ProfessorBainbridge.com

Ex-NY Governors versus NY AG Eric Schneiderman re Hank Greenberg suit

In today's WSJ, former NY Governors Mario Cuomo and George Pataki make a bipartisan call for NY's current AG Eric Schneiderman to drop his suit against ex-AIG boss Hank Greenberg:

For the past eight years, Maurice "Hank" Greenberg, the former chairman and chief executive officer of the insurer AIG, has been futilely pursued by the New York attorney general's office under the 1921 Martin Act, which gave the state's attorney general extraordinary powers to investigate and litigate financial fraud.

The Greenberg civil litigation, however, concerns the accounting for two entirely proper transactions that took place well over a decade ago—neither of which had any impact on the net income or shareholder equity of AIG. Yet as Charles Dickens wrote of the fictional case Jarndyce v. Jarndyce in "Bleak House," this interminable "scarecrow of a suit," which should never have been brought in the first place, "drones on."

Recently, the New York attorney general's office recognized that under both state and federal law, the resolution of federal class actions brought by AIG shareholders had mooted the attorney general's stated purpose in the civil litigation against Mr. Greenberg: the recovery of damages on behalf of AIG shareholders. As a result, the attorney general's office informed the New York Court of Appeals on April 25 that it had decided to "withdraw our claims for damages in this case."

This acknowledgment was long overdue and should have marked the end of this case. So we were surprised to learn that instead of dropping the litigation, the attorney general's office has decided to deplete its resources and consume more of the court's time by raising claims for injunctive relief against Mr. Greenberg that were long ago abandoned and that, in any event, are without merit and serve no conceivable purpose. ...

Mr. Greenberg has never worked in the securities industry, and he hasn't been an officer or director of a public company for eight years. There is also no reason to suppose he intends to do so in the future. Simply stated, the attorney general office's pursuit of injunctive relief against Mr. Greenberg is a waste of time and money.

The continued pursuit of Mr. Greenberg is also morally wrong. From landing on Omaha Beach on D-Day to building one of New York's largest companies, Hank Greenberg has been a patriot who has played a vital role in advancing U.S. interests in global trade and national security. He is one of the country's most generous philanthropists. Even today, he continues those efforts for New York's benefit.

Go read the whole thing and then read Alison Frankel's take on their op-ed. She puts the issues in context by highlighting how they relate to an ongoing struggle between the NY AG and the plainitff class action bar:

The battle to recover damages on behalf of misled investors (and the right to claim credit for the recovery) is part of that interplay: In New York, whoever makes a deal first wins. ...

You can see why, as a policy matter, this kind of scenario is of concern: It permits a defendant to pick whom it wants to settle with. (Of course, that’s been a long-running argument by private plaintiffs’ lawyers when their class actions are co-opted by regulators.) 

I don't share Frankel's concern. The issue is not unique to NY AG actions. Whenever you have multiple suits filed over the same conduct, the first case to settle inevitably creates a res judicata effect.That's why defendants settle cases and why courts will allow out of state litigants to intervene and be heard in the hearing(s) the court holds before approving any settlement.

Instead, my concern remains with the Martin Act. As Walter Olson aptly observed back in 2004:

Why is New York Attorney General Eliot Spitzer so feared by the state’s financial community? A major reason is a little-known piece of 1921 New York legislation called the Martin Act, aimed at financial fraud. “It empowers him to subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants. People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act’s powers exceed those given any regulator in any other state.

“Now for the scary part: To win a case, the AG doesn’t have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. Plus, when the prosecution is over, trial lawyers can gain access to the hoards of documents that the act has churned up and use them as the basis for civil suits.” 

Lovely.

Gender quotas at Harvard Law

The Harvard Crimson is currently running “a three-part series on gender disparity issues at [Harvard] Law School.” Part I reports that there are 17 tenured or tenure-track women out of 92 total on the Harvard Law School faculty. It goes on to report:

Since she took the helm of the school four years ago, [Dean] Minow has worked to change these numbers. Her first step: hiring equal numbers of men and women for entry-level faculty positions since 2009. This year, the Law School has made two hiring offers, one to a man and one to a woman.

Annually, the entry-level hiring committee conducts about 40 interviews, which are balanced in terms of gender breakdown. From these initial interviews, the hiring committee whittles down the pool of potential candidates, who must present to a faculty workshop, secure the recommendation of the hiring committee, and finally secure the approval of the faculty as a whole before they are hired. All the while, the hiring committee is careful to retain an equal number of male and female candidates, according to Law School professor David J. Barron ’89, chair of the entry-level committee.

The goal of having more female faculty members is “very much part of the consciousness, and consciousness matters,” said Barron.

At least as described, this sounds rather like a strict 50/50 gender quota, doesn’t it?

via www.volokh.com

Wider Problems Found at IRS - Twisting slowly in the wind

The Internal Revenue Service's scrutiny of conservative groups went beyond those that had "tea party" or "patriot" in their names—as the agency admitted Friday—to also include ones that raised concerns over government spending, debt or taxes, and even ones that lobbied to "make America a better place to live," according to new details of a government probe.

The investigation also revealed that a high-ranking IRS official knew as early as mid-2011 that conservative groups were being inappropriately targeted—nearly a year before then-IRS Commissioner Douglas Shulman told a congressional committee the agency wasn't targeting conservative groups.

via online.wsj.com

Le·gal In·sur·rec·tion: IRS anti-Tea Party scandal gets real

This is getting real.

Yesterday it was just some “low level” employees involved. Now AP is reporting that senior IRS officials were aware of the targeting, via AP, IRS watchdog: Senior IRS officials knew in 2011 tea parties’ tax-exempt status being targeted (h/t @GabrielMalor):

WASHINGTON (AP) — IRS watchdog: Senior IRS officials knew in 2011 tea parties’ tax-exempt status being targeted.

(added) AP has expanded its report now (h/t reader):

A federal watchdog’s upcoming report says senior Internal Revenue Service officials knew agents were targeting tea party groups in 2011.

The disclosure contradicts public statements by former IRS Commissioner Douglas Shulman, who repeatedly assured Congress that conservative groups were not targeted.

via legalinsurrection.com

Real, indeed. One might almost say Nixonian.

Corporate Practice Commentator's "Top 11" Corporate and Securities Law Review Articles for 2012

The Corporate Practice Commentator has announced the results of its nineteenth annual poll to select the ten best corporate and securities articles.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2012. Here's the results (HT: Leiter):

1. Armour, John, Bernard Black and Brian Cheffins. Delaware's balancing act. 87 Ind. L.J. 1345-1405 (2012). 
2. Bar-Gill, Oren and Ryan Bubb. Credit card pricing: the CARD Act and beyond. 97 Cornell L. Rev. 967-1018 (2012). 
3. Bartlett, Robert P., III. Making banks transparent. 65 Vand. L. Rev. 293-386 (2012). 
4. Barzuza, Michal. Market segmentation: the rise of Nevada as a liability-free jurisdiction. 98 Va. L. Rev. 935-1000 (2012). 
5. Bratton, William W. and Michael L. Wachter. The political economy of fraud on the market. 160 U. Pa. L. Rev. 69-168 (2011). 
6. Cain, Matthew D. and Steven M. Davidoff. Delaware's competitive reach. 9 J. Empirical Legal Stud. 92-128 (2012). 
7. Cheffins, Brian, John Armour and Bernard Black. Delaware corporate litigation and the fragmentation of the plaintiffs' bar. 2012 Colum. Bus. L. Rev. 427-501. 
8. Fisch, Jill E. The destructive ambiguity of federal proxy access. 61 Emory L.J. 435-500 (2012). 
9. Rock, Edward B. Shareholder eugenics in the public corporation. 97 Cornell L. Rev. 849-906 (2012). 
10. Squire, Richard. How collective settlements camouflage the costs of shareholder lawsuits. 62 Duke L.J. 1-78 (2012). 
11. Thomas, Randall S. and Robert B. Thompson. A theory of representative shareholder suits and its application to multijurisdictional litigation. 106 Nw. U. L. Rev. 1753-1819 (2012).

Apparently there was a tie for 10th.

Resolving the "should hedge funds be able to pay their stooges on corporate boards of directors" kerfuffle by private ordering

Steve Davidoff reports that:

Responding to hedge funds’ efforts to give incentives to nominees to company boards, the law firm Wachtell, Lipton, Rosen & Katz in essence came over the top on Thursday in a memo distributed to clients. Signed by the leading deal lawyer Martin Lipton and seven other Wachtell partners, the memo proposes that company boards consider adopting a bylaw prohibiting shareholder activists from compensating director nominees. Excluded from this prohibition are out-of-pocket expenses and payments for indemnification.

Wachtell’s proposal takes square aim at a topic I recently wrote about: the payment by hedge funds of large amounts of incentive compensation to director nominees. The issue has come to light because of two recent activist situations. Paul Singer’s Elliott Management has nominated five directors to the 14-member board of Hess while Barry Rosenstein’s Jana Partners recently lost a contest to elect five directors to Agrium’s 12-member board. In both cases, the hedge funds’ director nominees were provided with incentive compensation linked to the performance of the companies’ shares that had the potential to pay them millions of dollars.

Since then a mini-debate has broken out online among law professors over whether these payments are legal or appropriate. Wachtell, which has done battle before with academics over their views in support of shareholders, is now citing two academics who are on its side.

The first is John C. Coffee Jr., the Columbia Law School professor, who stated that these “third-party bonuses create the wrong incentives, fragment the board and imply a shift toward both the short-term and higher risk.”

Meanwhile, Professor Stephen Bainbridge of the UCLA School of Law has written extensively on this subject and summed up his feelings by stating that “if this nonsense is not illegal, it ought to be.”

On the other side, several equally well-respected academics have signed off on these arrangements, even allowing themselves to be quoted in Elliot’s materials. In this corner we have Professor Randall Thomas of Vanderbilt Law School who said this approach made sense because it “lends itself to allowing these nominees, if elected, to focus on independent decision-making and fulfilling their fiduciary obligations on behalf of shareholders.” Another professor quoted in the materials is Larry Cunningham of George Washington University Law School who later argued that all of this “is intended to align the interests of those directors with those of the company’s shareholders.”

Should JP Morgan make Jamie Dimon decide between being CEO and Chairman of the Board?

The WSJ opined today:

For the sin of steering the bank through the disaster intact, the JP Morgan Chase chairman and CEO now finds himself the target of a political campaign to weaken his authority and shut him up.

Specifically, activist shareholders and the usual media scolds are pushing for JP Morgan to strip Mr. Dimon of his chairman's role in the name of better corporate governance. The activists also want to replace several other bank board members. Shareholders are voting on this question through JP Morgan's May 21 annual meeting. 

Though a longtime Democrat, Mr. Dimon became a Beltway-union-media target by speaking out against Washington's regulatory frenzy in the wake of the 2010 Dodd-Frank law. He has highlighted the costs of the myriad new rules emanating from the capital, such as the Volcker Rule, which is still unfinished three years on. As a rare CEO of a big bank who avoided the worst of the mortgage crisis, Mr. Dimon carries an influential voice, and one that many politicians would rather not hear. ...

Now Mr. Levin's allies at government pension funds are joining the campaign to cut Mr. Dimon down to size. And as usual, advisory firms like Institutional Shareholder Services (ISS) are joining with the public pension funds to demand governance reforms that perform better in theory than in practice.

Yesterday, the WSJ's news section tackled the merits of splitting the CEO/CoB positions between two people:

Efforts to split the posts of chairman and chief executive at U.S. companies are finding success. Now all that is needed is evidence it actually helps investors.

Studies show a mixed impact on shareholder returns when independent chairmen are named to keep a better eye on CEOs. While the evidence suggests a split could help companies that are struggling, it also shows the step could hurt shareholders in many other cases. ...

A 2009 review of studies on independent chairmen by the Millstein Center for Corporate Governance and Performance concluded the impact on performance "was inconclusive,'' said Stephen Davis, associate director of Harvard Law School's programs on corporate governance and institutional investors, who helped oversee the review.

"It isn't driven by research,'' Mr. Davis said of the push to separate the top two jobs. "It's driven by investors' views about accountability.''

I discussed the issue back in 2009 at some considerable length, concluding that:

In sum, corporate governance is not an arena in which one size fits all. Different firms have different governance needs. Boards of directors should be free to select the governance structures optimal for their unique firm without having corporate governance activists putting them in a straight jacket.

Kindly go read the whole thing.

The Me Generation - TIME

I am about to do what old people have done throughout history: call those younger than me lazy, entitled, selfish and shallow. But I have studies! I have statistics! I have quotes from respected academics! Unlike my parents, my grandparents and my great-grandparents, I have proof.

Here's the cold, hard data: The incidence of narcissistic personality disorder is nearly three times as high for people in their 20s as for the generation that's now 65 or older, according to the National Institutes of Health; 58% more college students scored higher on a narcissism scale in...

via www.time.com

Did We Really Take Advice from a Chicken?: The Failure of the Dodd-Frank Act Say-on-Pay Provision

McKinzie, Amanda R., Did We Really Take Advice from a Chicken?: The Failure of the Dodd-Frank Act Say-on-Pay Provision (2012). 45 Tex. Tech L. Rev. Online Ed. 33 (2013). Available at SSRN: http://ssrn.com/abstract=2241691:

This Comment critiques the say-on-pay law and the repercussions that resulted during the 2011 proxy season. Part II of this Comment discusses the events leading up to the passage of the Dodd-Frank Act. Part III examines the say-on-pay precursors along with the Dodd-Frank Act say-on-pay provision. Part IV analyzes the results from the 2011 proxy season and the critiques that arose from its completion. Part V discusses the say-on-pay litigation resulting from negative say-on-pay feedback, including whether Congress intended for shareholders to pursue this type of action. Part VI and VII conclude this Comment by analyzing the impact of the poorly drafted law and proposes that Congress should repeal it. If, however, Congress refuses to repeal the law, Congress should amend it and insert new language that provides guidance for corporations and limitations on abusers of the law, such as shareholders.

via papers.ssrn.com

Director Primacy at the Lowell Milken Institute

Herewith the text of remarks I gave yesterday to a gathering at UCLAW's Lowell Milken Institute:

In the US, corporate governance traditionally has been board-centric. Section 141(a) of the Delaware General Corporation Law commands that “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” The drafters of the Model Business Corporation Act tell us that the corporation code of every state but one have some such formulation. I call this the director primacy model of corporate governance. Other call it the board-centric model. In retrospect, if I had it to do over again, I would too.

Why is director primacy almost universally enshrined in corporate statutes? Why not shareholder primacy, in which management power is vested in the shareholders, who own the corporation? Alternatively, why not managerialism, in which management authority is vested in the Chief Executive Officer (CEO) or an executive committee of top management?

Those are the questions to which the bulk of my scholarship has been devoted for the last 15 years or so.

I set out not to reform the statutory allocation of power, but simply to understand it. As it turned out, however, the analysis ended up having strong normative implications.

In particular, I’ve spent a considerable amount of time debating the merits of shareholder activism. As you likely know, shareholder activists have already achieved considerable results. Majority voting, say on pay, board declassifications, proxy expense reimbursement, and proxy access bylaws are just the most prominent legal changes they have affected.

Demands from the investor community for further shareholder empowerment, moreover, remain unrelenting. As such, the “most important trend in corporate governance today … is the move toward ‘shareholder empowerment.’” Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev. 1255, 1255 (2008).

The most important question in corporate governance today thus is finding the endpoint of the shareholder empowerment movement. Is there a balance that is both politically feasible and theoretically sound?

I am pleased to report that The Lowell Milken Institute has authorized me to organize a conference at UCLA Law in April 2014 that will bring together prominent corporate law scholars to discuss the central question of corporate governance; i.e., “who decides?” The focus will be on the changing dynamics in both law and practice that have significantly empowered shareholders.

I plan to invite scholars working in all three of the major models of corporate governance currently in widespread use in the corporate legal literature; namely, director primacy, team production, and shareholder primacy.

Director primacy is the model I have developed over the last ten years or so. It attempts to both explain and defend the broad grant of authority to boards of directors that is at the heart of American corporate law. It argues that this grant of authority is essential to ameliorating the informational demands a large corporation faces. The grant of authority, however, creates the potential for abuse of that authority, creating a need for accountability mechanisms to limit such abuses. The tradeoff between authority and accountability is at the heart of corporate law. I propose that a presumption should generally favor authority, and therefore I oppose most proposals to increase shareholder power.

Director primacy has been well received as a model of corporate governance. And I have been recognized as “the leading proponent of the director primacy view,” to quote J.W. Verret, Treasury, Inc.: How the Bailout Reshapes Corporate Theory and Practice, 27 Yale J. on Reg. 283, 321 (2010).

To be sure, director primacy has its critics. Some see it as normatively unattractive, while others see it as lacking descriptive power. A leading competitor to director primacy is the team production theory of Margaret Blair and Lynn Stout. Like director primacy, team production theory defends the broad grant of authority to boards. However, it draws upon a different theoretical framework in doing so. Although team production theorists agree with me on the desirability of granting significant authority to boards, they disagree on the proper ultimate aims of the board in exercising that authority. I believe boards should focus on maximizing the value of the corporation for shareholders. Team production theorists believe boards should focus on maximizing the net value created for all corporate constituents collectively.

More importantly, director primacy is strongly opposed by those scholars who adhere to shareholder primacy, with Lucian Bebchuk as the most prominent example. Shareholder primacy theorists contend not only that shareholders are the principals on whose behalf corporate governance is organized, but also that shareholders do (and should) exercise ultimate control of the corporate enterprise. Hence, for example, shareholder primacy assumes shareholder voting rights that are both exclusive and strong.

The debate between these models is widely recognized as having considerable importance for our understanding of corporate law and governance. Faith Stevelman, for example, notes that “[t]he competing claims of ‘shareholder primacy’ and ‘director primacy. go back to the early beginnings of corporate law.” Faith Stevelman, Globalization and Corporate Social Responsibility: Challenges for the Academy, Future Lawyers, and Corporate Law, 53 N.Y. L. Sch. L. Rev. 817, 841 (2008/2009).

The choice between shareholder and director primacy is most obvious relevant to proposals to empower shareholders, such as say on pay, proxy access, and majority voting. At present, as Gordon Smith notes, “[d]espite the recent moves facilitating shareholder empowerment with respect to director elections, both Delaware and the SEC continue to rely on ‘director primacy’ as a foundational principle of corporate governance.” D. Gordon Smith, Private Ordering With Shareholder Bylaws, 80 Fordham L. Rev. 125, 170 (2011). As advocates of shareholder empowerment continue to press their claims with respect to other legal issues, however, the pressure on Delaware and the SEC to chose between shareholder and director primacy will become even more intense.

The conference therefore will be devoted to using these models to explore the ongoing question of shareholder empowerment.

Is the Roberts SCOTUS really pro-business? Jonathan Adler analyses the claim:

The new study cited by Liptak is “How Business Fares in the Supreme Court” by Lee Epstein, William Landes, and Richard Posner, recently published in the Minnesota Law Review.  In addition to concluding that the Roberts Court is more friendly to business interests than its predecessors, the study also concludes that Chief Justice Roberts and Justice Alito are more likely to vote in favor of business interests than any other justices to have served on the Court during the past 65 years.  The other conservatives on the Court also rank in the top ten most business-friendly justices during this period.

The Epstein-Landes-Posner (ELP) study is certainly the most comprehensive examination of the Supreme Court’s handling of business-related cases in the post-New Deal era.  But I am not sure that this study can really substantiate the claim that the Roberts Court is notably more “pro-business” than its predecessors or that current justices are any more sympathetic to business interests.  The reason for this is that the methodology chosen by the study’s authors — determining whether a business interest won or lost in each case and then tallying up the decisions and individual justices’ votes — doesn’t account for the content of the studies or the doctrinal baseline.  As a consequence, a more “pro-business” court may actually produce decisions that are less business-friendly than one the is deemed “anti-business.”  Further, while the dataset used in this study is more comprehensive than that used in prior reports (including a prior study by these same authors) it still fails to account for classes of cases that could alter the results.

via www.volokh.com

How much do law professors make?

Efforts to slake your prurient interest in law professor salaries continue. Paul Caron has posted details from the Society of American Law Teachers 2012-13 Salary Survey, reporting the median faculty salaries and summer stipends at 68 of the 200 American law schools (132 law schools either refused to participate or did not respond to the survey). And Above the Law has posted the third in its series of law professor salary surveys, this time disclosing the salaries paid by the University of Michigan. Previous entries in the series include:

• Virginia (#7 in U.S. News) (salary spreadsheet)
• UC-Berkeley (#9) (salary spreadsheet)

In the mail: Research Handbook on Insider Trading

Today's mail brought an advance copy of the Research Handbook on Insider Trading, edited by yours truly.

In most capital markets, insider trading is the most common violation of securities law. It is also the most well known, inspiring countless movie plots and attracting scholars with a broad range of backgrounds and interests, from pure legal doctrine to empirical analysis to complex economic theory. This volume brings together original cutting-edge research in these and other areas written by leading experts in insider trading law and economics.

The Handbook begins with a section devoted to legal issues surrounding the US's ban on insider trading, which is one of the oldest and most energetically enforced in the world. Using this section as a foundation, contributors go on to discuss several specific court cases as well as important developments in empirical research on the subject. The Handbook concludes with a section devoted to international perspectives, providing insight into insider trading laws in China, Japan, Australia, New Zealand, the United Kingdom and the European Union.

This timely and comprehensive volume will appeal to students and professors of law and economics, as well as scholars, researchers and practitioners with an interest in insider trading.

Table of Contents (below the fold)

Delaware Fiduciary Duty of Disclosure

The plaintiffs alleged that the defendants owed them fiduciary duties that included a duty to disclose material information when they purchased the shares of the plaintiffs.  The court explained that directors of a Delaware corporation owe two fiduciary duties: care and loyalty.

The court added that “the duty of disclosure is not an independent duty, but derives from the duty of care and loyalty…. The duty of disclosure arises because of the application in the specific context of the board’s fiduciary duties . . . Its scope and requirements depend on context; the duty does not exist in a vacuum.”  Slip op. at 26 (citations omitted).

The court described the need to engage in a context specific analysis to determine the scope and requirements of a disclosure obligation.  The court referred to several recurring scenarios in which these issues arise, and provided a discussion of four scenarios that it labeled as prominent in an analysis of the duty of disclosure. In other words, the duty of disclosure most often arises in four common contexts described below as scenarios.

via www.delawarelitigation.com

Go read the whole thing.

And still more on hedge fund efforts to pay corporate directors

Usha Roqrigues returns to the fray here.