Congratulations to Paul Caron, the new dean of the Pepperdine law school. I hope he held out for one of those great on campus homes with the spectacular views of the Malibu.
Congratulations to Paul Caron, the new dean of the Pepperdine law school. I hope he held out for one of those great on campus homes with the spectacular views of the Malibu.
I have never been reconciled to the Delaware Supreme Court’s pronouncement in Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009) that “the fiduciary duties of officers are the same as those of directors”. Officers are, as I’ve previously noted, agents of the corporation while directors are not. This means that an officer’s duties are sourced in agency law. Professor Deborah A. DeMott forcefully makes this point in a forthcoming paper:
Making agency central to understanding officers’ positions and responsibilities helps to differentiate officers from directors. Like a director, an officer is a fiduciary, but distinctively so, not as a mere instance of a generic “corporate fiduciary” who owes duties of loyalty and care to the corporation.”
Corporate Officers as Agents, 74 Wash. & Lee L. Rev. __ (no. 2, 2017).
Understanding that officers are agents also brings into focus the often overlooked question of what law governs an officer’s performance of his or her duties. Remarkably, the Delaware Supreme Court made no mention in Gantler v. Stephens of the law of agency or the possible application of Ohio law, where the corporation was headquartered and operated a bank. In my view, the Court should have analyzed the actions of the defendants qua officers under agency law and determined under applicable choice of law principles whether to apply Delaware or Ohio law. ... Because officers typically exercise authority over corporate employees, the title of officer has come to imply authority.
First question, if officers are agents--pure and simple--why did the drafters of the Model Business Corporation Act feel it necessary to lay out both standards of conduct and standards of liability for officer? The MBCA had to do so for directors, who are fiduciaries but not agents, so as to define the directors' duties because agency law was not applicable. The decision to do so for officers therefore implies that even if officers are agents, they are a special sort of agent.
Second, even assuming that officers are mere agents--nothing more and nothing less--the Restatement tell us us that the law of the state of incorporation generally controls:
The local law of the state of incorporation will be applied to determine the existence and extent of a director's or officer's liability to the corporation, its creditors and shareholders, except where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the parties and the transaction, in which event the local law of the other state will be applied.
Restatement (Second) of Conflict of Laws § 309 (1971). The commentary focuses on breaches of fiduciary duty:
Issues relating to the liability of the directors and officers for acts such as these can practicably be decided differently in different states. It would be practicable, for example, for a director to be held liable for a given act in one state and to be held not liable for an identical act in another state. Nevertheless, in the absence of an applicable local statute, the local law of the state of incorporation has usually been applied to determine the liability of the directors or officers for acts such as these to the corporation, its creditors and shareholders. This law has usually been applied even in a situation where it might be thought that some other state had a greater interest than the state of incorporation in the issue to be determined. The local law rule of a state other than the state of incorporation is most likely to be applied in a situation where this rule embodies an important policy of the other state and where the corporation has little contact with the state of its incorporation.
The Restatement thus tees up a case in which the forum state is not the state of incorporation. In that instance, we are told, the forum state should apply the law of the state of incorporation except in rare instances in which the forum state has an applicable rule reflecting an important local policy and the corporation has weak contacts with the state of incorporation.
In Gantler, however, Delaware was both the forum state and the state of incorporation. If someone had raised the choice of law issue, the Delaware courts presumably would have applied Delaware choice of law rules. In turn, that would have sent the court to the substantive law of Delaware, as it has a particularly strong version of the internal affairs doctrine (perhaps not surprisingly):
The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders.12 The Restatement (Second) of Conflict of Laws § 301 provides: “application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the need of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied.”13 Accordingly, the conflicts practice of both state and federal courts has consistently been to apply the law of the state of incorporation to “the entire gamut of internal corporate affairs.”14
67 The internal affairs doctrine is not, however, only a conflicts of law principle. Pursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations “have a significant right ... to know what law will be applied to their actions”15 and “[s]tockholders ... have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs.”16 Under the Commerce Clause, a state “has no interest in regulating the internal affairs of foreign corporations.”17 Therefore, this Court has held that an “application of the internal affairs doctrine is mandated by constitutional principles, except in the ‘rarest situations,’ ”18 e.g., when “the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.”19
Second, Keith is perturbed by the court's failure to deal with the choice of law issue. But (1) maybe nobody brought it up, in which case the court had no duty to do so sua sponte and (2) the result would have been a foregone conclusion in favor of applying Delaware law.
Personally, I'm okay with it.
Last summer, at the National Business Law Scholars Conference at The University of Chicago Law School, I listened with some fascination to the presentation of an early-stage project by Todd Henderson (whose work always makes me think--and this was no exception). His thesis was a deceptively simple one: that the age-old disclosure debate could best be solved by creating a contextual market for disclosure (rather than by, e.g., continuing its the current system of "federal government mandates and issuer pays" or leaving market participants to their own devices as to what to disclose and punishing malfeasance merely through fraud and misstatement liability or state sanctions). The paper resulting from that presentation, coauthored by Todd and Kevin Haeberle from the University of South Carolina School of Law (but moving to William & Mary Law School in July), has recently been released on SSRN. The title of the piece is Making a Market for Corporate Disclosure, and here's the abstract:
One of the core problems that law seeks to address relates to the sub-optimal production and sharing of information. The problem manifests itself throughout the law — from the basic contracts, torts, and constitutional law settings through that of food and drug, national security, and intellectual property law. Debates as to how to best ameliorate these problems are often contentious, with those on one end of the political spectrum preferring strong government intervention and those on the other calling for market forces to be left alone to work.
When it comes to the generation and release of the information with the most value for the economy (public-company information), those in favor of the command-and-control approach have long had their way. Exhibit A comes in the form of the mandatory-disclosure regime around which so much of corporate and securities law centers. But this approach merely leaves those who value corporate information with the government’s best guess as to what they want. A number of fixes have been offered, ranging from more of the same (adding to the 100-plus-page list of what firms must disclose based on the latest Washington fad), to the radical (dump the federal regime and its fraud and insider-trading overlays altogether in favor of state-level regulation). This Article, however, offers an innovative approach that falls in middle of the traditional spectrum: Make relatively small changes to the law to allow a market for tiered access to disclosures, thereby allowing firm supply and information-consumer demand to interact in a way that would motivate better disclosure. Thus, we propose a market for corporate disclosure — and explains its appeal.
I have skimmed the article and am looking forward to reading it in full over my spring break in a week's time. I write here to encourage you to make time in your day/week/month to read it too--and to consider both the critiques of federally mandated disclosure and the article's response to those critiques. I am confident that the thinking it will make me do (again) will sharpen my teaching and scholarship; it might just do the same for you . . . .
I think it's one of the most innovative articles I've seen in a very long time.
Haeberle, Kevin S. and Henderson, M. Todd, Making a Market for Corporate Disclosure (February 23, 2017). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 769. Available at SSRN: https://ssrn.com/abstract=2814125 or http://dx.doi.org/10.2139/ssrn.2814125
The NY Times reports that:
Uber has for years engaged in a worldwide program to deceive the authorities in markets where its low-cost ride-hailing service was being resisted by law enforcement or, in some instances, had been outright banned.
The program, involving a tool called Greyball, uses data collected from the Uber app and other techniques to identify and circumvent officials. Uber used these methods to evade the authorities in cities such as Boston, Paris and Las Vegas, and in countries like Australia, China, Italy and South Korea. ...
Uber has long flouted laws and regulations to gain an edge against entrenched transportation providers, a modus operandi that has helped propel it into more than 70 countries and to a valuation close to $70 billion.
I discussed the corporate law issues raised when boards of directors allow the corporation to act illegally (or fail to detect that managers are allowing the company to do so), in two earlier posts:
Personally, I still think the business judgment rule ought to apply to these cases.
The Washington Legal Foundation announced:
On March 3, 2017, WLF asked the U.S. Supreme Court to overturn a Tenth Circuit decision that permitted the SEC to seek monetary penalties for securities law violations that occurred decades ago. In an amicus brief filed in the case, WLF argued that a strict five-year statute of limitations (28 U.S.C. § 2462) precludes such SEC enforcement actions. WLF reminded the appeals court that statutes of limitations serve important goals; they permit citizens to arrange their affairs secure in the knowledge that they won’t suddenly face sanctions based on long-ago events. WLF’s brief further contended that the “disgorgement” remedy SEC sought in the case has never been recognized as an equitable remedy throughout American legal history. Because the SEC never attempted to use disgorged funds to provide restitution to fraud victims, those funds served a punitive rather than a remedial purpose.
The discussion of the nature of the disgorgement remedy is particularly interesting. If the Court decides to take up that issue, it's ruling will have potentially important results beyond just the statute of limitations issue. In particular, it will force courts to deal with the issue of whether there is a right to jury trial in disgorgement cases. My sense of the law is that most courts assume there is no jury trial right, but the cases rarely dig into the issue in any depth.
I really like this new paper by Steven Davidoff Solomon and David Zaring:
The Trump administration has promised to pursue policy through deals with the private sector, not as an extraordinary response to extraordinary events, but as part and parcel of the ordinary work of government. Jobs would be onshored through a series of deals with employers. Infrastructure would be built through joint ventures where the government would fund but private parties would own and operate public assets.
We evaluate how this dealmaking state would work as a matter of law. Deals were the principal government response to the financial crisis, partly because they offered a just barely legal way around constitutional and administrative barriers to executive action. Moreover, unilateral presidential dealmaking epitomizes the presidentialism celebrated by Justice Elena Kagan, among others. But because it risks dispensing with process, and empowers the executive, we identify ways that it can be controlled through principles of transparency, rules of statutory interpretation, and policymaking best practices such as delay and equivalent treatment of similarly situated private parties.
Davidoff Solomon, Steven and Zaring, David T., The Dealmaking State: Executive Power in the Trump Administration (February 21, 2017). Available at SSRN: https://ssrn.com/abstract=2921407
Randy Barnett wrote on February 25 that:
... for several years, a group of conservative and libertarian law professors from a variety of law schools has quietly been urging the Association of American Law Schools, which has taken a leadership role in addressing racial and gender diversity–including by establishing a Racial Diversity Task Force in 1999–to do the same with viewpoint or political diversity. Our complaint was not limited to the gross political one-sidedness of the Annual Meeting of the AALS, but primarily concerned the gross political imbalance of law faculties–especially in such subjects as public law where viewpoint most affects a professor’s legal scholarship and teaching.
Although we were treated respectfully–and some marginal, though welcome, steps were taken this year to diversify the annual AALS program–as the following letter to the AALS explains, our requests for concrete preliminary steps to address the existing pervasive imbalance of law faculties have apparently been denied. ...
Having worked patiently behind the scenes for several years, we believe it is time to make our complaint more public.
He then posted an open letter to the AALS leadership that powerfully makes the case for viewpoint diversity.
The AALS has now responded and Barnett has posted the response, of which he observes that:
... we are grateful to Dean Areen for her courteous reception and to the Executive Committee for meeting with us in January of 2016. We wrote our letter because we had received no formal response to our requests in over a year, and appreciate the response we have now received. But, with all due respect, this response fails to address, or even mention, the thrust of our proposals to address the current imbalance on law school faculties–proposals which we reiterated in our letter of last week.
Indeed, this letter can fairly be read as a silent rejection of these suggestions. Oddly, it discusses an idea we do not mention in the letter to which it is responding, while failing to respond to the ones we do.
Indeed, if you asked me (not that anyone did), I'd say the AALS letter is the usual bullshit. And its time for a change.
Keith Paul Bishop evaluates California law on the question:
In the case of a California corporation, the answer is no. The power to remove directors is vested in the shareholders and the superior court pursuant to Corporations Code Section 303 and 304. While technically not a removal, one option may be available to a board. Section 302 provides that the board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony.
Under Delaware law, the board may remove its chairman from that office. But there is no provision under Delaware law for the board of directors to remove one of its members. Indeed, there is case law specifically holding that the board lacks power to remove one of its own members. See, e.g., Dillon v. Berg, 326 F. Supp. 1214 (D. Del. 1971). Under Delaware General Corporation Law § 141(k) only shareholders are authorized to remove a board member.
PS: I blogged about this issue back in 2003 in connection with Conrad Black's fight with the Hollinger board.
In sum, it looks like change is coming to the conflict-minerals disclosure regime. Whether it will happen through Congress repealing § 1502 as part of sweeping Dodd-Frank review, significantly revised by SEC, or put on a two-year hold by the White House is not certain. The odds of at least one of those events happening soon, however, seems high.
The Lowell Milken Institute for Business Law and Policy and the UCLA School of Law recently sponsored a conference entitled Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law.
Although Delaware’s domination of corporate law seems now to be well entrenched, this has not always been the case. At the end of the 19th Century, it was New Jersey that was the center of the corporate law world. As is the case in Delaware today, New Jersey law then provided both tax and doctrinal advantages giving it significant competitive advantages in attracting incorporations from out-of-state businesses. In 1913, however, New Jersey adopted the so-called “Seven Sisters Acts,” a package of legislation that collectively made New Jersey much less attractive to incorporators. Delaware swooped in and attracted a flow of New Jersey corporations to Delaware. Today, 64% of the Fortune 500 companies are incorporated in Delaware, as are more than half of all companies listed on the New York Stock Exchange, NASDAQ, and other major stock exchanges.
Whether Delaware’s domination resulted from a race to the top or to the bottom has been the subject of much argument. In either case, however, there is no doubt that Delaware benefits greatly from its dominance. Delaware gets a significant percentage of state revenues from incorporation fees and franchise taxes, typically over 20% of the state's budget. Delaware’s government thus has a very strong interest in maintaining Delaware’s dominant position.
In recent years, however, some observers have suggested that Delaware’s competitive position is eroding or, at least, that it should be doing so. In a 2008 law review article, “The Mystery of Delaware Law's Continuing Success,” Emory law professors William Carney and George Shepherd challenged “the widely held view that Delaware corporate law is dominant because it possesses superior traits, such as a well-understood statute, many judicial decisions interpreting the law, and wise and experienced judges administering that law.” They contend that if Delaware ever truly possessed such advantages, they have eroded substantially.
The purpose of this conference was to explore how Delaware achieved its dominance of corporate law, the threats (if any) to Delaware’s continued dominance, and the social and economic consequences of Delaware’s dominance for shareholders, stakeholders, and the national economy.
Here is the video from Day 1:
Here is the video from Day 2:
As this is the last weekend before Lent, we pushed the boat right out. Butter basted Wagyu beef ribeye steaks and Three Cheese Hasselback Potatoes. If you looked up decadence in the dictionary, it would have this meal's picture in the definition. Green vegetables, you ask? For once my view that green vegetables are not food, but rather what food eats, prevailed.
To drink I opened one of my two bottles of the 1997 Ridge Monte Bello. I last had this wine at a restaurant in 2007, when it was a tannic beast. An additional ten years of bottle age transformed it into a mellow and amiable companion. Ruby red in color. Strong bouquet of cassis, blackberry, tobacco, leather, and anise. On the palate, the tannins have softened considerably. Indeed, the texture is now velvety smooth. Lingering finish. A truly great wine at its peak.
(No. I don't know why Typepad sometimes flips the photos on their side. Grumble.)
The WLF has put out a briefing paper by Lawrence Ebner, which notes that a "recent Tenth Circuit decision has exacerbated a split among federal courts over whether the method used to appoint Securities and Exchange Commission ALJs violates the Constitution’s Appointments Clause."
Last noted August 2012. With an additional five years in the cellar, it is much less of a beast. Moderate sediment required decanting. I let it breathe about an hour before drinking. Still a deep ruby color. Big nose. The bouquet is sour cherry, some funky flinty earth, and raspberry. Ditto the palate. It's still big for a Pinot Noir with a firm acidic structure and a strong tannic backbone. I think it will improve, but with three bottles left in the cellar I'll probably drink at least two over the next couple of years and leave one for extended aging to see what happens.
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A new paper by Alessio Paces puts a new and potentially very helpful spin on hedge fund activism (I say potentially only because I'm still thinking through the implications):
In my recent article, I discuss the policy response to hedge fund activism. I argue that the short-termism debate cannot shed light on the desirability of such activism. Rather, hedge fund activism should be regarded as a conflict of entrepreneurship, namely a conflict about the most efficient horizon to maximize profit. The choice of this horizon, which is uncertain, belongs to the entrepreneur. An engagement by hedge funds reveals that their views about this particular point differ from that of the incumbent management. Because the efficient horizon to maximize profit varies with the individual company and with time, companies should be able to choose whether to be exposed to hedge fund activism and to alter this choice during their existence. In particular, companies should be allowed to introduce dual-class shares after they have gone public, subject to a majority-of-minority shareholder vote. Such transactions would only be acceptable for institutional investors in the presence of investor protection guarantees, such as board representation, and sunset clauses. I argue that this solution is more efficient than general curbs on activism, including loyalty shares. ...
In my paper, I argue that institutional investors cannot always be trusted to make the right decision. Although there are no studies on which category of investors are decisive in hedge fund campaigns, conceptually the key investors are those that vote without having the option to exit strategically, namely the index funds. Empirical evidence reveals that most index fund managers vote actively and independently. However, asset managers usually base their voting on low-cost policies that tend to enhance the returns on their portfolio as a whole. As a result, the judgment by index fund managers is trustworthy as far as standard behaviors, such as expropriation or mismanagement of free cash, is concerned. The same judgment, however, cannot be relied upon when the issue is more about the strategy that a company should pursue. ...
This solution would provide the following advantages. First, the veto right by the institutional investors would screen for the companies for which curbing hedge fund activism can arguably increase value. Second, managers would have to commit to protecting investors against expropriation and mismanagement while the dual-class structure is in place. Third, institutional investors could only accept the restriction if it expires within a defined period, after which managerial performance will again be assessed by the market. In this way, dual-class shares would deliver one unfulfilled promise of loyalty shares, namely the temporary character of the departure from one-share-one-vote.
The article is available here.
I've written about dual class stock a couple of times, one of which is available at SSRN: The Short Life and Resurrection of SEC Rule 19c-4. Washington University Law Quarterly, Vol. 69, Pp. 565-634, 1991. Available at SSRN: https://ssrn.com/abstract=315375 or http://dx.doi.org/10.2139/ssrn.315375