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California considering legislation to adopt underrepresented community board of director quotas--Internal Affairs Doctrine Issues

Keith Paul Bishop reports that:

In 2018, the California legislature enacted SB 826 (Jackson) which imposed gender quotas on corporate boards of directors of "publicly held corporations".  See California Enacts Novel Female Board Quota Legislation.  The constitutionality of that legislation is now before the courts.  See Secretary Of State Must Answer Legal Challenge To Female Director Quota Law.

On Monday, Assembly Member Chris Holden gutted and amended AB 979 to impose a similar quota requirement on domestic and foreign publicly held corporations having their principal executive offices in California.  Similar to SB 826, corporations will be required to have a minimum of one director from an underrepresented community no later than the close of the 2021 calendar year.  By the close of the 2022 calendar year, the minimum numbers would be as follows:

• Three, if the corporation's number of directors is nine or more;
• Two, if the corporation's number of directors is more than four but fewer than nine; and
• One, if the corporation's number of directors is four or fewer. 

The bill would also impose similar reporting requirements on the Secretary of State and subject violators to significant fines.

The bill defines a "director from an underrepresented community" to mean an individual who is African-American, Hispanic, or Native American. 

California law (SB 826) currently imposed gender quotas on boards, although that provision is currently being challenged in court.

As a corporate lawyer, what jumps out at me is the provision applying the new requirement to foreign publicly held corporations having their principal executive offices in California. As with SB 826, this raises a serious constitutional issue under the dormant commerce clause. I discussed the issues raised by SB 826 in a WLF Legal Pulse brief:

Virtually all U.S. corporations are formed (“incorporated”) under the laws of a single state by filing articles of incorporation with the appropriate state official.  The state in which the articles of incorporation are filed is known as the “state of incorporation.” Selecting a state of incorporation has important consequences, because of the so-called “internal affairs doctrine”—a conflicts of law rule holding that corporate governance matters are controlled by the law of the state of incorporation. Virtually all U.S. jurisdictions follow the internal affairs doctrine, even if the corporation in question has virtually no ties to the state of incorporation other than the mere fact of incorporation.

A few states make a more general exception to the internal affairs doctrine for so-called pseudo-foreign corporations. A foreign corporation is one incorporated either by a state or nation other than the state in question. A pseudo-foreign corporation has most of its ties to the state in question rather than to the state of incorporation. Many Delaware corporations are pseudo-foreign corporations. They are incorporated in Delaware, but most of their operations are located in one or more other states.

In most states, there is no significant legal difference between a foreign and a pseudo-foreign corporation, and the internal affairs doctrine will be applied to invoke the law of the state of the incorporation with respect to both. California and New York are the principal exceptions to this rule. Both states purport to apply parts of their corporate laws to pseudo-foreign corporations formed in other states but having substantial contacts with California or New York.

SB 826 is an especially aggressive attempt to regulate pseudo-foreign corporations. California’s basic pseudo-foreign corporation statute—Cal. Corp. Code § 2115—applies only to corporations that have more 50 percent of their property, payroll, and sales in California and have more than half of their shareholders of record held by California residents. In addition, §2115 does not apply to public corporations. In contrast, SB 826 applies to public corporations whose sole contact with California is the location of its principal executive office. Given that § 2115 is almost certainly unconstitutional under the dormant Commerce Clause, the more aggressive SB 826 should also be unconstitutional.

In the leading CTS Corp. v. Dynamics Corp. decision, the U.S. Supreme Court recognized that it “is an accepted part of the business landscape in this country for states to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares.” 481 U.S. 69, 81 (1987).Building on that fundamental principle, the Court emphasized that a state has a legitimate “interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” Id.

Note that the Court acknowledges the legitimate interest of a specific state; i.e., the state under whose law the company was incorporated:

Large corporations that are listed on national exchanges, or even regional exchanges, will have shareholders in many States and shares that are traded frequently. The markets that facilitate this national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that a corporation — except in the rarest situations — is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation.

Id. at 90. To be sure, the Court here may be referring not to constitutional principle, but rather to the conflict of laws principle known as the internal affairs doctrine, “which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands” from different states. Edgar v. MITE Corp., 457 U.S. 624, 645 (1982).

But while the Supreme Court has not held that it is unconstitutional for a state other than the state of incorporation to attempt to regulate a corporation’s internal affairs,² a number of commentators have concluded that the internal affairs rule rises to the level of a constitutional doctrine.³

Admittedly, there is not much case law on this issue, and the leading case comes from a very interesting party—i.e., the Delaware Supreme Court—but that case held that attempted application of California’s § 2115 to a company incorporated in Delaware violated the U.S. Constitution’s Due Process and Commerce Clauses:

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” and “[s]tockholders … have a right to know by what standards of accountability they may hold those managing the corporation’s business and affairs.” Under the Commerce Clause, a state “has no interest in regulating the internal affairs of foreign corporations.” Therefore, this Court has held that an “application of the internal affairs doctrine is mandated by constitutional principles, except in the ‘rarest situations,’” e.g., when “the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.”

VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005). Assuming Delaware to be correct on the constitutional status of the internal affairs doctrine, SB 826 is unlikely to survive judicial scrutiny.

AB 979 is subject to the same argument.

Also, as with SB 826, AB 979 defines a “publicly held corporation” as "a foreign corporation with outstanding shares listed on a major United States stock exchange." The problem with that definition, of course, is that there is no such thing as a "major United States stock exchange." It's simply not a defined term of art anywhere. 

"As I have argued elsewhere"

I am currently at work on a short essay that builds off of my director primacy model of corporate governance. Instead of rehearsing the whole argument for director primacy, which I have done elsewhere and often, I propose in the current essay simply to say "As I have argued elsewhere," and then very briefly state the thesis. A friend and fellow academic objects, saying that this device is disfavored because one should assume that the reader of your current article has not read everything you have ever done. Said reader, moreover, the friend opined, will be annoyed by being directed to another source.

This sent me to Westlaw. The phrase "As I have argued elsewhere" appears in 2,601 secondary sources including 2580 law review articles. The most frequently cited article in which it appears is by no less a scholar that Larry Tribe. His article Trial by Mathematics: Precision and Ritual in the Legal Process, 84 Harv. L. Rev. 1329, 1372 (1971), has been cited 765 times. Mark Tushnet comes in second with 656 citations to his article Following the Rules Laid Down: A Critique of Interpretivism and Neutral Principles, 96 Harv. L. Rev. 781, 823 (1983). Geoffrey Stone comes in third with 648 citations to Content Regulation and the First Amendment, 25 Wm. & Mary L. Rev. 189, 242 (1983). 

Finding myself in such eminent (if ideologically suspect) company, I have decided to press forward.

We get another question on turning Catholic belief into public policy

My earlier post on the the Gospel of Life prompted a second friend to pose this question:

But the question is on what grounds a Roman Catholic believes his or her position on, say, contraception must be implemented in public policy. I don't eat pork or shellfish, and don't eat milk and meat together, or unkosher meat, but I can't imagine making a law forbidding someone else from doing it. Now, to some extent, that is a difference between Judaism and Catholicism: the bright side of Jewish particularism is that we don't think that everyone has to be Jewish (we aren't sadists, after all). I would never in the world demand that someone use an IUD; I can't imagine conversely that someone be denied the right to use one, either.

 

So is there any place under which a Catholic would say, "this is my belief, but I would not insist that this be implemented as public policy"? Where do Catholics draw that line?

Another very fair question.

The Doctrinal Note on Some Questions Regarding the Participation of Catholics in Political Life acknowledges that, as to many issues, "a plurality of morally acceptable policies and solutions arises. It is not the Church’s task to set forth specific political solutions – and even less to propose a single solution as the acceptable one – to temporal questions that God has left to the free and responsible judgment of each person." (§3) It further recognizes that "there can generally be a plurality of political parties in which Catholics may exercise – especially through legislative assemblies – their right and duty to contribute to the public life of their country. This arises because of the contingent nature of certain choices regarding the ordering of society, the variety of strategies available for accomplishing or guaranteeing the same fundamental value, the possibility of different interpretations of the basic principles of political theory, and the technical complexity of many political problems." (Ibid)

The Note reminds us that Saint Pope John Paul II warned many times of the dangers which follow from confusion between the religious and political spheres. “Extremely sensitive situations arise when a specifically religious norm becomes or tends to become the law of a state without due consideration for the distinction between the domains proper to religion and to political society. In practice, the identification of religious law with civil law can stifle religious freedom, even going so far as to restrict or deny other inalienable human rights.” (§6)

Accordingly, setting aside the claims of Catholic Integralists, “the Church’s Magisterium does not wish to exercise political power or eliminate the freedom of opinion of Catholics regarding contingent questions. Instead, it intends – as is its proper function – to instruct and illuminate the consciences of the faithful, particularly those involved in political life, so that their actions may always serve the integral promotion of the human person and the common good.” (§6)

With respect to the vast majority of political disputes, the ordinary Magisterium at most expresses “a prudential judgment on a matter about which different conclusions are permissible.”[1] In these situations, as Saint John Paul II has stated, the “church has no models to present.” (Centesimus Annus § 43)

But there are limits: In a relatively small number of cases, the “magisterium proposes something as binding on the consciences of all Catholics.”[2]

"When political activity comes up against moral principles that do not admit of exception, compromise or derogation, the Catholic commitment becomes more evident and laden with responsibility. In the face of fundamental and inalienable ethical demands, Christians must recognize that what is at stake is the essence of the moral law, which concerns the integral good of the human person." (§4) In these (few) cases, the Church does believe that the civil law ought to accord with moral law. Hence, speaking of the duties of lawmakers, the Note explains that: “For them, as for every Catholic, it is impossible to promote such laws or to vote for them.” (Ibid.)

Even in those areas, however, the Church is pragmatic: “As John Paul II has taught in his Encyclical Letter Evangelium vitae regarding the situation in which it is not possible to overturn or completely repeal a law allowing abortion which is already in force or coming up for a vote, «an elected official, whose absolute personal opposition to procured abortion was well known, could licitly support proposals aimed at limiting the harm done by such a law and at lessening its negative consequences at the level of general opinion and public morality.” (§4)

In thinking about all of this, it often strikes me that, with few exceptions, such as abortion, murder, suicide, euthanasia, the death penalty, and so on, the Church mainly gives broad guidance rather than detailed policies.

If it thus seems as though the Church is unwilling to draw a bright line answer to my friend’s question, perhaps it is because the Church must navigate between Scylla and Charybdis. As prominent Vatican observer John Allen wrote:

On the one hand, it's fully legitimate to expect someone who calls him or herself “Catholic” to take the faith seriously in terms of public choices. At the same time, moral calculations in prudential circumstances are not the direct competence of Church authorities. It is a maddening dilemma: to one side lies the danger of clericalism, to the other assimilation of fecklessness. How to strike the right balance is perhaps the most pressing question facing the American church with regard to its engagement in public life.[3]

In any event, these are topics on which far smarter folks than I have written a small mountain of books and scholarly articles. I urge you to go forth and explore.

Roman Catholicism, Religious Assent, and Private Reason: The Case of the Gospel of Life

Longtime regular readers have probably figured out that I am pro-life. Over on Facebook, I posted something expressing a certain amount of dissatisfaction with Chief Justice Roberts' recent decision in June Medical Services v. Russo, the SCOTUS's latest pronouncement on abortion.

This prompted a friend to post the following reply:

Putting abortion to one side for a moment, do you favor things that would reduce the number of unwanted pregnancies? And what exactly? Do you favor free or subsidized contraception? Sex education broadly available to kids? Free or subsidized health care for pregnant moms, and free or subsidized help for young families? More adoptions? Put simply, while we all struggle to find agreement on abortion, are there other things we can do to collectively address your heartfelt objections? I do not agree with you, but I do not want to ignore your heartfelt view. What other policies can I support that you would view as helping here?

These are great questions, fairly asked, and deserve a fair answer. Such an answer, of course, requires more room than the usual Facebook reply. Hence, this blog post.

At least insofar as the question about contraception is concerned, I would respectfully suggest that its phrasing is problematic. I am, as you know, a Roman Catholic who tries (but all too often fails) to adhere to the faith. A core tenet of Roman Catholicism is the doctrine of religious assent:

Divine assistance is also given to the successors of the apostles, teaching in communion with the successor of Peter, and, in a particular way, to the bishop of Rome, pastor of the whole Church, when, without arriving at an infallible definition and without pronouncing in a "definitive manner," they propose in the exercise of the ordinary Magisterium a teaching that leads to better understanding of Revelation in matters of faith and morals. To this ordinary teaching the faithful "are to adhere to it with religious assent"which, though distinct from the assent of faith, is nonetheless an extension of it. (Catechism § 892.)

In his encyclical Evangelium Vitae, Saint Pope John Paul II affirmed that "direct abortion ... always constitutes a grave moral disorder." He specifically stated that this teaching is part of "the Church's Tradition and taught by the ordinary and universal Magisterium." (§ 62) In addition, JPII confirmed that "despite their differences of nature and moral gravity, contraception and abortion are often closely connected, as fruits of the same tree." (§ 13) In so doing, he disappointed those who hoped he would overturn or at least modify the ban on contraception set out in Pope Paul VI's encyclical Humanae Vitae (§ 14).

Although neither encyclical possesses the degree of infallibility Vatican I attributed to papal definitions, both possess the infallibility which Vatican II attributed to the teaching of the "ordinary and universal magisterium." (See Sullivan). As such, both command religious assent.

So what does that mean? The Dogmatic Constitution on the Church (Lumen Gentium) teaches that religious assent requires we acknowledge the teachings "with reverence" and "sincerely" adhere thereto. Despite the arguments of some Cafeteria Catholics I can't see any way around my obligation to adhere to the Church's position on contraception.

By the way, let me touch on an issue that often comes up at this point. Some critics of the doctrine of religious assent, especially as applied to issues involving the Gospel of Life, contend that it treats Catholics as unthinking automatons marching to the dictates of the Church hierarchy. The relationship between individual reason and religious assent is extremely complex. It is worth pointing out, however, that the church encourages lay initiative “especially when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” (Catechism § 899) The Church also acknowledges that:

In the work of teaching and applying Christian morality, the Church needs the dedication of pastors, the knowledge of theologians, and the contribution of all Christians and men of good will. Faith and the practice of the Gospel provide each person with an experience of life "in Christ," who enlightens him and makes him able to evaluate the divine and human realities according to the Spirit of God.Thus the Holy Spirit can use the humblest to enlighten the learned and those in the highest positions. (Catechism § 2038) 

Hence, it is the task of Catholic intellectuals to exercise critical reflective judgment with respect to society, the Church, and the relationship between the two. An an active and critical role for the laity seems especially important with respect to economic life, as to which JPII emphasized that “church has no models to present." (Centesimus Annus § 43) I note in passing that this is why my scholarship is increasingly focused on using Catholic social teaching to critique corporate law.

But I digress.

As for my friend's other proposals, they all strike me as reasonable and desirable. The Gospel of Life teaches that we have to respect life from its beginning at conception to its end at natural death. Hence, my problem with the American political duopoly is that too many Republicans appear to care about life only until birth and that too many Democrats appear to only care about life after birth. In contrast, a polity founded on Catholic social thought would recognize that the "starting point for a correct and constructive relationship between the family and society is the recognition of the subjectivity and the social priority of the family. Their intimate relationship requires that 'society should never fail in its fundamental task of respecting and fostering the family.'" (Compendium § 252)

Accordingly, I am in substantial agreement with the platform of the American Solidarity Party:

• Federal and state governments must enact constitutional and legal measures establishing the right to life from conception until natural death. These measures specifically include a constitutional amendment clarifying that there is no right to abortion, as well as laws that prohibit or restrict abortion. Because human life begins at conception, the intentional destruction of human embryos in any context must end.
• Federal, state, and local governments must end taxpayer funding of organizations that provide, promote, or facilitate abortions, and of health-care plans that include abortion coverage. Such funding should be redirected to organizations that promote healthy pregnancies and prenatal care.
• Federal and state governments must end capital punishment in light of its disproportionate use against those with fewer legal resources, the impossibility of reversal, and the existence of alternative ways to ensure protection for the rest of society.
• We support efforts to help prevent the tragedy of suicide, including universal access to affordable mental-health care and the destigmatization of mental illness. Assisted suicide and euthanasia are a violation of disability rights, medical ethics, and human dignity, and must be prohibited in every state.
• Federal and state governments should collaborate to guarantee universal healthcare by diverse means, including single-payer initiatives, direct subsidization of provider networks, subsidized education for medical professionals willing to work in rural areas, support for cost-sharing programs and mutual aid societies, home care grants, simplified regulation, and the easing of restrictions on the importation of prescription drugs.
• Health policy must include protections for those with preexisting, chronic, and terminal conditions. We must include those who have no means to save for an emergency, people at every stage of life from prenatal care to hospice care, and people who find themselves in need of medical assistance while away from their home network.

Does that answer the question?

Brainstorming re Remote Teaching

On the assumption that some or all of my teaching will be done remotely in the fall 2020 semester, I've been thinking about how to do it better. Here's some preliminary thoughts and some questions for further reflection. Feedback from recent or current law students especially welcome. (Note that I sent the bulk of this post by email to the students I taught remotely in Advanced Corporation Law last spring and to the students who I taught in person last fall in Mergers & Acquisitions. I figure the former can tell me what needs improvement from a pedagogic style perspective and the latter can anticipate how to adapt that course to the remote setting. After all, why not go to the proverbial horses' mouth?)

Preliminary Notes

• I teach exclusively using lecture. A comprehensive PowerPoint presentation accompanies each lecture, although the text on the slides is a pretty bare-bones outline.
• My remote learning base is my home office, which is equipped with a Mac with built-in camera and microphone. Any software or hardware must be Mac-compatible.
• I am familiar with using Zoom to share my desktop so that students can see me, the PowerPoint presentation, the Zoom chat room, and perhaps one other open window at a time.
• My students uniformly turn off their video and mute their audio, so I cannot see their faces and can only hear them when they unmute to ask a question.
• I will lay down a set of class rules about issues like muting microphones, raising one’s hand, and so on at the start of the semester with periodic reminders.

Questions

• Attendance during the remote learning in the spring 2020 semester was low; about 50%. While part of that may have been attributable to various pandemic-related factors, it is also possible that some students—knowing the sessions were recorded and posted to the law school intraweb—may have decided to view the lectures asynchronously.
• Is that cause for concern?
• Do I need to do anything to make sure the lectures are accessible for students with hearing or visual difficulties?
• One common suggestion I have seen for enlivening remote learning lectures is to have a second speaker break in for a short presentation.
• Would colleagues be willing to do that?
• Good idea?

Learning Goals

• The lighting in my office is very unsatisfactory.
  • Find someone knowledgeable to assess and recommend lighting, camera, and microphone setups.
• Are there alternatives to Zoom?
• Find out if it is possible to connect an iPad to the Mac to use as a whiteboard.
  • If not, is there a pen-based alternative whiteboard application/technology?
• There is data suggesting that the typical college student’s attention span in class is about ten minutes. I recall seeing data—but cannot now find it—suggesting that the typical attention span of university students in remote learning is about 7 minutes.
  • Note that part of the popularity of TED talks may be the 18 minute limit, which ensures they do not tax the participants’ attention span.
  • Find ways of breaking remote lectures into segments of no more than 10 minutes, with some alternative activity in the breaks.
• I have wanted for some time to include some sort of student feedback during a lecture. (I have planned for years to learn how to use clickers in our classrooms and am ashamed to admit I have let it slide.) Pop ungraded quizzes might be a good way of checking student comprehension and also a segment break activity.
  • Having some sort of feedback is especially important because one cannot see the students’ faces and thus cannot assess their attention level.
  • Learn how to use Zoom’s poll function.
    • Can Zoom’s poll function be incorporated into a PowerPoint presentation?
  • Find out if there are alternatives to Zoom’s poll function that might be a superior way of having students “answer” questions.
  • One possibility I am considering is assigning a few students ahead of each class to each give a 5-minute presentation on a topic relevant to the lecture that day.
• How to deal with students learning asynchronously?
• PowerPoint presentations tend to be static.
  • Find out if there is software available that could be used to create animations (easily) and then embed them in a PowerPoint deck (easily)?
  • If so, learn how to use it.

• In my fall class (Mergers & Acquisitions), there is a great deal of attention paid to looking at specific Word documents (such as merger contracts) and parsing them.
• Is there a better way of showing them than Word or a PDF viewer?
• If so, learn how to use it.
• Some websites recommend building in time pre-class for social chatter and community building.
• Our schedule does not currently contemplate allowing that.

A very cautious return to Twitter

I gave up Twitter back in April after a stupid and insensitive tweet gave offense to a large number of our students. At that point, I intended it to be permanent. 

I am VERY CAUTIOUSLY dipping my toe back into Twitter (I used to be @ProfBainbridge). I expect to use Twitter very differently this time. It will mainly serve as a feed for my blog posts. These days it's hard to publicize blogs without using social media and, frankly, my blog visitor stats have dropped very considerably since I left Twitter. One does hope to attract an audience, after all. Or, as Bertie Wooster put it in The Code of the Woosters, "I mean, while one lives for one's Art, so to speak, and cares little for the public's praise or blame and all that sort of thing, one can always do with something to paste into one's scrap-book, can one not?"

 

I'll probably also use it to communicate with web friends, do some evangelizing, and a little occasional self-promotion (I recognize the incongruity of the last two uses).

 

You can follow me at @PrawfBainbridge

 

Mainly, I intend to be as noncontroversial as possible. I do not with to break faith with the students I offended with my past tweets. And I am very aware that my previous participation in Twitter impeded my ability to educate and to act as a witness for Christ. It is my hope and intent not to let that happen again.

VC Laster's Dell Decision Gives a Very Director Primacy Spin on MFW

In his recent opinion in In re Dell Techs. Inc. Class V Stockholders Litig., 2020 WL 3096748 (Del. Ch. June 11, 2020), Vice Chancellor Laster gave a very board-centric spin on the MFW rule. Tyler O'Connell's Morris James blog post explains:

The Delaware Supreme Court’s MFW decision provides a safe harbor for controlling stockholder buyouts that are conditioned upon approval of a special committee of independent directors and a majority-of-the-minority vote, provided, inter alia, “there is no coercion of the minority.” Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635, 645 (Del. 2014). The Court of Chancery’s recent decision in In re Dell Tech. Inc. Class V. S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020), held that a redemption of minority stockholders’ shares failed to satisfy MFW due to the company’s decisions to give the special committee an impermissibly narrow mandate and then bypass it to negotiate directly with minority stockholders. 

The Vice Chancellor didn't cite my work on director primacy, but the opinion is very much in the spirit of director primacy:

MFW’s dual protections contemplate that the Special Committee will act as the bargaining agent for the minority stockholders, with the minority stockholders rendering an up-or-down verdict on the committee’s work. Those roles are complements, not substitutes. A set of motivated stockholder volunteers cannot take over for the committee and serve both roles.

The MFW framework contemplates that the special committee will act as “an independent negotiating agent whose work is subject to stockholder approval.” Flood, 195 A.3d at 767. Through the involvement of the special committee, the MFW framework ensures that there are “independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason ....” MFW, 88 A.3d at 644 (internal quotation marks and emphasis omitted). Like a board of directors in an arm’s-length transaction, the committee has superior access to internal sources of information, can deploy it’s the Board’s statutory authority under Section 141(a) as delegated to the committee under Section 141(c), and can “act as an expert bargaining agent.” In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch. 2005); see 8 Del. C. § 141(c). Like a board of directors, the committee “does not suffer from the collective action problem of disaggregated stockholders” and is therefore well positioned “to get the last nickel.” Id. at 619; see also In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 441 (Del. Ch. 2002) (“Delaware law has seen directors as well-positioned to understand the value of the target company, to compensate for the disaggregated nature of stockholders by acting as a negotiating and auctioning proxy for them, and as a bulwark against structural coercion.”).

He then described the shareholders' role in the MFW framework as being "more limited":

They have “the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.” MFW, 88 A.3d at 644 (internal quotation marks omitted). But “the ability of disaggregated stockholders to reject by a binary up or down vote obviously ‘unfair’ deals does not translate to their ability to do what an effective special committee can do, which is to negotiate effectively and strike a bargain much higher in the range of fairness.” Cox Commc’ns, 879 A.2d at 619.

Laster's interpretation of the relative board and shareholder roles is consistent with the approach I outlined in The Geography of Revlon-Land, 81 Fordham L. Rev. 3277 (2013):

In their efforts to decide who decides, the Delaware courts have grappled with the limits of a target corporation's board of directors' power to act as a gatekeeper in corporate acquisitions. In other words, to what extent can the target's board of directors prevent the target's shareholders from deciding whether the company should be acquired?

In a merger, two corporations combine to form a single entity. In an asset sale, the selling corporation transfers all or substantially all of its assets to the buyer. In both transactions, approval by the target board of directors is an essential precondition.

In both major forms of statutory acquisitions, the board thus has a gatekeeping function. Shareholders have no power to initiate either a merger or asset sale, because the statute makes board approval a condition precedent to the shareholder vote. If the board rejects a merger proposal, the shareholders thus have no right to review that decision. Instead, the shareholder role is purely reactive, coming into play only once the board approves a merger proposal.

The board also has sole power to negotiate the terms on which the merger will take place and to enter a definitive merger agreement embodying its decisions. Shareholders have no statutory right to amend or veto specific provisions, their role typically being limited to approving or disapproving the merger agreement as a whole . . . .

If the board disapproves of a prospective acquisition, the would-be acquirer therefore must resort to one of the nonstatutory acquisition devices. The proxy contest, share purchase, and tender offer all allow the bidder to bypass the target board and make an offer directly to the target's shareholders. Since the 1960s, the tender offer has been the most important and powerful of these tools. Almost as soon as the hostile tender offer emerged as a viable acquirer tactic, however, lawyers and investment bankers working for target boards began to develop defensive tactics designed to impede such offers. If validated by the courts, these takeover defenses promised to reassert the board's primacy by extending its gatekeeping function to the nonstatutory acquisition setting.

Consider the poison pill, for example, which has been called the “de rigeur tool of a board responding to a third-party tender offer.” … Proponents of pills contend that these plans thus do not deter takeover bids, but rather simply give the target board leverage to negotiate the best possible deal for their shareholders or to find a competing bid. In any case, it is clear that “the poison pill has made the board the ‘gatekeeper’ instead of the shareholders.” As a result, target boards have been empowered to play an active--and often determinative--role in the very class of transactions originally designed to bypass them entirely.

California budget deal offers bad news for state employees and higher education

UCLA Faculty Association:

LOSERS

State workers

The budget would save about $3.6 billion per year by cutting state workers’ pay by roughly 10 percent and canceling the raises many are scheduled to receive in July. The deal gives Newsom the authority to impose two furlough days per month if pay-cut deals can’t be reached with unions that haven’t yet negotiated with the state.

Universities

California’s university systems will each lose about half a billion from their budgets under the deal announced Monday. The budget cuts $470 million from the University of California and $500 million from California State University, although that funding could be restored if the federal government provides more aid money. Some programs and departments, however, will get money originally included in Newsom’s January budget proposal, including $25 million for UC Riverside School of Medicine and $5 million for the UC Davis Grant Program for Animal Shelters.

Berkeley and Harvard law schools to be on-line Fall 2020

UCLA Faculty Association:

The University of California, Berkeley School of Law will remain fully online for the fall semester. Dean Erwin Chemerinsky informed students by email Friday of the decision, which he wrote was made with “great reflection and study.” That makes Berkeley the second law school to unveil plans to stay remote amid the COVID-19 pandemic. Harvard Law School made a similar announcement June 3.

I'm not sure whether UCLAW has publicly announced its plans for the 2020-21 academic year, soI shall remain mum. I will note that the campus as a whole plans on a hybrid approach:

UCLA anticipates that 15% to 20% of courses will be offered on site or in an on-site and remote hybrid format. ...

Recommended infection-control procedures will be in place on campus, including physical distancing, de-densifying classrooms and other spaces, frequent cleaning of classrooms and facilities, and the wearing of face coverings while on campus, consistent with guidance from the Los Angeles County Department of Public Health. In addition, daily symptom checks will be required for everyone coming to campus or living in campus housing. Testing and contact tracing protocols for COVID-19 will also be in place.

Caleb Griffin on ESG Voting by the Big Three

Back in April, I noted a very useful paper by Caleb Griffin on ESG voting trends by Blackrock, Vanguard, and State Street. 

Professor Griffin has now posted a very useful and concise summary of his findings and conclusion at the CLS bog. I recommend it.

One of his findings strikes me as particularly troubling:

An analysis of the Big Three’s ownership and voting control over Fortune 250 companies reveals that they have the power to determine the outcome of as many as 49.1 percent of environmental proposals, that Vanguard and BlackRock combined (the “Big Two”) have sufficient voting control to determine the outcome of up to 35.1 percent of such proposals, and that Vanguard alone has sufficient voting control to determine the outcome of up to 15.8 percent of such proposals.

What doubles me about that finding is the power it shows the big three increasingly wield as the dominant investors of our time. Bigness by itself is not a crime, but Leviathans can wreak vast harm even unintentionally. It's past time for the SEC and the antitrust regulators to take a serious look at the big three.

The Supreme Court tames but does not end disgorgement in SEC cases: Liu v. SEC

By an 8-1 vote (with Justice Thomas dissenting), the Supreme Court in an opinion by Justice Sotomayor upheld--while limiting--the SEC's power to seek disgorgement in fraud cases. (For prior coverage see this post.)

Sotomayor sets the stage as follows:

In civil actions, the SEC can seek civil penalties and “equitable relief.” See, e.g., §78u(d)(5) (“In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, . . . any Federal court may grant . . . any equitable relief that may be appropriate or necessary for the benefit of investors”); see also §78u(d)(3) (“Money penalties in civil actions” (quotation modified)).

Congress did not define what falls under the umbrella of “equitable relief.” Thus, courts have had to consider which remedies the SEC may impose as part of its §78u(d)(5) powers.

Starting with SEC v. Texas Gulf Sulphur Co., 446 F. 2d 1301 (CA2 1971), courts determined that the SEC had authority to obtain what it called “restitution,” and what in substance amounted to “profits” that “merely depriv[e]” a defendant of “the gains of . . . wrongful conduct.” Id., at 1307–1308. Over the years, the SEC has continued to request this remedy, later referred to as “disgorgement,” and courts have continued to award it. ...

In Kokesh, this Court determined that disgorgement constituted a “penalty” for the purposes of 28 U. S. C. §2462, which establishes a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”  ... But the Court did not address whether a §2462 penalty can nevertheless qualify as “equitable relief ” under §78u(d)(5), given that equity never “lends its aid to enforce a forfeiture or penalty.” Marshall v. Vicksburg, 15 Wall. 146, 149 (1873). The Court cautioned, moreover, that its decision should not be interpreted “as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.” Kokesh, 581 U. S., at ___, n. 3 (slip op., at 5, n. 3). This question is now squarely before the Court.

Sotomayor began her analysis by explaining that:

In interpreting statutes like §78u(d)(5) that provide for “equitable relief,” this Court an- alyzes whether a particular remedy falls into “those categories of relief that were typically available in equity.”

She then goes on to claim that various remedies available at equity resembled disgorgement. The problem with that argument, of course, is that the SCOTUS in Kokesh itself had acknowledged that disgorgement is a relatively new penalty that was created by judicial fiat at SEC’s behest:

Initially, the only statutory remedy available to the SEC in an enforcement action was an injunction barring future violations of securities laws. … In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their “inherent equity power to grant relief ancillary to an injunction.”

Sotomayor later argues that:

In Tull v. United States, 481 U. S. 412 (1987), the Court described “disgorgement of improper profits” as “traditionally considered an equitable remedy.”

But so what? As I explained in my article Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases:

There is general agreement that the penalty phase of Texas Gulf Sulphur was the first time a court determined that the SEC had authority to seek disgorgement of a defendant’s ill-gotten gains.

As I further explained in that article, "all of the Court’s arguments about the nature of disgorgement apply with equal force to the issue of SEC authority and judicial power as they do to that of statutes of limitation. Disgorgement as practiced in SEC proceedings acts as a punitive sanction intended to deter, regardless of whether we are considering applicable statutes of limitation or the authority and power issues."

Sotomayor tried to avoid this problem by equating disgorgement with various equitable remedies that did exist in 1789. She compared it to an accounting, for example. But the analogy does not hold water. Accounting was a remedy only available against persons who has breached a fiduciary duty and cannot be ordered against a mere wrongdoer.

She also equated disgorgement to restitution. Yet, again, the analogy is flawed. Restitution is a generic term that can be characterized as legal or equitable depending on the nature of the claim and the relief being sought. As a result, as Francesco A. DeLuca has commented, "the analogy to ‘restitution’ is circular and unhelpful.”

In sum, I find Sotomayor's argument utterly unpersuasive.

Having erroneously preserved disgorgement, she did at least try taming it.

1. Because the statute authorizing the SEC to pursue equitable remedies requires any remedy be “appropriate or necessary for the benefit of investors,” and the equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors. Accordingly, without so deciding, she cast doubt on whether disgorgement orders requiring that the defendant pay sums over to the US Treasury are valid. Disgorgement “must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains,” she wrote.
2. Courts must deduct legitimate expenses before awarding disgorgement.

For discussion of Liu, see Ronald Mann's analysis at SCOTUSblog. As he explains:

Two threads dominate her reasoning. One is that the remedy must be “tethered to a wrongdoer’s net unlawful profits,” ensuring that the wrongdoer “should not be punished by” (in the words of another 19th century opinion) “‘pay[ing] more than a fair compensation to the person wronged.’” The second is the “‘protean character’ of the profits-recovery remedy,’” which the court has sometimes compared to restitution and at other times to an accounting for profits. In her view, though, even if the label of disgorgement is relatively new, the body of authority establishes that “equity courts habitually [have] awarded profits-based remedies” as a matter of general first principles of equity.

He also points out that:

The closing section of the opinion points out that the SEC’s pursuit of disgorgement in general, and arguably in this case, has transgressed each of [the limits she imposes in this opinion]. Sotomayor notes that the SEC “does not always return the entirety of disgorgement proceeds to investors, instead depositing a portion of its collections in a fund in the Treasury.” ...

Similarly, the opinion criticizes the SEC’s common imposition of “joint-and-several liability” in disgorgement cases, which Sotomayor finds to be “at odds with the common-law rule requiring individual liability for wrongful profits” because it “could transform any equitable profits-focused remedy into a penalty.” ...

Finally, Sotomayor flatly rejects the practice (followed by the lower court here) of ordering disgorgement of all revenues, explaining that “courts must deduct legitimate expenses before ordering disgorgement.”

First Experiment with our new KettlePizza for the Gas Grill

Since our no delivery of restaurant food policy has been in effect, the only pizza we've had has been a couple of Chicago-style frozen pizzas. Rather than breaking policy, I opted to buy something I've wanted for a longtime; namely, the KettlePizza oven. It's primary purpose is making pizza, of course, but when coupled with a smoker tube it should make a decent substitute for a wood-fired oven.

We made our first pizzas last night. Mushroom and onion for Helen and pepperoni for me. They turned out pretty well for a first try. I gave them a B- for results and a B+ for effort. Helen gave them B+ for both.

We learned several things. First, you definitely need to put something on the peel to make it easier to shake the pizza off the peel and onto the stone. Second, don't use cornmeal. Some of it gets on the stone or falls through the grill onto the heating elements. In either case, it burns and generates some nasty smoke. Use Wondra flour instead. Third, use mozzarella slices instead of pearls. The round pearls don't stay put when you're shaking the pizza off the peel.

We agreed that we'd need many more trials before we'd do it for company. But as a proof of concept, I thought it was a success.

BTW, we drank a 2017 Pio Cesare Barbera d'Alba. Big for a Barbera, but that seems to be the trend these days. Blackberry. Plum. Medium bodied. Plenty of acid. Good structure. Nice match. If I had it to do over again, I probably would have double decanted the wine so as to promote aeration. Grade: B+