Alison Frankel has an interesting article on the issue and the apparently looming SEC crackdown.
Edward Rock has posted Institutional Investors in Corporate Governance (October 15, 2014). U of Penn, Inst for Law & Econ Research Paper No. 14-37. Available at SSRN: http://ssrn.com/abstract=2512303:
Abstract: This chapter of the Oxford Handbook on Corporate Law and Governance examines the role of institutional investors in corporate governance and the role of regulation in encouraging institutional investors to become active stewards. I approach these topics through asking what lessons we can draw from the U.S. experience for the E.U.’s 2014 proposed amendments to the Shareholder Rights Directive.I begin by defining the institutional investor category, and summarizing the growth of institutional investors’ equity holdings over time. I then briefly survey how institutional investors themselves are governed and how they organize share voting. This leads me to two central questions: (a) why, over the last twenty five years, have institutional investors not fulfilled the optimists’ hopes?; and (b) can the core incentive problems that subvert Institutional Investor activism be cured by regulation? The U.S. experience, in which substantial deregulation has led to only modest increases in shareholder activism, suggests that a key explanation for institutional investors’ relative passivity is a fundamental lack of incentives. In considering whether imposing positive obligations on institutional investors is likely to succeed, I examine the disappointing results of the S.E.C.’s long experiment with incentivizing mutual funds to vote their shares. The U.S. experience suggests that the E.U. efforts are likely to be similarly disappointing.
I then examine the important role that hedge funds now play in catalyzing institutional shareholders, and consider some of the risks in relying on such highly incentivized actors.
Despite having a serious flaw (i.e., no cites to yours truly), it is a highly recommended read. Balanced, careful, thoughtful, insightful.
Eric Talley has posted Corporate Inversions and the Unbundling of Regulatory Competition (October 15, 2014). USC CLASS Research Paper No. CLASS14-32. Available at SSRN: http://ssrn.com/abstract=2511723:
Abstract: A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have a strong affinity for strong corporate governance rules, a traditional strength of American corporate law. This affinity has historically given the US enough market power to keep taxes high without chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. The most effective elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: either (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.
There are some very handy deal diagrams that I likely will swipe borrow when I teach Mergers & Acquisitions in the spring semester. There's also a whole bunch of math, which I just sort of skip over the I do those unpronounceable names in Russian literature. But the conclusion seems sound. In any case, highly recommended (even for the math phobic).
You will perhaps recall Judge Richard Kopf. If not, start here. The Judge recently got crosswise (again) with friend of the blog Rick Hasen who is a good guy and a major scholarly figure despite starting out with two strikes (he's a liberal and he teaches at Irvine). That spat presumably motivated Judge Kopf to post the following request:
I am interested in collecting a list of law professors who litigate in the trial courts of this country while also teaching law. I don’t care whether such litigation is civil or criminal in nature. I don’t care whether the litigation takes place in state or federal court. I understand and appreciate that busy law professors only have so much time. As a result, I don’t expect the list to contain law professors who are constantly in our trial courtrooms. But, I do want to know about law professors who try enough cases on a fairly regular basis that one might conclude that they are presently competent to sit at the first chair representing a client before a jury or a trial judge. ...
Please, please, please, no snark. I honestly have no interest in picking a fight. On the contrary, I am sincerely hoping to recognize and praise law professors who litigate in the many trial courtrooms of our nation while also regularly teaching law.
Without intending to be snarky in any way, I wonder why Judge Kopf is singling out trial lawyer law professors. Are law professors who regularly take the lead in writing briefs and conducting oral arguments in appellate cases not equally worthy of recognition and praise?
More important, are trial lawyers (law professors or not) worthy of recognition and praise? I'm quite serious about that question. Consider the Manhattan Institute's path breaking report Trial Lawyers Inc., which exposed the considerable damage being done to our economy by excessive and abusive litigation:
Trial Lawyers, Inc., while not an annual report per se, presents a snapshot of the lawsuit industry as it exists today. The picture is not pretty. Total tort costs today exceed $200 billion annually, or more than 2% of America’s gross domestic product—a significantly higher percentage than in any other developed nation. Moreover, even as the economy has stagnated and the stock market has plunged, the lawsuit industry’s revenues have continued to skyrocket: in 2001, the last year for which data are available, U.S. tort costs grew by 14.3%. Over the last 30 years, tort costs grew at a compound annual rate of 9.1%; by comparison, the U.S. population grew 1.1% annually, the consumer price index grew 5.0% annually, and the gross domestic product grew 7.6% annually during the same period.
In my home field of corporate law and securities regulation, runaway shareholder litigation has become an enormous impediment to capital formation, as I argued in my article, Corporate Governance and U.S. Capital Market Competitiveness, available at SSRN: http://ssrn.com/abstract=1696303.
Whether or not you agree with me that runaway litigation has reached crisis proportions and therefore calls into serious question any effort to praise trial lawyers, moreover, surely you can agree with me that law schools already devote too much attention to litigation. As I argued in my essay, Reflections on Twenty Years of Law Teaching, available at SSRN: http://ssrn.com/abstract=1122577:
[Law school as taught by] the Socratic method doesn’t really teach you to “think like a lawyer.” At best, it teaches you to think like a litigator.
Consider a typical law student who accepts a [transactional] job at a large firm. She has spent perhaps ninety-five percent of her time in law school reading and discussing cases and law review articles. Once in practice, she will go days or weeks at a time without picking up a case or a law review article. Instead, her days will be filled with drafting, reviewing, and marking up transactional documents, negotiating language with opposing counsel, participating in conference calls, and composing memos, emails, and letters to colleagues and clients.
“Thinking like a lawyer,” as Kingsfield and his ilk would have our graduate do is not very conducive to success in that environment.
In his book, The Terrible Truth About Lawyers, Mark McCormack, founder of the International Management Group, a major sports and entertainment agency, wrote that “it’s the lawyers who: (1) gum up the works; (2) get people mad at each other; (3) make business procedures more expensive than they need to be; and now and then deep-six what had seemed like a perfectly workable arrangement.” McCormack further observed that, “when lawyers try to horn in on the business aspects of a deal, the practical result is usually confusion and wasted time.” He concluded: “the best way to deal with lawyers is not to deal with them at all.”
All of which is why I emphasize not only doctrine but also economics and business. Transactional lawyers must understand the business, financial, and economic aspects of deals so as to draft workable contracts and disclosure documents, conduct due diligence, or counsel clients on issues that require business savvy as well as knowing the law.
I want my students to understand that successful transactional lawyers build their practice by adding value to their clients’ transactions. Instead of thinking like Kingsfield, I want them to learn where the value in a given transaction comes from and how they might add even more value to the deal.
The problem with most law schools is that we have too many litigators and ex-litigators and not enough deal lawyers. So why would Judge Kopf want to contribute to that problem by giving trial lawyer law professors yet more recognition and praise? Why this bias against deal lawyers?
Finally, I suspect Judge Kopf's many fans in the "law school is a scam" crowd will take issue with his list if they stop to think about its implications. Judge Kopf is "only interested in law professors who litigate while they also teach law. Exclude professors who were once trial lawyers but who no longer spend time in the trial courtroom."
Of course, one of the main complaints by the law school scam crowd is that too many law professors spend too much time doing things other than teaching. Given how intensive trial work is, a law professor who is spending much time first chairing cases is a law professor who likely is not spending all that much time preparing for class, mentoring students, and so on.
In sum, without wanting to start a fight--just a discussion, I think Judge Kopf's latest project doesn't make much sense to me.
At a Democratic rally in Massachusetts, Hillary Clinton’s attempt to attack “trickle-down economics,” resulted in a spectacularly odd statement.
Clinton defended raising the minimum wage saying “Don’t let anybody tell you that raising the minimum wage will kill jobs, they always say that.”
She went on to state that businesses and corporations are not the job creators of America. “Don’t let anybody tell you that it’s corporations and businesses that create jobs,” the former Secretary of State said.
WTF? Who does she think creates jobs? Who does she think does?
Even the liberal-leaning Washington Post managed to get this one right:
It makes for a less popular stump speech, but large firms are a vital player when it comes to job creation. Over the past two decades, for example, small and mid-sized businesses have held a larger share of the country’s overall employment (29 percent and 27 percent, respectively) than they have of total jobs added (16 percent and 19 percent). During the same period, companies with more than 500 workers employed about 45 percent of the workforce yet contributed 65 percent of the jobs created since 1990.
In other words, not only do corporations create jobs, the biggest ones are the best at doing so.
So once again, Hillary lied. Why am I not surprised?
Lyman Johnson organized a group of law professors including yours truly to provide comments to HHS on its rulemaking to implement the Supreme Court's Hobby Lobby decision. Lyman put together a very interesting group. Eclectic in every dimension. Protestants, Catholics, agnostics. Liberals, progressives, moderates, conservatives. All brought together by a shared respect for religious liberty and diversity.
Citation: Lyman Johnson, and Stephen M. Bainbridge, Ronald J. Colombo, Brett McDonnell, David Millon, Alan J. Meese, and Nathan B. Oman, Comments on the HHS' Flawed Post-Hobby Lobby Rules (October 21, 2014), available at SSRN: http://ssrn.com/abstract=2513620.
Abstract: In late August 2014, after suffering a defeat in the Supreme Court Hobby Lobby decision when the Court held that business corporations are "persons" that can "exercise religion," the Department of Health and Human Services ("HHS") proposed new rules defining "eligible organizations." Purportedly designed to accommodate the Hobby Lobby ruling, the proposed rules do not comport with the reasoning of that important decision and they unjustifiably seek to permit only a small group of business corporations to be exempt from providing contraceptive coverage on religious grounds. This comment letter to the HHS about its proposed rules makes several theoretical and practical points about the Hobby Lobby holding and how the proposed rules fail to reflect the Court's reasoning. The letter also addresses other approaches to avoid in the rule-making process and argues for rules that, unlike what the HHS has proposed, align with the Supreme Court's reasoning while being consonant with generally applicable precepts of state law and principles of federalism.
Brett McDonnell has posted The Liberal Case for Hobby Lobby (October 22, 2014), available at SSRN: http://ssrn.com/abstract=2513380:
The recent Supreme Court decision in Burwell v. Hobby Lobby Stores, Inc. has stirred strong objections from political liberals. This article argues that those objections are unwarranted, and that the Court’s opinion reflects core liberal values. The decision has two main parts, and liberal objections to each part are misguided.
In the first part, the Court held that in some circumstances for-profit corporations committed to religious goals may invoke the religious liberty protection of the Religious Freedom Restoration Act (RFRA). Liberals have treated this as an appalling and/or humorous extension of rights which should apply only to humans. However, the Court’s decision rightly recognizes that corporations can and sometimes do pursue goals other than shareholder profits. This fits well with the stress on corporate social responsibility one finds in progressive corporate law scholarship such as the author’s. Where religious beliefs shape a corporation’s purposes, the protections of RFRA may rightly apply. The article suggests a detailed framework for determining when particular corporations are engaged in the exercise of religion, looking to both organizational and ownership dimensions of commitment to religion. This framework clarifies the somewhat sketchy analysis of the Court and more firmly roots that analysis in corporate law and theory.
In the second part of the opinion, the Court held that the contraceptive mandate of the Affordable Care Act substantially burdens the religious exercise of employers, and that the mandate is not the least restrictive means of achieving a compelling governmental objective. Liberals fear that this holding aggressively extends the protection of RFRA while undermining the compelling goal of the contraceptive mandate. The article argues that the holding is quite nuanced and limited, and that much liberal reaction reflects discomfort with RFRA itself. That is a shame, as creating a diverse society where persons and groups with differing beliefs are able to co-exist should be a core liberal commitment. The article suggests that liberals may have lost sight of this commitment as the groups invoking RFRA’s protection have shifted from social outcasts to more mainstream religious conservatives. That may explain, but does not justify, liberal opposition to Hobby Lobby.
As you can imagine, I disagree with the first for reasons well rehearsed in this space many time before.
The second point is one that I think makes a lot of sense. Sadly, however, I do not believe that today's modern liberals value a diverse society when the diversity is expressed along religious lines and, in articular, when diversity requires toleration of opinions that differ from the politically correct liberal catechism. Hence, where Brett says "liberals may have lost sight" of their commitments to religious diversity and freedom, I would say "liberals have definitely lost sight" thereof.
My post the other day on the problems with the SEC's increasing use of administrative law judges prompted the great Henry Manne to send along this comment:
Steve, you might also have noted the other problem with administrative adjudication, and that is that it is often used as a way around the more taxing standards for explicit rule making. The most egregious case of this in history, I suspect, was Cady Roberts, an administrative adjudication (and in some respects also a case of double jeopardy) which displayed the chutzpa of inventing a new rule against insider trading. A reading today shows the total ignorance of economic effects and appears almost ludicrous in light of the ensuing scholarship on the subject. Certainly the most significant change in federal law of corporations and one of the most significant things the SEC ever did (ask them; they'll agree), deserved some kind of hearing with public comment, as rule making under the APA would require. None was allowed and the world has not been the same since.
David Millon sent along a response to my post "Corporate Law after Hobby Lobby":
A couple of brief thoughts on your remarks about the freedom of shareholders in closely held corporations to depart from a corporate law profit maximization requirement. First, I had not realized that you considered profit maximization to be a default rather than mandatory rule. Your view would appear to be inconsistent with at least some of the few judicial precedents involving closely held firms that profit maximization proponents cite in support of their view that corporate law mandates that corporate objective, namely the eBay case and also Dodge v. Ford (although, as we explain in our article, that case does not actually mandate profit maximization). Second, I don¹t see the legal basis for distinguishing closely held from public corporations on this point. The law could draw such a distinction, but I don¹t see where it has. Not in the corporate statutes and not in case law either. There may be policy reasons for such a distinction and as a practical matter it is probably impossible for shareholders qua shareholders in a public corporation to redefine the firm’s purpose, but it¹s hard to see where the closely held/public distinction exists in the law. Finally, to be clear, certainly a profit maximization default would be preferable to a mandatory rule, but we don’t think that even a default rule exists on this issue.
Todd posted that:
Here's what apperars to be the relevant passage:
A reader in Taiwan kindly sent along this translation:
"Both Sarbanes-Oxley Act and Dodd-Frank Act are devoted to making the board of a company become professional, qualified and neutral. However, [controlling] shareholders are not necessarily willing to cede board seats to [those professional, qualified and neutral directors], and independent directors do not function well. Therefore, Professor Bainbridge of UCLA and Professor Henderson of UChicago suggest that individual director should be replaced by BSP. The main reason: a company will not pay for a consultant who works several hours per month/season, so it is unreasonable, at the same or higher cost, to retain a director who works several hours per month/season either. Rather, [the directors' role] can be passed to BSP so that more experts can be hired for support. The two professors' suggestion leaves many questions unanswered, such as who shall decide to retain the BSP, the governance of BSP and whether BSP will dictate the operation of the board, etc. The reason for the two professors' revolutionary suggestion is due to the dysfunction of modern board that makes the company with limited liability, referred as the most important invention in modern history by [Nicholas Murray] Butler, ... the most serious disaster."
He also comments that:
As correctly indicated by Professor Henderson on his Facebook post, [the article's author] Mr. Chong Chen is the former prime minister in Taiwan, who is highly respected due to his expertise in the financial market.