ProfessorBainbridge.com

American Sōkaiya

In Japan, the Sōkaiya "acquire enough stock from multiple companies in order to gain entrance to a shareholders' meeting. There, they disrupt the meeting (and embarrass the company) until their demands are met." 

I was reminded of that phenomenon by an article in the latest Economist, which observes that:

The Dodd-Frank law of 2010 requires a “say-on-pay” vote for shareholders of American companies. Clever lawyers scent a payday for themselves.

One law firm in particular, Faruqi & Faruqi, has filed a series of class-action suits demanding more information about how companies decide what to pay their senior executives. It seeks to prevent its targets from holding their annual meetings until the extra information turns up. ...

Alas, paying up does not make the problem disappear, as English kings discovered long ago when they bribed Viking marauders to go away. DLA Piper, a law firm defending companies, warns that if a company offers extra disclosure and settles a suit, “every piece of information it discloses may provoke a plaintiff to argue that yet more backup information is required.” Companies fear they will end up paying an “annual meeting tax”.

In my book Corporate Governance after the Financial Crisis, I predicted that greedy plaintiff lawyers would try to find a way to make money out of say on pay even though Congress claimed that say on pay would not create any new duties or liabilities.

What we have there thus is another way in which federal regulation of corporate governance amounts to a tax on corporations for the benefit of trial lawyers (among others). Yet, people like Lucian Bebchuk go on defending the ever-increasing federalization of corporate governance. From now on out, whenever somebody like Bebchuk proposes new federal corporate governance rules, I'm going to ask him how he's going to keep the Faruqi & Faruqi's of the world from using them to get rich.

I wish I'd had this when I was in practice

Rob Pollak has put together a flowchart for helping lawyers decide whether to stay at work or go home.It's both funny and depressing.

Memo to Barry Gross and his lawyers

Get over yourselves and stop trying to profit from frivolous lawsuits. So your sandwich was an inch short of a foot? Back in college I noticed that "60 Minutes" actually only runs for 58 minutes. So you going to sue them next?

Even a plaintiff lawyer gets it:

Lawsuits like this - and celebrities that sue for every possible slight - really sends a message to people, who later become jurors, that the judicial system is not often a place for serious justice. So when an injured plaintiff begins a trial, she does not begin on the 50 yard line. She starts deep in her own territory. That's not an impossible mission for a worthy plaintiff by any stretch - people flip quickly when they learn facts. But it makes the hill a tougher climb and it can change the way they value personal injury cases.

Subway says the word "footlong" should not be taken literally, as it is a trademark and "not intended to be a measurement of length." But they are misleading people. They misled me. I thought it was a foot long till I read this story. But consumers who think like me have two reasonable choices: (1) decide not to buy the Subway subs because they are mad at the false advertising, or (2) remain annoyed but say, "Hey, Subway is not perfect, I don't think many big companies are, but I think make a good sandwich and I'm going to eat it." (I pick the latter. Subway makes a good low fat sandwich, albeit with a ridiculous amount of sodium.). 

Theodore Dalrymple on the anti-smoking zealots and their trial lawyers

At Liberty Law Blog:

I am no friend to smoking, therefore; but even I feel a certain unease about the zealotry of the anti-smokers. The problem is that, in the modern world (though perhaps it was always so), a good cause is turned into rent-seeking, and generally into rent-finding as well.

Examination of the legal proceedings in the United States against the tobacco companies persuaded me that the real tort in the case was, in effect, the transfer of the profits of the tobacco companies from the shareholders to the trial lawyers. The last thing that anyone wanted to do was drive the milch-cow, the tobacco companies, into bankruptcy, or simply to close them down so that they could be sued no more. Governments, which had been deriving large revenues from the tobacco companies’ products for many years in spite of knowledge of the effects of smoking, were at least as responsible for any harm done by tobacco as the companies. No doubt the tobacco companies lied in a disgraceful fashion about the harmfulness of their products, but I have never met anyone who believed their lies; and although no longer young, I grew up knowing that smoking was bad for you in the same way that I knew that the world was round and the Battle of Hastings was in 1066. As to the supposed impossibility of giving up smoking once started because of the addictiveness of nicotine, this was clearly nonsense; what millions of people (including my mother) have done cannot be impossible.

And where there are rents to be found, lawyers will be there to take our cut.

Veasey on Bainbridge on In-House Lawyers

In an article in the latest Business Lawyer (68 Bus. Law. 57, 62-63), former Delaware Supreme Court Chief Justice E. Norman Veasey has some very nice things to say about yours truly's book Corporate Governance after the Financial Crisis:

Professor Bainbridge has put his finger on the “go along to get along” problem. In a chapter entitled “The Gatekeepers” in his recent book, he carefully analyzes the tension the corporate lawyer experiences between gatekeeping and job security:

The gatekeepers failed rather miserably during the dotcom era. Enron was primarily an accounting scandal, little different from the 150-plus other accounting fraud cases that the SEC investigates in most years. Indeed, this was true not just of Enron, but also most of the dotcom era corporate scandals ....

.... There is little doubt that lawyers played an important role in the scandals. Sometimes their negligence allowed management misconduct to go undetected. Sometimes lawyers even acted as facilitators and enablers of management impropriety ....

.... The nature of the legal market gives lawyers--both in-house and outside counsel--strong incentives to overlook management wrongdoing. As to the former, even if the board of directors formally appoints the in-house general counsel, his tenure normally depends mainly on his relationship with the CEO ....

.... Both the general counsel and outside lawyers necessarily have access to a wide range of information, including but hardly limited to information relating to law compliance by the organization. Because the management-attorney relationship tends to become the focus of the attorney's relationship with the firm, however, lawyers have strong incentives to help management control the flow of information to the board of directors. Worse yet, attorneys may be tempted to turn a blind eye to managerial misconduct or even to facilitate such misconduct .... 

While these excerpts highlight the anxieties and temptations that may face in-house counsel, the entirety of Professor Bainbridge's book paints a balanced picture of the temptations as well as the integrity of in-house lawyers.

Say on pay shakedowns

Kevin LaCroix explains how plaintiff securities lawyers are using say on pay to shake down corporatons:

... one plaintiffs’ firm has now “orchestrated a new strategy to hold companies liable: suits to enjoin the shareholder vote because the proxy statement failed to provide adequate disclosure concerning executive compensation proposals.” According to the memo, there have been at least 18 of these types of suits, with nine of them having been filed just in the month preceding the memo’s publication. 

As detailed in Nate Raymond’s November 30, 2012 Reuters story entitled “Lawyers gain from ‘say-on-pay’ suits targeting U.S. firms” (here), these new style lawsuits (of which the article says some 20 have been filed) have met with some success. According to the article, at least six of these suits “have resulted in settlements in which the companies have agreed to give the shareholders more information on the pay of the executives.” These settlements have also “resulted in fees of up to $625,000 to the lawyers who brought the cases.” The article also notes, however, that while the settlements have provided additional disclosures and legal fees for the firm that has filed almost all of these suits, “they have netted no cash for shareholders.”

These new suits share certain characteristics with the M&A-related lawsuits that are another current litigation trend. (Refer here for background regarding the M&A-related litigation trends.)  That is, they are filed at a time when the defendant company is under time pressure that motivates the company to settle quickly rather than deal with the lawsuit. Just as in the merger context, where the company wants to move the transaction forward and doesn’t want the lawsuit holding things up, companies facing these new style say-on-pay lawsuits, facing an imminent shareholder vote, are pressured to reach a quick settlement rather than risking a delay in the shareholder vote.

It is hard to disagree with the sentiment of one defense counsel, quoted in the Reuters article, that these lawsuits are nothing more than a “shakedown for a quick buck.”

Sometimes I think the world would be a better place if we got rid of all plaintiff lawyers. But then what would defense lawyers do for a living?

 

Stopping frivolous say on pay suits

In my book, Corporate Governance after the Financial Crisis, I explained that the federal Dodd-Frank Act of 2010 included a new "say on pay" provision requiring shareholder approval of executive compensation.

Dodd-Frank § 951 creates a new § 14A of the Securities Exchange Act, pursuant to which reporting companies must conduct a shareholder advisory vote on specified executive compensation not less frequently than every three years. At least once every six years, shareholders must vote on how frequently to hold such an advisory vote (i.e., annually, biannually, or triannually). The compensation arrangements subject to the shareholder vote are those set out in Item 402 of Regulation S-K, which includes all compensation paid to the CEO, CFO, and the three other highest paid executive officers. In addition, a shareholder advisory is required of golden parachutes. Both such votes must be tabulated and disclosed, but neither is binding on the board of directors. The votes shall not be deemed either to effect or affect the fiduciary duties of directors. 

Despite the clear legislative intent that the vote be non-binding and should not affect the fiduciary duty of directors and officers, plaintiff lawyers started bringing suits where say on pay votes failed. A I noted:

... the preliminary results from say on pay votes in 2010 and 2011 strongly suggest that say on pay will be turned into a club with which activists will beat boards of directors. In 2010, when several hundred companies voluntarily conducted say on pay votes, two companies at which the vote was negative were subsequently hit with lawsuits alleging waste and breach of fiduciary duty. Given the business judgment rule and the express Congressional statement that say on pay is supposed to be nonbinding, it is difficult to imagine that such suits will have much more than nuisance value. Even so, they may generate negative publicity and withhold vote campaigns against directors. The costs to shareholders of say on pay thus may turn out to be quite significant.

Once mandatory say on pay went into effect, even more lawsuits were forthcoming.

As Alison Frankel reports, moreover, the creativity of plaintiff lawyers to bring clearly frivolous suits based on say on pay has reached even greater heights:

As my Reuters colleague Nate Raymond reported Friday in a comprehensive piece on the trend that’s spawned a recent round of law firm client alerts, the New York shop Faruqi & Faruqi has filed almost two dozen suits asserting that corporate boards breached their fiduciary duties in connection with shareholder advisory votes on executive compensation. But unlike last year’s mostly unsuccessful suits against the boards of companies whose shareholders voted down pay packages, the Faruqi suits have been filed in advance of say-on-pay votes at annual shareholder meetings, with claims based on allegedly inadequate disclosures in proxy materials. As leverage, the suits seek to enjoin shareholder meetings. So far, according to Raymond, these say-on-pay injunction suits have produced a few beefed-up disclosures but no cash for shareholders. They’ve also netted the Faruqi firm legal fees, including $625,000 in one settlement.

Of course, defense lawyers can be pretty creative too.  As Frankel reports, Boris Feldman of Wilson Sonsini has laid out a strategy for beating these cases:

Dodd-Frank does not include mention of any private cause of action deriving from say-on-pay votes. So if federal courts have jurisdiction over say-on-pay disclosure cases, he said, defendants will have powerful arguments that the suits should be tossed for failure to state a claim. And according to Feldman, even if Delaware corporate law does impose state law say-on-pay disclosure obligations — a question that will ultimately have to be answered by the Delaware Supreme Court — he will argue that the state law claims are pre-empted by Dodd-Frank. “I’m going to get this to federal court regardless,” he said.

The trouble with Feldman's argument, of course, is that existing implied private rights of action under Section 14(a) and/or Rule 10b-5 may provide the requisite cause of action. But that's a question for another day.

In the meanwhile, these cases have all the hallmarks of abusive litigation. As a report from Stanford's Center for Leadership Development and Research observes, "The lead plaintiff in the case, Natalie Gordon, is involved in similar lawsuits against Cisco Systems and Symantec, and has a long his- tory of shareholder lawsuits against companies ...." In my humble and First Amendment-protected opinion, that's a bad sign.

In addition, as the Center suggests by quoting a DLA Piper analysis, these suits can put companies on the horns of a dilemma:

The rationale for the nascent claims in these lawsuits is troubling. Such suits suggest a bottomless demand. Regardless of the amount and detail of information a company may disclose in its proxy statement, a plaintiff may assert that even more disclosure is required. Indeed—paradoxically— a company that chooses to disclose more rather than less may be penalized for its candor, because every piece of information it discloses may provoke a plaintiff to argue that yet more backup information is required. 

Lastly, the Center raises some important questions about these suits that need answering before we allow them to go forward:

• The shareholder disclosure lawsuit against Microsoft alleges that the company’s proxy is “materially misleading and incomplete.” However, the deficiencies identified by the plaintiffs in Exhibit 3 include information that is often considered proprietary and extreme in its detail. How much disclosure is too much disclosure? If a company follows SEC guidelines, why is this not sufficient?
• The Microsoft lawsuit calls for the release of the report prepared by the compensation consultant and all internal memos regarding discussions about executive compensation. Are there any other board decisions that have this level of disclosure? Would the release of this information improve shareholder judgment about the quality of the board’s decision on compensation?
• If compensation litigation alleging misconduct by the board of directors is successful, what other board decisions would be subject to potential suits?

Say on pay was sold as an advisory process that would not change a board of directors' liability exposure. Plaintiff lawyers are trying to remake that bargain into a cash machine on which they will annually draw every proxy season. It's time to nip that effort in the bud. Throw these suits out of court and hit those who bring them with exemplary sanctions.

Plaintiffs' lawyers move nuisance M&A litigation from the pre-merger stage to the post-merger stage

Kevin LaCroix has details.

How much do general counsels make?

Broc Romanek has the highpoints of Equilar's new study on general counsel pay. Bottom line # is $1.4 million (average of Fortune 500 GCs). Beats being a law professor, although the hours are probably worse.

"'Say on Pay' and Executive Compensation Litigation: Plaintiffs' New Racket"

Bruce Vanyo, Richard Zelichov and Christina Costley of the Katten Muchin Rosenman law firm argue that:

Nobody can accuse the plaintiff’s shareholder bar for suffering from a lack of creativity or being easily dissuaded from purporting to represent shareholders. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) in July 2010. Section 951 of Dodd-Frank requires a stockholder advisory vote on executive compensation (a “say-on-pay” vote). The Dodd-Frank Act, however, “specifically provides” that the say-on-pay vote (1) “shall not be binding on the issuer or the board of directors;” and (2) does not “create or imply any change to the fiduciary duties of the board members.” 15 U.S.C. § 78n-1(c)). Nonetheless, the plaintiff’s bar began filing stockholder derivative lawsuits alleging breach of fiduciary duty after any negative say-on-pay vote. The vast majority of these cases have been dismissed because the plaintiff failed to make demand on the company’s board of directors before bringing suit and such See Gordon v. Goodyear, 2012 WL 2885695, *10 (N.D. Ill. July 13, 2012) (collecting cases); see also Swanson v. Weil, 2012 WL 4442795 (D. Colo. Sept. 26, 2012); Haberland v. Bulkeley, No. 5:11-CV-463-D (E.D.N.C. Sept. 26, 2012).

As a result, the plaintiff’s bar has resorted to a new attack based on a tactic developed from the merger cases: suing companies before the say-on-pay vote to enjoin the vote based on alleged misleading disclosures. In the last month or so, Plaintiffs’ shareholder lawyers have issued over 30 notices of investigation concerning such suits, and over the course of the last year, they have sued over 20 companies. 

So much for the promises of the say on pay proponents that the new requirements would not become a source of revenue for the trial lawyer bar.

"Lawyers Extract `Merger Tax' From Shareholders, Study Says"

Daniel Fisher:

The U.S. Chamber’s Institute for Legal Reform today released a study on merger-related litigation that concludes plaintiff lawyers take advantage of the court system to extract tens of millions of dollars a year in fees from companies at the expense of shareholders.

A loophole in the federal law designed to cut down on securities class-action abuses allows lawyers to file suits challenging mergers in multiple state and federal courts, the study found, making it impossible for companies to consolidate the litigation in one place and increasing the odds they’ll pay the lawyers a fee to go away. ...

The study calls the litigation a “merger tax” on corporate transactions, since lawyers now file fraud suits challenging 91% of all mergers of public companies valued at over $100 million. Either there’s been a vast increase in corporate fraud since 2005 — when only 39% of mergers drew lawsuits — or lawyers are filing more meritless suits.  ...

Lawyers file suits accusing companies of fraud sometimes within hours of a merger announcement, hard to square with good-faith efforts to find a client and fully investigate that client’s claims. ...

The New York Bar Association offers another common-sense approach: Let companies contract with their shareholders to restrict litigation to the state of incorporation. That would at least eliminate the tactic of gaming multiple state courts to extract a fee, which of course is paid by the shareholders. Instead most companies would face lawsuits, at most, in Delaware state and federal court. And Delaware judges are increasingly hostile toward hastily filed merger suits.

 

TV station reported sightings of sharks on floor of the New York Stock Exchange

But it turned out to just be a couple of plaintiff lawyers who took a wrong turn.

My "Corporate Lawyers as Gatekeepers" published in UCLA School of Law Journal of Scholarly Perspectives

The UCLA School of Law Journal of Scholarly Perspectives publishes short summaries (~5K words) by law faculty of their recent scholarship. The latest issue (Fall 2012) is available here.

This issue includes my article, Corporate Lawyers as Gatekeepers, a copy of which can be downloaded here.

The article argues that corporate lawyers traditionally viewed themselves - and were viewed by the managers who hired them - as advocates, confidents, and advisors, not as gatekeepers like auditors. 

In fact, however, lawyers often play a reputational intermediary role not dissimilar to that of an auditor. A very high profile general counsel or law firm partner, for example, can give a client in trouble the benefit of the lawyer’s reputation for probity and upstanding ethics.

Usually, of course, counsel play a more behind the scenes role, but it is still a gatekeeping role. Specifically, transactional counsel and in-house lawyers are well positioned to intervene by blocking the effectiveness of a defective registration statement or prevent the consummation of a transaction, to cite but two examples. In many recent financial crises, however, lawyers all too often failed to be effective gatekeepers. In the Sarbanes-Oxley Act of 2002 (SOX), Congress directed the Securities and Exchange Commission to adopt rules of ethics governing lawyers who appear or practice before the Commission. 

As adopted, the post-SOX rules give lawyers what purports to be a very “simple” up-the-ladder reporting obligation. As one proponent explained counsel’s duty: “You report the violation [to top management]. If the violation isn’t addressed properly, then you go to the board of directors.”

Despite SOX’s many strictures in this and other areas, however, a new and even more devastating financial crisis came in 2008 when the subprime mortgage market’s troubles nearly brought the entire banking system to its knees. Once again, questions are being asked about the role lawyers played in this crisis. A reassessment of SOX’s legal ethics rules thus is in order.

This essay was adapted with permission from my book Corporate Governance after the Financial Crisis. The first decade of the new millennium was bookended by two major economic crises. The bursting of the dotcom bubble and the extended bear market of 2000 to 2002 prompted Congress to pass the Sarbanes-Oxley Act, which was directed at core aspects of corporate governance. At the end of the decade came the bursting of the housing bubble, followed by a severe credit crunch, and the worst economic downturn in decades. In response, Congress passed the Dodd-Frank Act, which changed vast swathes of financial regulation. Among these changes were a number of significant corporate governance reforms.

Corporate Governance after the Financial Crisis asks two questions about these changes. First, are they a good idea that will improve corporate governance? Second, what do they tell us about the relative merits of the federal government and the states as sources of corporate governance regulation? Traditionally, corporate law was the province of the states. Today, however, the federal government is increasingly engaged in corporate governance regulation. The changes examined in this work provide a series of case studies in which to explore the question of whether federalization will lead to better outcomes. I analyze these changes in the context of corporate governance, executive compensation, corporate fraud and disclosure, shareholder activism, corporate democracy, and declining US capital market competitiveness.

Kauai attorney found guilty of licking his client's ear

A Kauai District judge found an attorney guilty Thursday of licking his client’s ear at his Lihue office. 

Lawrence McCreery, 64, was convicted of harassment by per-diem District Judge Frank Rothschild. 

On July 26, 2011, McCreery was discussing a 21-year-old woman’s child custody case when he touched her arm, said a news release from the Kauai prosecutor’s office, and McCreery made a strange sound, hugged her tightly and licked the back of her right ear. 

via www.staradvertiser.com

We probably ought to teach something about not licking client ears in our Professional Responsibility course.

Posner never was a conservative, so how can he become less of one?

NPR (gleefully?) reports that:

Judge Richard Posner, a conservative on the 7th U.S. Circuit Court of Appeals in Chicago, has long been one of the nation's most respected and admired legal thinkers on the right. But in an interview with NPR, he expressed exasperation at the modern Republican Party, and confessed that he has become "less conservative" as a result.

OTOH, who can deny that the current GOP leadership has more than its share of -- as Posner puts it -- "goofy" people, but what political party doesn't?

OTOH, how can Posner become "less conservative" when he was never a conservative to begin with?

Russell Kirk's classic canons of conservative thought include six elements: (1) belief in a transcendent order and natural law; (2) rejection of egalitarianism and utilitarianism; (3) support for class and order; (4) belief in the linkage between freedom and private property; (5) faith in prescription and custom; and (6) recognition that change is not necessarily salutary reform.

As I read his body of work, Posner clearly fails #s 1 and 2, and likely fails #s 3 and 5. The only one I'm sure he passes is #4. I'm not going to bother defending those claims in detail, largely because Posner himself long has rejected the conservative label, calling himself a pragmatic classical liberal. Richard A. Posner, Overcoming Law 23 (1995).

For those interested in pursuing the disconnect between Posner's jurisprudence and the strand of conservatism that comes down to us from Burke via Russell Kirk, however, I recommend James G. Wilson's article Justice Diffused: A Comparison of Edmund Burke's Conservatism with the Views of Five Conservative, Academic Judges, 40 U. Miami L. Rev. 913 (1986) (Westlaw sub. req'd) and Ernest Young's article Rediscovering Conservatism: Burkean Political Theory and Constitutional Interpretation, 72 N.C. L. Rev. 619 (1994) (same). (Of course, I do not mean to endorse everything in those articles, such as Young's arguments against judicial deference to democratic majorities.)