In re Omnicare, Inc. Sec. Litig., 13-5597, 2014 WL 5066826 (6th Cir. Oct. 10, 2014):
The purpose of “the materiality requirement is not to ‘attribute to investors a child-like simplicity, an inability to grasp the probabilistic significance of [opinion statements],’ but to filter out essentially useless information that a reasonable investor would not consider significant, even as part of a larger ‘mix’ of factors to consider in making his investment decision.” Basic, Inc. v. Levinson, 485 U.S. 224, 234 (1988) (quoting Flamm v. Eberstadt, 814 F.2d 1169, 1175 (7th Cir.1987)). To this end, we have said before that “[m]isrepresented or omitted facts are material only if a reasonable investor would have viewed the misrepresentation or omission as ‘having significantly altered the total mix of information made available.’ “ Sofamor Danek, 123 F.3d 394, 400 (6th Cir.1997) (quoting Basic, Inc., 485 U.S. at 232). Put another way, a “ ‘fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.’ “ Basic, Inc., 485 U.S. at 231 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “ ‘Immaterial statements include vague, soft, puffing statements or obvious hyperbole’ upon which a reasonable investor would not rely.” Public Sch. Teachers' Pension & Ret. Fund of Chi. v. Ford Motor Co. (In re Ford Motor Co. Sec. Litig.), 381 F.3d 563, 570 (6th Cir.2004) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 897 (8th Cir.2002)).
This standard and these examples, however, are vague and provide little guidance in close cases. At first glance, this doctrine might appear “both clever and intuitively sensible,” but it has the potential to “look more like a heuristic rather than an entirely legitimate doctrine” when used too often “at the motion to dismiss stage (where materiality, being a fact question, typically should not be decided)....” Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L.J. 83, 115 (2002). In general, the federal judiciary has a limited understanding of investor behavior and the actual economic consequences of certain statements. Thus, we must tread lightly at the motion-to-dismiss stage, engaging carefully with the facts of a given case and considering them in their full context. See Jennifer O'Hare, The Resurrection of the Dodo: The Unfortunate Re-emergence of the Puffery Defense in Private Securities Fraud Actions, 59 Ohio St. L.J. 1697, 1727–1731 (1998) (illuminating the importance of context to materiality determinations). Otherwise, we risk prematurely dismissing suits on the basis of our intuition.
A revised version of my article Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker is now available at SSRN: http://ssrn.com/abstract=2494003
Abstract: Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FECundermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
Delaware Chief Justice Leo Strine and Nicholas Walker recently posted an article (forthcoming in the Cornell Law Review) entitled Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United, which is available at SSRN: http://ssrn.com/abstract=2481061, and argues that:
One important aspect of Citizens United has been overlooked: the tension between the conservative majority’s view of for-profit corporations, and the theory of for-profit corporations embraced by conservative thinkers. This article explores the tension between these conservative schools of thought and shows that Citizens United may unwittingly strengthen the arguments of conservative corporate theory’s principal rival.
Citizens United posits that stockholders of for-profit corporations can constrain corporate political spending and that corporations can legitimately engage in political spending. Conservative corporate theory is premised on the contrary assumptions that stockholders are poorly-positioned to monitor corporate managers for even their fidelity to a profit maximization principle, and that corporate managers have no legitimate ability to reconcile stockholders’ diverse political views. Because stockholders invest in for-profit corporations for financial gain, and not to express political or moral values, conservative corporate theory argues that corporate managers should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching. Conservative corporate theory’s recognition that corporations lack legitimacy in this area has been strengthened by market developments that Citizens United slighted: that most humans invest in the equity markets through mutual funds under section 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process.
Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.
As promised, I've knocked out a reply, which has just been posted to SSRN and is entitled Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker, and is available at SSRN: http://ssrn.com/abstract=2494003:
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.
Now it just needs to find a law review home.
Usha Rodgrigues chimes in and I just have to quote part, because well, you know:
Georgia Law started classes this week, and I (the rare bird who rotates casebooks because she is easily bored) am happily back teaching from Steve's casebook, co-authored with Klein & Ramseyer, which I highly recommend.
But go read the whole thing because she makes some very good points.
Brian Galle poses an age-old question, Why is insider trading illegal? At the risk of annoying my dear friend and mentor Henry Manne, I'm afraid I still think it's because we want to enforce private rights in information. I offer that argument, along with a critique of both arguments in favor of regulating insider trading and arguments in favor of deregulating it, in Insider Trading: An Overview, which is vailable at SSRN: http://ssrn.com/abstract=132529:
Insider trading is one of the most controversial aspects of securities regulation, even among the law and economics community. One set of scholars favors deregulation of insider trading, allowing corporations to set their own insider trading policies by contract. Another set of law and economics scholars, in contrast, contends that the property right to inside information should be assigned to the corporation and not subject to contractual reassignment. Deregulatory arguments are typically premised on the claims that insider trading promotes market efficiency or that assigning the property right to inside information to managers is an efficient compensation scheme. Public choice analysis is also a staple of the deregulatory literature, arguing that the insider trading prohibition benefits market professionals and managers rather than investors. The argument in favor of regulating insider trading traditionally was based on fairness issues, which predictably have had little traction in the law and economics community. Instead, the economic argument in favor of mandatory insider trading prohibitions has typically rested on some variant of the economics of property rights in information. A comprehensive bibliography is included.
There's a shorter justification of the property rights approach in a 2010 post The Whys and Wherefores of Regulating Insider Trading.
You'll also want to read my post Implications of a property rights approach to insider trading.
As for whether the insider trading prohibition should be mandatory or a default rule, I addressed that issue in a 2009 post Why the insider trading prohibition is mandatory rather than just a default rule.
And, of course, you'll want my book Bainbridge's Insider Trading Law and Policy
The past decade has seen several attempts to bring boards up to date. In America the Sarbanes-Oxley act (2002) and the Dodd-Frank act (2010) forced companies to appoint more independent directors and disclose more information about compensation. Good-governance advocates have pressed companies not just to choose white men as directors, and to publish more data so shareholders can make better informed decisions. But big companies continue to make extraordinary appointments: in 2011 IAC, a media conglomerate chaired by Barry Diller, appointed Chelsea Clinton, then a 31-year-old graduate student, to its board. And some magic bullets have proved to be blanks. Everyone thinks independent directors make better board members but there is no academic evidence to prove it. When Lehman Brothers went bankrupt, eight of its ten directors were independents.
These reforms have left the basic problem untouched. ...
In the May edition of the Stanford Law Review Stephen Bainbridge of the University of California, Los Angeles, and Todd Henderson of the University of Chicago offer a proposal for fixing boards that goes beyond tinkering: replace individual directors with professional-services firms. Companies, they point out, would never buy legal services or management advice from people only willing to spare a few hours a month. Why do they put up with the same arrangement from board members? They argue for the creation of a new category of professional firms: BSPs or Board Service Providers. Companies would hire a company to provide it with “board services” in the same way that it hires law firms or management consultants. The BSP would not only supply the company with a full complement of board members. It would also furnish it with its collective expertise, from the ability to process huge quantities of information to specialist advice on things such as mergers.
... Messrs Bainbridge and Henderson have come up with an intriguing idea for keeping companies from straying.
You can read the Stanford article here.
From the Introduction to the Symposium as published in the UCLA Law Review Discourse:
On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance.
Corporate law and economics scholarship initially relied mainly on agency cost and nexus of contracts models. In recent years, however, various scholars have built on those foundations to construct three competing models of corporate governance: director primacy, shareholder primacy, and team production.
The shareholder primacy model treats the board of directors as agents of the shareholders charged with maximizing shareholder wealth. Scholars such as Lucian Bebchuk working with this model are generally concerned with issues of managerial accountability to shareholders. In recent years, these scholars have been closely identified with federal reforms designed to empower shareholders.
In Stephen Bainbridge’s director primacy model, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body whose powers are “original and undelegated.” To be sure, the directors are obliged to use their powers towards the end of shareholder wealth maximization, but the decisions as to how that end shall be achieved are vested in the board not the shareholders.
Margaret Blair and Lynn Stout’s team production model resembles Bainbridge’s in that it is board-centric, but differs in that it views directors as mediating hierarchs who possess ultimate control over the firm and who are charged with balancing the claims and interests of the many different groups that bear residual risk and have residual claims on the firm. Although team production is not explicitly normative, many commentators regard it as at least being compatible with stakeholder theorists who promote corporate social responsibility.
This conference provided a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines. In addition to an oral presentation, each conference participant was invited to contribute a very brief essay of up to 750 words (inclusive of footnotes) on their topic to this micro-symposium being published by the UCLALaw Review’s online journal, Discourse.
These essays provide a concise but powerful overview of the current state of corporate governance thinking. Our thanks to all the participants.
Jeff's got a great post on the role practice experience ought to play in faculty hiring, of which I will (perhaps all too predictably) just excerpt the snippet about yours truly:
I do think there is something to requiring an aspiring full-time tenure track academic in a university or quasi-university setting to signal (to Brian Galle's point) what I would call a tolerance for, if not a commitment to, in the absence of a better term, "the life of the mind." (Put aside my belief that there are whole areas of practice now the exclusive domain of lawyers and law schools that could be taught and practiced without a three year traditional law degree, and the university model need not apply there any more than it does for barbers or chefs.) The person who comes to mind is my friend Steve Bainbridge, who quite publicly proclaims (often and loudly in a metaphoric way) his impatience with both "law and ..." and empirical legal studies and his preference to focus on the law. Nevertheless, I don't think you ever pick up from Steve a disdain for intellectual pursuit or think of him as anything other than a university professor. (You can pick up a lot of other clever disdain from Steve - that's why we who disagree with him so much still love him - but not disdain for thinking!)
Here's my take: A good law professor needs some practice experience, if only just to get acculturated to the profession into which s/he will be directing students for the rest of his/her professional life. More is probably better, although I think my shortish stint in practice has not been an obstacle to staying current or to being engaged with practitioners and the bench. It's mostly a matter of attitude, I think.
A good law professor also needs a commitment to the life of the mind. A commitment to doing serious but engaged scholarship of the sort that the bench and bar can't do but will find useful. A commitment to writing often and well. A commitment to keeping up to date with developments in your field OF LAW (not your law and fill in the blank field). A commitment to going where the evidence takes you. A commitment to not whoring yourself out as an expert witness or lobbyist. Mostly, a commitment to revel in the intellectual freedom this job allows. The law is an endlessly fascinating subject. A good law professor will commit to mastering some part of it at a level no judge or practitioner would ever have time to do.
You can listen to it here (it's the second or third segment).