been included in Wal-Mart's proxy materials for its 2014 annual shareholders meeting and should not be excluded in 2015. NAM posits that a proposal attempting to influence the types of products a retailer may sell clearly relates to an "ordinary business" matter (Trinity Wall Street v. Wal-Mart Stores, Inc., January 21, 2015).
You would think so, but the SEC and the courts have essentially gutted the exception. If the Wal-Mart case is not reversed, however, the rule will essentially have been repealed. As Hamilton notes:
Citing Trinity's claims that the products at issue could have the potential to impair Wal-Mart's reputation or be offensive to community values, NAM contends that this subject matter is "inherently subjective and open-ended." Where retailers sell a wide variety of products to an array of consumers, many products could offend someone, somewhere. The shareholder proposal rules are not meant to be a referendum on how a retailer selects its inventory, NAM says, and "[i]f the mix of products a retailer chooses to stock and sell is not subject to the ordinary business exception, that exception is rendered a nullity."
The problem is that the SEC takes the position that "proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." It doesn't take a very imaginative proponent to twist virtually any corporate activity so as to raise "significant social policy issues." Want Nabisco to stop making Oreos? Bleat at length about childhood obesity. Want Wal-Mart to stop selling some article of clothing? Bloviate about sweatshops. And so on.
In sum, the SEC and the courts have completely undermined Rule 14a-8(i)(7) and thereby are allowing shareholders increasing ability to micromanage corporations. It's time to put the genie back in that bottle. And stopper it.
The children apparently have fallen in love with the whole divestment thing. BDS is an especially prominent and insidious case. But there are a ton of other divestment movements floating around in the higher education circus. Fossil fuels. To which you can now add Turkey:
According to the Daily Bruin, "the undergraduate student government voted 12-0-0 Tuesday to pass a resolution that calls for the University of California to divest from investments made in the Republic of Turkey." See http://dailybruin.com/2015/01/21/usac-passes-resolution-for-uc-to-divest-from-the-republic-of-turkey/. 12-0-0!
...Gun control activists in the national Campaign to Unload group and student governments — horrified by the May rampage that left seven dead at Isla Vista near UC Santa Barbara — are now seeking a more formal ban on weapons industry investment and better public disclosure...
The Regents actually did divest from guns after the Sandy Hook (Connecticut) shooting so apparently this campaign wants something more. It's not clear what that is.
All this despite the fact that divestment doesn't work and has very high costs:
A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:
"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"
Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:
"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."
In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.
As the Manhattan Institute's James Copeland explained in reference to an anti-semitic effort by the Presbyterian Chiurch (USA) to embrace the BDS movement, these results are entirely consistent with financial theory:
"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."
As the UCLA Faculty Association blog observed of this ongoing stupidity:
So apparently there was not a doubt that it is a Good Thing to use the pension fund for political statements at a time when a) the pension is underfunded, b) there is a UC Regents dispute with the state over the state's responsibility to fund the pension, c) employer and employee contributions are being raised at UC to cover the pension liability, and d) students are wondering if in some way their tuition will go up to help pay for that liability. Interesting!
Dealbook reports that:
Federal prosecutors are seeking to reverse, or at least narrow, a crucial insider trading ruling that overturned the convictions of two hedge fund managers last month, DealBook’s Matthew Goldstein and Ben Protess report. Preet Bharara, the United States attorney in Manhattan, is asking the same three-judge panel that issued the ruling to revisit its decision, according to a filing on Friday. As an alternative, Mr. Bharara’s filing proposes the legal equivalent of a do-over in a process known as en banc.
I hope that the court will deny these requests. As I have explained before, Newman was demonstrably correct. See this post for details.
Seth Mnookin, a journalist who's chronicled the anti-vaccination movement, observed a few years ago that you only had to go visit a Whole Foods to find anti-vaxxers.
Now, it doesn't seem that anyone's actually done the science on that one, but Mnookin's point here is obvious — the anti-vaccination movement is fueled by an over-privileged group of rich people grouped together who swear they won't put any chemicals in their kids (food or vaccines or whatever else), either because it's trendy to be all-natural or they don't understand or accept the science of vaccinations. Their science denying has been propelled further by celebrities, like Jenny McCarthy, Robert F. Kennedy, Jr. and actress Mayim Bialik, who is also a neuroscientist and even plays one on TV.
My guess is that the anti-vaccination crowd leans way left. Among other things, they tend to cluster in far-left areas:
Researchers analyzing records for about 55,000 children born in 13 northern California counties between 2010 and 2012 found five geographic clusters of 3-year-olds with significantly higher rates of vaccine refusal. These included East Bay (10.2 percent refusal rate); Marin and southwest Sonoma counties (6.6 percent refusal); northeastern San Francisco (7.4 percent); northeastern Sacramento County and Roseville (5.5 percent); and south of Sacramento (13.5 percent). By comparison, the vaccine refusal rate outside these clusters is 2.6 percent, according to the study published in the journal Pediatrics. ...
The communities where anti-vaxxers cluster are also among the most liberal. Marin County, San Francsico County and Alameda County all voted overwhelmingly for Obama in 2008. In Marin, 78 percent of the vote went to Obama. In San Francisco, it was 84 percent. And in Alameda, it was 79 percent. That's all higher than what Obama got in his own home county of Cook County, Illinois.
So the next time one of your liberal friends starts in on science denial, point them to this one. Unlike creationism or (at least in the short run) climate change, denying the science on vaccines can be leathal.
If you think of law schools as companies selling a product, our customer base has skrunk dramatically and continues to shrink:
The number of people applying to law school is down 8.5% compared to last year at this time, according to the latest figures released by the Law School Admission Council.
As of Jan. 9, just shy of 20,000 would-be lawyers had submitted applications to law schools. The downward trend is even starker if you compare it to figures from three years ago. By this point in 2012, about 30,000 students had applied.
The drop-off in applicants suggests that law schools may have an even harder time propping up their enrollment figures, which have also been shrinking.
In a market system, the result would be business failures and a lot of mergers. Sadly, higher education is effectively insulated by the government from market forces, so we're not seeing the kind of consolidation process that is necessary.
If law school reformers were serious about making changes, they'd be looking for ways to create a market for law schools or replicate market forces in some other way. But they're not. Which means the reformer either aren't serious or they're a bunch of socialists who think the solution is more regulation and diverting taxpayer dollars to finance all these unnecessary law schools. Or, in all probability, both.
I was amused, puzzled, and mildly annoyed by this post at Prawfsblawg:
You may have noticed a recent "sponsored post" on our feed, and there were some questions from our valued readers about it. We're happy to provide some information.
We were pleased to reach a sponsorship agreement with West in spring 2014. Occasional sponsored posts, written by prominent law professors, are part of that new relationship, and have appeared intermittently since last spring.
We welcome West on Prawfsblawg. But we should make clear that West provides the content of those posts. They do not necessarily represent the views of the other writers on Prawfsblawg, although their subject matter is consistent with this blog's conversation about law schools and legal education.
Seems like they've swapped their birthright for a mess of pottage.
Bloomberg reports that:
A federal appeals court ruling that makes it harder to obtain insider-trading convictions was called “dramatically” wrong in the U.S. government’s first formal response to the sweeping decision.
In the Dec. 10 ruling tossing the convictions of two fund managers, the court said that, to be found guilty of insider trading, defendants must know their tips came from someone who not only had a duty to keep it secret but also got a benefit for leaking it. ...
The ruling “dramatically (and in our view, wrongly) departs from 30 years of controlling Supreme Court authority and, in so doing, legalizes manipulative and deceptive conduct that no court has ever sanctioned,” prosecutors said in a court filing Monday.
Wow. The government's argument is itself so dramatically wrong as to border on being deceptive. In fact, the case in question -- US v. Newman -- got it exactly right, as I explain in this post.
I'm particularly flummoxed by this claim made by the government:
The government’s response came in a case against four men who admitted trading on tips about IBM Corp.’s $1.2 billion purchase of the software company SPSS Inc. The information originated with a lawyer working on the deal. The judge in that case asked prosecutors about the effect of the appellate ruling. ...
They said the decision shouldn’t affect the IBM case because the four men admitted “misappropriating” or stealing the information. The government shouldn’t have to also show any personal benefit was traded for it, the prosecutors said.
In my book, Insider Trading Law and Policy, I explain that the government has made this argument before and lost:
The Eleventh Circuit has held that the personal benefit requirement applies to tipping cases brought under the misappropriation theory of liability, rejecting an SEC argument to the contrary. SEC v. Yun, 327 F.3d 1263 (11th Cir. 2003).
In its desperation to continue the war on insider trading (which reliably generates headlines, budget increases, and career advancement for prosecutors), the government has frequently stretched precedent to the breaking point. But this appears to take the proverbial cake.
The Seattle University Law Review recently published a symposium devoted to a 15 year retrospective on Margaret Blair and Lynn Stout’s article A Team Production Theory of Corporate Law. Deservedly so. It was a provocative article that advanced the ball in many respects. Ultimately, however, I was unpersuaded and explained why in my article Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. Rev. 547, 592-600 (2003). The following excerpt is taken from my original draft. I offer it up as a rebuttal to the recent symposium. In doing so, however, I am reminded of the lyrics of a Dave Mason song:
...we can't see eye to eye.
There ain't no good guy, there ain't no bad guy,
There's only you and me and we just disagree.
Blair and Stout contend that corporate law treats directors not as hierarchs charged with serving shareholder interests, but as referees—mediating hierarchs, to use their term—charged with serving the interests of the legal entity known as the corporation. In turn, the corporation’s interests are defined as the “joint welfare function” of all constituents who make firm specific investments. Although Blair and Stout tend to downplay the normative implications of their model, they acknowledge that it “resonates” with the views of progressive corporate legal scholarship. They differ from the progressive wing of the corporate law academy mainly on positive grounds. Many progressives believe that corporate directors currently do not take sufficient account of nonshareholder constituency interests and that law reform is necessary. In contrast, Blair and Stout believe that corporate directors do take such interests into account and the current law is adequate in this regard.
Team production is an important and highly useful concept in neoinstitutional economics. Blair and Stout stretch the team production model to encompass the entire firm. Doing so is unconventional. In my view, stretching team production that far also detracts from the model’s utility.
Production teams are defined conventionally as “a collection of individuals who are interdependent in their tasks, who share responsibility for outcomes, [and] who see themselves and who are seen by others as an intact social entity embedded in one or more larger social systems ....” This definition contemplates that production teams are embedded within a larger entity. As one commentator defines them, teams are “intact social systems that perform one or more tasks within an organizational context.”
Building on the work of Rajan and Zingales, Blair and Stout define team production by reference to firm specific investments. Hence, for example, they describe the firm “as a ‘nexus of firm-specific investments.’” In fact, however, firm specific investments are not the defining characteristic of team production. Instead, the common feature of team production is task nonseparability.
Oliver Williamson identifies two forms production teams take: primitive and relational. In both, team members perform nonseparable tasks. The two forms are distinguished by the degree of firm specific human capital possessed by such members. In primitive teams, workers have little such capital; in relational teams, they have substantial amounts. Because both primitive and relational team production requires task nonseparability, it is that characteristic that defines team production.
Most public corporations have both relational and primitive teams embedded throughout their organizational hierarchy. Self-directed work teams, for example, have become a common feature of manufacturing shop floors and even some service workplaces. Even the board of directors can be regarded as a relational team. Hence, the modern public corporation arguably is better described as a hierarchy of teams rather than one of autonomous individuals. To call the entire firm a team, however, is neither accurate nor helpful.
As among shop floor workers organized into a self-directed work team, for example, team production is an appropriate model precisely because their collective output is not task separable. In a large firm, however, the vast majority of tasks performed by the firm’s various constituencies are task separable. The contribution of employees of one division versus those of a second division can be separated. The contributions of employees and creditors can be separated. The contributions of supervisory employees can be separated from those of shop floor employees. And so on. Accordingly, the concept of team production is simply inapt with respect to the large public corporations with which Blair and Stout are concerned. 
John Coates argues that Blair and Stout’s mediating hierarch model fares poorly whenever there is a dominant shareholder. If so, the model’s utility is vitiated with respect to close corporations, wholly-owned subsidiaries, and publicly held corporations with a controlling shareholder. In addition, Coates argues, Blair and Stout’s model also fares poorly whenever any corporate constituent dominates the firm. Many of publicly held corporations lacking a controlling shareholder are dominated one of the constituents among which the board supposedly mediates—namely, top management. Although the precise figures disputed, a substantial minority of publicly held corporations have boards in which insiders comprise a majority of the members. Even where a majority of the board is nominally independent, the board may be captured by insiders.
I more skeptical than Coates of board capture theories, having argued elsewhere that independent board members have substantial incentives to buck management. On balance, however, Coates makes a persuasive case that the mediating hierarch model has a relatively small domain. In contrast, the domain of director primacy, which merely requires the absence of a controlling shareholder, seems considerably larger.
Blair and Stout develop the mediating hierarchy model by telling the story of a start-up venture in which a number of individuals come together to undertake a team production project. The participating constituents know that incorporation, especially the selection of independent board members, will reduce their control over the firm and, consequently, expose their interests to shirking or self-dealing by other participants. They go forward, Blair and Stout suggest, because the participants know the board of directors will function as a mediating hierarch resolving horizontal disputes among team members about the allocation of the return on their production.
On its face, Blair and Stout’s scenario is not about established public corporations. Instead, their scenario seems heavily influenced by the high-tech start-ups of the late 1990s. Yet, even in that setting, the model seems inapt. In the typical pattern, the entrepreneurial founders hire the first factors of production. If the firm subsequently goes public, the founding entrepreneurs commonly are replaced by a more or less independent board. The board thus displaces the original promoters as the central party with whom all other corporate constituencies contract. It is due to my empirical impression that this is the typical pattern that director primacy assumes the board of directors—whether comprised of the founding entrepreneurs or subsequently appointed outsiders—hires factors of production, not the other way around.
Lest the foregoing seem like an argument for shareholder primacy, I think it is instructive to note the corporation—unlike partnerships, for example—did not evolve from enterprises in which the owners of the residual claim managed the business. Instead, as a legal construct, the modern corporation evolved out of such antecedent forms as municipal and ecclesiastical corporations. The board of directors as an institution thus pre-dates the rise of shareholder capitalism. When the earliest industrial corporations began, moreover, they typically were large enterprises requiring centralized management. Hence, separation of ownership and control was not a late development but rather a key institutional characteristic of the corporate form from its inception. At the risk of descending into chicken-and-egg pedantry, the historical record thus suggests that director primacy emerged long before shareholder primacy. Directors have always hired factors of production, not vice-versa.
In Blair and Stout’s model, directors are hired by all constituencies and charged with balancing the competing interests of all team members “in a fashion that keeps everyone happy enough that the productive coalitions stays together.” In other words, the principal function of the mediating board is resolving disputes among other corporate constituents. This account of the board’s role differs significantly from the standard account.
The literature typically identifies three functions performed by boards of public corporations: First, and foremost, the board monitors and disciplines top management. Second, while boards rarely are involved in day-to-day operational decisionmaking, most boards have at least some managerial functions. Broad policymaking is commonly a board prerogative, for example. Even more commonly, however, individual board members provide advice and guidance to top managers with respect to operational and/or policy decisions. Finally, the board provides access to a network of contacts that may be useful in gathering resources and/or obtaining business. Outside directors affiliated with financial institutions, for example, apparently facilitate the firm’s access to capital. In none of these capacities, however, does the board of directors directly referee between corporate constituencies.
To be sure, institutional economics acknowledges that dispute resolution is an important function of any governance system. Ex post gap-filling and error correction are necessitated by the incomplete contracts inherent in corporate governance. Those functions inevitably entail dispute resolution. As we’ve seen, the firm addresses the problem of incomplete contracting by creating a central decisionmaker authorized to rewrite by fiat the implicit—and, in some cases, even the explicit—contracts of which the corporation is a nexus.
As the principal governance mechanism within the public corporation, the board of directors is that central decisionmaker and, accordingly, bears principal dispute resolution responsibility. Yet, in doing so, the board “is an instrument of the residual claimants.” Hence, if the board considers the interests of nonshareholder constituencies when making decisions, it does so only because shareholder wealth will be maximized in the long-run.
If directors suddenly began behaving as mediating hierarchs, rather than shareholder wealth maximizers, an adaptive response would be called forth. Consistent with the predictions developed above, shareholders would adjust their relationships with the firm, demanding a higher return to compensate them for the increase in risk to the value of their residual claim resulting from director freedom to make trade-offs between shareholder wealth and nonshareholder constituency interests. Ironically, this adaptation would raise the cost of capital and thus injure the interests of all corporate constituents whose claims vary in value with the fortunes of the firm.
Because a model’s ability to predict real world outcomes is more important than the extent to which the model’s assumptions accurately depict the real world, the key question is whether the mediating hierarchy model facilitates accurate predictions about the content of the law. To support their claim that the mediating hierarch model explains the substantive content of corporate law as it exists today, Blair and Stout examine a substantial number of doctrinal principles. Out of consideration for the long-suffering reader, because delving deeply may be more instructive than taking a broad overview, and so as to leave something for future articles, I focus here on a single doctrine—the business judgment rule.
The business judgment rule is the separation of ownership and control’s chief common law corollary. It pervades every aspect of the state law of corporate governance, from allegedly negligent decisions by directors, to self-dealing transactions, to board decisions to seek dismissal of shareholder litigation, and so on. Enabling one to make accurate predictions about the business judgment rule’s scope and content thus stands as the basic test for any model.
Blair and Stout correctly assert that the business judgment rule does not reflect a norm of shareholder primacy, but err in suggesting that the business judgment rule does not reflect a norm of shareholder wealth maximization. The case law, properly understood, does not stand for the proposition that directors have discretion to make trade-offs between nonshareholder and shareholder interests. Instead, the cases stand for the proposition that courts will abstain from reviewing the exercise of directorial discretion even when the complainant alleges that directors took nonshareholder interests into account in making their decision.
The question is one of means and ends. In the classic case of Dodge v. Ford Motor Co., the court emphasized that director discretion is the means by which corporations are governed. More recently, the Delaware supreme court explained:
Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in [Delaware General Corporation Law] § 141(a), the business and affairs of a Delaware corporation are managed by or under its board of directors.... The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.
In other words, the rule ensures that the null hypothesis is deference to the board’s authority as the corporation’s central and final decisionmaker. On this Blair and Stout and I agree. We part company, however, when they deny that the end towards which corporations are governed is, as the Dodge court put it, “the profit of the stockholders.”
Put another way, we agree that the business judgment rule exists to preserve director discretion, but disagree as to why that discretion is important. Blair and Stout contend that the business judgment rule insulates the board of directors from “the direct command and control” of shareholders (or other corporate constituents for that matter) so as to prevent the various constituents from opportunistically expropriating rents from the team. In contrast, I contend that the business judgment rule is the doctrinal mechanism by which courts on a case-by-case basis resolve the competing claims of authority and accountability.
As a positive theory of corporate governance, director primacy claims that fiat—centralized decisionmaking—is the essential attribute of efficient corporate governance. As a normative theory of corporate governance, director primacy claims that authority and accountability cannot be reconciled. As Kenneth Arrow observed:
[Accountability mechanisms] must be capable of correcting errors but should not be such as to destroy the genuine values of authority. Clearly, a sufficiently strict and continuous organ of [accountability] can easily amount to a denial of authority. If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.
The business judgment rule prevents such a shift in the locus of decisionmaking authority from boards to judges. It does so by establishing a limited system for case-by-case oversight in which judicial review of the substantive merits of those decisions is avoided. The court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decisionmaking process was tainted by self-dealing and the like. The questions asked are objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus builds a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision. This is precisely the rule for which shareholders would bargain, because they would conclude that the systemic costs of judicial review exceed the benefits of punishing director misfeasance and malfeasance.