First day of school. N-12 14 years + 4 in college + 2 in grad school + 3 at UVa law + 8 teaching at UIUC + 19 at UCLAW. Wow: 50 first days.— Stephen Bainbridge (@ProfBainbridge) August 25, 2014
First day of school. N-12 14 years + 4 in college + 2 in grad school + 3 at UVa law + 8 teaching at UIUC + 19 at UCLAW. Wow: 50 first days.— Stephen Bainbridge (@ProfBainbridge) August 25, 2014
Case in point from ThinkProgress:
Your Whopper May Soon Come With A Side Of Tax Avoidance
American fast food chain Burger King is in talks to buy Tim Hortons, a doughnut and coffee chain based in Canada, the New York Times reported Monday.
A deal, which could be reached as soon as this week, would mean the iconically American company would be headquartered in Canada, and benefit from the country’s lower corporate tax rate, 15 percent, compared to the on-paper 35 percent rate in the U.S.
Among the comments: "I ate my last BK meal last week. Never again will I grace their doors."
The potential departure of an iconic American company because of "corporate greed" will be trotted out on the campaign trail.
And then we get to the Twitter world:
Send a message, and denounce Burger King's tax dodge scheme:... http://t.co/8zdPpQ6ZDQ— Left Action (@LeftAction) August 25, 2014
The traitorous Burger King sits on a throne of fries.— Scott Lincicome (@scottlincicome) August 25, 2014
Here's my question for anybody who's upset about tax inversions: Do you have an IRA? or a 401(k)? Did you take any deductions on your tax return last year? or any tax credits? If so, you used a perfectly legal "tax avoidance" strategy. Which is exactly what Burger King is considering.
I stand with Judge Learned Hand who famously opined that:
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
Interesting article in the WSJ over the weekend:
Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren't run by stock pickers or star managers. ...
The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners. ...
Traditional stock-fund managers—old-fashioned stock pickers—have been the hardest hit in the wave toward passive investment. Through July, passively managed stock funds have seen a net $128.4 billion in investor inflows, compared with $18 billion for traditional stock funds, according to Morningstar.
Even uber-active investor Warren Buffett has seen the light, recently disclosing how he wants his estate invested: "Mr. Buffett, 83 years old and with a net worth of $66 billion, wrote that he advised his trustee to 'put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.).'"
If you want to know why index funds are deservedly beating the crap out of actively managed funds, read this post and then go buy Burton Malkiel's book:
Like a lot of his fellow shareholder gadfly activist proponents Broc Romanek seems a bit put out by Steven Davidoff Solomon's NY Times column Grappling With the Cost of Corporate Gadflies. Broc listed 10 reactions. Here are my reactions to Broc:
1. Never Use the Loaded “Gadfly” Term – It’s politically incorrect to call someone a “gadfly.” Trust me, it is. ...
And your point would be what? If the shoe fits, etc.... Political correctness is lame.
2. Gilbert Brothers Brought Rule 14a-8 to Life ....
Apropos of Broc's point # 1, here was the headline for John Gilbert's obituary: John J. Gilbert Is Dead at 88; Gadfly at Corporate Meetings. If gadfly is good enough for the Grey Lady, it's good enough for me. Anyway, the obit went on to say of his persistent questioning of CEOs that "not a few of whom considered it badgering." In 1982 alone, these busybodies submitted 198 shareholder proposals to companies. In 1991, they submitted a whopping 75 out of 319 proposals. (Data from this paper.) What I can't find is data on how many of these proposals passed. My guess is zero. In any event, that's not governance. It's a fraking obsession. See Douglas M. Branson, Corporate Social Responsibility Redux, 76 Tul. L. Rev. 1207, 1215 (2002) ("in those years the shareholder proxy proposal area was a territory occupied by corporate gadflies, such as the Gilbert brothers and Evelyn Davis. Critics pointed out that most proposals were motivated more by narcissism than by any heartfelt concern about improved governance or social responsibility"); D. A. Jeremy Telman, Is the Quest for Corporate Responsibility A Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd., 44 Akron L. Rev. 479, 487 (2011) ("There arose in the 1940s the phenomenon of the “gadfly investor.” Three such investors, Lewis and John Gilbert and Evelyn Davis, still accounted for 30% of the resolutions submitted to corporations as late as 1982. Their prominence among proponents led to cries that the process was being abused by people who were not interested in the economic well-being of the corporation but by people promoting 'crackpot' ideas or 'afflicted with an insatiate desire for personal publicity.'").
3. Most Individual Proponents Don’t Like Being Grouped Together – John Gilbert hated being lumped together with EYD in media articles. They didn’t act in concert.
And your point would be what? I'm sure Iraq, Iran, and North Korea didn't like being lumped together as the axis of evil.
4. Remarkable That Anyone Bought EYD’s “Highlights & Lowlights” – It’s amazing to me that any company would cave to what is essentially blackmail and buyEvelyn Davis’ “Highlights & Lowlights” – which essentially was a publication about herself. But it was a smart investment for anyone that didn’t want EYD to cause trouble at the annual meeting.
EYD was running a racket not unlike the Sōkaiya in Japan: Blackmailing "companies by threatening to publicly humiliate companies and their management, usually in their annual meeting." Today, of course, its union pension funds that abuse the 14a-8 shareholder proposal to extract private gains at the expense of their fellow shareholders. But 14a-8 is still an enabler of racketeers.
Speaking of Evelyn Davis, here's a few more facts: "Until rather recently, people like Johnny Carson,96 Dr. Spock,97 and others of their ilk were nominated from the floor of the annual meeting by the Evelyn Davises of the world." Thomas J. Andre, Jr., The Corporate Governance Reform Act of 1995, 17 J. Corp. L. 87, 101 (1991). "Mrs. Davis stated at the 1972 annual meeting ‘I'm opposed and against women directors and women officers. I'd much rather deal anytime with the worse men than the friendliest woman.’" Leila N. Sadat-Keeling, The 1983 Amendments to Shareholder Proposal Rule 14a-8: A Retreat from Corporate Democracy?, 59 Tul. L. Rev. 161, 197 n.112 (1984).
5. What Is a “Successful” Shareholder Proposal? – Davidoff presumes that a shareholder proposal is successful only if it receives majority support from shareholders. But I define it much differently. For the proponent who brought the proposal, the definition of success may vary. They merely might want to force the board to consider the issue of the proposal. They actually might want to use a proposal to gain attention so they can obtain a meeting to discuss a more pressing issue (for which they don’t want to publicly disclose).
Does Broc really want to celebrate the use of Rule 14a-8 for disingenuous private purposes? Or to celebrate forcing companies to spend money - i.e., to coerce speech - to give some asinine gladfly a soapbox? Even a proponent of board-shareholder engagement admits that "there is a lot of anecdotal evidence suggesting that often the few people who attend annual meetings do so in order to be disruptive. These anecdotes support the notion that shareholder meetings have become, in one expert's words, a '[t]heater of the [a]bsurd.'" Lisa M. Fairfax, Mandating Board-Shareholder Engagement?, 2013 U. Ill. L. Rev. 821, 837 (2013).
I say repeal 14a-8 and let them send out tweets.
6. Most Recent Court Cases Have Resulted in Losses for Companies
Which is sort of the point. The law is too favorable for shareholder proponents.
7. $87 Grand for No-Action Requests? Call My Lawyer – The gist of the Davidoff article is that shareholder proposals are costing companies so much money. Of course, that depends on whether a company decides to seek no-action relief from Corp Fin to exclude them. Davidoff throws out that it costs companies $87,000 per proposal for “dealing with them.”
Sorry, but we really are talking about serious money here. As far back as 2001, Roberta Romano tolds us that "the estimated present value of the cost of the current regime ... ranges between $293 million and $1.9 billion." Less Is More: Making Institutional Activism A Valuable Mechanism of Corporate Governance, 18 Yale J. on Reg. 174, 182 (2001). See also Alan R. Palmiter, The Shareholder Proposal Rule: A Failed Experiment in Merit Regulation, 45 Ala. L. Rev. 879, 926 n.15 (1994) (citing Susan Leibler's well-known study "using reported costs of shareholder proposals in 1976 and 1981 to estimate that shareholder proposals, both included and excluded, during 1975-1976 proxy season cost U.S. companies a total of $7 million").
8. No-Action Process Ripe for Reform? – Anyways, if the real beef is cost – why not go to the heart of the matter and reduce the costs inherent in the no-action process?
I actually agree with the need for no action letter reform, but that doesn't change the fact that we also need Rule 14a-8 reform.
9. Do Institutional Investors Support Proposals From Individual Proponents? – It appears that Davidoff didn’t bother to talk to any institutional investors to ask their opinion about individual proponents. If he did, I can tell you that most would support the right of these shareholders to submit proposals (in fact, EYD was known to pick topics that would receive wide support on purpose). And that institutions have supported their proposals many times over the years
Broc's probably right that union and state/local government pension funds support expansive Rule 14a-8 rights. After all, they're big abusers of the rule too. I'm not convinced that mutual funds and so on would be so supportive.
10. Shouldn’t the Topic of the Proposal Matter, Not Who Submitted It? – Yep. Amen.
No. The identify of proponents matters a lot. We need to make it a lot harder for hobbyist gadflies like the Gilberts and private rent-seekers like union and state/local government pension funds to abuse the process.
I’m honored to be giving this lecture at my alma mater, and thanks go to Charles Elson for the opportunity and Kim Ragan for organizing the event. It’s the first in the book tour that will take me to many other great universities with thanks to many more wonderful colleagues nationwide. More details as they are finalized.
Have you bought his new book about Warren Buffett yet?
Thanks very much for the publicity and the generous evaluation. A couple of thoughts.
First, on the 'semantic quibble' of director primacy versus what I call 'traditional' shareholder primacy, I agree with you that as between directors and shareholders, directors enjoy primacy. I use the term in a different sense. As between shareholders and the corporation's other stakeholders, shareholders enjoy primacy (voting rights and derivative suit monopolies, for example). But the 'horizontal' point implies nothing about the 'vertical' dimension, because as we both know the law accords very little power to shareholders vis-a-vis directors. I certainly agree with you about that. And I agree that it's a good thing.
Second point: I respectfully suggest that you don't take the director primacy idea as far as you should. I don't think the law requires of directors even the watered-down version of shareholder wealth maximization that you assert. I think Delaware law is actually agnostic on the question of corporate purpose. I think they really mean it when they say 'incorporation for any lawful purpose.' So directors (absent atypical direction in the corporate charter) end up deciding the extent to which the company pursues profit maximization versus various possible alternatives, and this includes selection of the relevant time horizon for pursuit of corporate objectives. (Hobby Lobby is right on the state law corporate purpose question. Lyman Johnson and I have a new paper about this.)
Third, please note that the view of Delaware law that I'm sketching here bears no resemblance to the idea that directors should be subject to specific fiduciary-like duties to corporate constituencies other than shareholders. If the law truly is agnostic about corporate purpose, it makes no more sense to talk about duties owed to nonshareholders than it does to assert a duty owed solely to shareholders. So the ideas about corporate law as a panacea for society's injustices that Gordon Smith criticizes in the article you quote (in your blog piece about Lyman's recent article) have nothing to do with the view of the law that Lyman and I espouse. Broad director discretion as to corporate purpose has been the law for a long time and does not threaten the health of the economy. The real threat comes from shareholder pressures to maximize short-term stock prices. Corporate law tolerates this approach to management but certainly does not require (because it's agnostic). The misguided insistence that the law requires of management that it act as the agent of the shareholders probably makes things worse, but that isn't the law's fault.
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.
And now for some tweets:
Anne Tucker opines:
Fellow BLPB blogers have shared on and off line their coverage scope and strategies for Business Associations/Corporations. In thinking about how to fit in big corporate constitutional questions into a syllabus that is already jam packed with topics, this 2013 article (Teaching Citizens United v. FEC in the Introductory Business Associations Course) by Michael Guttentag at Loyola Los Angeles, provides some great suggestions. Written in a post-Citizens United and pre-Hobby Lobby era, I think his insights are broadly applicable about how corporate constitutional rights illustrate the "costs that may arise from differences between manager interests and shareholder interests, the costs that may arise from following a shareholder primacy norm, and the distinctive nature of the role of the transactional lawyer." This short (8 pages) article is worth reading to identify some opportunities to discuss these important issues in a way that illustrates difficult concepts within your existing syllabus and hopefully keep students engaged throughout the semester.
I agree that you ought to read Mike's paper. But then again I think you ought to read everything Mike writes (as I do). Having said that, however, I affirmatively avoid teaching Citizens United or anything else remotely resembling constitutional law in my Business Associations course. Why?
1. The law school curriculum already over emphasizes constitutional law, elevating it as the highest and best form of law a lawyer can aspire to practice. It is the most extreme example of how all too many law schools privilege public law over private law (especially business law). So why perpetuate the problem in our own courses?
2. At many law schools, the line to teach constitutional law is huge and students fairly get the impression that the professor teaching [fill in the blank] really wants to be teaching constitutional law and that's why they're spending so much time on US Supreme Court cases. I have zero interest in teaching constitutional law and want to give students an example of at least one professor who finds business law (and Delaware Chancery Court cases) far more interesting than constitutional law. Getting students interested in business law as an intellectual exercise is hard enough without ourselves perpetuating the stereotype that business law is boring and con law is fun.
3. Mike suggests that:
One can ask: How would you feel if the managers of a corporation you owned shares in decided to oppose same-sex marriage, even if a majority of the firm's shareholders supported same-sex marriage?
Perish the thought. As a white male conservative Catholic teaching business law courses at a law school whose faculty and student body are overwhelming secular and liberal, spending class time on issues of race, gender, class, politics, religion, culture and so on would inevitably plunge me into a Kobayashi Maru scenario. Call me a wimp, but I get myself into enough trouble on those issues here on the blog without bringing them into the classroom.
4. I have enough trouble keeping up to date with Delaware corporate law without adding the need to steep myself in constitutional law. Granted, as was the case in Hobby Lobby, sometimes I touch on Supreme Court cases in my scholarship. As was also the case in Hobby Lobby, however, I ignored the constitutional issues to focus on what I saw as a potential corporate law twist to the case.
5. As Anne correctly notes, the basic Business Associations course is jam packed. As it stands, I cover most of Chapter 1, all of Chapters 2 to 5, and part of Chapter 6 of the Klein, Ramseyer, & Bainbridge casebook in the basic course. I don't have time to get to Chapters 7 or 8 at all (for which my dear friend Bill Klein periodically repreimands me, as he thinks Chapter - Debt - is essential). What core business law topics should I ditch? Granted, Mike advocates working Citizens United into the mix in three areas that i suspect most of us teach:
(1) the potential for differences between the interests of those who manage the firm and those who own the firm,(2) the costs and benefits of shareholder primacy, and (3) the role of a transactional lawyer in advising on business decisions that involve legal risks.
But I can teach those issues using plain vanilla business law courses. And prefer to do so for the reasons already set out above.
As always, your mileage may vary, but at the very least I would advise my fellow business law professors to think very carefully before following Anne and Mike's advice.
I have been reading with interest David Millon's new paper, Radical Shareholder Primacy (July 28, 2014), available at SSRN http://ssrn.com/abstract=2473189, which argues that:
Abstract: This article, written for a symposium on the history of corporate social responsibility, seeks to make sense of the surprising disagreement within the corporate law academy on the foundational legal question of corporate purpose: does the law require shareholder primacy or not? I argue here that disagreement on this question is due to the unappreciated ambiguity in the shareholder primacy idea. I identify two models, the 'radical' and the 'traditional.' Radical shareholder primacy originated at the University of Chicago in the later 1970s, first in the work of Daniel Fischel and then in his co-authored writings with Frank Easterbrook. The key point is the assertion that corporate management is the agent of the shareholders, charged with maximizing their wealth. There is no legal authority for this claim; Fischel drew it from the financial economists Michael Jensen and William Meckling, who used the agency idea in a non-legal sense. So those who say that this notion of shareholder primacy is not the law are correct. However, a different conception of shareholder primacy is based on the idea that shareholders hold a privileged position within the corporation's governance structure, enjoying a monopoly over voting rights and the right to bring derivative lawsuits and singled out for special mention in the traditional specification of fiduciary duties as being owed to 'the corporation and its shareholders.' In this sense, shareholders enjoy primacy over the corporation's other stakeholders, although there is no maximization mandate and corporate law is largely ineffective in allowing shareholders to insist that management privilege their interests. Nevertheless, this version of shareholder primacy is enshrined in the law, and, if the radical version's agency claim is laid to rest, there is no harm in acknowledging that fact.
I am prepared to associate myself more or less with David's traditional version of shareholder primacy, which he describes as follows:
This model also claims to privilege shareholders, but its commitment to them is significantly weaker than under the radical version. Under the traditional model, which emerged in the last years of the nineteenth century and was embodied in corporate law and widely accepted for much of the twentieth century, management enjoys broad discretion and is largely inunune from shareholder control." While it is assumed that a business corporation is organized in order to generate profit and, as a practical matter, a corporation that regularly loses money cannot survive long-term, there is no expectation that management must maximize current share price to the exclusion of competing objectives. These can include regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate, as well as long-term investments that reduce current earnings for the sake of future gains. Certainly there is no sense that an agency relalionship exists between management and shareholders.
I say more or less because I would offer a couple of qualifications. First, for reasons I've laid out in various places, but perhaps most comprehensively here, I think that management can and should have "regard for the interests of non-shareholder constituencies under circumstances management deems to be appropriate [only to the extent management reasonably believes doing so will redound to the benefit of shareholders in the long-term and that management should not do so at all in final period situations]."
Second, and this is mostly a semantic quibble, i understand the term shareholder primacy as making two distinct claims. One goes to the ends of corporate governance and claims that managers have a fiduciary duty to sustainably maximize shareholder returns over the long-term. The other goes to the means of corporate governance and claims that shareholders both do and should have ultimate control of the company. I accept the former but reject the latter. Instead, as I have argued ad nauseam, control of the corporation is vested in the board subject to very limited shareholder accountability mechanisms. Hence, I prefer the term director primacy.
I have been reading with interest Lyman Johnson's new paper, Law and the History of Corporate Responsibility: Corporate Governance (2014). 10 University of St. Thomas Law Journal 974 (2014); U of St. Thomas (Minnesota) Legal Studies Research Paper No. 14-21; Washington & Lee Legal Studies Paper. Available at SSRN: http://ssrn.com/abstract=2469979:
Abstract: This article is one part of a multi-article project on the role of law in the history of corporate responsibility in the United States. Key background material for the project is set forth in the introduction to an earlier article addressing corporate personhood. This paper deals with corporate governance while other articles address corporate purpose and corporate regulation.
Corporate responsibility concerns associated with corporate personhood, corporate purpose, and corporate regulation all ultimately relate to a far more basic issue: corporate governance. As the commercial demands of nineteenth century industrialization led to substantial displacement of the partnership form of business enterprise by large corporations with dispersed shareholders, control of these corporations - i.e., their governance - centered in the hands of senior managers, not investors themselves. This phenomenon of “separation of ownership from control” is quite different than in the typical partnership and was seminally described by Adolf Berle and Gardiner Means in their 1932 book, The Modern Corporation and Private Property. It has continued to occupy center stage in corporate law for the past eighty years.
From a legal history vantage point on corporate responsibility, the stupendous rise in commercial significance of the corporation in the nineteenth century corresponded to the precipitous decline of a regulatory approach to corporations under state corporate law, and instead, the twentieth century “outsourcing” of such regulation to an array of other legal regimes ostensibly designed to protect both investor and noninvestor groups. This meant that corporate law itself developed in such a way as to loosen, not tighten, most constraints on those who govern public corporations. The thesis of this article, developed in Parts I and II, is that corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms. Recently, corporate law’s long and unsustainable neglect of corporate responsibility concerns has led to the emergence of a new type of business corporation, the “benefit corporation.” Benefit corporations expressly permit the directors to advance both investor and noninvestor interests, in aid of pursuing a larger public benefit. The implications of this development for governance of the regular business corporations are unknown. One potential adverse outcome is the “ghettoization” of corporate responsibility within benefit corporations, leading to even less serious attention to such concerns in the traditional business corporation.
I agree with Lyman that "corporate governance, both as a body of law and as a field of academic study, has historically had little to say on the important subject of corporate responsibility. Instead, the quest for greater responsibility in the United States largely has come from “external” legal regulation and from ongoing shifts in business and social norms."
But I disagree with Lyman's argument that this supposed neglect is unsustainable. Instead, I agree with Gordon Smith's eloquent exposition of the The Dystopian Potential of Corporate Law, available at SSRN: http://ssrn.com/abstract=976742, which argues that:
The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal.
This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question.
In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.
One consequence of the events in Ferguson, Mo. is that people are talking with each other across ideological lines who usually don’t, a symbol being the attention paid on both left and right to Sen. Rand Paul’s op-ed last week in Time. And one point worth discussing is how the problem of police militarization manifests itself similarly these days in local policing and in the enforcement of federal regulation.
At BuzzFeed, Evan McMorris-Santoro generously quotes me on the prospects for finding common ground on these issues. The feds’ Gibson Guitar raid — our coverage of that here — did much to raise the profile of regulatory SWAT tactics ....
Walter Olson reminds us that the problem of paramilitary cops goes beyond local SWAT teams and the like, to include the feds.
Corporate America is being held hostage by three people you have probably never heard of.
The three people — John Chevedden, William Steiner, James McRitchie and their families — specialize in bringing shareholder proposals at annual meetings, urging companies to change their compensation practices or improve their corporate governance.
These three are a force unto themselves. Together, they accounted for 70 percent of all proposals sponsored by individuals among Fortune 250 companies this year, according to a new study by the Manhattan Institute.
Go read the whole thing. Now.