ProfessorBainbridge.com

ProfessorBainbridge.comSM

I've noted before ( here and here) that we bloggers need to trademark our blogs. Thanks to Howard "Lawyer to the Blogosphere" Klein, for a very modest fee and very minimal hassle, I now have a servicemark for ProfessorBainbridge.com. (Update: To be precise, I should have said that I have an application for a registered servicemark pending with the feds.) If you're a blogger looking to protect your intellectual property, I suggest giving Howard a buzz.

Ruffino Riserva Ducale (Chianti Classico) 2000

Very nice, forward and fruity Chianti. Good cherry and berry flavors, with notes of earth and minerals. Perfect for mid-week quaffing. Grade: B

Hollinger

In his latest opinion in the ongoing Hollinger litigation, Delaware Vice Chancellor Leo Strine kindly made the following reference to my work:

On its side, International has the virtues that accompany all bright-line tests, which are considerable, in that they provide clear guidance to transactional planners and limit litigation. That approach also adheres to the director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes. [FN39] ...

FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).

Hollinger Inc. v. Hollinger Intern., Inc., 2004 WL 1728003 (Del.Ch., Jul 29, 2004) (you must have a Westlaw subscription to get the opinion). A working paper version of the article cited by Chancellor Strine is available here. Personally, however, I think my article Director Primacy: The Means and Ends of Corporate Governance does a better job of laying out the "director-centered nature of our law."

Smith endorses First Things

Right Coast blogger Tom Smith reports being very happy with his new subscription to First Things, the mostly Catholic and mostly neoconservative opinion journal. I've been a happy subscriber for years. If you're a Christian (or a Jew or a Muslim or an atheist for that matter) with an interest in serious writing on religion and politics, this is a journal to which you should subscribe.

Ribstein on the social function of blogging

Larry writes:

One thing that blogs clearly do is create a more efficient information market. I know there's a lot of falsity on the market, but as with securities markets true and false information get aggregated into a whole that transcends the parts. That's why I hope that blogging never becomes part of the official press. I worried about that when bloggers were invited to the table at the DNC. The result of that move seemed more echo than truth.

We are probably going to see this aspect of blogging get played out in the latest campaign flap, "Swift Boat Veterans for Truth." This group's TV ad devastatingly slams Kerry's signature Viet Nam experience. But is it true? Of course, the Kerry campaign is all over this. The NYT highlights the Republican backing and the fact that the Bush campaign has, at least overtly, distanced itself. Albert Hunt in the WSJ hits the ad harder, playing up the long political history of its backers.

Before blogs, this negativity from mainstream sources might have been enough to finish the story, or at least relegate it to the sidelines. But Instapundit weighed in heavily, plugging this from Lorie Byrd.

In the blogosphere, this story is too hot to simply die. I am confident we will know the truth before it's all over. And that's the big deal about blogging.

And that's why his blog is a must read.

My Judicial Blushes

In his latest opinion in the ongoing Hollinger litigation, Delaware Vice Chancellor Leo Strine kindly made the following reference to my work:

On its side, International has the virtues that accompany all bright-line tests, which are considerable, in that they provide clear guidance to transactional planners and limit litigation. That approach also adheres to the director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes. [FN39] ...

FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).

Hollinger Inc. v. Hollinger Intern., Inc., 2004 WL 1728003 (Del.Ch., Jul 29, 2004) (you must have a Westlaw subscription to get the opinion). A working paper version of the article cited by Chancellor Strine is available here. Personally, however, I think my article Direct or Primacy: The Means and Ends of Corporate Governance does a better job of laying out the "director-centered nature of our law."

SUV Ban

Andy Bowers at Slate:

Unless you drive one of the largest SUVs, such as the Chevy Suburban, the Cadillac Escalade, or the Ford Excursion, I'll bet you've watched them thundering down quiet residential lanes and wondered to yourself: Why is that monster allowed on this little street?

Well, here's a surprising piece of news. It may not be. Cities throughout California—the nation's largest car market—prohibit the heaviest SUVs on many of their residential roads. The problem is, they don't seem to know they've done it.

I discovered this secret ban after noticing the signs at both ends of my narrow Los Angeles-area street (a favorite cut-through route for drivers hoping to avoid tie-ups on bigger roads). The signs clearly prohibit vehicles over 6,000 pounds.

I knew a 6K pound limit ruled out a lot of the larger trucks that routinely rumble by my house, unpursued by traffic cops. But then I got to thinking: Could some of those bigger SUVs exceed 3 tons? So I did some research, and I hit the mother lode.

It turns out every big SUV and pickup is too heavy for my street. Here's just a sampling: The Chevy Suburban and Tahoe, the Range Rover, the GMC Yukon, the Toyota Land Cruiser and Sequoia, the Lincoln Navigator, the Mercedes M Class, the Porsche Cayenne S, and the Dodge Ram 1500 pickup (with optional Hemi). What about the Hummer, you ask? Hasta la vista, baby!

Cool. I say impound 'em all!

Update: If the trackbacks to this post prove anything, it is that the arachno-libertarians (especially the morons at mises.org) have absolutely no sense of humor. But what do you expect from the kind of people who think Bush's Ownership Society program is an American version of fascism?

Gil Weinrich's TCS Column on White Collar Crime

Weinrich argues:

The Fastows, Martha Stewart and her broker, Peter Bacanovic, need not suffer degradation in a dank prison cell. Their victims need not remain victims. And society need not waste its precious resources imprisoning people who are no menace to their neighbors. We don't need to build more prisons; we need white-collar criminals to repay their debt to society -- literally.

He thus proposes the following system for dealing with white collar crime:

When Andrew Fastow pleaded guilty early this year, he agreed to surrender $23.8 million in cash and property, including vacation homes in Vermont and Galveston, Texas. That's a start. He and those who shared in his crime should be apportioned the part of the losses for which a court deems them responsible, including an extra 10 percent to compensate for the unearned return on the victims' money, and an additional fine to compensate the government if the perpetrator did not cooperate in the investigation of the crime.

The perpetrators should then spend as long as it takes, up to the rest of their lives if necessary, to repay that debt. Andrew Fastow may be a criminal but he is also a financially savvy corporate executive. Surely his vast talents can be put to some good use for some company somewhere. A court could give him an allowance (based on a percentage of his income so that he would always have an incentive to increase his earnings), with the lion's share (say, 90 percent) devoted to a restitution fund.

Excuse me? Since when is restitution the sole - or even primary - purpose of punishment? As Weinrich acknowledges:

Fastow and others concealed billions of dollars in debt in off-the-books partnerships. The crime wiped out $68 billion in market value, destroyed at least 5,600 jobs and vaporized workers' retirement savings.

Given the vast harm Fastow did, why aren't retribution and deterrence relevant to setting his punishment? As Robert Barley, no liberal weenie, observed of Fastow et al.: "The law doesn't pretend to prevent all crime, but functions through deterrence, including throwing criminals in jail."

Watching the UC System Shrivel

For the fourth year in a row, the final state budget cuts the University of California:

UC?s state-funded operating budget will fall from $2.9 billion last year to $2.72 billion, a reduction of 6 percent. This reduction will be made up through program cuts and student fee increases. In addition, no state funding is provided for employee cost-of-living increases, though the compact [between the Governor, Legislature, and University] offers funding for faculty and staff salary increases beginning in 2005- 06.

The shortfall is now staggering:

The 2004-05 state budget reduces funding for the University of California by $322 million, on top of a cut of $317 million in 2003-04. If UC had received normal funding increases associated with enrollment growth and inflation over the past few years, state funding would be around $4 billion. Instead, state funding for UC has fallen to $2.6 billion. It is not good news.

On days like this, I feel like I'm standing on the bridge of the Titanic, watching it slowly slip under the waves.

Antinori Santa Cristina (Tuscany) 2002

Santa Cristina is an IGT blend of Sangiovese and Merlot. The 2002 is a delicious red wine with forward fruit, modest tannins, and good acidity. If it tastes more like a Napa Sangiovese than a classic Chianti, who cares? Great for mid-week quaffing. Grade: B+

Those Divesting Presbyterians

My latest TCS Daily column

The Presbyterian Church (USA)'s General Assembly recently adopted a resolution calling for divestment of denominational funds from "multinational corporations operating in Israel." Predictably, the decision generated protests, including charges of anti-Semitism. The questions thus raised are legitimate and important. Yet, I wish to come at the problem from a different angle.

Let's start with a basic question: Will the PC(USA)'s decision "work"? In other words, do divestment campaigns tend to achieve their proponent's goals? The clear answer from the empirical literature is "no."

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, 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."

If the PC(USA) mavens who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? Apparently, however, the plan encompasses divesting the retirement funds of Presbyterian pastors and workers invested in denominational pension plans. As such, their decision illustrates a perennial problem of institutional investment; namely, Quis cusotdiet ipsos custodies.

Like the vast majority of large institutional investors, the PC(USA)'s pension plans manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. Plan investors have no more control over the election of company trustees than do shareholders over the election of corporate directors. Nor do the holders of such shares have greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (it's easier to switch than fight), he cannot do so anywhere nearly as easily with respect to investments such as these denominational pension plans.

Managers of pension plans are fiduciaries of the beneficiaries of those plans. When they pursue a social agenda nearly certain to result in poorer performance, they are disserving their beneficiaries. The activists at the PC(USA) may have gotten a warm and fuzzy feeling from taking a slap at Israel, but in doing so they injured Jewish-Christian relations, besmirched the one functioning democracy in the Middle East, and stabbed their own people in the back. All for the sake of a gesture that experience teaches will be fruitless.

Trial Lawyer/John Edwards Propaganda at Kos

In what reads like a press release from John Edwards and/or ATLA (the trial lawyer group), the Daily Kos features a ringing defense of the verdict in Stella Liebeck's suit against McDonalds. You don't remember Stella? She was the woman who successfully sued McDonalds after she spilled coffee on herself. The Kosites think it was just peachy for Stella to get paid off. After all, they argue, (1) McDonald's had received 700 previous complaints and (2) Liebeck suffered serious injuries.

Unlike the folks at Kos, the good folks at Overlawyered.com have the straight dope on Ms. Leibeck:

To say that there were 700 previous complaints of burns (ranging from scalds to real injuries) from McDonald's coffee begs the question. After all, 700 is just the numerator. What's the denominator? The answer is in the tens of billions. A product that hurts one in twenty-four million people is not "unreasonably dangerous", especially when the vast majority of the 700 incidents were not the sort of grievous injuries Ms. Liebeck had. (McDonald's had settled previous cases, but the cases were incidents where the McDonald's employees had spilled the coffee.) However, the jury took the 1-in-24 million statistic not as evidence that McDonald's coffee was not dangerous, but as evidence that McDonald's cared more about statistics than people -- when in fact the statistic should have been used to throw the case out.

That Ms. Liebeck was surely serious hurt doesn't change the underlying problem with the lawsuit: Ms. Liebeck was hurt because she spilled coffee on herself. If (as all fast-food restaurants do now) McDonald's had the obvious statement "Coffee is hot and can burn you" on the cup (a juror later complained that McDonald's warning was too small), would that have prevented her injuries? True: McDonald's could have served luke-warm coffee or even iced coffee. But at the end of the day, the proximate cause of Ms. Liebeck's injuries, as awful as they were, was Ms. Liebeck.

The argument for liability is that McDonald's chose to serve its coffee hot and should have foreseen that people would burn themselves when they spilled coffee. But, here's a question: the reason Ms. Liebeck's injuries were so terrible was because she was wearing a sweatsuit that absorbed the hot liquid and held it close to her skin. Surely, clothing manufacturers can foresee that people will spill hot liquids on themselves. If Ms. Liebeck's sweatpants had been made out of Gore-Tex or some other liquid-resistant material, she never would have been hurt. What's the principle of tort law that holds McDonald's liable, but not the clothing manufacturer?

You got me. (More at Thoughts Online.)

By the way, there are at least two factual errors in the Kos post. First, Stella was 79 when she was hurt not 81. Second, her medical costs apparently were $20,000 - the amount she originally sought - not $200,000. Support here.

By the way (#2), Stella's case prompted an internet hoax called the Stella Awards, which in turn prompted a website that gives the True Stella Awards.

By the way (3), a comment at Kos points "out that all trial lawyers aren't the same, that Edwards had nothing to do with the frivolous lawsuits we sometimes hear about, and that he's won money for helpless kids disembowelled by known-defective products." Not quite right. As The Washington Times explained:

Mr. Edwards earned a considerable portion of his millions on cerebral palsy cases. Cerebral palsy is a set of debilitating diseases that impair movement. The muscular disorders — which can include involuntary movements and difficulties with many motor tasks, ranging from walking to writing — are caused by damage to or faulty development of the motor areas of the brain. Until the 1980s, many medical professionals believed that damage could be caused by a lack of oxygen to the brain during delivery. As a consequence, Mr. Edwards was able to successfully sue doctors who did not demand Caesarean deliveries as soon as the infant's fetal monitor suggested that it was short of oxygen.

Yet, even as Mr. Edwards was perfecting his science of suing, evidence was growing that the blame was misplaced. Studies demonstrated that most of the children who developed the disease had brain damage well before they were born. Scientists now believe that, like other brain disorders, cerebral palsy has a wide variety of causes, which likely include both genetic and environmental factors.

As a consequence of the expensive efforts made by Mr. Edwards and his fellow malpractice practitioners, doctors often rush to perform Caesarean sections, with rates rising from 6 percent of births in 1970 to 26 percent today. Yet rates of cerebral palsy have remained stable in populations, regardless of how many Caesarean sections are performed.

That led the New York Times to point out in a Jan. 31 article, "There is a growing medical debate over whether the changes have done more harm than good." More harm is likely. Ceasarean sections are major surgery, putting both mother and infant at significant risk. Mr. Edwards claims he acted on behalf of helpless victims, but the costly claims made by Mr. Edwards and other lawyers have driven doctors away from some areas of practice, taking their care and cures elsewhere.

Yet another Techincolor decision

Fritz over at Sneaking Suspicions posts re the latest Technicolor decision - the 18 year long and counting takeover lawsuit. He flags the part of the opinion that also struck me as key; i.e., Chandler's explanation of the appraisal process and accompanying slap at the Delaware supreme court:

As expected, the occasional Chandlerism also makes a very early appearance, on page 3 of the main text.

Although 8 Del. C. § 262 requires this Court to determine “the fair value” of a share of Technicolor on January 24, 1983, it is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date, especially a date more than two decades ago. Experience in the adversarial, battle of the experts’ appraisal process under Delaware law teaches one lesson very clearly: valuation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts’ opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all of the relevant evidence and based on considerations of fairness.

The footnote accompanying this passage makes a typically Chandlerian wry note about relative competence:

Many commentators have recognized the indeterminate nature of the search for the fair or intrinsic value of a company. Professors Allen and Kraakman have also noted the institutional disinclination of Chancery judges to engage in the valuation process in certain circumstances precisely because those judges recognize it as a “daunting task” subject to significant uncertainty. The same institutional pressures that result in this disinclination at the Chancery Court level, of course, do not apply at the appellate level and may explain why the Supreme Court exhibits more confidence in the ability to ascertain the fair value of an enterprise. See [citation to competing text struck, because that's just the kind of guy I am].

The Technicolor litigation has not been one of the Delaware supreme court's better efforts. At virtually every opportunity, the supreme court has made really bad law in this case. As a result, Technicolor crops up for criticism in at least three chapters of my Corporation Law and Economics. (See my earlier post Cinerama v. Technicolor: The Anticlimax.)

The Unsustainability of Social Democracy

Every time I criticize the Franco-German model of social democracy, commie pinko blogger (who probably live in 4 bedroom homes someplace like Berkeley) get all snarky. Well, the evidence conitnues to mount that the social democratic economic model is unusustainable in a competitive global marketplace. The latest round is summarized by the WSJ Europe ($):

Just as the Reagan and Thatcher revolutions were in full swing, Germany was stomping on Adam Smith's toes. While the U.S. and U.K. emphasized low taxes, deregulation and hard work, union leaders in Germany were realizing their vision of a "leisure economy." The mandatory reduction in working hours was supposed to miraculously combine the "humanization of the working environment" with a giant job- sharing program. As people worked shorter hours, the theory went, employers would just have to hire more people to pick up the slack.

But guess what? If you pay people the same money for doing less work, employers have less money, not more, for hiring. Unemployment rose instead of falling, taxes went up to pay for the additional jobless benefits and the economy stagnated, forcing consecutive governments to pile on more and more debt to finance the welfare state. But despite these unintended if predictable consequences, touching the 35-hour workweek remained taboo.

Until now. This summer, the German unions' springtime -- along with the 35-hour workweek -- has come to an abrupt end. But instead of calling for a general strike, the unions gave the expanded working hours their blessing -- and then denied that anything had really changed. ...

"Longer working weeks will become the standard in Germany. We'll soon be talking about 43 hours," said Continental Chairman Manfred Wennemer from his office in Frankfurt.

What's changed? With a jobless rate twice as high as in the U.S. and a "recovery" (1.7% economic growth projected for this year) that would be considered stagnation in America, Germans are no longer so sure about their economic model.

Germany's weekly Der Spiegel calls it "Farewell to Paradise." This expulsion from the socialist garden of Eden has been hastened by the arrival of 10 new members in the European Union. It was the threat of moving production sites to Hungary -- where labor costs are a fraction of those in Germany -- that concentrated the workers' minds at Siemens. Earlier this month, the German firm Bosch threatened to move a car parts plant from France to the Czech Republic unless workers agreed to longer hours for the same money. They overwhelmingly agreed to the deal, sparking a debate within the French government -- zut alors! -- about scrapping its 35-hour workweek.

Thanks to the new competition from the east, Germans are increasingly finding that if they want to keep their standard of living they will have to work harder and longer. In short, Germany has to become more like America just to stay Germany.

And this is the model the US left keeps touting for us. Anyway, the Economist claims this is what's driving a large part of German anti-Americanism (unlike French anti-Americanism, which seems to be based on forlorn dreams of Napoleonic glory):

Many Germans are going through a phase of resentment over the pressure they feel to abandon the welfare state and accept amerikanische Verh�ltnisse??American conditions?, in which the economy would be totally market-driven.

If that is the main thing turning Germans against America, there may be some light at the end of the tunnel. Resentment, and the search for scapegoats, is bound to be at its keenest in the early stages of economic reform, as the most difficult decisions are tackled. Once the painful structural changes now underway show signs of success, Germans may be more relaxed about their big, transatlantic brothers.

Let's hope so. In the meanwhile, my heart goes out to those having to work those awful 8 hours a day.