Useful WLF Legal Backgrounder on these critical corporate law developments.
Useful WLF Legal Backgrounder on these critical corporate law developments.
The Delaware Corporate and Legal Services Blog reports that "all state courts that have considered the enforceability of exclusive forum provisions have upheld them, including courts in California, New York, Illinois and Louisiana." The Blog also reports that predictions organized shareholder opposition would deter companies from adopting them has proven untrue:
... while proxy advisory firms and some institutional investors and investor groups remain generally opposed to these provisions, shareholders more broadly do not appear to have resisted their adoption or punished directors or companies that have adopted them. In light of these developments, and the significant benefits that an exclusive forum bylaw can afford to companies by reducing costs of multi-jurisdictional litigation, companies should give serious consideration to adopting such a bylaw.
A detailed analysis by the blog of this important phenomenon follows.
Keith Paul Bishop offers a list.
Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons. But for some purposes, they should be treated as natural persons are and for others they should not.
Context is key and hard liners tend to forget context. In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.
He's right on both counts, of course. Corporate personhood obviously is a legal fiction, but it's a very useful--I would argue necessary--fiction. And the culture wars suck. It is a pity that people of good will are unable to agree without being disagreeable (and I say that as someone who occasionally errs badly in this area, usually to my regret), but we live in an era of kulturkampf.
Keith Paul Bishop has the text of the bylaw amendment adopted by Echo Therapeutics, Inc. And so it begins?
Update: WSJ Law Blog has news that a second company has adopted a fee-shifting bylaw:
Yet Echo Therapeutics Inc.ECTE +1.79%, a Philadelphia-based maker of medical devices, and LGL Group Inc.LGL 0.00%, an electrical-components maker, appear to be the first companies to adopt them, doing so last month, regulatory filings show.
LGL did not respond to requests for comment. A spokeswoman for Echo said “Echo’s Board and management team believe that it is in our shareholders’ best interests to focus our limited resources on our ongoing product development efforts rather than responding to frivolous litigation.”
The new bylaws are the latest sign that some companies are eager to discourage shareholder litigation, which has become more common over the past few years. Lawsuits followed 94% of corporate merger announcements last year, for example, and rarely resulted in substantial gains for shareholders.
In a recent Delaware Law Weekly interview with recently retired Delaware Supreme Court Justice (and former Vice Chancellor of the Delaware Chancery Court) Jack Jacobs, the eminent jurist was asked:
Q: What do you view as your most significant opinion on either court?
A: That's a difficult question because I've authored a lot of opinions in many different areas of law over the last 29 years. Although I wish I could give you a straight direct answer, but I think, in all candor, that question is one better answered by other people.
At the risk of being accused of engaging in empirical scholarship, I decided to undertake an answer to that question. I searched Delaware cases on WestlawNext to find all published opinions written by Jacobs. I then had WestlawNext rank them by frequency of citation. With this result:
Long time readers will remember the many occasions on which I have noted my admiration for recently retired Delaware Supreme Court Justice Jack Jacobs. He is a brilliant jurist and a wonderful person, who has been unfailingly gracious towards me on many occasions. The Delaware Law Weekly has posted an interview with Justice Jacobs (HT: Pileggi), which I encourage you to go read. But here's the part that stood out for me:
Q: What can judges do to prevent shareholder lawsuits from further exploding without giving boards carte blanche to operate without any checks and balances?
A: There is no one answer to that question. The landscape at this moment may be thought of as an experimental laboratory where many different approaches are being attempted. One of those is the exclusive forum bylaw. Another is the refinement of forum non conveniens law. A third consists of efforts of judges in the different forum courts to communicate with one another, with the consent of the parties, in order to coordinate the litigation and either center it in one court or, failing that, to avoid duplicative judicial and lawyer activity. The overall objective is to control the processing of multiforum disputes, which otherwise would be oppressive to the defendant corporation being forced to defend in multiple courts all at once.
I would just add: Fee shifting bylaws!
In Justice Alito's Hobby Lobby decision, he ruled for the majority that "the term 'person' as used in RFRA" includes "the closely held corporations involved in these cases."
Over on Facebook, a friend and fellow corporate law professor posted this query:
... regarding the question of "what is a closely-held corporation," for purposes of the Hobby Lobby decision, do you think the Supreme Court majority relied on a 50-state survey or treatise identifying state corporate law statutory (and/or) case law definitions of closely-held corporations? If so, can you tell me where I'd find it. . . . as just comparing DE, MA and NY, there is great variety, not to mention the IRS definition or the securities law analog (of privately held vs. publicly traded for both 33 and 34 Act purposes). Thanks.
Unless I missed it, Alito's opinion nowhere defines "closely held corporation." So let's put on our thinking caps.
First, as I explain in Corporate Law, a number of states have adopted special statutes for close corporations, commonly modeled on the ABA’s former (now discontinued) Model Close Corporation Supplement. Promoters of a close corporation may opt into coverage by such statutes through an express designation of such status in the articles of incorporation. The regulatory regime for statutory close corporations is substantially more liberal in a variety of ways than is mainstream corporate law. Yet, courts frequently grant comparable benefits to nonstatutory close corporations. In Ramos v. Estrada, 10 Cal. Rptr. 2d 833 (Cal. App. 1992), for example, defendants noted that California’s close corporation statute authorizes vote pooling agreements but the general corporation statute was silent. Defendants inferred that vote pooling agreements were invalid in close corporations that had not opted into the special statute. The court rejected that argument, upholding vote pooling agreements as valid even in nonstatutory close corporations. See also Zion v. Kurtz, 428 N.Y.S.2d 199 (1980) (similar holding under Delaware law).
Indeed, in Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), the court expressly acknowledged that one could be a closely held corporation without being a statutory close corporation. Hence, my first proposition:
It is possible that courts will look to the law of the state of incorporation. One hint in this regard is provided by Justice Alito's discussion of what courts should do if a corporation's shareholders disagree about the corporation's policies:
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. ... Courts will turn to that structure and the underlying state law in resolving disputes.
But notice that Alito is referring here to resolution of disputes, not to the fundamental question of whether the entity is closely held. That is a definitional question that arises under federal rather than state law: Is this a "person" for purposes of RFRA? In turn, that requires the court to engage in what amounts to creating interstitial federal common law.
Once the problem is seen as one to be solved by application of federal common law, a choice of law question arises. Federal common law often is influenced by, and not infrequently incorporates, state law. In Burks v. Lasker, for example, a shareholder of a federally regulated investment company brought suit under the federal securities laws against the company's board of directors. The Supreme Court held that state law controls the board of directors' ability to use a special litigation committee to terminate the litigation. In Kamen v. Kemper Financial Services, Inc., the Court extended Burks, describing the federal law governing derivative suits brought under the Investment Company Act as a species of federal common law, and incorporating state law governing excusal of the demand requirement in such suits. Until quite recently, for another example, the federal courts applied state statutes of limitation to private party lawsuits under Rule 10b-5. Although the Supreme Court adopted a unique federal limitations period in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, the Court indicated that it would continue to borrow state statutes of limitations in appropriate cases. …
[In making these decisions,] courts have two options. First, they may create a unique rule of federal common law that applies uniformly throughout the nation. The courts could draw on state law by analogy in doing so, but the rule would remain wholly federal. Second, they may adopt state law as the federal rule. If this option is selected, the substantive content of the federal rule will vary depending on which state's law controls. …
Unfortunately, the standards governing that choice are not particularly well-developed. The basic test, however, is the impact incorporation of state law would have on the relevant federal statutory policies. In Lampf, for example, the Court created a unique federal statute of limitations for implied federal rights of action because borrowing a state limitations rule would frustrate the purpose of the underlying federal statute. In Burks, the Court used state law to fill the interstices of a federal statute affecting the powers of directors because doing so did not permit acts prohibited by the federal statute and was otherwise not inconsistent with the statutory policy. In Kamen v. Kemper Financial Services, Inc., the Court reaffirmed what it termed “the basic teaching of Burks v. Lasker: Where a gap in the federal securities laws must be bridged by a rule that bears on the allocation of governing powers within the corporation, federal courts should incorporate state law into federal common law unless the particular state law in question is inconsistent with the policies underlying the federal statute.” The bottom line then is whether there are important federal interests that would be adversely affected by adopting state law fiduciary duty principles as the federal rule of decision.
Hence, proposition 2:
2. Unless the court decides that there is an essential federal interest in having an uniform national definition, courts will turn to the law of the state of incorporation.
My guess is that courts will find an uniform federal common law rule to be appropriate here, given the important federal interests at stake in the ACA and RFRA statutes.
Finally, given my inherent skepticism about the Supreme Court's institutional competence in the areas of corporate and securities law, if the issue gets back to the SCOTUS, I suspect what will really happen is some version of Potter Stewart's take on obscenity: They'll know it when they see it.
The protest against corporate personhood is deeply incoherent. If you impose obligations on a corporation and hold it responsible for not meeting that obligation, you are treating the corporation as a thing with agency. Why shouldn't that corporation be able assert rights against this imposition?
What are the defining characteristics of a person? What makes one thing a person and not another thing?
Absent a religiously inspired answer, anything you come up with will an inadequate answer. It will be over-inclusive or under-inclusive. A genealogical investigation will reveal that our concept of personhood is inconstant. An anthropological investigation will reveal that personhood is culturally conditioned and varies between peoples.
Personhood is a social construct. You naive metaphysicians objecting to corporate personhood need a better argument than "corporations aren't people."
There are good theological explanations of personhood. There aren't good secular explanations that would disqualify the application of personhood to corporations for certain purposes.
If data is the plural of anecdote, we need just one more example to go along with this classic story of plaintiff bar abuse from the pen of Keith Paul Bishop to declare that the evidence favors fee-shifting bylaws.
It's a very fair review, although apparently the reporter concluded that I left my audience unpersuaded. Apparently, I'll have to go back and try again, which I'd certainly be happy to do!
The paper on which my lecture was based is Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law (March 26, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-05. Available at SSRN: http://ssrn.com/abstract=2416449.
Abstract: Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decision maker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail?
On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. On the ends question, prior scholarship has tended to favor either shareholder primacy or various stakeholder theories. In contrast, this author has proposed a “director primacy” model in which the board of directors is the ultimate decision maker but is required to evaluate decisions using shareholder wealth maximization as the governing normative rule.
Shareholder primacy is widely assumed to be a defining characteristic of New Zealand company law. In assessing that assumption, it is essential to distinguish between the means and ends of corporate governance. As to the latter, New Zealand law does establish shareholder wealth maximization as the corporate objective. As to the former, despite assigning managerial authority to the board of directors, New Zealand company law gives shareholders significant control rights.
Comparing New Zealand company law to the considerably more board-centric regime of U.S. corporate law raises a critical policy issue. If the separation of ownership and control mandated by the latter has significant efficiency advantages, as this article has argued, why has New Zealand opted for a more shareholder-centric model? The most plausible explanation focuses on domain issues, which suggest that there are a small number of New Zealand firms for which director primacy would be optimal. The unitary nature of the New Zealand government may also be a factor, because the competitive federalism inherent in the U.S. system of government promotes a race to the top in which efficient corporate law rules are favored.
The slides from my presentation are reprinted below:
Claudia Allen says yes.