ProfessorBainbridge.com

Hypocrisy thy name is Washington

An amusing WSJ editorial on how Jack Lew--President Obama's newly minted Treasury Secretary--has availed himself of virtually every fat cat perk about which Democrats are constantly complaining.

And people wonder why I won't fly, plus a note on my availability for academic events

From the WSJ:

The small regional jets once loved because they replaced rickety, noisy, slow turboprops have multiplied into the majority of domestic airline flights in the U.S., and are now seen as some of the least desirable airplanes. Travelers accustomed to riding in a full-size jet instead find themselves on planes with tighter seating, lower ceilings and fewer amenities for flights as long as four hours.

Regional-jet service has grown over the last 10 years to be the backbone of much of domestic air travel, even if it is impossible to stand up straight in the bathroom. ...

Russell Huffman, a tech company sales vice president on the flight, joked that airlines have "done a good job figuring out the right amount of misery people will put up with."

Wrong. At least as far as this camel is concerned, the airlines and TSA have figured out the right amount of miserable straws to break his back. I'm not scared of flying. I just fraking hate it so much that it'll take a death in the family to get me on a plane these days.

But I have discovered trains with sleeper compartments. And I'm hoping to use them to get back into the academic speaking circuit starting next year.

Judge Kozinski goes out of his way to be an asshole, but did he go far enough to require disqualification?

28 US Code sec. 455 provides that "(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned. (b) He shall also disqualify himself in the following circumstances: (1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding ...."

Many of us have become familiar with the activities of Paul Watson and his anti-whaling group Sea Shepherd Conservation Society through the Animal Planet program Whale Wars. In a civil case brought by the Japanese whalers' front group against Watson and the Sea Shepherds, US Ninth Circuit Court of Appeals Alex Kozinski (of cow porn fame) has issued an opinion finding that the whalers should be allowed to bring piracy claims against Watson and the Sea Shepherds. 

Kevin Jon Heller has shown that Kosinzki's grasp on the law is pretty weak:

... the Ninth Circuit, in an opinion written by Judge Kozinski, has decided that anti-whaling activism qualifies as piracy if it involves violence against a ship on the high seas. I’m running short for time right now, but I want to briefly respond to Kozinski’s key claim about the traditional understanding of piracy’s “private ends” requirement (p. 4; emphasis mine; internal citations omitted):

The district court construed “private ends” as limited to those pursued for “financial enrichment.” But the common understanding of “private” is far broader. The term is normally used as an antonym to “public” (e.g., private attorney general) and often refers to matters of a personal nature that are not necessarily connected to finance (e.g., private property, private entrance, private understanding and invasion of privacy)…. We give words their ordinary meaning unless the context requires otherwise. The context here is provided by the rich history of piracy law, which defines acts taken for private ends as those not taken on behalf of a state.

Kozinski doesn’t mention any of the historical sources that ostensibly constitute this “rich history”; he simply cites the dictionary definition of “private” and a 25-year-old Belgian case that has never been followed by any other court. But that’s not surprising: although the traditional understanding of piracy is not limited to acts of violence motivated by the desire for financial gain (an error made by many scholars and activists), there is significant historical support for the idea that piracy specifically excludes acts of violence that are politically motivated.

Heller continues with examples from legal history showing that Kozinski is wrong on the law, before concluding that:

Kozinski’s “rich history,” in short, is actually much poorer than he imagines. Perhaps he should spend less time writing clever introductions to his opinions and more time analyzing actual historical sources. 

Which brings me to that "clever introduction." Kozinski opens his opinion with these paragraphs:

You don’t need a peg leg or an eye patch. When you ram ships; hurl glass containers of acid; drag metal-reinforced ropes in the water to damage propellers and rudders; launch smoke bombs and flares with hooks; and point high-powered lasers at other ships, you are, without a doubt, a pirate, no matter how high-minded you believe your purpose to be.

Plaintiffs-Appellants (collectively, “Cetacean”) are Japanese researchers who hunt whales in the Southern Ocean. The United States, Japan and many other nations are signatories to the International Convention for the Regulation of Whaling art. VIII, Dec. 2, 1946, 62 Stat. 1716, 161 U.N.T.S. 74, which authorizes whale hunting when conducted in compliance with a research permit issued by a signatory. Cetacean has such a permit from Japan. Nonetheless, it has been hounded on the high seas for years by a group calling itself Sea Shepherd Conservation Society and its eccentric founder, Paul Watson (collectively “Sea Shepherd”). Sea Shepherd’s tactics include all of those listed in the previous paragraph. 

Remember there has been no trial. Kozinski is reversing the district court's dismissal of the piracy claims against Watson and the Sea Shepherds. There is no factual record on which Kozinski can draw any conclusions about Sea Shepherd’s tactics.

Beyond this, however, there is the demeaning and belittling tone adopted by Kozinski. "You don’t need a peg leg or an eye patch." A lame attempt at humor at defendants' expense?

Asserting the whalers have been "hounded," without proof thereof?

Calling Watson "eccentric"?

We are told that "it is reversible error for the trial court to belittle counsel, demonstrate outright bias, or 'so infect[ ] [the trial] with the appearance of partiality' that the trial court's conduct inevitably improperly influenced the jury." McMillan v. Castro, 405 F.3d 405, 409-10 (6th Cir.2005). Should it not equally be error for an appellate judge to belittle a party, especially before there is even a shred of admissible evidence on which to base such perjorative comments?

We are told by the Ninth Circuit itself that:

The Ninth Circuit has disapproved of the admission of derogatory statements from a judge concerning a defendant's credibility because a judge is an “authoritative, professional fact finder” who is apt to carry excessive weight with the jury. United States v. Sine, 493 F.3d 1021, 1033–34 (9th Cir.2007); see id. at 1031 (agreeing with a defendant that “derogatory factual findings and comments” from a judge's order in a prior related case created “too great a danger of unfair prejudice and thus violated Rule 403”). 

U.S. v. Wiggan, 700 F.3d 1204, 1220 (9th Cir. 2012). Yet, don't we have precisely such derogatory comments here? Don't they call into question Kozinski's impartiality?

Look, I think what Watson and the Sea Shepherds do at the very least hovers on the brink of eco-terrorism. But I'm not a federal judge charged with impartially assessing evidence and applying law. I'm just a guy with a blog.

Whatever one makes of Watson and his fellow ecomentalists, they deserve a fair shake. They didn't get one from Judge Kozinski. He may not be legally obliged to disqualify himself from further involvement in the case, an almost impossibly high standard, but he sure ought to take a hard look at himself and ask himself why he went out of his way to be an ass.

By the way, in what is the utlimate irony, Kozinski concludes his opinion by disqualifying the trial judge:

The district judge’s numerous, serious and obvious errors identified in our opinion raise doubts as to whether he will be perceived as impartial in presiding over this high-profile case. The appearance of justice would be served if the case were transferred to another district judge, drawn at random, and we so order in accordance with the standing orders of the Western District of Washington.

But Kozinski's opinion doesn't raise doubts about his impartiality? The man is a joke! Albeit not a very funny one.

Jim Hamilton: Contour of Dodd-Frank Corrections Bill Begins to Emerge in 113th Congress

Senator Mark Warner (D-VA) presaged this in December of 2012 when he said, in remarks at the Bipatisan Policy Center, that the Senate would take up a bi-partisan Dodd-Frank corrections bill in 2013. A 2500 page piece of legislatikon like Dodd-Frank will be in need of corrections, said Senator Warner, who is a key member of the Banking Committee and a author and co-author of a numberf of Dodd-Frank provisions. In addition, Senate Banking Committee Chair Tim Johnson (D-SD) said that the Commitee will consider changes to Dodd-Frank if they have strong and overwhelming bi-partisan  support. As more and more bi-partisan bills emerge, such as one codifying the end-user exemption from some Title VII requirements, the momentum for a Dodd-Frank corrections bill will become inexorable and irresistable.

via jimhamiltonblog.blogspot.com

I've got some provisions they ought to repeal. See Dodd-Frank: Quack Federal Corporate Governance Round II (September 7, 2010). Available at SSRN: http://ssrn.com/abstract=1673575

as somebody likes to ask, why can't we have a better news corp?

MSNBC has long been as bad as Fox News when it comes to ideological bias. But with the hiring of longtime Team Obama loyalists David Axelrod and Robert Gibbs, it’s official: MSNBC is worse.

The cable channel that flies under the banner of NBC News is now all but a bona fide organ of state propaganda, an information channel that speaks in the same dominant voice as the folks running the government–and tries to mask what it is up to.

via daily-download.com

Jim Barrall on "An Important Company Victory in the Proxy Disclosure Litigation Wars"

In a very important development in the current proxy disclosure litigation wars relating to annual meeting votes, last Thursday the Santa Clara County Superior Court sustained Symantec Corporation’s demurrer in Natalie Gordon vs. Symantec Corporation, et al., dismissing a shareholder lawsuit which had sought declaratory relief and damages against Symantec and its directors based on allegations that the directors had breached their fiduciary duties by failing to provide adequate disclosure to shareholders regarding Symantec’s say-on-pay vote in the company’s August 2012 proxy. The Symantec decision can be read here. (For background on the annual vote proxy disclosure litigation cases, see my February 5 post and Latham’s January 2013 Corporate Governance Commentary.)

While the court’s earlier denial of the plaintiff’s motion to preliminarily enjoin Symantec’s annual say-on-pay vote (in October 2012) was welcome and important news to public companies and their advisors (especially since the same court had previously granted a shareholder’s motion to preliminarily enjoin an equity plan approval vote in Stephen Knee v. Brocade Communications Systems In., et al.), as a decision on the merits, the court’s Thursday decision will be even more valuable than the injunction denial decision to companies in defending proxy disclosure lawsuits.

via tcbblogs.org

Science Gives All-Clear On In-Flight Flatulence For Health Reasons

A three-thousand word treatise published by The New Zealand Medical Journal on Friday has given anxious flyers prone to bouts of flatus good cause to breathe easy again, after a highly-scientific conducted by actual scientists produced empirical evidence supporting those in favour of farting on planes.

To do otherwise is now officially bad for your health, according to Science.

It took five researchers, gastroenterologists from all over the world, to determine that high altitude air pressure changes cause the body to produce more gas; gas that under the pretence of decency in a confined presurised cabin often remains confined in an even smaller pressurised cabin. It is there, under great duress, that the gas exposes its captor to the increased likelihood of contracting terrible ailments. 

The resulting "subsequent stress symptoms... hold significant drawbacks for the individual, such as discomfort and even pain, bloating, dyspepsia (indigestion), pyrosis (heartburn) just to name but a few resulting abdominal symptoms." Ergo, let it go.

 

via www.pedestrian.tv

Two thoughts. (1) A friend who knows of my aversion to flying thought this would get me back in the air. What exactly is he implying?

(2) In an era of austerity, surely even Obama and Reid would think that funding for this sort of nonsense could be cut. Right?

Corporate Law and Governance: UK: FSA responds to to Treasury Committee report on LIBOR

Last August the Treasury Select Committee published its report Fixing LIBOR: some preliminary findings: see here. The response of the Financial Services Authority was published today: see here (pdf). This contains some interesting points about the FSA's powers in respect of approved persons, and the approved persons regime, which were also recently discussed before the Parliamentary Commission on Banking Standards: see here.

via corporatelawandgovernance.blogspot.com

For my take on reforming LIBOR, see Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013; UCLA School of Law, Law-Econ Research Paper No. 13-02. Available at SSRN: http://ssrn.com/abstract=2209970

Attention corporate law professors needing an article idea

The Michigan Law Review has announced that:

The Michigan Law Review publishes an Annual Survey of Books dedicated to book reviews. Book reviews are not included in any other issue of the Michigan Law Review. The Survey includes reviews of books published in the current year and the past two years. So, for example, the 2014 Survey, which will be published in April 2014, will include reviews of books published in 2012, 2013, and 2014.

The 2014 Survey of Books is currently accepting submissions for the 2014 Review. The Book Review Office welcomes unsolicited submissions. Proposal guidelines can be downloaded here.

My book Corporate Governance after the Financial Crisis was published in 2012. Just sayin'.

 

Does the Apple proxy decision mean anything? No.

Schumpeter:

... a legal action brought against Apple by Greenlight Capital, a hedge fund run by David Einhorn, a high-profile financier, has now become something of an embarrassment for the tech giant. On February 22nd a judge ruled in favour of Greenlight, which has a stake in Apple, giving Mr Einhorn a symbolic victory in his battle to get the company to return more of its $137 billion cash mountain to shareholders.

The legal tussle revolves around Apple’s plan to have its shareholders vote on a proposal that critics such as Mr Einhorn fear will make it harder for the company to issue preferred shares in the future. Greenlight’s boss has been urging Apple to issue such shares with a perpetual 4% dividend as a way to hand back more of the computer maker's Croesus-like stash of cash.

Greenlight has won this round on a technicality: issuing a preliminary injunction, the judge handling the case said that a vote on Apple’s proposed move could not go ahead as planned at its annual shareholder meeting on February 27th because the firm had bundledthe preference-share matter together with other, unrelated ones in a single proxy. However, he also added that Greenlight was likely to succeed in its challenge to Apple's proposed move "on the merits of the case". The hedge fund was quick to hail the decision as “a significant win for all Apple shareholders and for good corporate governance”.

But it's really not all tha big a deal, as Larry Cunnigham explains:

The substantive fight is about how Apple should allocate substantial accumulated cash, running to some $140 billion. The board wishes to retain it; the shareholder wants it distributed to shareholders. Einhorn envisions using a specific approach to distributing the cash that would involve the issuance of a new class of preferred stock to existing shareholders with a stated cash dividend. Einhorn has no right to direct the board on such a matter and any claim challenging the board’s decision would be decisively dismissed. In fact, I cannot imagine any reputable attorney filing such a suit. Boards, not shareholders, set dividend policy. ...

Einhorn won this technical round but the substantive power about the dividend policy remains firmly in the board’s hands.

Exactly.

The purpose of regulating insider trading

Don Langevoort has posted a very interesting article on the questions of "how or why did the insider trading prohibition survive the retrenchment that happened to so many other elements of Rule 10b-5?," which is linked and summarized here.

Langevoort goes on to observe that:

The Supreme Court’s strange and intellectually ungainly judicial commitment to assertive insider trading regulation, even by some fairly conservative judges, shows how powerful a totemic symbol the prohibition of insider trading has become in “branding” the American securities markets as supposedly open and fair, and American securities regulation as the investors’ champion. Insider trading regulation had already taken on an expressive value far beyond its economic importance, which judges were reluctant to undercut. 

My argument is that the Supreme Court embraced the continuing existence of the “abstain or disclose” rule, and tolerated constructive fraud notwithstanding its new-found commitment to federalism, because it accepted the central premise on which the expressive function of insider trading regulation is based: manifestations of greed and lack of self-restraint among the privileged, especially fiduciaries or those closely related to fiduciaries, threaten to undermine the official identity of the public markets as open and fair.  The law effectively grants an entitlement to public traders that the marketplace will not be polluted by those kinds of insiders. 

As an explanation of what the Supreme Court might have been thinking when it developed the modern insider trading prohibition, Langevoort's argument has much to commend it. 

Assuming he's right about that question, however, it leaves open the question of whether the SCOTUS' policy choice makes any sense. I don't think so. I've tackled this issue in several places, most notably in The Law and Economics of Insider Trading: A Comprehensive Primer (February 2001). Available at SSRN: http://ssrn.com/abstract=261277.

In the absence of a credible investor injury story, it is difficult to see why insider trading should undermine investor confidence in the integrity of the securities markets. As Bainbridge (1995, p.1241-42) observes, any anger investors feel over insider trading appears to arise mainly from envy of the insider’s greater access to information.

The loss of confidence argument is further undercut by the stock market’s performance since the insider trading scandals of the mid-1980s. The enormous publicity given those scandals put all investors on notice that insider trading is a common securities violation. If any investors believe that the SEC’s enforcement actions drove insider trading out of the markets, they are beyond mere legal help. At the same time, however, the years since the scandals have been one of the stock market’s most robust periods. One can but conclude that insider trading does not seriously threaten the confidence of investors in the securities markets.

Macey (1991, p. 44) contends that the experience of other countries confirms this conclusion. For example, Japan only recently began regulating insider trading and its rules are not enforced. The same appears to be true of India. Hong Kong has repealed its insider trading prohibition. Both have vigorous and highly liquid stock markets.

Let me repeat: If any investors believe that the SEC’s enforcement actions drove insider trading out of the markets, they are beyond mere legal help. And, if the Supreme Court believes that investors believe that, the Court needs help.

SEC Commissioner Gallagher on the proper role of the federal government in corporate governance

SEC Commissioner Daniel Gallagher from a recent speech:

It seems that the standard response to severe economic downturns or epochal corporate scandals is reactive and hurried federal legislation and regulation, often impacting corporate governance standards.  A hallmark of this trend is the presentation of proposed new, sometimes misplaced and usually onerous, requirements as “feel good and cure all” responses to perceived problems that one would be hard pressed to disagree with.  After all, who could be against “better” corporate governance? The result is that the lofty goals of such legislation and their implementing regulations, often rushed out without serious analysis of costs and benefits, are superseded by a higher law: the law of unintended consequences.  Indeed, the risk of unintended consequences looms particularly large in the case of corporate governance, a field in which states have long enjoyed the role of primary steward.

This has been, of course, a longstanding argument advanced by myself and others such as Roberta Romano and the late Larry Ribstein. See, e.g., my book Corporate Governance after the Financial Crisis.

Indeed, Commissioner Gallagher goes on to cite yours truly at two points in his argument:

Although the stated purpose of Sarbanes-Oxley was to help protect investors, if you were to ask executives and boards of directors today who they believed were the biggest beneficiaries of the passage of the Act, many would answer that it was accountants, foreign markets, and lawyers that truly benefited.  One example relates to compliance with Section 404 of Sarbanes Oxley, which the Commission estimated would cost on average roughly $91,000 a year to implement.⁵  Section 404 of Sarbanes-Oxley (in conjunction with the related PCAOB Auditing Standard 2) caused a fury when the associated costs of compliance ended up being substantially higher than anticipated by policymakers.  Most of the costs related to auditors, who were perhaps overly cautious in the wake of the failure of Arthur Andersen.  Or maybe they simply found Section 404 compliance to be a lucrative new revenue source. ...

... As Professor Stephen Bainbridge wrote in his article Quack Federal Corporate Governance Round II, the proponents of say-on-pay ignore “the probability that say-on-pay really will shift power from boards of directors not to shareholders but to advisory firms[.]”⁷

5 Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1781 (2011). ...

7 Bainbridge supra note 5 at 1811.

Holman Jenkins on the Dell MBO

Using the proposed management buyout of Dell, Holman Jenkins offers a muddled and largely uninformative take on MBOs:

Yes, private-equity investors sometimes pay a premium to take a public company private in order to change management or strategy. That's not the case here. Much "legacy" talk has circulated about Mr. Dell's motives. Oddly, this doesn't help his case either, implying that he has been sacrificing shareholder interests all along in a quest for redemption.

Whatever Mr. Dell intends, moreover, stockholders can clearly see a tax arbitrage at work. Dell is still a profitable company. They suspect Mr. Dell and Silver Lake of taking advantage of Dell's depressed share price and the tax deductibility of LBO debt to get rid of Dell's outside shareholders on the cheap and capture more of Dell's ample cash flow for themselves.

So what does Jenkins think we should do about these sort of transactions?

Some will tell you, in all seriousness, that management buyouts like Dell's are inherently corrupt and should be banned as a matter of law.

A counterview is that, with thousands of public companies to choose from, investors knew they were getting in bed with Mr. Dell. One reason Dell was cheap was because of its CEO-founder's legacy-itis.

Conflicts of interest are intrinsic to any modern business run by insiders for the benefit of outside shareholders. Conflicts of interest are not aberrations. Corporate governance is the market's answer to these conflicts, in which shareholders withhold their capital unless satisfied with the rights afforded them, and then they take their chances. ...

Dell shareholders may have to hold their noses and take Mr. Dell's offer—and perhaps think twice next time before investing in a troubled company whose founder is still on the premises.

My own take is somewhere in the middle between banning MBOs and simply saying caveat emptor. More precisely, I think Delaware corporate law gets it pretty much right. Steven Davidoff explains:

In the Siliconix and Pure Resources opinions, Delaware courts held that a majority shareholder could freeze out and acquire a minority shareholding and avoid “entire fairness” review if the acquisition occurred via a tender offer rather than a merger. The business judgment rule would apply and the court would not second-guess the sale price or process so long as certain requisites of process were followed, including consideration by a special committee of independent directors and the inclusion of a noncoercive majority of minority condition in the tender offer. ...

Delaware courts have continued to push procedural mechanisms as an appropriate remedy in transactions involving controlling shareholders. ...

In light of this law, certain practices have been developed to ensure that these rules are followed in M.B.O.’s and freeze-outs, including the formation of special committees of independent directors with independent advisers. To protect shareholders, go-shop provisions and majority-of-minority conditions are included in acquisition agreements. Moreover, boards have been negotiating deals with lower termination fees to encourage bidding in the case of M.B.O.’s.

Recent research by Matthew Cain and Steven Davidoff (36 Del. J. Corp. L. 849) confirms that these procedural protections provide investors with significant protections:

... we compiled a dataset of MBOs announced from 2003 through 2009. We then empirically studied the contract terms and processes associated with these transactions. In addition, we compiled from court records an extensive set of litigation rates and outcomes in order to measure the effect of litigation on MBO outcomes. We have thus measured the value of “process” through board procedures, contractual mechanisms, and litigation in conflicted interest transactions involving MBOs. ...

... Our results show that process indeed matters in MBOs, and that certain mechanisms which empower shareholders in the decision process appear to particularly matter. In addition, we find that MBO merger transactions with controlling shareholders, which are also subject to “entire fairness” review, do not result in higher offer premiums. Our results provide support for the Delaware courts' adoption of procedural protections in takeovers where management principal/shareholder agency conflict exists.

So Dell will need to provide its shareholders with significant procedural and process protections or run the risk of litigation setbacks and substtnial liability. But you wouldn't have learned that from Jenkins.

10 Commandments for External Counsel (from an In-House Counsel)

10 Commandments for External Counsel (from an In-House Counsel)

While technical skill is important in selecting an external lawyer, in most cases there will be a number who can do the work. So how to stand out?

via www.linkedin.com

Looks like good advice.

Did UC law reviews that used Scholastica's "diversity" questions violate Prop 209?

Josh Blackman speculates:

The Pacific Legal Foundation has sent requests under the California Public Records Act (the equivalent of FOIA) to the University of California Berkeley and University of California Davis, seeking information about how they use race and gender in making decisions about what articles to publish. You can download the requests here: [UC Davis PRA request; UC Berkeley PRA request.] The letters were sent to the Dean of the law schools, and carbon copied to the Editor in Chief and the Faculty Adviser. ...

As I noted in my previous post on this topic, these public institutions in California may have some issues with respect to Prop 209.