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Ridge York Creek Late Picked Zinfandel (Spring Mountain) 1999

I am probably the wrong person to be reviewing this wine. I am not a fan of late harvest zinfandel. Even at their best, I find them the ogres of wine. They are big, hot, high alcohol wines that age gracelessly. This Ridge zin, unfortunately, is far from a good example of the type. Very high alcohol with modest residual sugar (about 1%). Sweet enough to cloy, but not sweet enough to use as a dessert wine. Earthy and funky flavors dominate both the nose and palate, with a strong element of sweaty saddle leather. Brett contamination? Drinkable (just) but not enjoyable. An oddity, given Ridge's status as one of the great zinfandel houses. N.B.: The Wine Bork reviewers liked it a lot better than I did, but even they concluded that it was "not our cup of tea." Grade: C-

Omnicare v. NCS Healthcare: The § 251 issue

In an earlier post, I discussed the Delaware supreme court's puzzling decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003). We noted therein that the NCS-Genesis merger agreement required NCS’ board to submit the Genesis deal to a shareholder vote even if the board withdrew its recommendation that the shareholders approve the deal. This is known as a § 251 clause. As with so much else in the Omnicare decision, the majority's treatment of § 251 is quite troubling.

In Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), the Delaware supreme court had held that directors could not submit a merger to shareholders without making a recommendation that it be approved. The Delaware legislature later overturned that result by adopting DGCL § 251(c), which provides: “The terms of the agreement may require that the agreement be submitted to the stockholders whether or not the board of directors determines at any time subsequent to declaring its advisability that the agreement is no longer advisable and recommends that the stockholders reject it.”

In Omnicare, however, the Delaware supreme court held that § 251 did not trump the fiduciary duties of directors: “Taking action that is otherwise legally possible, however, does not ipso facto comport with the fiduciary responsibilities of directors in all circumstances. . . . Section 251 provisions . . . are "presumptively valid in the abstract." Such provisions in a merger agreement may not, however, ‘validly define or limit the directors' fiduciary duties under Delaware law or prevent the [NCS] directors from carrying out their fiduciary duties under Delaware law.’” 818 A.2d at 937-38. If so, however, what is the point of § 251? The court seems to have eviscerated § 251 of any utility.

Bachelor Night

My good wife is going to some artsy-fartsy play tonight with some of her gal pals, leaving the faithful dog and I unsupervised. By a happy coincidence, my copy of the Matrix: Reloaded dvd arrived today.

Hence, with the cat away, the mice shall play. The traditional bachelor dinner of porterhouse (rare), garlic and rosemary roasted new potatoes, obligatory green vegetable, and a nice Hitching Post pinot noir. After which, the faithful dog and I will settle in to watch the film while enjoying, respectively, the bone and some port and a cigar. We will incur a certain level of opprobrium for smoking indoors, of course, but by then the damage will have been done.

UPDATE: What is there to say about the Matrix Reloaded that hasn't been said? It was stylish. The effects were fairly cool; I especially liked the bullet effects when Trinity was falling. The freeway chase was too long. The fight scenes got repetitive. Why doesn't Neo always solve a fight by flying off as soon as he starts losing? Why did he stick around so long in the mass Smith fight? My main concern is that the plot is now makes a Gordian Knot look simple. How are they going to resolve things without leaving us feeling ripped off?

Henry Manne on academic corporate law

Law and economics superstar Henry Manne has a fabulous essay in the latest issue of the Emory Law Journal, A Free Market Model of a Large Corporation System, in which he makes a telling observation about recent corporate law scholarship:

Scholars have for too long been led by events into accepting the status quo and building on it. As the total picture gets more and more complicated and messier and messier, it is much easier to do limited "event studies" or other partial equilibrium analyses. This necessarily results in a loss of a sense of history and a lack of a proper cynicism about the beneficence or legitimacy of previous government regulation.

Academic careers can be ruined by too much departure from the conventions of the moment, even though the cumulative effect of this is to limit any chance for large-scale rethinking of a whole field. What is needed now is a larger debate on the real costs and benefits of market and regulatory alternatives to corporate governance. This could in time result in a very different accepted wisdom about large corporations.

52 Emory L.J. 1381, 1400 (sub. req'd). [Ed.: Thunderous applause in the hall.]

Omnicare v. NCS Healthcare: The precommitment issues

In class yesterday, we tackled the Delaware supreme court's decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003), in which the Delaware supreme court held that an exclusive merger agreement -- such as a no shop or best efforts clause -- must include a fiduciary out, at least where the agreement presents target shareholders with a “fait accompli.” No Delaware court has yet offered a persuasive reason for their hostility to no shop clauses and the like. Instead, the invalidity of such strategies has been asserted by mere fiat. If Omnicare proves anything, it proves that the Delaware supreme court's fiat is not infallible.

NCS was an insolvent health care company considering a “pre-packaged” bankruptcy reorganization. Omnicare, a competitor health care firm, offered to acquire NCS’ assets for $225 million (later raised to $270 million and then to over $313 million) in a bankruptcy sale pursuant to § 363 of the Bankruptcy Code. Omnicare’s proposal was substantially less than NCS’ outstanding debt, which meant that NCS’ shareholders would get nothing and many creditors would be paid only in part. Negotiations broke down and were discontinued.

A few months later NCS was approached by Genesis, another health care firm. Genesis proposed a merger that would have paid off most of NCS’ creditors in full, provided substantial recovery for holders of NCS’ notes, and given NCS’ shareholders a small return on their investments. NCS formed a special committee of independent directors to conduct the negotiations. Because Genesis had lost a prior bidding war to Omnicare, Genesis insisted on an exclusivity arrangement pursuant to which NCS would not conduct merger negotiations with any other potential bidder while the negotiations between NCS and Genesis were underway. When Omnicare tried to reopen negotiations, the independent committee decided to honor the exclusivity agreement with Genesis because they believed there was a substantial risk that Genesis would walk away from the deal, allowing Omnicare to press its bankruptcy sale plans.

In light of Omnicare’s bid, NCS’ independent directors did extract significantly better terms from Genesis. In return, however, Genesis’ insisted on substantial deal protections. First, it required a termination fee of $6 million. Second, NCS’ board agreed to submit the Genesis deal to a shareholder vote even if the board withdrew its recommendation that the shareholders approve the deal. Third, the agreement contained a no shop clause. Finally, Genesis insisted on a shareholder lockup.

The shareholder lockup was possible because two shareholders had a majority position. NCS had two classes of common stock. Class A was standard common with one vote per share. Class B was super-voting rights stock with 10 votes per share. The vast majority of the Class B stock was owned by NCS’ board chairman and its CEO. The chairman and CEO thereby had effective voting control of NCS. At Genesis’ insistence, the chairman and CEO agreed to vote in favor of the merger. NCS was a party to that agreement, apparently to validate it under Delaware’s antitakeover statute.

In combination, these provisions presented the minority shareholders of NCS with a fait accompli. There was no way they could reject the deal as long as the two controlling shareholders voted for it, as they were obliged to do. When Omnicare nevertheless made a higher offer to acquire NCS, Omnicare and some NCS shareholders sued to invalidate the agreement.

By a 3-2 vote, the Delaware supreme court struck down the NCS-Genesis merger agreement. In his dissent, Chief Justice Veasey noted that “[s]plit decisions by this Court, especially in the field of corporation law, are few and far between.” 818 A.2d at 940 n.90. There is a strong unanimity norm in that court. David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 Va. L. Rev. 127 (1997). The willingness of Justices Veasey and Steele to dissent indicates the high profile nature of the Omnicare decision.

The majority acknowledged that “[a]ny board has authority to give [a bidder] reasonable structural and economic defenses, incentives, and fair compensation if the transaction is not completed.” In addition, the majority acknowledged that the controlling shareholders “had an absolute right to sell or exchange their shares with a third party at any price.” Yet, the majority nevertheless concluded that NCS’ board “was required to contract for an effective fiduciary out to exercise its continuing fiduciary responsibilities to the minority stockholders.”

The court based that requirement on a notion that the board has an on-going fiduciary duty to constantly reevaluate its decision. The court’s initial order stated that the measures at issue in that case were preclusive because, “[i]n the absence of a fiduciary out clause, [they] precluded the directors from exercising their continuing fiduciary obligation to negotiate a sale of the company in the interest of the shareholders.” When the court later issued its full opinion, the court again advanced the pernicious notion that the board must “discharge its fiduciary duties at all times” even “as circumstances change.” In dissent, Justice Steele aptly criticized the majority for adopting “proscriptive rules that invalidate or render unenforceable precommitment strategies negotiated between two parties to a contract who will presumably, in the absence of conflicted interest, bargain intensely over every meaningful provision of a contract after careful cost benefit analysis.”

I find the Delaware court’s hostility to no shops and other forms of exclusive merger agreements very puzzling. As I discussed in an earlier post, precommitment strategies are commonplace. Think of Odysseus lashing himself to the mast so that he can hear the Sirens’ song without running his ship aground. Hostility to precommitment strategies certainly does not follow a fortiori from the mere fact that directors are fiduciaries. Why should informed directors acting in good faith not be allowed to lash themselves to the mast of a particular deal? Case law in other jurisdictions allows them to do precisely that. See, e.g., Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc., 741 F.2d 1555 (9th Cir. 1984), which specifically validated no shop clauses by permitting the target’s board to “lawfully bind itself in a merger agreement to forbear from negotiating or accepting competing offers until the shareholders have had an opportunity to consider the initial proposal.” Id. at 1564.

The Jewel approach makes much more sense than that of Omnicare. Suppose the board of directors makes an informed decision that the merger proposal on the table is the best deal they are likely to get for their shareholders and that granting a no shop clause is necessary and appropriate to induce the prospective acquirer to make a formal bid. The board recognizes that a no shop clause will impede its ability to negotiate with any competing bidders who subsequently emerge, but the board decides to accept that risk and go forward. In doing so, the board relies on the old adage that a bird in the hand is worth two in the bush. So long as the decision to enter into the no shop clause was an informed one, why should a board of directors have an on-going fiduciary duty to constantly reevaluate its decision?

Reference: Mergers and Acquisitions at 189-91 and 367

Delaware corporate law's puzzling hostility to precommitment strategies (II)

Dead hand and no hand pills are a type of precommitment strategy. Individuals and entities use precommitment strategies all the time. In The Odyssey, for example, Homer tells a classic story of using a precommitment strategy to achieve a desired goal. Circe warned Odysseus that his course would lead him past the Sirens, whose song famously enchanted all who passed near them. Once trapped, the passerby would be warbled to death by the sweetness of their song. Following Crice’s advice, Odysseus adopted a plan by which he would be able to hear the Sirens’ song but still escape their trap. Odysseus charged his men to lash him to the mast of their boat and not to release him until they were far beyond the Sirens. Odysseus then stopped up his sailor’s ears with beeswax, so they could hear nothing. As his ship passed the Sirens, their song overwhelmed Odysseus’ will power and he tried desperately to get his men to approach the Sirens. Unable to hear the song, and thus being free of its enchantment, however, his men merely tied him even more tightly to the mast and sailed on. Only once they were safely past the Sirens did they release Odysseus.

Homer’s tale illustrates the use of a precommitment strategy to solve the problems known to behavioral economists as time inconsistent discount rates and multiple selves. The discount rate an individual applies when making net present value calculations often declines as the date of the reward recedes. Professors Korobkin and Ulen offer the following example: “Suppose that an individual is to choose between Project A, which will mature in nine years, and Project B, which will mature in ten years. Suppose, further, that an individual who compares the two projects across all their different dimensions prefers Project B to A. Now suppose that we bring the dates of maturity of the two projects forward while maintaining the one-year difference in their maturity dates. Because discount rates increase as maturity dates get closer, it is possible that the individual’s preference will switch from Project B to Project A as the dates of maturity decline (but preserving the one-year difference).” Russell B. Korobkin and Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 Cal. L. Rev. 1051 (2000). One effect of time inconsistent discount rates is that people “always consume more in the present than called for by their previous plans.” Richard H. Thaler, The Winner’s Curse 98 (1992).

The somewhat related multiple selves phenomenon posits that individuals do not have a single utility function, but rather multiple competing utility functions. Because each “self” orders preferences differently, there is an ever-present risk that the self predominating at a given moment may make decisions not in the complete individual’s best interest. Again, Korobkin and Ulen explain: “A stiff tax on cigarettes, to take an obvious example, can be viewed as aiding the future-oriented self in its battle with a more present-oriented self that values immediate gratification over long-term health. . . . Today’s self can attempt to make commitments that either will completely bind tomorrow’s self or, at least, raise the cost of taking action that today’s self wishes to avoid.” In Homer’s tale, Odysseus had himself lashed to the mast precisely so that his present-oriented self could not satisfy its desire to prolong exposure to the Sirens’ song. Being lashed to the mast was a precommitment strategy by which he avoided making an unwise decision in the future. Hence, Odysseus privileged the desires of his farsighted “planner” self, who was concerned with lifetime utility, over those of his myopic and selfish “doer” self. Bank Christmas Clubs are predicated on the same idea. By prohibiting the withdrawal of funds until late November, Christmas Clubs prevent people from acting on hyperbolic discounting proclivities, and assure the future availability of funds to pay for Christmas presents. In general, precommitment strategies are desirable because they disempower the myopic “doer” self. As such, “people rationally chose to impose constraints on their own behavior.” See generally Richard H. Thaler & H.M. Shefrin, An Economic Theory of Self-Control, 89 J. Pol. Econ. 392 (1981).

Accordingly, there are many situations in which both individuals and organizations make enforceable precommitments. Such precommitments are beneficial because they protect ourselves against passion and time inconsistency. In using contractual devices to make a precommitment, the incumbent board likewise binds itself—and future boards—to a particular strategy. In striking down the dead hand and no hand poison pills on authority grounds, the Delaware courts seemingly have limited the use of such precommitment strategies by adopting a broad principle that boards have an ongoing duty to constantly re-evaluate their decisions.

Boards commonly enter into contracts limiting their future authority to varying degrees. Bond indentures commit the board to long-term obligations that will continue to bind future boards for many years. To be sure, the constraint on the authority of future boards is relatively modest, as such boards could always choose to breach the contractual obligations imposed by the indenture, but it nevertheless remains the case that their authority has been constrained.

Merger agreements likewise commonly contain provisions by which the board of directors binds itself to particular courses of conduct. A best efforts clause, for example, obliges the target’s board to use its “best efforts” to consummate the transaction. No shop clauses prohibit the target corporation from soliciting a competing offer from any other prospective bidders. The no negotiation covenant, a variant on the no shop theme, goes further to prohibits negotiations with unsolicited bidders.

Fair price shark repellents commonly include continuing director provisions. Like the dead hand pill, the continuing director provision of a fair price shark repellent allows a bid to go forward only if approved by those members of the board of directors who were on the board when the acquirer first triggered the defensive provision. If the fair price shark repellent was included in the articles of incorporation, rather than the bylaws, it might satisfy the supreme court’s view that “any limitation on the board’s authority be set out in the” articles of incorporation. Query, however, whether a typical fair price provision would contain language explicitly authorizing a limitation of the board’s authority and whether the Delaware courts would require an explicit statement to that effect.

All such corporate actions would be vulnerable to an authority-based challenge if the supreme court’s reference to “any limitation on the board’s authority” is to be taken literally. Yet, if the word “any” is not to be taken literally, where is the firebreak between permissible and impermissible limitations?

If there is no firebreak, what should the Delaware supreme court have done? Instead of creating a novel doctrine based on statutory authority, the court should have relied on the well-established principles outlined in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and its progeny. Dead hand and no hand pills unquestionably raise very serious issues of target director fiduciary duty. The market for corporate control and, in particular, the unsolicited tender offer are critical accountability mechanisms by which agency costs are constrained in the corporate setting. Director action that impedes unsolicited bids therefore is tainted by a conflict of interest, as Unocal recognized. Indeed, it is difficult to imagine a legally cognizable threat sufficiently severe for a dead hand pill to pass muster under the proportionality prong of Unocal. Binding someone else’s hands, as the dead hand pill does, does seem more problematic than binding one’s own. Such concerns become even more pronounced, when the decision to disable another is tainted by a conflict of interest situation.

Yet, never before had the Delaware supreme court adopted a prophylactic prohibition in response to that taint. To the contrary, the court rejected just such an approach when it rejected academic calls for a rule mandating director passivity in the face of an unsolicited bid. Moreover, Delaware courts have employed even Unocal cautiously. They recognize the danger “that courts—in exercising some element of substantive judgment—will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ.” City Capital Assoc. Ltd. Partnership v. Interco, Inc., 551 A.2d 787, 796 (Del. Ch. 1988).

The Delaware supreme court should acknowledge that both self-disablement by the board of directors and disablement by the board of other constituencies are legitimate and accepted corporate governance practices. It then should emphasize that such self-disablement raises issues of fiduciary duty, especially when tainted by the sort of potential conflict of interest inherent in takeover defense decisions.

References:

Corporation Law and Economics at 685-90.

Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law

Delaware corporate law's puzzling hostility to precommitment strategies

In Carmody v. Toll Brothers, the Delaware chancery court (per Vice Chancellor Jack Jacobs) cast considerable doubt on the validity of so-called dead hand poison pills. Carmody v. Toll Bros., Inc., 723 A.2d 1180 (Del.Ch.1998). In addition to fairly standard flip-in and flip-over features, the Toll Brothers pill provided that it could be redeemed only by those directors who had been in office when the shareholder rights constituting the pill had become exercisable (or their approved successors). This provision was intended to foreclose a loophole in standard poison pills. Most pills are subject to redemption at nominal cost by the target’s board of directors. Such redemption provisions purportedly allow the target’s board to use the pill as a negotiating device: The poison pill makes an acquisition of the target prohibitively expensive. If the prospective acquirer makes a sufficiently attractive offer, however, the board may redeem the pill and allow the offer to go forward unimpaired by the pill’s dilutive effects. Although such redemption provisions gave the target’s board considerable negotiating leverage, and were one of the justifications used to defend the whole idea of the poison pill, they also made the target vulnerable to a combined tender offer and proxy contest. The prospective acquirer could trigger the pill, conduct a proxy contest to elect a new board, which, if elected, would then redeem the pill to permit the tender offer to go forward. The dead hand pill was intended to close this loophole by depriving any such newly elected directors from redeeming the pill. A shareholder sued, alleging both lack of authority and breach of fiduciary duty claims.

In denying Toll Brothers’ motion to dismiss, Vice Chancellor Jacobs indicated that dead hand pills likely ran afoul of several aspects of Delaware law. First, such pills implicated the Delaware statutes governing the powers of directors: “Absent express language in the charter, nothing in Delaware law suggests that some directors of a public corporation may be created less equal than other directors, and certainly not by unilateral board action.” Second, by deterring proxy contests by prospective acquirers, the dead hand pill effectively disenfranchised shareholders who wished to elect a board committed to redeeming the pill. Accordingly, the shareholder stated a claim under Stroud v. Grace, 606 A.2d 75, 92 n. 3 (Del.1992), in which the Delaware supreme court held that defensive measures that disenfranchise shareholders are strongly suspect and cannot be sustained absent a compelling justification. Finally, Vice Chancellor Jacobs concluded that the plaintiff-shareholder had stated a “far from conclusory” breach of fiduciary duty claim. Although standard pills had been upheld against such claims, the dead hand pill was both preclusive and coercive. It was coercive because the pill effectively forced shareholders to re-elect the incumbent directors if they wished to be represented by a board entitled to exercise its full statutory powers. The pill was preclusive because the added deterrent effect of the dead hand provision made a takeover prohibitively expensive and effectively impossible.

In Mentor Graphics v. Quickturn Design Systems, 728 A.2d 25 (Del. Ch. 1998), Vice Chancellor Jacobs likewise invalidated a so-called no hand pill. Unlike Toll Brother’s pill, Quickturn’s pill contained no provision for redemption by continuing directors. Instead, it made the pill nonredeemable for six months after a change in control of the board. Vice Chancellor Jacobs concluded that the no hand pill violated the target board’s fiduciary duties and, accordingly, declined to address plaintiff’s authority-based claims.

The Delaware supreme court affirmed, but on different grounds. 721 A.2d 1281 (Del. 1998). The supreme court’s opinion focused on the board’s authority. According to the court’s opinion, Delaware law “requires that any limitation on the board’s authority be set out in the” articles of incorporation. The no hand pill limited a newly elected board’s authority by precluding redemption of the pill—and thereby precluding an acquisition of the corporation—for six months. Consequently, the no hand pill tended “to limit in a substantial way the freedom of [newly elected] directors’ decisions on matters of management policy.” Accordingly, it violated “the duty of each [newly elected] director to exercise his own best judgment on matters coming before the board.” Absent express authorization of such a limitation in the articles, the no hand pill was invalid as beyond the board’s authority.

In striking down the no hand pill as lacking statutory authority, the Delaware supreme court relied solely on section 141(a) of the Delaware General Corporation law. Section 141(a) states:

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

On its face, section 141(a) is directed to an entirely different problem than the one raised by the no hand pill. In particular, note the reference in the second sentence of section 141(a) to the “powers and duties” of the board being “exercised or performed” by such other persons as provided in the certificate of incorporation. This language clearly reflects a concern with the special problems of close corporations, whose shareholders often seek to modify the default rules of corporate governance so as to run the firm as though it were a partnership. Hence, section 141 is concerned with attempts to transfer the board’s authority to some other body (such as the shareholders) rather than self-imposed limitations on the board’s authority. On its face, the statute therefore provides no support for the court’s holding. As we will see in the next post, moreover, the court’s policy rationale holds even less water.

References:

Corporation Law and Economics at 685-90.

Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law

The corporate governance racket

The special report on corporate governance in yesterday's WSJ (sub. req'd) included an interesting article by Phyllis Plitch entitled A Piece of the Action: Corporate governance is hot -- and there's no shortage of companies promising to help:

With corporate governance showing no signs of fading as a hot business buzzword as executives scramble to meet new regulations, companies of all kinds and sizes are trying to get a piece of the action. "This looks like the first widespread new potential to sell software and services to the whole economy since the dot-com bust three years ago," says Lane Leskela, research director at Gartner Inc. Mr. Leskela says he found at least 50 high-tech vendors marketing services related to the Sarbanes-Oxley Act of 2002, the legal centerpiece of sweeping reforms aimed at preventing corporate malfeasance. The businesses, he says, range "from the usual suspects all the way down to companies no one has really heard of before." ...

To critics, however, the onslaught of "you must hire us" pitches can scare companies into thinking they have no choice but to pony up big bucks. Some promotions "seem designed to put the fear of God in companies -- that complying is so difficult, you can't possibly do it without expensive and extensive outside help," says Beth Young, senior research associate at the Corporate Library, an independent research firm and corporate watchdog. "It's making people extremely paranoid about the requirements and what it takes to comply."

Well, that's just great. As an investor, I don't want my portfolio companies spending a dollar on "good corporate governance" unless doing so adds at least a buck to the bottom line. I don't have any voice in how much to spend on corporate governance, however. The board of directors and top management make that decision (as they should, of course). Unfortunately for the bottom line, however, directors and management have a strong incentive to over-invest in corporate governance consultants and so on.

Why? The answer lies in the incentive structures of the relevant players. Who pays the bill if a director is found liable for breaching his federal or state duties? The director. if the director has adequately processed decisions and consulted with advisors, will the director be held liable? Unlikely. Who pays the bill for hiring corporate governance consultants, lawyers, investment bankers and so on to advise the board? The corporation and, ultimately, the shareholders. Suppose you were faced with potentially catastrophic losses, for which somebody offered to sell you an insurance policy. Better still, you don't have to pay the premiums, someone else will do so. Buying the policy therefore doesn't cost you anything. Would not you buy it? isn't that exactly the choice we're giving directors and senior managers?

Corporate governance reforms have thus given us the corporate governance racket. We know that these reforms have significantly raised the regulatory burden on Corporate America. Will we get a commensurate bang for our buck? Regular readers know that I'm very skeptical. What I've tried to show here is even modest reforms can result in costs that outweigh their benefits so long as those upon whom the reforms impose new liabilities control the purse strings.