1. Frum is right and Harcourt is wrong. Being a corporate litigator does not develop the same skill set re business as being a transactional lawyer. I agree with Paul Horowitz that "it is quite possible ... to work for many years as a litigator, working for some of the nation’s largest businesses, without having a tremendously well-developed sense of the business environment, of what businesses need to do to flourish, or even of significant aspects of business law that are part of the planning rather than the litigation stage of corporate life." I think Frum gets it, which is why I don't think he's being dishonest.
With OTAs under way and training camp around the corner, it's time to start thinking about the 2009 fantasy football season. After a successful inaugural ProfessorBainbriodge.com season in 2008, I plan to run two leagues in 2009: one on a free site and one on a pay site (probably Yahoo and CBS, respectively.)
Randy Moss went very high in most leagues last year, some even in the first round, while his teammate Wes Welker could be had a handful of rounds later. Moss caught 11 touchdowns while Welker caught a measly three, or so you think. Their yardages were both comparable, Welker coming in with just 157 yards more than Moss, which in most leagues is around 15 fantasy points. With Moss leading the way in touchdowns that gave him a 48 point advantage; and with the 15 points now figured in we are looking at a 33 fantasy point edge to Moss. Now comes the eye-opener. When you add in the points-per-reception. Last year Welker had 111 receptions while Moss had only 69. That is a 42 point fantasy edge to Welker, making him the better fantasy football option in PPR leagues, where Moss would be the preference in standard leagues.
So suppose I were drafting 10th in a league that uses PPR scoring and snake drafting. I'd expect Andre Johnson to be available with the 10th pick and I'd grab him. At 2.3, I'd expect a very good RB-1 to be available: Steve Slaton, Marion Barber, or Clinton Portis. If they're all off the board, there should be some great receivers available, such as Moss or maybe even Larry Fitzgerald, in which case a WR-WR-RB-QB-RB strategy might be worth pursuing.
Lisa Fairfax reports that:
Yesterday, Exxon shareholders voted against all eleven of the shareholders proposals on the company’s proxy statement. So it appears that the extra effort to reach out to mutual fund shareholders did not have the desired impact on the vote. In fact, the proposal to split the CEO and chair functions garnered only 29.5% of the vote, a ten percent decrease from last year. Moreover, despite the extra outreach by shareholders, Exxon’s annual meeting was notable because of the lack of protesters outside of the meeting place. So perhaps the meeting and its outcome reveal that the financial crisis has had an impact on shareholder activism, making shareholders more hesitant to rock the boat and less willing to support initiatives that may impinge on managers’ discretion or otherwise pressure them to divert resources on green initiatives, despite assertions that such initiatives could improve the financial bottom-line in the long term.
It just goes to show, perhaps, that shareholder activism is an expensive indulgence for people with too much time on their hands. Like other luxury items, it may disappear during bad times, even though certain people would have you believe that these sort of times are when it is needed most.
Target Corp.'s shareholders have re-elected the company's slate of directors, rejecting a hedge fund's alternate slate, according to preliminary vote totals.
William Ackman had sought for months to put up his own slate — including himself — to the Minneapolis-based retailer's board of directors. ...
Shareholders also sided with the company in approving a measure that sets the board's size at 12 members.
Yet, the SEC and the Congress doubtless will continue pressing for pro-activism "reforms."
The Detroit News reports:
Michiganians appear evenly divided in their belief that President Barack Obama's heavy involvement in restructuring the auto industry is doing more harm than good, a Detroit News/WXYZ survey shows.
With Chrysler LLC in bankruptcy proceedings and General Motors Corp. apparently ready to follow suit, 42 percent of poll respondents say Obama's role has hurt the domestic automakers while 39 percent say he's been helpful. The poll's margin of error is plus or minus 4 percentage points.
Under pressure from the federal government, GM will close 16 plants, the iconic Pontiac brand is disappearing and thousands of auto dealerships across the nation will shut their showrooms.
Those who think Obama's already done too much are in for some more bad news, because CNBC is reporting that:
Chapter 11 reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 percent of the company's stock had failed. GM has received $19.4 billion in federal loans. General Motors bondholders felt they deserved something like a 58 percent stake in the company in exchange for their billions of dollars in debt. What they were offered wasn't even close. GM bondholders are owed about $27 billion, the largest chunk of GM's roughly $58 billion in debt.
The same CNBC report informs that:
There was a small hope Tuesday that GM could avoid a bankruptcy filing when the United Auto Workers union disclosed that it would take a 20 percent stake in GM — down from the original plan of 39 percent. That seemingly freed 19 percent of the Detroit-based company's shares to sweeten the pot for its recalcitrant bondholders. ...
Because the bondholder deal did not go through, the equity freed by the UAW deal now apparently will go to the U.S. government, which may have to commit billions more for GM's restructuring in court. The government's stake in the company originally was to be 50 percent, according to GM's regulatory filings. But it now could be as high as 69 percent.
With the UAW owning 20%, only 11% of GM will remain in the hands of private investors of any stripe. In effect, GM will have been nationalized, putting Barack Obama in charge.
Even at its full sticker price, the CTS is well worth the money. Here you have a car with the outstanding handling and ride qualities of its German competitors but with more room inside than a similarly-priced BMW or Mercedes-Benz.
The inside is pretty, although I don't know about "prettiest." The ergonomics of the center console are excellent. The analog gauges are clear and easy to read in both daylight and at night. The XM radio worked great. The steering wheel feels really good in your hands.
The interior is also one of the prettiest in the business. Plus, the controls for navigation, climate control and entertainment are much easier to use than those found in most luxury cars. The CTS was also named a "Top Safety Pick" by the Insurance Institute for Highway Safety.
On both the left and right side, but especially the latter, the places where one's knees naturally rest have sharp edges and are formed out of very, very hard plastics. By the end of the second day, my knees were seriously hurting. By the end of the third, I just wanted out of the damn car. This may seem like a little thing. But it is little things like this that separate good cars from great cars. Every BMW I've ever owned (and between us my wife and I have owned 5) has had a more comfortable driving position than the CTS. (And don't even get me started on how much better my Porsche is than the CTS.)
JW Verret interviews Delaware Supreme Court Justice Jack Jacobs, whose many prominent corporate law decisions have given him enormous influence in our field. (We are big Jacobs fans here at PB.com)
Verret: You first joined the bench in 1985, which seems to have been a watershed period for takeover law in Delaware. It must have been an exciting time to be on the Court of Chancery?
Justice Jacobs: It was a very exciting time, for many reasons. First, the takeover cases were at the very cutting edge of Delaware corporate law. Although we could not know it at the time, they ultimately transformed Delaware corporate jurisprudence and made merger and acquisitions law a new and important sub-specialty. It was very heady to be at the center of many of these widely publicized cases. Second, those cases presented unique intellectual challenges, not only because each new takeover dispute pushed the envelope of corporate law doctrine out one more notch, but also because it forced the judges to do their best to reconcile the rulings in each new case consistently with the doctrine developed up to that point. That was more easily said than done, and in many cases the process took years to complete. This new doctrine was a moving target that was being developed at warp speed, rather than at the tortoise’s pace which characterized corporate doctrinal development during decades before. Third, and relatedly, these cases forced the judiciary to examine several of the basic premises and underpinnings of corporate law.
Our need to shape this law into a fabric that was coherent led the Court of Chancery judges to become a very collegial group. Although each trial judge is free to decide a case as he or she deems appropriate, unencumbered by the views of colleagues, nonetheless, we found it institutionally useful and beneficial to attempt to puzzle out collectively (where possible) the difficult issues that we confronted individually, in circumstances where the decision of one judge in any particular takeover case could bind other judges in future cases. This practice also helped to avoid inconsistent adjudications and to strengthen that court as an institution.
Verret: What is so unique about Delaware's approach to corporate law?
Justice Jacobs: That is a subject to which corporate law academics have devoted much time and law review space. In my opinion, the quality that is most unique is its effort to reconcile, in each specific case, the requirements of law (specifically, transactional predictability and giving practical guidance to corporate fiduciaries) with the commands of equity (to arrive at results that are fair and make sense in the business world). That is often more easily said than done, but over time I believe we have been successful in doing that.
Walter Olson comments:
Her defenders (and less-severe critics) do make some interesting points about a judge whose friend, Yale lawprof Stephen Carter, calls her a "moderate, with liberal leanings" but not a "firebrand on a mission":
Alarms over Dabit v. Merrill Lynch notwithstanding, Paul Karlsgodt at Class Action Watch finds Sotomayor's rulings in class action and securities cases mostly unexceptional (more here). Jonathan Adler summarizes what he's found, good and bad. Conservative California lawyer-blogger Patterico says the nominee, a former prosecutor, "appears to be OK on criminal law issues". And at Volokh Conspiracy, libertarians David Bernstein and Ilya Somin have good words for rulings by the judge on public-employee discipline for off-job racist speech and seizure of the vehicles of persons charged with DUI.
The talk radio-types will get worked up, but it's going to be hard (based on what we know so far) to make the case that Sotomayor is so far out of the mainstream as to be unconfirmable.
Walter Olson comments on Barack OBama's nomination of Sonia Sotomayor to the Supreme Court:
Two 2006 cases present more problems for Sotomayor advocates, but they're on subject matter that could come off to the public as dry and remote: Merrill Lynch v. Dabit, where she held that state courts could entertain certain securities lawsuits notwithstanding the preemptive effect of federal law (reversed 8-0 by the high court), and Knight v. Commissioner, on the deductibility of certain trust fees, in which the court upheld her result but unanimously rejected her approach as one that (per Roberts) "flies in the face of the statutory language."
Issues of business law don't come across as Sotomayor's great passion one way or the other, so it's hard to know what all this portends for the high court's direction on business issues should she be confirmed. As Home Depot's ( HD - news - people ) Bernard Marcus and others have pointed out, for all of David Souter's predictable role on the court's liberal side in most high-profile cases, he in fact steered to middle-of-the-road, hard-to-characterize views on many issues of litigation, liability and procedure, either as a swing vote or as the author of opinions. (Two key issues to watch: what sort of constitutional restraints, if any, there are on punitive damages, and how much scrutiny judges should give to initial pleadings to determine whether a federal lawsuit ought to go forward.)
In a post at Point of Law, Olson reports:
Randy Maniloff at White and Williams finds that she's ruled mostly for insurers against policyholders (PDF) in coverage disputes -- not usually seen as the more "liberal" or empathy-driven way of doing things.
OTOH, the Business Law Professor observes:
I was reviewing Judge Sotomayer's record on business cases and the same word kept coming up, reversed. There is little to be said of a consistent record learning one way or the other on the business cases except the high frequency of reversals by the Supreme Court whenever one of her cases goes up on appeal. There is one case she wrote that I do not like at all and that is her opinion several years back giving the NYSE immunity from investor actions questioning the manipulative activities of NYSE floor brokers and specialists. The NYSE has change enough to moot the opinion, but at the time it I found it poorly reasoned and of questionable policy to boot.
I am saddened to learn that my former University of Illinois colleague John Cribbet has passed away. The College of Law announcement informs us that:
Cribbet, chancellor of the Urbana campus from 1979-84, was a well-known legal scholar and pioneer in the field of property law. His books include the widely used "Cases and Materials on Property," a law textbook now in its eighth edition.
"John Cribbet transformed all that he touched - the university, the College of Law, and, most importantly, his students and colleagues," said Bruce P. Smith, the dean of the college and Guy Raymond Jones Faculty Scholar. "He was a legendary teacher and scholar in the field of property law. But he was also a terrific person.
I can confirm from personal experience that John was an amazing teacher (I sat in on several of his classes as a young teacher to see what the fuss was about and was blown away by his command of the classroom) and a wonderful colleague. He was a true gentlemen and scholar. (HT: Leiter)
The Houston Chronicle relates:
The Dallas Mavericks are out of the NBA playoffs, and the spotlight is now following the team's controversial owner, Mark Cuban, to a different venue — federal court.
The insider trading suit filed against Cuban by the U.S. Securities and Exchange Commission last year is scheduled to receive its first hearing Tuesday when attorneys present oral arguments on a motion by the billionaire owner to have the case dismissed.
The hearing will provide yet another window to a case that has captured the attention of the country's legal minds, some of whom believe it represents an unprecedented step by the SEC....
"The basis on which they're going after Cuban hasn't been tried before," said Peter Henning, a law professor at Wayne State University in Detroit who formerly worked as an attorney in the SEC's enforcement division. "Whether the SEC is going to be able to stretch (its authority) that far certainly remains to be seen."
The SEC alleges that Cuban engaged in insider trading when he sold his shares in a Canadian Internet search engine company, Mamma.com Inc., after receiving confidential information that the company planned to sell additional shares through a private offering in 2004. Cuban was able to avoid more than $750,000 in losses by selling his shares, according to the SEC.
The government's case is based on the contention that, by violating an oral agreement to keep the sensitive information confidential, Cuban committed insider trading.
Cuban and his legal team, while not admitting that the facts detailed in the suit are true, say the government's premise is wrong. They say Cuban, whose shares represented a 6.3 percent stake in Mamma.com, was never an "insider" because he didn't have a fiduciary or similar duty in his relationship with the company.
Cuban's motion to have the case dismissed has sparked a series of pleadings and briefs in which he has attacked the government's position and the government has pushed back with equally sharp elbows.
The SEC argues that a confidential agreement is sufficient to establish a fiduciary relationship and derides Cuban's attempt to say it isn't so.
"Cuban's argument that a person can promise confidentiality and then deliberately and furtively break that promise by trading on the confidential information is shameless," the SEC stated in a memo opposing his motion to dismiss. "Cuban accepted a duty of trust and confidence to the source of the information and was therefore legally obligated to abstain from trading or first disclose his plan to trade."
Five respected law professors have filed a brief in support of Cuban's position. The professors — Alan Bromberg of Southern Methodist University in Dallas, Stephen Bainbridge of UCLA, Allen Ferrell of Harvard, Todd Henderson of the University of Chicago and Jonathan Macey of Yale — weren't compensated for signing off on the brief, according to the document.
While doing some research on Google, I recently ran across a article on hedge funds by my friend U Penn bankruptcy law scholar David Skeel in the November 2005 (!) issue of Legal Affairs. Money quote:
Hedge fund misbehavior looks ominously like the edge of the next wave of financial scandals. While many top executives of Enron and WorldCom—and the investment bankers and accountants who advised them—have been punished or soon will be, the scandals they perpetrated never prompted a thorough rethinking of how American markets should work, and how best to preserve the markets' integrity. After 25 years of deregulation in financial, airline, and other industries, a high-velocity, service-oriented economy has given the wealthiest Americans more money than ever. They are pouring it into hedge funds, whose whiz-kid managers are guided by an overriding principle: Multiply the money, any way you can.
I’m not convinced that hedge funds deserve much of the blame for the current financial mess, but Skeel’s essay otherwise looks quite prescient in many respects.
Senator Chuck Schumer's proposed Shareholder Bill of Rights would, inter alia:
[Affirm] the U.S. Securities and Exchange Commission's authority to grant shareholders access to the corporate proxy for nominations to the board of directors. ...
The bill requires public companies to create a separate risk committee in order to ensure that risk management is given appropriate oversight. Companies would be required to separate the duties of the chief executive and board chairman -- such as what happened at Bank of America. In April, shareholders voted to strip Chief Executive Officer Kenneth Lewis of his position as chairman of the board.
Schumer's bill would require companies to obtain shareholder approval for executives' so-called golden parachutes, or the hefty pay packages given to executives when they leave the company.
It also requires corporate directors to be subject to annual shareholder votes and to receive a majority of votes cast by shareholders in order to remain on board.
Count me as a skeptic. Several years ago, I published a pertinent paper entitled Director Primacy and Shareholder Disempowerment. You can down load it here.
Abstract: This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow "shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements."
In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm’s organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.
Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.
Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.
Keywords: corporations, corporate governance, shareholders, stockholders, institutional investors, board of directors, managers, voting
JEL Classifications: K22
In my corporate governance seminar this past semester, a couple of students wrote papers on the emerging phenomenon of so-called beneficial corporations (a.k.a. for benefit corporations). As Inc explained:
Public companies are legally obligated to maximize returns to shareholders, according to a widespread interpretation of corporate law. For private firms, it's more a matter of withstanding pressure from investors. Hannigan and Marx, for example, fear their social mission could be threatened if an investor changed his mind about Give Something Back's penchant for charity. They want to avoid the fate of ice cream maker Ben & Jerry's, which received a buyout offer from the Dutch conglomerate Unilever (NYSE:UL) in 2000. Founders Ben Cohen and Jerry Greenfield didn't want to sell, so Cohen assembled a group of investors to make a counteroffer. When they couldn't offer as much as Unilever, shareholders sued, and the company, then publicly traded, was forced to relent. In April 2000, Ben & Jerry's was acquired by Unilever for $326 million.
That's exactly the situation that B Lab, a new nonprofit organization, aims to prevent. The group is creating a new kind of company--the B Corporation. (The B stands for "beneficial.") It's less a legal designation than a certification system that will allow businesses to define themselves as socially responsible to consumers and investors. To become a certified B Corporation, a company must amend its articles of incorporation to say that managers must consider the interests of employees, the community, and the environment instead of worrying solely about shareholders. Those amendments, according to B Lab, will let entrepreneurs like Hannigan take on outside investors without worrying that their values will be compromised. "For us, this is a huge step forward," says Hannigan, whose company recently became one of about two dozen certified B Corporations.
While there might be some benefit here in providing an off-the-rack form that could have been difficult to contract into otherwise (or not -- more on this in a later post), the form surely seems tailor made to deal with the CSR problem. (On which see here, here, here and here). If corporate directors want to maximize something other than shareholder interests, let them. But why not also make them (permit them to?) identify their organizations accordingly -- call it Whole Foods, CIC –- and subject them to dividend monitoring by regulators (and see how well that goes over).
Part of the stated purpose with the CIC is, in fact, branding, and this might be its real appeal: “The CIC legal form was specifically designed to provide a purpose-built legal framework and a ‘brand’ identity for social enterprises that want to adopt the limited company form.” It’s a way for “socially-conscious” corporations cheaply to identify their consciousness (and a way for the rest of us cheaply to avoid investing in them). (But I will note that some fascinating recent research by Anup Malani and Guy David has suggested that there may be less value in nonprofit branding than we might have thought, and the benefits of a CIC designation may be accordingly limited).
Larry Ribstein commented:
The CIC clarifies ... that the key csr question concerns the extent of managers’ control over the cash. In a standard publicly held corporation, managers significantly control corporate cash subject only to shareholders’ fairly weak voting, selling and fiduciary rights. In a CIC, the managers have even more control over the cash.
... the main effect of opting into the CIC form is that the governing statute would then limit the extent to which the firm's governance ever could be changed through a takeover or similar device to restrict the manager’s control over the cash.
If US corporation law codes were more clearly understood to be enabling statutes, there is nothing the CIC buys you (other than the label) that could not be done via the articles of incorporation of a standard business corporation. The articles of an aspiring US CIC would include:
Unfortunately, it's not at all clear that US corporate law is sufficiently enabling to achieve this result. State law arguably does not permit corporate organic documents to redefine the directors' fiduciary duties. In general, a charter amendment may not derogate from common law rules if doing so conflicts with some settled public policy. In light of the well settled shareholder wealth maximization policy, nonmonetary factors charter amendments therefore appeared vulnerable. This problem seems especially significant for Delaware firms, as Delaware law became increasingly hostile to directorial consideration of nonshareholder interests in the takeover decisionmaking process.
The question of whether corporate law is sufficiently enabling strikes me as one of the two big issues. The other is how to give a B corp teeth.