Not up to B&H standards. Ton of alcohol. Hot. Disjointed. Gamy. meaty. Earthy. Past prime, if it ever had one. Not flawed in a technical sense, but just not very enjoyable to drink. Grade: 75
Not up to B&H standards. Ton of alcohol. Hot. Disjointed. Gamy. meaty. Earthy. Past prime, if it ever had one. Not flawed in a technical sense, but just not very enjoyable to drink. Grade: 75
Keith Paul Bishop reports on yet another attack on Citizens United by the California Democrat assembly caucus:
Earlier this month, Senators Benjamin Allen and Mark Leno decided to take another run at putting an advisory vote on the ballot. They gutted SB 254, a bill amending the Streets and Highways Code, and inserted legislation calling a special statewide election to be consolidated with the November 8, 2016 general election. At this special election, the voters will be asked to vote on the following “advisory” question:Shall the Congress of the United States propose, and the California Legislature ratify, an amendment or amendments to the United States Constitution to overturn Citizens United v. Federal Election Commission (2010) 558 U.S. 310, and other applicable judicial precedents, to allow the full regulation or limitation of campaign contributions and spending, to ensure that all citizens, regardless of wealth, may express their views to one another, and to make clear that the rights protected by the United States Constitution are the rights of natural persons only?
First, it is a little puzzling that the Democrats are so opposed to corporate political campaign contributions since corporations are increasingly shifting to supporting the progressive left on social issues.
Second, corporations have a lot more constitutional rights than just the ones protected by Citizens United:
Just out of curiosity, which of those rights do the Democrats think corporations should not be allowed to exercise? And how do the Democrats intend to protect the rights go shareholders and stakeholders that would be adversely affected if corporations could not exercise those rights?
As a former law professor and US Senator, Elizabeth warren ought to respect basic rights like free speech. But now she wants to deploy the SEC to silence corporate critics of her campaign to massively over-regulate financial services. In a letter to SEC Chairman Mary White, Warren writes:
Corporate interests have become accustomed to saying whatever they want about Washington policy debates, with little accountability when their predictions prove to be inaccurate. But the information we have obtained raises questions about how, in this specific case, the companies could have knowingly provided such dramatically different public statements about the impact of the DOL Conflict of Interest Rule - in one example, saying almost simultaneously that the rule would be "unworkable" and that the rule would not be "a significant hurdle" - without misleading investors.
In effect, what Warren--who you recall lied about her ancestry--wants is to punish companies that at worst used a bit of puffery in the regulatory process. It's part of the "progressive" left's continuing effort to criminalize any dissent.
Joshua Fershee has long had a bee in his bonnet about courts and commentators who incorrectly refer to LLCs as corporations. His latest blast on this topic spots five examples ranging from sit coms (yes, really) to judicial opinions. Although I can't help tweaking him a bit, he is correct that much shoddy thinking and erroneous rulings have been occasioned by failing to treat LLCs as the sui generis entities that they are.
Joshua Fershee comments on Wyoming's new LLC provisions on piercing the "corporate" veil:
The additions are a response of a court decision from last year, Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014), which is summarized nicely here. The first added section provides:
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:(i) Fraud;(ii) Inadequate capitalization;(iii) Failure to observe company formalities as required by law; and(iv) Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them. ...
I do have a concern that some courts might miss that the need for "company formalities" as a potential factor for veil piercing is limited only to the formalities that are "required by law," which also means very few such formalities. "Company formalities" are not "corporate formalities," and I hope courts remember this.
I concur. First, much confusion has been occasioned by courts' repeated reference to the "corporate" veil when, of course, the LLC is not a corporation. In addition, LLCs were intended from the outset to be far less formal organizations than corporations, so it is critical that they be required to observe only such formalities as may be specifically required by statute. ("Law" is sadly ambiguous on that score.)
Of course, what we ought to do is to abolish LLC veil piercing altogether, as I have argued:
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?
Abolishing LLC Veil Piercing (May 2004). UCLA School of Law, Law-Econ Research Paper No. 04-11. Available at SSRN: http://ssrn.com/abstract=551724
Speaking of my new article Preventing Shareholder Micromanagement by Proposal (March 29, 2016), which is available at SSRN: http://ssrn.com/abstract=2750153, an updated and corrected version has posted to SSRN.
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Here's the PowerPoint deck from a presentation of my new article Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016), available at SSRN: http://ssrn.com/abstract=2750153
The usual answer is that activists have a short-term focus. But while that is sometimes true, it's not the real issue. Jeffrey Gordon makes this point succinctly in a recent post:
When we examine the behavior of institutional investors who are the majoritarian stockholders of the largest public firms, we learn that the same investors who purportedly follow the activists’ siren song for the “short term” also turn over large sums to venture capital firms and private equity for investment in promising companies over a ten year commitment period. This is the very definition of long term investing.
Instead, the real issue is whether activists are able to come up with strategic plans for portfolio companies that are superior to whose of the incumbent board and managers. Gordon thinks they are:
Ownership of large public companies is now re-concentrated in institutional investors – pension funds, mutual funds, insurance companies — which have the capacity to evaluate competing strategic alternatives for portfolio companies. Now turn to an activist’s campaign, which starts with a claim that the current management is making serious operational or strategic mistakes, reflected in the company’s underperformance. Institutional investors have the voting power to determine the outcome; how should they respond? To start, institutions increasingly have come to understand the activist is sincere in its belief about problems at the “target,” since it has made a significant upfront investment and has a business model that depends upon repeated successful engagements. ...
In short, the present wave of shareholder activism shows us that the current corporate governance infrastructure is creaky, a swaying bridge that needs renewal. To cast this as a debate over “short term” vs. “long term” misunderstands a genuine problem.
This is where I (respectfully) disagree. As I argued in my essay Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415:
Even if we grant Bebchuk (2013)’s claim that hedge funds have incentives to pursue what he calls “PP Action”—i.e., corporate courses of action that will have positive effects on both short- and long-term value—do we really think a hedge fund manager is systematically going to make better decisions on issues such as the size of widgets a company should make than are the company’s incumbent managers and directors? Of course, a hedge fund is more likely to intervene at a higher level of generality, such as by calling for the company to enter into or leave certain lines of business, demanding specific expense cuts, opposing specific asset acquisitions, and the like, but the argument still has traction. Because the hedge fund manager inevitably has less information than the incumbents and likely less relevant expertise (being a financier rather than an operational executive), his decisions on those sorts of issues are likely to be less sound than those of the incumbents. It was not a hedge fund manager who invented the iPhone, after all, but it was a hedge fund manager who ran TWA into the ground.
But even so, Gordon does make one point with which I am in agreement:
Reform should move not in the direction of closing down the activists who are bringing the news about this design flaw. Rather we should develop a new role for the board: credibly evaluating and then verifying that management’s strategy is best for the company (or making changes if it is not). Boards need directors who will have that credibility, which is won through deep knowledge about the company and its industry and an appropriate time commitment. Venture capital and private equity firms attract funds for long term investing because they provide a different style of corporate governance that includes directors who are engaged and knowledgeable. Such “thickly informed” directors provide “high powered” monitoring of managerial performance. They enable investors to trust that the firm is pursuing a planning horizon that is suited to its genuine opportunities, “right termism.” Public corporations will be better run if their boards are staffed by directors with such capacities.
Which brings me to my article with Todd Henderson Boards-R-Us: Reconceptualizing Corporate Boards (July 10, 2013), available at SSRN: http://ssrn.com/abstract=2291065:
State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal.
I believe that permitting BSPs would provide precisely the sort of board reform for which Gordon correctly calls.
Gordon Smith is one of my favorite people. He's a great person and a wonderful scholar. He's also BYU's new law school dean and I can't think of anyone better qualified for the job:
Smith served as associate dean for faculty and curriculum for five years during Rasband’s tenure as dean. Smith received his bachelor’s degree in accounting from BYU and his JD from the University of Chicago Law School. Prior to joining the faculty at the Law School in 2007, Smith was a professor of law at the University of Wisconsin Law School, and he has taught as a visiting law professor at Vanderbilt University Law School, Arizona State University College of Law, and Washington University School of Law in St. Louis.
An expert in law and entrepreneurship, Smith has written extensively on the role of law in promoting entrepreneurial action, and he co-founded the Law and Entrepreneurship Association. He was also a founding faculty member of the Crocker Innovation Fellowship at BYU. A Delaware corporate lawyer, Smith has published foundational articles on the theory of fiduciary relationships, and he is co-authoring a law school casebook on fiduciary law. Smith currently serves as Chair of the Section on Transactional Law and Skills for the American Association of Law Schools.
A popular professor, Smith has received several teaching awards, including being voted the BYU Law School Alumni Association’s Teacher of the Year by the three most recent graduating classes. Smith has also taught in Australia, China, and throughout Europe.
The Economist's Schumpeter column tackles the emergent love affair of business with team production:
Companies are abandoning functional silos and organising employees into cross-disciplinary teams that focus on particular products, problems or customers. These teams are gaining more power to run their own affairs. They are also spending more time working with each other rather than reporting upwards. Deloitte argues that a new organisational form is on the rise: a network of teams is replacing the conventional hierarchy. ...
The fashion for teams is driven by a sense that the old way of organising people is too rigid for both the modern marketplace and the expectations of employees. Technological innovation puts a premium on agility. John Chambers, chairman of Cisco, an electronics firm, says that “we compete against market transitions, not competitors. Product transitions used to take five or seven years; now they take one or two.” Digital technology also makes it easier for people to co-ordinate their activities without resorting to hierarchy. The “millennials” who will soon make up half the workforce in rich countries were reared from nursery school onwards to work in groups.
Pardon me for being somewhat skeptical. We have, after all, been here before. Back in the late 1990s I wrote several articles on the purported tension between hierarchy and team production, perhaps most notably in Bainbridge, Stephen M., Privately Ordered Participatory Management: An Organizational Failures Analysis; available at SSRN: http://ssrn.com/abstract=38600. Back then I concluded that:
According to conventional academic wisdom, perceptions of procedural justice are important to corporate efficiency. Employee voice promotes a sense of justice, increasing trust and commitment within the enterprise and thus productivity. Workers having a voice in decisions view their tasks as being part of a collaborative effort, rather than as just a job. In turn, this leads to enhanced job satisfaction, which, along with the more flexible work rules often associated with work teams, results in a greater intensity of effort from the firms workers and thus leads to a more efficient firm.
Although this view of participatory management has become nearly hegemonic, the academic literature nevertheless remains somewhat vague when it comes to explaining just why employee involvement should have these beneficial results. In contrast, my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchial structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchical structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking.
Accordingly, as I observed in Why a Board? Group Decisionmaking in Corporate Governance. Vanderbilt Law Review, Vol. 55, pp. 1-55, 2002. Available at SSRN: http://ssrn.com/abstract=266683:
Despite downsizing and the widespread adoption of employee involvement programs (such as quality circles), public corporations remain hierarchical institutions. To be sure, with the growth of team production, many firms are more accurately described as hierarchies of teams rather than of individuals. Yet they are hierarchies just the same.
Hierarchy persists because it remains a high survival value adaptive response to the transaction costs associated with organizing production within a firm. In particular, hierarchy is a very efficient *6 mechanism for information development and transmittal. Both new institutional economics and behavioral economics posit that decisionmakers are rational actors but that their cognitive powers are limited. Among other things, bounded rationality implies that decisionmakers can only gather so much information from so many inputs before being overloaded. In the corporate context, bounded rationality thus specifically implies that an individual manager can gather information about the productivity and capacities of only a limited number of inputs and, consequently, that no supervisor should receive such information from more than a few subordinates.
Branching hierarchies are an efficient adaptation to bounded rationality. They limit the span of control over which any individual manager has supervision to a small number of subordinates. Specifically, branching hierarchies put people into small groups, each member of which reports information to the same supervisor. That supervisor is likewise a member of a small group that reports to a superior and so on up to the top. Such an organizational system gets reliable information to the right decisionmaker more efficiently than any other organizational system. Not surprisingly, some form of branching hierarchy therefore tends to be found in most public corporations; they could not make decisions without it.
In addition to its information production and transmission functions, hierarchy also provides an important constraint on agency costs within the firm. Although agents ex post have strong incentives to shirk, ex ante they have equally strong incentives to agree to a corporate contract containing terms designed to prevent shirking. In any organization, however, the familiar triad of contracting problems—uncertainty, complexity, and opportunism—precludes the organization and its agents from entering into the complete contract necessary to prevent shirking by the latter. In large organizations, these transaction cost barriers to contracting are compounded by the equally familiar litany of collective action problems. Accordingly, organizations rely not on ex ante contracting but on ex post governance—creating mechanisms for detecting and punishing shirking. Specifically, managers of such organizations are tasked with monitoring the organization's members: management meters the marginal productivity of each member and responds as necessary to prevent shirking.
Have things really changed all that much?
Schumpeter cautions that:
A good rule of thumb is that as soon as generals and hospital administrators jump on a management bandwagon, it is time to ask questions. Leigh Thompson of Kellogg School of Management in Illinois warns that, “Teams are not always the answer—teams may provide insight, creativity and knowledge in a way that a person working independently cannot; but teamwork may also lead to confusion, delay and poor decision-making.” The late Richard Hackman of Harvard University once argued, “I have no question that when you have a team, the possibility exists that it will generate magic, producing something extraordinary…But don’t count on it.”
Hackman (who died in 2013) noted that teams are hampered by problems of co-ordination and motivation that chip away at the benefits of collaboration. High-flyers forced to work in teams may be undervalued and free-riders empowered. Groupthink may be unavoidable. In a study of 120 teams of senior executives, he discovered that less than 10% of their supposed members agreed on who exactly was on the team. If it is hard enough to define a team’s membership, agreeing on its purpose is harder still.
Indeed. In Why a Board, I reviewed at length the literature on group decision making. It is true that groups have advantages with respect to certain types of tasks: "groups are superior at evaluative tasks. ... Group decisionmaking presumably checks individual overconfidence by providing critical assessment and alternative viewpoints .... The proposition that group decisionmaking counteracts individual biases obviously overlaps with the claim that group decisionmaking is an adaptive response to bounded rationality. Numerous studies suggest that groups benefit from both pooling information and from providing opportunities for one member to correct another's errors."
But groups are less well suited to other types of tasks:
The old joke about the camel being a horse designed by a committee captures the valid empirical observation that individuals are often superior to groups when it comes to matters requiring creativity. Research on brainstorming as a decisionmaking process, for example, confirms that individuals working alone generate a greater number of ideas than do groups. Strikingly, this is especially true when the assigned task is “fanciful” rather than “realistic.”
Indeed, as Schumpeter suggests, groups have their own biases and idiosyncrasies that impede effective decision making. As I explained in Why a Board:
A widely cited example is the so-called risky shift phenomenon. Although we might assume that group decisionmaking has a moderating influence, social dilemma experiments demonstrate that groups actually make more extreme decisions than individuals. In early versions of these experiments, individual subjects were pretested by being presented with a story in which they were featured as the central characters. The story placed them in a familiar social setting and asked them to choose between two options, one of which was described as being the riskier of the two, but also as having a potentially higher return. Small groups were then presented with the same problem and asked to make a collective decision. Groups were significantly more likely to select the riskier option than individuals. Given that individuals tend to be risk averse but that shareholder interests often require risk-preferring decisions, the risky shift phenomenon seems useful on first blush. Unfortunately, later experiments demonstrated that group shifts to greater caution could also be induced. There seems to be a polarizing effect in group decisionmaking, so that post discussion consensus is more extreme than the individual pretest results.
The most significant group bias for our purposes, however, is the “groupthink” phenomenon. Highly cohesive groups with strong civility and cooperation norms value consensus more than they do a realistic appraisal of alternatives. In such groups, groupthink is an adaptive response to the stresses generated by challenges to group solidarity. To avoid those stresses, groups may strive for unanimity even at the expense of quality decisionmaking.
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George Will points out a glaring problem with Merrick Garland's Supreme Court nomination, namely Garland's excessive affection for the lamentable Chevron deference doctrine:
“Chevron deference” ... actually is germane to Garland. He is the most important member (chief judge) of the nation’s second-most important court, the U.S. Court of Appeals for the District of Columbia Circuit, the importance of which derives primarily from its caseload of regulatory challenges. There Garland has practiced what too many conservatives have preached — “deference” in the name of “judicial restraint” toward Congress, and toward the executive branch and its appendages in administering congressional enactments. Named for a 1984 case, Chevron deference unleashes the regulatory state by saying that agencies charged with administering statutes are entitled to deference when they interpret supposedly ambiguous statutory language. ...
Bloomberg Law likewise thinks that Garland's appointment would lead to more judicial deference to agencies:
President Barack Obama's nomination of Merrick B. Garland to the U.S. Supreme Court could spell good news for the Securities and Exchange Commission, given the federal appeals court judge's long history of deferring to administrative agencies.
Why's that a bad thing? Let's go to Senator Mike Lee:
Over the course of the twentieth century, and accelerating in the twenty-first, Congress has handed too many of its constitutional responsibilities to the Executive Branch, creating a “headless fourth branch” of the federal government, untethered from any clear lines of accountability connecting policy, policymakers, and the people.
This upending of our constitutional order has led not only to bad policy, but to deep public distrust in our governing institutions.
Although Congress bears primary responsibility for this toxic state of affairs, the other two branches share in the blame.
In particular, the Supreme Court’s doctrine of “Chevron deference” has helped to midwife this shadowy fourth branch, by requiring Courts, under certain circumstances, to surrender their Article III constitutional power of judicial review to executive agencies.
Chevron deference is hardly the only problem with the administrative state, nor is it the biggest. But it may be the one with the clearest and most obvious fix.
Lee supports legislation (as described in this briefing paper) that would require courts "hearing challenges to agency actions to review 'de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions and rules.'" So do I. And that's a reason for opposing Merrick Garland's nomination.
I have just posted to SSRN and sent out to the law reviews (hint, hint) a new article: Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal, http://ssrn.com/abstract=2750153:
Abstract: Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.
The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion in Rule 14a-8(i)(7) of proposals relating to ordinary business operations is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements.
This article proposes an alternative standard that is grounded in relevant state corporate law principles, while also being easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
Anne Tucker has a thorough overview of Lisa's nomination hearing.
Jonathan Adler opines:
In anticipation of a Supreme Court nomination, the progressive Alliance for Justice is circulating a letter signed by more than 350 law professors arguing that the Senate has a “constitutional duty” to provide a hearing and vote on a nominee to the Supreme Court. While there are reasonable policy and political arguments that the Senate should consider a nominee by President Obama, the claim that the Senate has a constitutional “obligation” is quite weak. ...
I'm always dubious of these mass letters (even the ones I sign), since I suspect most of the signatories aren't really thinking the issue through but rather are just lending their academic credentials to a political cause they support. In any case, Prof. Adler slams the argument:
Whereas the AFJ’s law professors argue the Senate’s “obligation” is “clear,” legal scholars to have seriously considered this question have reached the opposite conclusion. In a post at The Originalism Blog, Professor Michael Ramsey readily dismantles the AFJ letter’s arguments. The appointments clause of the Constitution gives the president the power to nominate judges, but it also gives the Senate the power to provide “advice and consent” and places no limits on how the Senate discharges this power. The Senate may withhold its consent by voting down a nominee, but it may also withhold its consent by refusing to act, or otherwise failing to confirm a nominee. (Ramsey has more on supposed “originalist” arguments in support of a supposed Senate “duty” here.) At NRO’s Bench Memos, Ed Whelan reaches similar conclusions.
Although many prominent liberal law professors signed the AFJ’s letter, serious liberal scholars who have studied the history of judicial confirmation fights are conspicuously absent from the list of signatories. Given the weakness of the constitutional argument, this should not surprise. It’s hard to argue with a straight face that the Senate has a constitutional obligation to, say, hold a confirmation hearing on a Supreme Court nominee when no such public hearings were held for most of the nation’s history. ...
While I believe the long-term interests of the court and the country are best served by a relatively quick and deferential confirmation process every time the president nominates a qualified individual to fill an open court seat, this has not been the norm for quite some time. Indeed, as Ben Wittes and Miguel Estrada ruefully explained, there are no longer any rules governing the confirmation process. Rather,
Whatever elevated rhetoric anyone invokes to suit his or her convenience, the fact is that our real judicial nominations system is now one of raw power and nothing else.
A buddy of mine posted this on Facebook:
I was getting a tire replaced this morning at the Firestone in [omitted] and one of the customers was on a conference call on his phone. He was wearing big headphones, so we couldn't hear the folks he was on call with, but he was speaking loudly so I got the gist of the meeting: a merger between two companies, his and someone else's. I heard him say some really odd things that seemed to make no sense but I am no business dude, for all I know the non-sequiturs that flowed from his tongue mean something in the merger world...but they were odd...for the most part I zoned him out, then he said this...
"we don't want to run so fast that we drop the potatoes between the grate."
I get that he's basically saying let's be cautious and steady...but couldn't he have just said that? I lol'd...and he turned down the volume on his voice after that.
I can't wait to use this at the next staff meeting.
Like my friend, I love that expression. But I desperately want him to tell me the name of the company in question. After all, I discuss this very hypothetical in my book Insider Trading Law and Policy:
An instructive case is SEC v. Switzer, which involved Barry Switzer, the well-known former coach of the Oklahoma Sooners and Dallas Cowboys football teams. Phoenix Resources Company was an oil and gas company. One day in 1981, Phoenix’s CEO, George Platt, and his wife attended a track meet to watch their son compete. Coach Switzer was also at the meet, watching his son. Platt and Switzer had known each other for some time. Platt had Oklahoma football season tickets and his company had sponsored Switzer’s television show. Sometime in the afternoon Switzer laid down on a row of bleachers behind the Platts to sunbathe. Platt, purportedly unaware of Switzer’s presence, began telling his wife about a recent business trip to New York. In that conversation, Platt mentioned his desire to dispose of or liquidate Phoenix. Platt further talked about several companies bidding on Phoenix. Platt also mentioned that an announcement of a “possible” liquidation of Phoenix might occur the following Thursday. Switzer overheard this conversation and shortly thereafter bought a substantial number of Phoenix shares and tipped off a number of his friends. Because Switzer was neither an insider nor constructive insider (do you see why?) of Phoenix, the main issue was whether Platt had illegally tipped Switzer.
Per Dirks, the critical issue was whether Platt had violated his fiduciary duty by obtaining an improper personal benefit: “Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider [to his stockholders], there is no derivative breach [by the tippee].” The court found that Platt did not obtain any improper benefit. The court further found that the information was inadvertently (and unbeknownst to Platt) overheard by Switzer. Chatting about business with one’s spouse in a public place may be careless, but it is not a breach of one’s duty of loyalty. Accordingly, as the court explained, “Rule 10b–5 does not bar trading on the basis of information inadvertently revealed by an insider.”
So we could make some fast and perfectly legal money.