ProfessorBainbridge.com

Watch for the coming flood of global warming litigation

My Examiner column:

Let's assume, for the sake of argument, that the climate change phenomenon commonly called "global warming" exists and is being caused, at least in part, by human activity. Who is responsible? The only sensible answer is, everybody. We all contribute to the release of greenhouse gasses, as did our ancestors going back at least to the beginning of the Industrial Revolution.

One would therefore think litigation is no more an appropriate response to global warming than litigation would be to any so-called "act of god." One would be wrong.

Earlier this year, Texas trial lawyer Stephen Susman told the Dallas Morning News that "You're going to see some really serious exposure on the part of companies that are emitting CO2." He added, for good measure, that "I can't say for sure it's going to be as big as the tobacco settlements, but then again it may even be bigger."

Indeed, trial lawyers are gearing up to turn global warming into their next pot of gold. A coalition of environmental groups and cities are suing the Overseas Private Investment Corporation and the Export-Import Bank of the United States for making loans to finance oil pipelines, oil drilling, and similar projects that supposedly result in a net emission of billions of tons of carbon dioxide. After Hurricane Katrina, New Orleans trial lawyers Gerald Mapes and Timothy Porter sued dozens of energy companies, claiming they had contributed to global warming.

Last year, Business Week reported that there were 16 pending global warming cases of these sorts pending around the country. More are surely in the pipeline, so to speak.

Indeed, the prospect of a boom in global warming litigation is prompting law firms to begin setting up units specializing in climate change issues. According to the Dallas Morning News, for example, Dallas law firms Vinson & Elkins and Thompson & Knight have set up global warming units with 41 and 26 lawyers, respectively.

If it weren't for the precedents set by tobacco, alcohol, and obesity lawsuits, one might be tempted to dismiss climate change litigation out of hand. After all, the law typically requires a showing of causation. Before you can hold me liable, you must show that but for my conduct you would not have been injured. Typically, you also must show that my conduct was the proximate cause of your injury.

How can one firm—or even one industry—be blamed for a global phenomenon that took decades to arise? Making causality findings and apportioning responsibility in this context is ludicrous. Yet, what might a New Orleans jury still smarting over Katrina do if they got the chance to decide Mapes and Porter's suit?

This is a classic example of why tort reform is a pressing need. The Institute for Legal Reform offers some chilling statistics: "America's civil justice system is the world's most expensive, with a direct cost in 2005 of $261 billion, or 2.09 percent of GDP.

"Tort costs were $880 per U.S. citizen in 2005, meaning the average American family of four paid a 'litigation tax' of more than $3,500 due to increased costs from lawsuits and other liability expenses that force businesses to raise the price of products and services. That cost is equivalent to nearly an 8 percent tax on wages."

These costs are having a dramatic impact on the US economy. A nonpartisan report prepared for New York Senator Charles Schumer and New York City Mayor Michael Bloomberg, found that the "propensity toward litigation" in the United States is "driving growing international concerns about participating in US financial markets."

Along with regulatory excesses like the Sarbanes-Oxley Act, the litigation industry in this country is making our capital markets and our economy as a whole less competitive.

It's time for Congress and the president to step up with legislation that take the question of global warming out of the arena of ad hoc judicial decision making and put it into the hands of our elected officials. Both fairness and efficiency demand it.

Paying a Premium for Supermajority Voting Shares

Larry Ribstein's got a nice analysis of the legal questions raised by the prospect that Rupert Murdoch might pay more for the supermajority voting shares owned by the various Bancroft holders than for the regular voting shares held by everybody else. Some will argue that, since both classes of shares have essentially the same economic rights, they should have the same value in a sale. Yet, as Larry points out:

Not permitting [a controlling] shareholder to reap the premium may stop the sale because he may not want to sell unless he can get some gelt to salve the pain of losing control. That may well be a consideration in the DJ situation, since the Bancrofts obviously derive status and satisfaction from their power.

"Steve" (not your truly) left a comment on Larry's post arguing that under Delaware law (is Dow Jones a Delaware corporation?) there would be no real obstacle to the Bancroft entities getting a premium.

As "Steve" notes, the chief problem case is In re Tele-Communications, Inc. Shareholders Litigation, 2005 WL 3642727 (Del.Ch. 2005), in which Chancellor William Chandler indicated that the entire fairness standard would be applied where the supermajority voting shares got a premium. In that case, however, a substantial percentage of the supermajority were held by directors. The deal was thus more closely akin to an interested director transaction than one involving a controlling shareholder. Chandler wrote: "no single shareholder possessed more than 50% of the vote, but the financial interests of a number of directors holding large amounts of TCOMB shares significantly diverged from the interests of their constituent shareholders.  ... Alternatively, evidence in the record suggests that a majority of the board of directors were interested in the transaction, requiring an entire fairness analysis."

TCI thus could be distinguished on grounds that the Bancrofts are mere shareholders, whose fiduciary duties have always been regarded as less demanding than those of directors. Conversely, however, if entire fairness is the test, Chandler's opinion indicates that paying a premium to the supermajority voting shares could constitute an unfair price to the non-controlling shareholders. More precisely, he said it presented a "triable issue of fact." Unfortunately, the case was settled without resolution of that issue.

Broc Romanek opined that "many commentators will criticize the court's apparent focus on the historical relative trading prices of a liquid low vote stock and an illiquid high vote stock and the numerous precedent transactions in which holders of high vote stock had foregone a premium even though they may have been legally and economically entitled to one (e.g., the fact that holders of high vote stock may be willing to forego a control premium to avoid litigation is not much help or particularly relevant when negotiating with a large holder of high vote stock like John Malone who adamantly insists on extracting a premium to which he is legally entitled)."

McDermott Will & Emery complained that Chandler thought "that the special committee should have requested a “relative fairness” opinion from its financial advisor (i.e., an opinion as to whether the transaction was fair to the holders of shares of the TCI Group’s low-vote stock in light of the preferential payment being made to holders of the high-vote stock)." As MWE explained, however: "Given that allocating consideration among different classes of capital stock could require a financial advisor to draw legal conclusions, financial advisors often refuse to deliver opinions in respect of such types of allocations."

A Cleary Gottleib M&A newsletter argued that Chandler improperly relied on cases involving recapitalizations:

A recapitalization is, in effect, a reshuffling of the interests of a corporation’s security-holders and is, in that sense, a zero-sum game in which any gain by one constituency necessarily comes at the expense of another constituency. Such a transaction can be “fair” to a constituency only if it does not unduly diminish that constituency’s interest in the corporation, and therefore a fairness analysis should include an examination of the allocation of the post-recapitalization pie. A third-party acquisition, by contrast, is not a zero-sum game as to the separate classes of target stock; since an acquiror often pays a premium above the market value of the target corporation, it is possible for all stockholders to receive a fair and attractive price even if some stockholders receive a greater portion of the total consideration.

That makes sense. It also suggests that it would be okay to pay a control premium to the Bancrofts.

Cleary's analysis also suggests that Chandler may have overlooked the point Larry makes above:

if a transaction promises to deliver a fair price to all stockholders, are directors nevertheless precluded from approving the transaction because it also involves what might be viewed as an unduly generous payment to controlling stockholders who refuse to sell on lesser terms? The TCI court’s approach implies that a board should reject a transaction, even though it “unlocks” premium value for all stockholders, simply because the controlling stockholder insists that he will not approve the transaction (which, it is clear, he has no obligation to do) unless he receives what may be seen by a court as an excessive payment.

As I read TCI, two conclusions may be drawn. First, a review of Chandler's opinion demonstrates that most of his concern seems to have been with the process by which the merger was negotiated. Basically, the special committee of directors that negotiated on behalf of the target was uninformed and less than vigorous. A decision to pay a control premium to the supermajority voting shares reached after an adequate decisionmaking process likely would have received somewhat greater deference. Murdoch and the Bancrofts can afford really good lawyers. There's no excuse for process inadequacies, especially in a deal that is this high profile.

Second, TCI left open an interesting question: Is it proper to pay a control premium to a supervoting class of shares or only to a controlling shareholder. TCI's Class B shares (which had the super voting rights) were owned by a number of investors. It was not the Class B holders as a cohesive group that controlled TCI, however. Instead, TCI was controlled by John Malone by virtue of Malone's holdings of both Class A and Class B stock. Although Malone wanted a premium for the Class B shares, maybe Malone should have gotten a premium for his shares of either class. Malone's lawyers argued it would have been improper for the board to discriminate amongst shareholders in this way. Given that Delaware (unlike some other states, including New York) approved the idea of poison pills that discriminate against specified shareholders, perhaps Delaware would allow allocation of merger premia discrimination in favor of certain shareholders? (Obvious, we're not talking about any form of invidious discrimination here.) On that issue, Cleary makes an interesting argument:

The TCI decision also fails directly to confront the defendants’ argument that the 10% premium paid to holders of TCOMB shares was a legitimate control premium. In advancing this argument, they relied on the well-established principle that a controlling stockholder is entitled to sell his shares at a price that reflects a control premium. Given that entitlement, AT&T could have purchased Malone’s shares at one price, and then offered to purchase the remaining shares of TCI at a lower price. Or, Malone himself could have taken TCI private (at a price per share that was fair, but less than the price per share that a third party might be willing to pay for all of the shares of TCI), and subsequently sold the entire company to AT&T at a higher price per share. In either situation, the TCI directors’ fiduciary duties would not require them to reject the transaction in which the noncontrolling TCI stockholders’ shares would be acquired merely because the price offered in that transaction was lower than the price obtained (or that could be obtained) by Malone for his shares. We do not believe that a controlling stockholder should be any less entitled to obtain a control premium simply because the entire company is sold in a one step transaction.

Ultimately, however, I don't find this argument persuasive. A control premium is paid to the person(s) who have control in order to persuade them to allow the deal to happen. Paying a control premium to some non-controlling shareholders (who hold Class B shares) and not to others (Class A holders) does start to look a fiduciary duty problem.

All of which leads to the question of whether controlling shareholders ought to be allowed to get a premium for their shares. My answer: It depends.

Courts have not imposed a general obligation for controlling shareholders to share a control premium with the minority. The conventional explanation given by the courts is that it is not per se wrong for a controlling shareholder to sell at a price significantly higher than that available to noncontrolling shareholders. It becomes wrong only under special circumstances, such as sale to a looter, sale of office, or taking of a corporate opportunity. In contrast, many scholars have argued for some sort of sharing or equal opportunity rule. Should we adopt such a rule? In short, no.

One of the risks minority shareholders assume when they acquire stock in a corporation with a controlling shareholder is that the latter may sell at a premium without giving the minority an opportunity to participate. If the control block existed when the minority shareholder invested, the minority shareholder presumably paid a lower per share price than he would have paid in the absence of a controlling shareholder. In other words, assuming full disclosure, the minority became shareholders having accepted as adequate whatever trade-off was offered in recompense. Even if the control block was assembled after the minority shareholder invested, moreover, the possibility that such a block would be assembled is one of those risks of which a rational shareholder should be aware in making pricing decisions.

Bounded rationality and other transaction cost obstacles to complete contracting, of course, somewhat weaken the foregoing argument’s force. Even if the pricing mechanism does not adequately protect minority shareholders, however, there are still efficiency arguments in favor of a no sharing rule. If we believe corporate takeovers promote economic efficiency by displacing inefficient incumbent managers, for example, controlling shareholders generally should be allowed to keep their premiums. Unequal distribution lowers the cost of doing takeovers, because the new controlling shareholder only needs to buy the control block, which should result in more takeovers. Giving the controlling shareholders a special premium, moreover, essentially bribes them to quit. Consequently, a no sharing rule should facilitate replacement of inefficient incumbents.

The Sinclair Oil case provides the right analogy. As long as the controlling shareholder does nothing to leave the minority worse off, it should be allowed to sell on whatever terms the market will bear. Doing so is consistent with the reasonable expectations of minority shareholders and promotes efficient changes in control. If controlling shareholders could engage in transactions that affirmatively injure the minority, however, the latter doubtless would take precautions to prevent such transactions. By providing a coercive backstop preventing such transactions, the Sinclair Oil-based default rule minimizes bargaining and enforcement costs.

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COMMENT:

AUTHOR: Steve (not Bainbridge)

DATE: 08/03/2007 06:10:04 AM

You wrote:  "Second, TCI left open an interesting question: Is it proper to pay a control premium to a supervoting class of shares or only to a controlling shareholder." 

You hit the nail on the head.  Luigi Zingales at Chicago has done some interesting work on this, but he didn't look at mergers.  I believe that his work shows (perhaps intuitively) that a buyer will not pay in open market purchases a premium for any shares beyond majority voting power because there is little incremental benefit beyond that point.  If you look at empirical evidence for mergers, however, whenever the high-vote class receives a premium, then in almost all situations the entire high-vote holders get it (i.e., no price differentiation within the class, only class-to-class).  It bears noting that price discrimination (which you noted was permitted in the context of poison pills) is also permissible as a general matter in mergers.  As Bill Allen explained, “So if the law were to be unyielding that there never could be discrimination between shareholders holding the same security, then you might encounter situations in which no transaction could be done at all.  And it is not in the social interest… to have a rule that prevents efficient transactions….”  In re Times Mirror Co. S’holders Litig., 1994 WL 1753202, at *2.

 

As you note, the board is in an interesting situation if they are asked to pay a control premium to the controlling stockholder AND the other non-controlling high-vote holders.  Should Dow Jones's board have agreed to a control premium for the Bancrofts paid pro rata to them only up to a majority of their voting power?  What if, as was alleged in TCI, the controlling stockholder demanded that the only way he'd vote for the deal was that if all high-vote holders received the same premium shares?  Does the board breach its duties by granting the controller's demands, notwithstanding it's still a great deal for all stockholders?  Or has the controller somehow breached its fiduciary duties by making such a demand?  All interesting questions that didn't get the treatment they deserved in TCI. 

I agree completely that TCI was complicated by the interested-director aspect.  In particular, the decision points out the difficulty in taking off one's director hat and just wearing a controlling stockholder hat to vote out of "whim or caprice," as the Delaware courts like to say. 

Interesting point regarding Sinclair.  It would seem to work in a straight-forward sale of control and other going concern transactions.  But in a merger, I think minority stockholders would argue that any control premium was a benefit to the controller at their expense (i.e., lower per share consideration).  I think the courts would assume a premium is permissible, so they'd then have to determine whether the actual premium paid was excessive.... At the point, you lose the benefit of Sinclair's bright-line rule b/c the situation becomes very fact intensive. 

Cook's "The Corporation Problem": There is Nothing New Under the Corporate Law Sun

Adolf Berle and Gardiner Means are commonly credited with having identified the separation of ownership and control in public corporations as the central problem of corporate governance. See The Modern Corporation and Private Property (1932). Dalia Tsuk, by the way, has a very interesting recent piece on how our understanding of Berle and Means' work has evolved over time. I recommend it. From Pluralism to Individualism: Berle and Means and 20th-Century American Legal Thought.

In fact, however, Berle and Means were not the first to document the phenomenon of separation of ownership and control. Herbert Hovenkamp, in his wonderful book Enterprise and American Law: 1836-1937 (1991), shows that Alfred Marshall had made the same point in 1890, as had William W. Cook in 1891.

All of which comes as preface to the fact that I have found an online version of William Cook's philippic The Corporation Problem: The Public Phases of Corporations, Their Uses, Abuses, Benefits, Dangers, Wealth, and Power, With a Discussion of the Social, Industrial, Economic, and Political Questions to Which They Have Given Rise. Cook writes:

Without corporations America would be a different nation and have had a different history. The Civil War would have been more dangerous to the Republic. The present railroad system could not have been built, and the Pacific Coast and the Eastern States would not have been bound by ligaments of steel to a common interest. ...

And yet notwithstanding all the advantages, material, intellectual, and moral, which have been derived from corporations, there is much to be said against them. And they have two peculiarities which have led to these abuses. These are, first, the ease with which all responsibility for bad acts is placed upon the corporation itself, while the real perpetrators are concealed; second, the separation of the stockholders from the corporate agents, of the investor from the investment, of the principal from the agent, with the expectation on the part of the investor, the principal, the stockholder, that profits will be made, honestly if possible, but that profits will be made.

What's fascinating to me is how strongly that passage confirms the relevance of Ecclesiastes 1:9 to the study of corporate governance. These are precisely the same problems with which we continue to struggle today.

Anyway, I'm about a third of the way into the monograph and may report back as needed.

Carter on Generation 9/11

Phil Carter takes Dean Barnett to the blogosphere woodshed:

In the same breathless style of reporting that exemplified Tom Brokaw's book "The Greatest Generation," last week's issue of the Weekly Standard featured a package of articles on the "9/11 Generation." In the lead article, Dean Barnett contrasts the current generation with the one that came before it:

In the 1960s, history called the Baby Boomers. They didn't answer the phone.

Confronted with a generation-defining conflict, the cold war, the Boomers--those, at any rate, who came to be emblematic of their generation--took the opposite path from their parents during World War II. Sadly, the excesses of Woodstock became the face of the Boomers' response to their moment of challenge. War protests where agitated youths derided American soldiers as baby-killers added no luster to their image.

Few of the leading lights of that generation joined the military. Most calculated how they could avoid military service, and their attitude rippled through the rest of the century. In the 1970s, '80s, and '90s, military service didn't occur to most young people as an option, let alone a duty.

But now, once again, history is calling. Fortunately, the present generation appears more reminiscent of their grandparents than their parents.

Except that only a tiny fraction of today's generation serves, and deserves such praise. Approximately 0.83 percent of the U.S. population serves in uniform, and less than 3 percent of the draft-aged population (male and female) serves. America is not at war; only its military is.

Surely, our sons and daughters who serve overseas in uniform deserve our praise. So too do those men and women who serve abroad in the Foreign Service, the Peace Corps, the clandestine service, and in other capacities. But the whole generation? Hardly. And who can blame them? Their president has not called them to service, and no one has ever truly asked them to sacrifice something for the war they support.

Divesting Terror

Michael O'Brien on NRO:

An emerging trend in finance and politics across the country is a focus on so-called ?terror-free? investments. Individuals and states alike are increasingly taking time to ensure that the stock they hold is certified as ?terror-free,? meaning that they have no holdings in any government designated by the State Department as a terrorist-sponsoring state, or in businesses with substantial investments in those nations.

Divestment is bad investing policy. When politicians decide to divest public funds (like my state employee retirement fund), it's bad public policy. As I've written over at TCS:

... do divestment campaigns tend to achieve their proponent's goals? The clear answer from the empirical literature is "no." ...

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. ...

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.

Or, as I wrote of the UC Regents decision to divest from Sudan:

In life, of course, there are times when a costly but symbolic gesture seems appropriate. Indeed, some situations absolutely require that "a really futile and stupid gesture be done on somebody's part."

Yet, there's a very important difference between an individual deciding to make such a gesture and an organization like the UC board of regents deciding to do so. If the regents who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? But they have ordered that the university divest its endowment and retirement funds. 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 UC regents manage other people's money, a large chunk of which comprises the pooled savings of small individual investors. But UC employees and retirees have even less control over the election of regents than shareholders do over the election of corporate directors. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (its easier to switch than fight), we cannot do so with respect to our pension plans.

Like all managers of pension plans, the UC regents 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. All for the sake of a gesture that experience teaches will be fruitless. I'd call that a pretty clear breach of fiduciary duty.

Divesting "terror" investments strikes me as just as bad an idea as divesting from Sudan or Israel.

Should the GOP Duck the Youtube Debate?

Over at Hugh Hewitt's blog, regular contributor Patrick Ruffini says the GOP ought to do the CNN/Youtube debate. Regular Hewitt blog contributor Dean Barnett says he cares "very little about" the debate itself, than launches into an analysis of why the Democrats seem to be doing better online than the GOP. Barnett goes on to note that:

The right wing base is, to put it mildly, dispirited. The two most prominent Republicans over the past seven years, John McCain and George W. Bush, have made a habit of maddening the base. None of the presidential candidates electrifies the base. ...

A conservative online community that rivals the Progressive one will only develop when conservatives are as motivated and passionate as liberals have been the past five years.

Exactly. Finally, the founder of the eponymous Hewitt Blog opines:

Skipping a CNN set-up camouflaged with YouTube videos is a symptom of wanting to win, that's all. Don't believe me, go visit the question site, and this is before the moonbats, egged on by Arianna and Josh Marshall, begin the inevitable push to salt the mine after any of the major candidates agree to appear at the circus. I hope the candidates step up and bluntly announce that they are connecting with millions of Americans and will continue to do so, but won't agree to be props in a CNN carnival.

Personally, I figure that we need all the entertainment we can get, so I hope they do it. After all, we'll need something to chuckle about come 2009 when the Democratic President and Congress raise our taxes 20-30%.

Meanwhile, my personal favorite Youtube commentators have a solution:

Concurring Opinions Sponsored by Aspen

The deservedly popular group law professor blawg Concurring Opinions is now sponsored by Aspen Publishers (which old timers like me still sometimes call Little Brown). This raises all sorts of questions, most of which are none of my business:

• How much money are they making?
• How do the blog members split up the take?
• If they are sharing profits, they are now probably partners. Have they formed a corporation or LLC without my having noticed?
• Will all the contributors now switch to Aspen case books and treatises?
• Will this affect my book sales?
• As a career Foundation Press author, I probably don't want Aspen as a sponsor, but how do I get Foundation to at least take out a few Blogads?

Ribstein on SOX at 5

Larry writes:

Five years ago today President Bush signed SOX. The journalistic celebration of this event seems to resemble the birthday party of any five year old: he?s a real bundle of trouble, but still growing, and so much fun to have around. More precisely: we?re better off than when SOX was passed; SOX isn?t completely to blame for all the woes that have been laid at its doorstep; companies and regulators are adjusting. See, for example, this view from across the pond, which has the virtue of advertising my t-shirt, this Economist story, which has the virtue of highlighting the scholarly empirical work on SOX, and this story in today?s WSJ.

I?ll have much more to say about all this as I gear up for my debate with Lynn Turner at the AAA meeting next Monday. In the meantime, let me offer a couple of thoughts:

• It would not be at all surprising if SOX has had some benefits. If we lowered the speed limit to 40 mph and put billions into traffic enforcement, lives would surely be saved, and this would be a much more important benefit than avoiding financial harm. The question is whether the cost would be one we?d find worth paying. Cost is similarly the key to the case against SOX.
• My arguments on the costs of SOX are summarized in my book with Butler, The Sarbanes-Oxley Debacle. Ample data, particularly over the last year, supports these arguments, as indicated by papers discussed in my Sarbanes-Oxley archive.
• As for the argument that the costs are declining, they are doing so from a very high level.  And we haven?t yet seen the real deluge, which will occur when the first down market (now?) triggers the ?litigation time bomb? lurking in SOX.
• More importantly, as Butler and I discuss, there?s a strong argument that markets, given the opportunity, would have produced many, if not all, of the benefits attributed to SOX, but at lower cost.

All of which strikes me as about right. Except for the minor quibble that he forgot to mention The Complete Guide to Sarbanes-Oxley.

Hewitt and Reynolds on Steyn on Black with Strine in the Wings

Hugh Hewitt recently linked Mark Steyn's wrap up column on the Conrad Black trial, in which Steyn opined:

Lord Black of Crossharbour is now a convicted felon. And those of us who believe he's innocent of any crime have to acknowledge that reality.

Hugh concludes: "Steyn is so skilled at his craft, he could have made TimesSelect work."

Glenn Reynolds links to Steyn's blog covering the Black trial, in which Steyn launches a blistering attack on the fairness of US criminal justice. On that blog, we also find such gems of objective journalism as the following:

Conrad Black is only in his present predicament because of his love of America and therefore, when his tribulations began four years ago, an undue faith in the integrity of its judicial process. Were it not for his excessive respect for the US justice system, Conrad would have done a Garth Drabinsky or a Marc Rich and been holed up far away somewhere. After all, it's hard to see, say, Switzerland extraditing to the US for something that wouldn't even be a criminal case in Geneva or Lucerne, never mind one commanding a century in jail. It is because of a touching and naive love for America, its law and even the SEC (see his Roosevelt book) that Conrad stands right now in the well of Judge Amy's courtroom and faces the prospect of never seeing his home in Toronto again.

About that Roosevelt book Steyn mentions, I once blogged:

Black also is the author of a recent biography of Franklin Delano Roosevelt. Interestingly, one of the charges against Black is that he caused Hollinger to spend $8 million to buy FDR historical papers, which he presumably then used in writing his FDR biography. For a critique of Black's analysis of FDR's economic policies, see Jim Powell's review, which Alex Tabarrok of Marginal Revolution strongly endorsed.

In other words, even when it came to writing that book, Black used company funds rather than his own money.

In any case, I haven't been paying much attention to Steyn's coverage of the Black trial, since it became obvious so early on that Steyn was intent on providing a whitewash for his former employer. (From Wikipedia: "Steyn became a close ally of former Canadian and Hollinger chief Conrad Black, and subsequently wrote for many of Black's newspapers.")

Let's put Steyn's hagiography in perspective by going to Delaware Vice Chancellor Leo Strine's opinion in Hollinger Intern., Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), in which Strine made the following findings of fact:

• "Conrad M. Black, the ultimate controlling stockholder of Hollinger International, Inc. (“International”), a Delaware public company, has repeatedly behaved in a manner inconsistent with the duty of loyalty he owed the company." (1028-29)
• "During the course of his dealings, Black misrepresented facts to the International board, used confidential company information for his own purposes without permission, and made threats, as he would put it, of “multifaceted dimensions” towards International's independent directors." (1029)
• "By late October 2003, the Special Committee had come to a troubling conclusion; namely, that $15.6 million in so-called “non-competition” payments had been made by International to Black, Radler, Atkinson, and Boultbee-i.e., the International management team-without proper authorization. Furthermore, another $16.55 million in “non-competition” payments had been made by International to Inc.-even though Inc. had no operational capacity to compete with anyone. Of these amounts, Black had received $7.2 million personally, as had Radler." (1036) In other words, Black paid himself $7.2 million of the shareholders' money (remember that his economic stake was only 15%) with no - nada, zilch, nil - independent authorization. Hollinger was not Black's personal piggybank, but he treated it as such.
• "After performing its own inquiry into the non-compete payments, the [Hollinger] Inc. audit committee presented a report to the full Inc. board on November 19, 2003 that included various recommendations. Among other things, the Inc. audit committee recommended that Black, Radler, and Boultbee immediately resign from their management positions at Inc., and that Atkinson, Boultbee, and Radler resign from Inc.'s board of directors. On November 21, 2003, the five non-independent directors voted against taking these actions, over the objection of all four independent directors. The independent directors promptly resigned from the Inc. board." (1044)
• In violation of contractual obligations he had undertaken, Black interfered extensively with efforts to undertake a financial restructuring of Hollinger. (1045ff)
• "In late December, Black was questioned by the SEC about matters within the scope of the Special Committee's investigation, including the non-competes. He invoked the Federal Constitution's privilege against self-incrimination and refused to cooperate. Specifically, Black refused to answer any questions regarding the non-competes on the ground that his answers might incriminate him. By doing so, he denied the SEC the full cooperation of International that had been promised when the Restructuring Proposal was announced in November." (1049)
• "Black also began steps to repudiate his commitment to repay the monies due back to International under the Restructuring Proposal." (1049)

Strine concludes: "First, having had a three-day evidentiary hearing, I am in a good position to make certain credibility determinations and have done so. ... As to Black himself, it became impossible for me to credit his word, after considering his trial testimony in light of the overwhelming evidence of his less-than-candid conduct towards his fellow directors. In some ways Black was feistily direct, flat-out admitting that he viewed himself as having no obligation to spend time on the Strategic Process after his removal as CEO, despite ¶ 6 of the Restructuring Proposal. Black also vigorously defended his failure to inform the International board of his discussions with the Barclays. But then again, he could hardly deny these facts. On more debatable points, I found Black evasive and unreliable. His explanations of key events and of his own motivations do not have the ring of truth. I find it regrettable to say so but it is the inescapable, and highly relevant, conclusion I reach."

In contrast, as the Independent observed after the criminal trial:

For Black's defence to be believed, the jurors would have had to conclude not only that [David Radler, Black's business partner since 1969, who decided to admit his part in the crime and become a government witness in September 2005] was a liar, but also that the board directors of Hollinger who gave evidence for the prosecution, including a former US ambassador, a former governor of Illinois, and Marie-Josée Kravis, who has served on the boards of several public companies, were also inveterate liars.

Given their longstanding personal and professional ties, it is perhaps understandable that Steyn would wish to see the best in his former boss. (But see The Independent, which called Steyn "Black's indefatigable supporter and – some would say – useful idiot....")

As for me, I've never met Steyn and read him only rarely. In contrast, as a corporate law professor, I read Leo Strine's opinions routinely. And I agree completely with Len Costa:

IN THE POST-ENRON WORLD, many fallen moguls have had their transgressions laid bare in court. But in February 2004, newspaper baron Lord Conrad Black of Crossharbour received an unusually explicit judicial whipping. That was the day Black's bad behavior ignited the pen of a sharp-tongued young Delaware Chancery Court judge named Leo Strine. Strine, who was confirmed to the court in November 1998 at the age of 33, has emerged as the hardest-working, wittiest, and most outspoken judge on the world's most important court dealing with corporate law. More than 60 percent of Fortune 500 companies are incorporated in his tiny home state, drawn by a lax corporation law and the court's propensity not to second-guess decisions made by businessmen. ...

Strine's record is enviable. Since his confirmation to the bench in 1998, he has written more than 100 business law decisions. Only a handful have been reversed. "They are extremely well crafted legally," says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

It may be that the Black trial is yet another example of the criminalization of agency costs, a trend I have criticized. It may be the case, as I speculated, that the verdict was a compromise. But let's not kid ourselves. In my opinion, Conrad Black was the worst example of the Imperial CEO who repeatedly plundered and pillaged his shareholders for his own personal gain. (I emphasize that this is just my opinion in light of Black's reported use of libel suits "to neuter coverage of his activities.") As the Toronto Star reminds us:

Richard Breeden, a former SEC chair recruited by Hollinger International to examine the firm's Black-era compensation practices, issued a report accusing Black and associates of operating the firm as a "corporate kleptocracy," diverting some $400 million (U.S.), or 95 per cent of Hollinger International's adjusted net income between 1997 to 2003, to themselves and holding companies controlled by Black.

Again, from the Independent:

According to their (very unofficial) biographer Tom Bower, Conrad Black and Barbara Amiel were millionaires who behaved as if they were billionaires, desperate to keep up with the Kravises, Manhattan's pre-eminent power couple, who definitely are billionaires. Ms Amiel envied the Kravises their two private jets and encouraged Black to acquire two corporate jets for Hollinger. Once, when her Concorde flight was delayed, she tried to reach Lord King, the British Airways chairman and a Hollinger director. Instead she had to pass on a message for him via a Telegraph journalist: "Tell Lord King that I'll never fly commercial again. I'm finished with British Airways, public transport and the lot of them."

It was Black's arrogant refusal to abide by a November 2003 agreement to pay back $7.2m in non-compete fees and admit that they were "not properly authorised on behalf of the company" and his underhand attempt to sell the Telegraph Group to the Barclay twins that proved his undoing. What followed was an investigation by the Securities and Exchange Commission, the Delaware court case in February 2004, at which Judge Leo Strine characterised Black as an "evasive and unreliable witness", and Hollinger's May 2004 $1.25bn lawsuit against the Blacks, culminating in the seizure of their principal assets and the indictment against him in the autumn of 2005.

Plurality Voting for Directors and the Withhold Authority Option

The email brought the following question from a reader who works for a government agency:

I am looking into the rationale for the option to "withhold" one's vote (instead of an "against" option) in the election of directors. There does not seem to be much literature on this aspect of director elections. Any insight would be much appreciated.

I replied as follows:

I have always assumed that the withhold authority option was created by the SEC to deal with the prevailing rule of electing directors by plurality.

Until quite recently, under plurality voting rules in most states, a vote "against" a director candidate had no legal effect.

My reply continued:

SEC Release No. 16356, which was the adopting release for the relevant language, states:

Rule 14a-4(b)(2), as proposed, would have required that a form of proxy relating to the election of directors list the nominees individually. It also would have permitted shareholders to vote for or against each nominee, individually, by marking a box or by other similar means. A mechanism for shareholders to vote in favor of the entire slate of nominees by marking a single box, rather than by marking boxes for each of the nominees, also would have been permitted provided that there was a similar means for the security holder to vote against the entire slate. …

Virtually all of the commentators addressed themselves to questions concerning the feasibility of structuring a proxy card to allow individual voting and the costs necessary for implementation. The corporate commentators generally expressed opposition to the proposal based on cost estimates included in their comments. Most of these commentators, including corporate transfer agents, asserted that this proposal would make the current vote tabulation system obsolete, thereby requiring new data handling systems in order to tabulate the expanded number of proposals. It was further argued that the proposal would not only reduce the accuracy and efficiency of the tabulation process, but also would overly complicate the process of voting on a proxy card, thereby fostering shareholder disinterest and confusion.

A number of legal commentators questioned the treatment of an “against” vote under state law, most arguing that it normally would have no effect in an election. They also expressed the concern that shareholders might be misled into thinking that their against votes would have an effect when, as a matter of substantive law, such is not the case since such votes are treated simply as abstentions. …

The Commission has carefully considered the comments and recognizes that, given the present state of proxy tabulation procedures, the rule, as proposed, could be burdensome to some companies and that there may be other ways to achieve similar benefits without the economic and practical difficulties presented by the proposed rule. Therefore, as adopted, rule 14a-4(b)(2) has been revised to delete the specific requirement of a for and against vote for individual nominees. Instead, the rule provides that the form of proxy shall clearly provide one of several designated methods for security holders to withhold authority to vote for each nominee. It is contemplated that the rule will allow issuers to provide shareholders the opportunity to express themselves in the most economic and practical manner. The Commission intends to monitor the workings of the rule and will consider appropriate revisions as deemed necessary to facilitate shareholder participation in the corporate electoral process.

Rule 14a-4(b)(2), as revised, requires that the names of the persons nominated to the board shall be set forth on the form of proxy. This requirement will provide shareholders with the readily accessible information upon which to withhold authority from individual nominees if such is their desire. It is contemplated that a horizontal listing of the nominees could be set forth in the space available on the form of proxy.

Robert Todd Lang explains in 1486 PLI/Corp 1115:

The SEC Adopting Release clearly indicates that the SEC knew that the effect, under state corporate law, of executing a proxy in this manner, whatever it was called, would be equivalent to an abstention, and would not count toward the vote required under the prevailing plurality requirement, concluding that the term “withhold authority” more accurately conveyed the concept to shareholders. Consequently, it seems that the SEC's creation of the “withhold authority” proxy option represented the creation of a unique form of abstention for the election of directors which could be affirmatively selected on the proxy card by shareholders. Underlying this affirmative ability to abstain was the idea that withholding authority represented an expression of dissatisfaction with the particular candidate, a different means of implementing the proposed rule's “against” voting mechanism. Indeed, the rule provides in an instruction that a means to “vote against” should instead be provided on the proxy card where legally effective under state law. Accordingly, both the “vote against” proposed by the SEC and the “vote withheld” it adopted provided a means for shareholders to express dissatisfaction with nominees, but without having a direct effect on the election. In serving primarily as a shareholder communication mechanism, the withheld vote was largely the same in purpose as a precatory proposal required to be included in company proxy material under Rule 14a-8. Based on the federal regulatory history, the withheld vote in the case of plurality voting may be considered a form of abstention for reasons of dissatisfaction with respect to the election of one or more nominees, but the legal effect is primarily dependent on state law and each corporation's charter and bylaws. Accordingly, the meaning to shareholders may not be entirely clear, particularly since shareholders are likely to have different reasons for withholding their votes. …

Under the plurality voting system used for the election of directors, a vote is cast for each nominee or it is not cast at all, since there is no vote against. This inability to dissent means that a nominee can be elected to the board if at least one share is voted in his or her favor, as long as no nominee receives a greater number of affirmative votes and a quorum is present. The number of shares actually voted in the election are irrelevant once a quorum is established.

Might I ask why you’re interested?

No answer to that last query so far.

Interestingly, I today came across a new paper on SSRN entitled Are Uncontested Director Elections Meaningful?

Abstract: Almost all company directors are routinely approved in uncontested elections; that is, no outside group contests director nominees via a vote-no campaign or a proxy fight. Because of plurality voting rules, such elections are meaningless, in the sense that the director nominees are almost surely elected. We hand collect over 10,000 individual director vote tallies from these meaningless elections and assess whether they serve as an aggregator of investor perceptions regarding firm management. We document that vote approval is extremely high for almost all nominees in uncontested elections, with the lowest quintile of vote approval still having a mean of 90%.

Nonetheless, we provide evidence that uncontested elections serve as meaningful aggregators of investor perceptions by documenting that (1) vote approval is associated with prior-year stock return and prior-year return on assets, and (2) vote approval predicts stock price reactions to subsequent announcements of management turnovers. In addition, we provide evidence that boards are responsive to the sentiment captured in the uncontested vote by documenting that vote approval predicts forced CEO turnover in the twelve months after the annual meeting. Furthermore, we show that other statistics that determine or reflect investor perceptions (i.e., prior stock returns, prior return on assets, and change in institutional ownership) do not subsume the information content in vote approval, which suggests that it captures some unique aspects of investor perceptions. Finally, we document that both the change in institutional ownership, which captures institutions voting with their feet, and the vote approval measure both have predictive value in identifying forced turnovers, which suggests that each type of voting captures different investor perceptions. We conclude that while director do not directly determine who sits on boards, they do reflect investor perceptions regarding board performance and the board appears to be responsive to those perceptions.

There's a glitch in that last sentence, but I take the finding "that uncontested elections serve as meaningful aggregators of investor perceptions" as suggesting that the SEC's imposition of a requirement that the form of proxy provide a "withhold authority" option actually has had informational value for firms. The finding that the vote is associated with "forced CEO turnover," moreover, suggests that the requirement may also have positive governance effects.

Independent Director Access to Information

It's long been assumed that the mushroom is a good analogy for how management funnels information to independent directors: the latter are kept in the dark and fed manure. An interesting recent paper, however, found that:

... independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement.

This suggests that independent directors may have almost as good access to information as executive officers, at least at firms with strong corporate governance. It further suggests that information asymmetries are no longer as significant a barrier to director primacy as they once were.

Journalism's "Public Function"

Journalists seem to have convinced themselves that they aren't part of a business. Case in point, James Fallows:

... as is obvious as soon as you think about it, the press has cultural, social, and political effects beyond the purely commercial. But its managers are being forced to make decisions on the same focused quarterly-returns basis that guides choices at Merrill Lynch or General Motors. Sometimes those pressures for maximized return (and rising stock price) make news organizations more efficient. But in general they weaken or destroy the parts of news systems that affect people in any role other than as shareholders - that is, as readers, viewers, voters, citizens.

Whining about Rupert Murdoch's pending takeover of the Wall Street Journal follows at length. (HT: Andrew Sullivan)

This is precisely the sort of hubris that leads journalists to think of themselves as some sort of fourth branch of government, with a mandate to act as an ombudsman for society. It would be silly, if it were not so pernicious.

Economist Michael Jensen takes a much more sensible approach, writing:

I assert that most of the demand for the product of the various “news” services derives, not from the individuals’ demands for “information,” but rather from their demands for entertainment. In that sense, the news media are in competition with drama, soap operas, situation comedies, fictional writing, sports events, and so on. Observing the almost overwhelming devotion of the news media to political events, quasi events and non-events, it is easy to delude oneself into believing that people have a demand for information about the political sector. Downs, in his classic book on democracy, argues persuasively, however, “that for a great many citizens in a democracy, rational behavior excludes any investment whatever in political information per se.” ...

Go read the whole thing, it's a brilliant essay. For present purposes, however, the main point is that journalists have precisely the same public function as the guys that produce such dreck as Jackass or Girls Gone Wild.

Moraga (Bel Air) 2004

A white wine in a half bottle from the famous Los Angeles vineyard. Reportedly, it's a Sauvignon Blanc. This bottle, however, had a very Riesling-like peach flavor. On the other hand, there was a gooseberry and bell pepper element on the finish. I found it a bit thin and one dimensional, suggesting that it has value mainly as a curiosity. Candidly, I much preferred the other half bottle of Conundrum 2004 (previously reviewed in 5/06) we opened tonight. Grade: B

The Republicans and Kids Today

Andrew Sullivan:

A new study (PDF) finds a devastating collapse of support for the GOP among the next generation. Money quote:

Young people react with hostility to the Republicans on almost every measure and Republicans and younger voters disagree on almost every major issue of the day. The range of the issue disagreements range from the most prominent issues of the day (Iraq, immigration) to burning social issues (gay marriage, abortion) to fundamental ideological disagreements over the size and scope of government. This leaves both potential Democratic nominees with substantial leads over Rudy Giuliani, but importantly, both Democrats still have room to grow their support among younger voters. The current problems with the Republican brand are not fully reflected in young people’s preferences for President.

One is reminded, of course, of the famous aphorism that someone who is not a liberal in his youth has no heart and who is not a conservative in his old age has no mind.

Having said that, however, I have no doubt that George Bush has done long-term damage to the GOP brand. We are likely to be paying for his mistakes with years of Democratic rule leading to higher taxes and economy-choking regulation. Personally, I plan on hunkering down in a bunker well stocked with good cigars, red wine, red meat, dogs, fast cars, 80s music, and maybe even a few guns until it's all over.

Clio (Jumilla, Spain) 2003

A blend of 70% Monastrell (a.k.a. Mourv�dre) and 30% Cabernet Sauvignon. My experience with Spanish wines is almost nil, but if this sample is anything to go by, I am missing something. Very deep purple. Strong legs. A big, fruity bouquet. Blackcurrants, mocha java, cocoa, and toasty oak. Although the tannins are supple, the body and weight of the wine suggest that it could have rewarded additional cellaring. I am tremendously impressed. This was a gift from a friend, to whom I now owe a very obsequious thank you note. Grade: A