ProfessorBainbridge.com

Nevada adopts fee-shifting: Should Delaware worry?

Benjamin Edwards reports:

Earlier today, Senator Cancela introduced Senate Bill 304 in Nevada.  Although the bill's text is not yet available on the website, the digest reveals that the legislation will explicitly authorize fee-shifting provisions under Nevada corporate law.  (Update--the text of the draft legislation is now available.)

The digest indicates that it will also do a few other interesting things if it passes:

• Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
• Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
• Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
• Authorize Nevada-specific forum-selection provisions;
• Authorize the Nevada Secretary of State to issue rules allowing lawyers to indemnify stockholders for any possible fee-shifting;
• Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada; and
• Require the Secretary of State to study fee-shifting's impact on the business environment and report back to the legislature in three years.

Despite the problems with shareholder litigation, Delaware opted to ban fee-shifting right as a mass of public companies began to adopt it. This, of course, didn't stop corporations chartered in Nevada and other states from adopting fee-shifting provisions anyway.  By my count, seven publicly-traded Nevada corporations already have fee-shifting charter or by-law provisions. (Disclosure:  I consulted with legislative counsel on the initial draft. Nobody paid me any money.) ...

Delaware's decision to ban fee-shifting was and remains controversial.  Despite Delaware's decision to go the other way, fee-shifting has been widely discussed and proposed by many informed commentators as a way to address the issue. Stephen Bainbridge even noted that Delaware's position on fee-shifting was a "self-inflicted wound" and "contrary to sound public policy and adverse to Delaware’s own interests."  His short piece on the controversy argued that jurisdictions where "the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws."  Nevada may fit that description.

My guess is that the Nevada statute will have an effect on incorporation decisions at the margins, but not a major effect. Cremers and Sepe’s analysis of reincorporation decisions found that between 1996 and 2011 356 companies reincorporated into Delaware. During the same time period Nevada picked up only 19. https://finance.eller.arizona.edu/sites/finance/files/ssepe.cs_delaware.02-15.pdf During the same period Delaware’s overall percentage of firms incorporated in it rose from 52% to 65%. There’s basically no evidence that Nevada poses a viable threat to Delaware’s dominance.  Fee shifting alone may affect some decisions at the margin, but Delaware’s dominance will require not just Nevada adding stuff like fee shifting but Delaware making serious errors. It’s like a race in which the winner is so far ahead that 2^nd place can only catch up if the winner stumbles.

Update: Kevin LaCroix observes:

Nevada’s legislature is not the first state legislature to take up proposed legislation authorizing fee-shifting in connection with shareholder litigation. As I discussed in a post at the time, in 2014 the Oklahoma legislature adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here. The Oklahoma legislation is noteworthy in a number of respects, including the fact that it makes the fee-shifting to the unsuccessful litigant mandatory and does not even require the company involved to have a fee-shifting charter provision.

While Oklahoma has gone before, Nevada’s move may be more significant if for no other reason that, as Professor Edwards notes (citing to this article), “Nevada is the leading alternative to Delaware corporate law.” Other states did not follow after Oklahoma’s lead, but if the Nevada legislation were to pass, other states might well follow the lead, as a part of the time-honored “race to the bottom” competition between states when it comes to corporate law provisions.

Point well taken.

Is the SEC finally going to take action on proxy advisory companies?

A report by Bloomberg suggests that the answer might be yes:

Managers likely will see developments in the Securities and Exchange Commission’s work in this area “around the end of proxy season this year,” said Dalia Blass, director of the agency’s Division of Investment Management. She was speaking at the Investment Company Institute’s Mutual Funds and Investment Management Conference in San Diego.

The agency is looking at how to promote voting practices that are in the best interest of managers’ clients and whether they should vote all proxies, Blass said. The commission also is examining how managers should handle possible proxy advisory firm conflicts of interest and evaluate the advisers’ recommendations, especially when companies disagree with the advice, she said. Proxy firms include Glass, Lewis & Co., in addition to Institutional Shareholder Services Inc.

It's about time. As I wrote in my book, Corporate Governance after the Financial Crisis:

In arguing that institutional investors have incentives to be rationally apathetic, we emphasized the costs entailed in monitoring and responding to problems at portfolio companies. These costs could be reduced if activist investors could make use of economies of scale by developing standardized voting procedures on recurring issues and standard responses to common types of managerial derelictions. We in fact observed just such a response very early in the evolution of institutional investor activism as many institutions adopted standard voting practices on issues such as takeover defenses.

Significant savings, however, would require collective action. Only by clubbing together in monitoring their portfolio companies, could institutions truly achieve economies of scale. As long as they were obliged to act individually, the size and high rate of turnover of their portfolios made achieving real economies of scale impractical.

The emergence of Institutional Shareholder Services (ISS) offered a solution to these problems. ISS was founded in 1985 to provide proxy advisory services to institutional investors.[1]The premise was that institutions could outsource to ISS the tasks of monitoring corporate governance at portfolio firms and making decisions about how to vote their shares.

ISS got a major boost in 1988 when the Department of Labor announced that ERISA pension plan fiduciaries had a fiduciary duty to make informed decisions about how they voted shares of portfolio companies. In response, pension plans began to rely on ISS for analysis of issues upon which a shareholder vote would be required and advice as to the best voting decision. A similar 2003 SEC ruling that mutual funds and other investment company advisors must adopt policies designed to ensure that shares of portfolio companies are voted in the best interests of their clients added a whole new class of institutions that outsourced their proxy decision making to ISS.

Today, ISS services some 1700 institutional investor clients, which collectively manage some $25 trillion in equity securities. The goal of reducing the expenses of activism through economies of scale thus seems well within reach.

ISS has proven highly successful at influencing shareholder voting. By some estimates, an ISS recommendation can effect a swing of 15 to 20% in a proxy vote.[2]Although competitors have entered the market for proxy advisory services, ISS remains the most powerful player in that market. Only one other advisory service, Glass, Lewis & Co., has a measurable effect on the outcome of shareholder votes and its impact remains minor compared to that of ISS.[3]

The shareholder empowerment provisions of Dodd-Frank are widely expected to further enhance ISS’s influence, especially with respect to executive compensation. Institutional investors will look to ISS for guidance on both the say when on pay and say on pay votes. The biggest effect of Dodd-Frank on proxy advisory services, however, is likely to come indirectly via NYSE Rule 452.

The NYSE rule deals with voting of shares held in brokerage accounts. The typical retail investor account is set up with the broker as the legal owner of the shares and the investor as the beneficial owner thereof. Under state law, the brokers therefore are the ones who vote the shares. Under federal law, brokers are obliged to request voting instructions from their client. Many retail investors, however, fail to provide instructions. In such cases, Rule 452 permits the broker to vote the shares in its discretion with respect to routine matters. As to non-routine matters, however, a broker without instructions must abstain.

In the past, brokers routinely voted as management recommended. As a result, management often had a substantial base of support on many issues. A 2009 amendment to Rule 452 significantly altered the environment, however, by changing the treatment of an uncontested director election from a routine to a non-routine matter. As a result, the number of retail investor-owned shares voted in director elections has fallen, increasing the proportion of institutional investor votes as a percentage of those being cast, and thereby enhancing the effect of an ISS recommendation.

Dodd-Frank § 957 will have a similar effect in a potentially wide range of issues. At a minimum, § 957 requires that votes on executive compensation be deemed non-routine. The proportion of votes coming from institutional investors therefore will rise with respect to both say on pay and say when on pay decisions. Because § 957 directs the SEC to undertake a rulemaking proceeding to determine whether there are “other significant matters” that should be deemed non-routine, which proceeding is expected to be completed by late 2012, ISS’ influence likely will continue to grow. Indeed, it seems fair to say that Dodd-Frank does more to empower ISS than it does shareholders.

Despite its success (or, perhaps, because of it), ISS has been controversial. Some critics argue that ISS is too rigid and mechanical in its advice. Martin Lipton complains, for example, that ISS routinely recommends against reelection of a board’s nominating committee if those members allow the firm’s CEO to provide recommendations or advice:

It would be a totally dysfunctional process if input and advice from the CEO were prohibited until after the committee meets and makes its decisions. There is nothing in the NYSE rule or “best practices” that warrants restricting the CEO from voicing advice or opinion until after the committee has acted. [4]

A related example of excessive rigidity on these issues came in 2004, when ISS urged its clients to oppose reelecting Warren Buffett as a director of Coca-Cola because Buffett did not satisfy ISS’ strict definition of director independence. Shortly thereafter, CalPERS announced that it would oppose Buffett’s reelection on the same grounds. Critics of the ISS and CalPERS positions pointed out that Warren Buffett is probably the most respected investor of all time, with a long record of integrity. At the time in question, Buffet’s Berkshire Hathaway Company owned almost 10% of Coke’s stock, which meant that his personal financial interests were closely aligned with those of other shareholders (albeit not perfectly). Buffett qualified as an independent director under the NYSE’s listing standards. As I argued at the time, if “Buffett doesn’t qualify as independent under the ISS and CalPERS standards, the problem is with the standards not Mr. Buffett.”[5]

Critics link this sort of check the box mentality back to the very reason for outfits like ISS to exist; namely, the cost associated with making informed voting decisions about numerous issues posed on the proxy statements of the thousands of publicly traded companies. The globalization of institutional investor holdings has compounded the problem by forcing ISS to stretch its resources to include many foreign issuers. In 2009, for example, ISS had to prepare voting recommendations with respect to more than 37,000 issuers around the world. The constantly growing number of voting recommendations that must be made, most of which are concentrated into the three to four month annual meeting season, reportedly forces even ISS to automate decision making to the fullest possible extent and, accordingly, to rely one one-size-fits-all standards instead of giving careful consideration to the specific needs and circumstances of each individual firm.

Finally, there is the question of accountability. Although both the SEC and the Department of Labor are considering regulation of the proxy advisory business, as of this writing they remain essentially unregulated. Ironically, market forces are the only thing holding ISS accountable; i.e., the same forces most shareholder power proponents claim do not work when it comes to holding management accountable.

Taken together, these concerns raise serious issues as to whether shareholder activism is an appropriate solution to the principal-agent problems of corporate governance. The view that institutional investor activists will carefully scrutinize portfolio companies to reach informed voting decisions is exposed as a fiction. Instead, shareholder activism depends on the whims of a single proxy advisor who offers limited transparency and is largely unaccountable, essentially unregulated, and poorly informed.[6]

"What Happens When the CEO or the Face of the Business Is a Risk? #MeToo and Corporate Governance"

Interesting post by Marcia Narine Weldon

No room for people of faith in the Democratic inn?

Peter Beinart:

Today’s white liberals don’t only talk about faith less than their predecessors did. They talk about it in a strikingly different way. Earlier Democrats invoked religion as a source of national unity. ...

Today, by contrast, progressive white candidates more often cite religion as a source of division. ... While white progressives once described religion as something that brought Americans together, they’re now more likely to describe it as something that drives them apart.

It’s not hard to understand why. For starters, the percentage of white Democrats who express no religious affiliation has skyrocketed. ... Secular Democrats haven’t only grown more numerous. They’ve also become some of the party’s most motivated activists. As The Atlantic’s Emma Green has noted, a PRRI poll taken last August and September found that Democrats who shun organized religion were more than twice as likely to have attended a political rally in the previous year than Democrats who identify with a religious group. Today’s Democratic candidates cannot simply assert, as Obama did in 2004, that “we worship an awesome God in the blue states,” because so many active Democrats do not.

What makes this trend especially scary is the recent data suggesting that as people become more active, the more they are inclined to think their opponents are pure evil:

... the New York Times’ Thomas Edsall published an important essay highlighting a new study that analyzed the extent of “lethal mass partisanship.” As Edsall observes, the paper contained some disturbing statistics. Among them, “42 percent of the people in each party view the opposition as ‘downright evil.’” A stunning 20 percent of Democrats and 16 percent of Republicans believe “we’d be better off as a country if large numbers of the opposing party in the public today just died.” And if the opposing party wins the 2020 election, 18 percent of Democrats and 13 percent of Republicans “feel violence would be justified.”

We hear quite a bit about “dehumanizing rhetoric” in American public life. Well, it appears that tens of millions of Americans now have dehumanizing beliefs. “One out of five Republicans and Democrats agree with the statement that their political adversaries ‘lack the traits to be considered fully human — they behave like animals.’”

I fear that this is not going to end well. As Cardinal George famously predicted:

"I expect to die in bed, my successor will die in prison and his successor will die a martyr in the public square. His successor will pick up the shards of a ruined society and slowly help rebuild civilization, as the church has done so often in human history."

Memo to Dave Hoffman (aka @HoffProf): Reading v. Regem is going nowhere

I am taking a break from Twitter for Lent (although my blogging software automatically tweets a link to new posts), but my minions occasionally alert me to tweets of interest. To wit:

I'm seriously hoping we get a corporate opportunity opinion out of this to replace an old WWII bribery case, right @ProfBainbridge? https://t.co/ee4bxstCvk

— Dave Hoffman (@HoffProf) March 13, 2019

Dave speaks, of course, of Reading v. Regem, a British case on secret profits in agency law, which has long been a staple of the Klein, Ramseyer & Bainbridge Business Associations case book. I hate to tell Dave this, but while I am just one vote out of three, I will strain every sinew to defend Reading. I love that case. It's a wonderful teaching tool.

• What is the precise nature of the fiduciary duty breach?
• Was the principal injured?
• If not, why is the agent liable?
• Was “the position which he occupies,”“the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it”?
• Why is disgorgement the remedy here?
• How do you distinguish this case from a law professor using a law school computer to work on a private blog that generates advertising revenue for the professor and not the law school?

Having said that, the college admission scandal does touch on a question that has always interested me; namely, is there a breach of the corporate opportunity doctrine when the opportunity being taken is itself illegal? (I'm assuming arguendo it would have violated some law for USC et al. to have participated in the scheme.) But that'll have to wait for a later post.

Social responsibility is for the proletariat not for limousine liberals

From recode:

One of Silicon Valley’s most prominent private equity investors — and one of the tech sector’s leading proponents of how to invest ethically and for social impact — has been charged in an explosive college admissions scandal that was revealed Tuesday, March 12.

Prosecutors charged Bill McGlashan, a founder and managing partner at TPG Growth — which has made landmark investments in companies like Uber and Airbnb — on fraud allegations for trying to engineer the admission of his son to the University of Southern California.

Side note: Why anybody would take so much trouble to get their kid into USC is beyond me.

Main note: This is a classic example of how limousine liberals in Hollywood and Silicon Valley (and elsewhere, of course) consistently fail to practice what they preach.

CST and the Law Seminar: Notes and Questions on Centesimus Annus and the Law

Our seminar on Catholic Social Thought and the Law began by reading Pope Leo XIII’s 1891 encyclical Rerum Novarum(notes here).

In 1991, Saint Pope John Paul II (JPII) issued Centesimus Annus(literally “hundredth year”) to commemorate the centennial of Rerum Novarum.

This week we tackled Centesimus Annus.

Context

The historical context of Centesimus Annus is quite significant. It was promulgated by the first non-Italian Pope in over 400 years. It was written by a Pole who had lived under both Nazism and Communism and, moreover, who was widely regarded as having been influentialin inspiring the revolutions of 1989 that brought down the Berlin Wall and restored democracy to eastern Europe. As Centesimus Annus was being written, moreover, the Soviet Union—the first and long most important Communist state—was crumbling and, it briefly seemed, evolving towards a liberal democratic state. Democratic capitalism seemed to be triumphant. The concerns about issues such as socialism and class struggle that had preoccupied Leo XIII thus seemed to have gone by the wayside.

Accordingly, JPII invites the reader not only to reflect on the meaning and legacy of Rerum Novarum but also to consider “the ‘new things’ which surround us and in which we find ourselves caught up, very different from the ‘new things’ which characterized the final decade of the last century.” (3)

JPII begins by describing a process by which labor had been commodified, which began with the Industrial Revolution and accelerated throughout the 19^thCentury. By 1891, this process had produced an endemic conflict between capital and labor, which in turn had inspired such developments as revolutionary socialism.

Interestingly for us as lawyers, JPII several times emphasizes the failure of the law to mediate the conflict between capital and labor:

“… the prevailing political theory of the time sought to promote total economic freedom by appropriate laws, or, conversely, by a deliberate lack of any intervention.” (§ 4)

“Pope [Leo XIII] and the Church with him were confronted, as was the civil community, by a society which was torn by a conflict all the more harsh and inhumane because it knew no rule or regulation.” (§ 5)

Recurring Themes

Given that Centesimus Annus was intended to provide a cohesive summation of the century-long development of CST, we see a number of themes that have recurred throughout the course.  It will be useful to reflect on how these themes have evolved and, as a result of that evolution, how Centesimus Annus both restates but also revises the positions staked out in Rerum Novarum.

1. The Church’s right and duty to speak to social conditions. In this regard, consider especially § 43. If the Church has “no models to present,” what is the function of the social teaching?
   1. Note also the discussion in § 54 of the relationship between the Church’s social mission and its spiritual mission.
   2. I liked one of my student’s answers to this question: “the Church’s job is advocate for the rights of humans—most specifically the dignity of all endowed by God—and to hold out the teaching of Christ as law which must be followed by the governments of the world in whatever more particularized form they take.”
2. The Church’s “theory of the State.” How does JPII’s theory of the state differ from that of Leo XIII? What type of government does Leo XIII appear to believe is best? What types does JPII seem to think is best?
   1. In § 47, JPII raises a concern that democracies “seem at times to have lost the ability to make decisions aimed at the common good.” Is that true of American democracy today and, if so, how do we regain the ability to do so?
   2. Sadly, I think one of my students speaks for many: “Frankly I have as of late been feeling apathetic and untrusting of both sides of the aisle, pretty much all forms of media, and anything I can’t verify with my own eyes. (Which is very little).”
3. The importance of human dignity, especially with respect to workers.
   1. One of my students asked; “Is the argument because we look like God and his son embodied a human then we must have dignity?”
      1. Let’s define what we mean by human dignity. I think the Compendium § 133 captures it:
         1. “In no case, therefore, is the human person to be manipulated for ends that are foreign to his own development”
         2. “The person cannot be a means for carrying out economic, social or political projects”
      2. Kant’s second formulation of the categorical imperative also speaks to this point:
         1. “Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end.”
      3. CST teaches that humanity is “the only creature willed by God for itself.” Humans have been endowed with unique human capacities. “These capacities are, in turn, typically understood to be exercised by acting morally, that is, to act in line with a morality that concerns what one does to oneself, to other humans, or to God.” (Cite)
   2. If human dignity is not something with which we are endowed by a Creator, what is the source and basis of it?
4. The right of private property.
5. Human rights more broadly. What is striking about the discussion (§§ 6-9) is the relative weighting given property rights versus the rights of workers.
6. The importance of work and the temptations of wealth. But note how the Church’s understanding of wealth and work evolved from the essentially agrarian vision that underlies Rerum Novarum to the industrialized vision that informs Centesimus Annus. (E.g., §§ 31-32)

CST, Capitalism, Socialism, and Culture

The morality of capitalism has been a recurring theme in CST. Michael Novak connects the historical context of Centesimus Annus to that debate by observing that:

By section 42, the Holy Father considers the consequences of that collapse and asks, “After the collapse of socialism, should we recommend capitalism to the bishops of the rest of the world?” Here again, the Holy Father says, “That depends on what you mean by capitalism,” and he makes a very astute separation between the political, the economic, and the moral/cultural components of the free society. He offers a unified vision of how the three relate to one another. He then proceeds to make a cultural critique of the existing order, and reveals an ecology of the free society–a moral ecology–which I think opens up the battle ground of the future.

What is that unified vision?

In § 12, JPII opines that:

… the fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism, so that the good of the individual is completely subordinated to the functioning of the socio-economic mechanism. Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil. Man is thus reduced to a series of social relationships, and the concept of the person as the autonomous subject of moral decision disappears, the very subject whose decisions build the social order. From this mistaken conception of the person there arise both a distortion of law, which defines the sphere of the exercise of freedom, and an opposition to private property. A person who is deprived of something he can call "his own", and of the possibility of earning a living through his own initiative, comes to depend on the social machine and on those who control it. This makes it much more difficult for him to recognize his dignity as a person, and hinders progress towards the building up of an authentic human community.

How might US democratic socialists such as Bernie Sanders or Alexandria Ocasio-Cortez respond to that critique?

JPII also observes (§ 14):

Quadragesimo anno… stated that "if the class struggle abstains from enmities and mutual hatred, it gradually changes into an honest discussion of differences founded on a desire for justice".

Can CST contribute to changing American politics into “an honest discussion of differences founded on a desire for justice"?

Subsidiarity and Solidarity

JPII posits that the state must simultaneously embrace the principles of subsidiarity and solidarity. (E.g., §§ 15-16) How do those principles relate to law and policy?

Legal Applications

Corporate Social Responsibility

Compare and contrast this famous passage from Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919):

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.

with § 35 of Centesimus Annus:

The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied. But profitability is not the only indicator of a firm's condition. It is possible for the financial accounts to be in order, and yet for the people — who make up the firm's most valuable asset — to be humiliated and their dignity offended. Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency. In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavoring to satisfy their basic needs, and who form a particular group at the service of the whole of society. Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business.

Can these views be reconciled?

Blue Laws

In McGowan v. Maryland, 366 U.S. 420 (1961), the U.S. Supreme Court upheld “the constitutional validity of Maryland criminal statutes, commonly known as Sunday Closing Laws or Sunday Blue Laws.” The Court explained that:

Starting in 1650, the Plymouth Colony proscribed servile work, unnecessary travelling, sports, and the sale of alcoholic beverages on the Lord's day and enacted laws concerning church attendance. The Massachusetts Bay Colony and the Connecticut and New Haven Colonies enacted similar prohibitions, some even earlier in the seventeenth century. The religious orientation of the colonial statutes was equally apparent. …

But, despite the strongly religious origin of these laws, beginning before the eighteenth century, nonreligious arguments for Sunday closing began to be heard more distinctly and the statutes began to lose some of their totally religious flavor. …

The proponents of Sunday closing legislation are no longer exclusively representatives of religious interests. Recent New Jersey Sunday legislation was supported by labor groups and trade associations …; modern English Sunday legislation was promoted by the National Federation of Grocers and supported by the National Chamber of Trade, the Drapers' Chamber of Trade, and the National Union of Shop Assistants. …

Throughout this century and longer, both the federal and state governments have oriented their activities very largely toward improvement of the health, safety, recreation and general well-being of our citizens. Numerous laws affecting public health, safety factors in industry, laws affecting hours and conditions of labor of women and children, week-end diversion at parks and beaches, and cultural activities of various kinds, now point the way toward the good life for all. Sunday Closing Laws, like those before us, have become part and parcel of this great governmental concern wholly apart from their original purposes or connotations. The present purpose and effect of most of them is to provide a uniform day of rest for all citizens; the fact that this day is Sunday, a day of particular significance for the dominant Christian sects, does not bar the State from achieving its secular goals. To say that the States cannot prescribe Sunday as a day of rest for these purposes solely because centuries ago such laws had their genesis in religion would give a constitutional interpretation of hostility to the public welfare rather than one of mere separation of church and State.

Businesses and consumers have criticized blue laws as infringements on their economic rights. Likewise, certain religious groups that observe a different Sabbath than Sunday have objected to blue laws as an infringement on their religious rights.

Using JPII’s analysis of workers’ rights as a basis, discuss whether workers should have a statutory right to at least one day a week of rest. Should we include law firm associates among the workers having such a right? That may seem like a facetious question, but take a moment to consider seriously whether the discussion of work at, for example, § 32 speaks to what your impending careers as lawyers. 

The Preferential Option for the Poor

What is the preferential option for the poor? (§ 11) What role does JPII assign the state in promoting it? How does JPII think the state should empower the poor? To what extent does the right of property (see Part IV) limit the state’s ability to advance the preferential option for the poor?

Consider the relevance of the preferential option and the right to property to current legal debates such as tax policy.

Slate magazine reports that:

One of Sen. Elizabeth Warren’s first proposals upon joining the 2020 presidential field was a wealth tax. Warren would impose an annual tax of 2 percent on family assets in excess of $50 million, which would increase to 3 percent for assets above $1 billion. Overall, this tax would hit 75,000 families in the country, who make up 0.01 percent of the population but hold 10 percent of the nation’s wealth.

Vox reports that:

In an interview that aired Sunday on 60 Minutes, America’s most widely covered new House member Alexandria Ocasio-Cortez (D-NY) floated the idea of a top marginal income tax rate as high as 70 percent as part of a plan to finance a “Green New Deal” that would aim to drastically curb America’s carbon dioxide emissions.

You are legislative counsel to a Catholic member of Congress. She asks for your advice as to whether CST as articulated by JPII suggests that she should support or oppose these proposals.

War

JPII write in § 52:

I myself, on the occasion of the recent tragic war in the Persian Gulf, repeated the cry: "Never again war!". No, never again war, which destroys the lives of innocent people, teaches how to kill, throws into upheaval even the lives of those who do the killing and leaves behind a trail of resentment and hatred, thus making it all the more difficult to find a just solution of the very problems which provoked the war.

Which calls to my mind this scene from Gandhi. How do you think JPII would answer the question of whether you can stop someone like Hitler without resorting to state violence?

Populism and Citizens United

I'm working on a project about corporate purpose and populism. I originally planned for it to include a section on Citizens United, but have decided that section needs to go. But having a place to publish work that has no where else to go has long been one of my main reasons for having a blog.

In my view, the case for Delaware’s rule of shareholder wealth maximization becomes even stronger when right-wing populists have significant political power. The populist contribution is not providing new theoretical constructs in the intellectual debate, but rather opening new political possibilities. As we shall see, one of the principle arguments in favor of Delaware’s rule is that the acknowledged externalities of corporate behavior are best addressed through general welfare legislation rather than via the fiduciary obligations of corporate directors.[1] Delaware Chief Justice Leo Strine and his coauthor Nicholas Walter contend that the U.S. Supreme Court’s Citizens United decision undermined that argument by changing the political dynamics in ways that strengthened corporate power.[2] Even if one accepts their argument,[3] however, a resurgent right-wing populism may provide alternative constraints on corporate political power sufficient to revitalize the argument for leaving regulation of corporate externalities to general welfare legislation.

A standard move in the corporate social responsibility debate by defenders of the shareholder wealth maximization norm is the claim that the legislative and “regulatory process [is] an adequate safeguard against corporate overreaching for non-stockholder constituencies and society generally.”[4] Various commentators, notably including Delaware Supreme Court Chief Justice Leo Strine, contend that a wave of corporate political spending unleashed by the controversial Citizens Uniteddecision[5]undermines that argument:

Because corporate wealth far exceeds that held directly by human beings, if corporations are able to act directly to influence who is elected to office, the laws and regulations in our society will increasingly tend to tolerate the imposition of greater externalities, because they will be enacted by politicians who have been elected in an expensive process in which money matters, and in which securing the support of non-human corporate money with a monocular focus on profit will be important to electoral competitiveness.[6]

I have elsewhere disagreed with their argument on several grounds. First, “much corporate political spending is likely to be defensive,”[7]being aimed at staving off additional regulation rather than eroding existing regulations.[8] Absent “a showing that the benefits of foregone regulations exceed their costs, there is no reason to assume that corporate political spending increases the extent to which corporations can externalize costs.”[9]

In addition, Strine and Walter fail to explore the implications of the fact that large corporations dominate corporate campaign spending. First, spending by such corporations is highly constrained by reputational considerations due to “the seriousness with which large corporations treat any potential threats to their goodwill arising from ... negative publicity” generated by unpopular contributions. Second, and more important, while Strine and Walter assume corporations use political spending exclusively to externalize the negative costs of their activities, the reality is that large corporations frequently support regulations that force corporations to internalize social costs. They do so because such regulation can create significant costs for smaller competitors and barriers to entry for startups. Because regulatory costs frequently do not scale, they are often borne disproportionately by small businesses and startups. This observation is not offered as a defense of corporate political spending, but solely as a critique of Strine and Walter’s assumption that corporate political spending is inevitably anti-regulation.[10]

The rise of right-wing populism as a viable political force strengthens the case against Strine and Walker’s Citizens United argument. Although the early Tea Party activists tended towards libertarian views on economic issues and regulation,[11] the right of center populist movement is evolving towards an increasingly anti-business stance. This sentiment may well find expression in a regulatory agenda analogous to the Southern Agrarian program. If so, the risk that Citizens United will permit corporations to externalize more costs will be further mitigated.

Corporate Cowardice: If Corporations Won't Defend Capitalism Against Democratic Socialists, Who Will?

Politco reports:

Facebook removed several ads placed by Sen. Elizabeth Warren’s presidential campaign that called for the breakup of Facebook and other tech giants.

But the social network later reversed course after POLITICO reported on the takedown, with the company saying it wanted to allow for "robust debate." ...

"Curious why I think FB has too much power? Let's start with their ability to shut down a debate over whether FB has too much power," she tweeted. "Thanks for restoring my posts. But I want a social media marketplace that isn't dominated by a single censor."

It is true, of course, that I am no fan of Facebook. Indeed, I recently permanently deleted my Facebook account. But I'm even less of a fan of the emergent crowd of Democratic Socialists like Elizabeth Warren.

If we want to prevent Warren et al. from turning the United States into Venezuela, corporations are going to have start standing up for themselves. Unfortunately, however, most CEOs today are either social justice warriors themselves or spineless cowards (or, as in Zuckerberg's case, both).

Memo to Cardinal Cupich and Archbishop Chaput--The Metropolitan Model is a Very Bad Idea

In February 2019, the Vatican held a Meeting on the Protection of Minors in the Church, which was a global gathering of Church leaders to discuss the sex abuse scandals.[1]The summit was never intended to be a legislative event that would result in specific reforms, but rather was described by Pope Francis as “a ‘catechesis’ on the problem of abuse aimed at bishops who do not understand the issue or what they should do in response to abuse.”[2]Not surprisingly, no new regulations or prohibitions emerged from the Meeting. Instead, Pope Francis’s concluding address announced that the Church would begin developing new legislation guided by eight principles.[3]The fifth of these principles is the one most pertinent for purposes of this article:

Strengthening and reviewing guidelines by Episcopal Conferences. In other words, reaffirming the need for bishops to be united in the application of parameters that serve as rules and not simply indications. Rules, not simply indications. No abuse should ever be covered up (as was often the case in the past) or not taken sufficiently seriously, since the covering up of abuses favours [sic] the spread of evil and adds a further level of scandal. Also and in particular, developing new and effective approaches for prevention in all institutions and in every sphere of ecclesial activity.[4]

This statement appears to have two implications of particular significant for present purposes. First, it suggests the Vatican may allow individual national conferences to develop their own rules as befits their local situation. Second, it also suggests that none of the proposals advanced herein—including those relating to discipline of bishops—has been foreclosed.

As the Meeting’s title suggests, the Pope and Vatican leaders appear to be focused exclusively on the problem of sexual abuse of minors. There was no discussion of the closely related problems of sexual abuse of vulnerable adults and consensual sexual relationships by priests with adults, both of which this article argues also must be addressed. On the other hand, nothing emerged from the Meeting to preclude national conferences from addressing that problem and the recommendations made herein with regard to them are therefore still valid.

Looking forward, one reform model likely to get serious consideration by the USCCB is the “Metropolitan Model” proposed by Cardinal Blase Cupich, Archbishop of Chicago, who is widely regarded as a close ally of Pope Francis.[5]The likelihood that the Metropolitan Model will end up being the official USCCB position is substantial, particularly because it is also supported by Archbishop Charles Chaput of Philadelphia, who is generally regarded as being a leader of the more conservative members of the Conference.[6]

The Metropolitan Model was presented to the by Cardinal Cupich, in remarks setting forth a number of principles that he believed should guide the Church as it reforms.[7]Of special relevance to the agenda proposed by this Article, Cardinal Cupich affirmed “that every member of the Church has an essential role in helping the Church to eliminate the horrific reality of clergy sexual abuse.”[8]The Cardinal’s Metropolitan Model therefore includes a role for the laity in all accountability processes,[9]which is consistent with the proposals made herein.

Of at least equal importance, Cardinal Cupich recognized “the systematic failures in holding clerics of all rank responsible” and the resulting need for “accountability within the college of bishops.”[10]He therefore proposed several specific reforms aimed directly at holding bishops accountable. In many respects, those proposals are consistent with the recommendations made by this article. For example, Cardinal Cupich proposed a prohibition of retaliation against the person reporting such an allegation should be adopted,[11]which would permit the sort of whistle blower protections proposed herein.

Cardinal Cupich’s proposed accountability mechanism, however, differs in some critical respects from the proposals made by this article. First, his proposals are limited to developing new mechanisms for holding bishops accountable.[12]This is a necessary but not sufficient reform. Instead, as this article suggests, the Church should undertake major reforms of the rules governing sexual misconduct at all levels and by all Church personnel.

Second, the Cardinal suggests that allegations of misconduct against a bishop be referred to the metropolitan of the accused bishop,[13]rather than to a national review board of the sort contemplated herein. The metropolitan’s powers also would be far more limited than those this article proposes granting to the national review board. The metropolitan would require approval from the Vatican before initiating an investigation.[14]Upon completion of the investigation, the metropolitan would forward his findings to the Vatican.[15]The final decision of whether to take disciplinary action and the nature of that discipline would rest with the Vatican.

Cardinal Cupich’s Metropolitan Model thus has a number of disadvantages when compared to the national review board proposed herein. First, in modern times the role of a metropolitan has been reduced to a virtual irrelevancy.[16]It therefore seems likely that many Church members are unfamiliar with the role and function of a metropolitan. The metropolitan model therefore may not do much to restore confidence in the Church.

Second, although the metropolitan model purportedly contemplates lay participation, it appears to contemplate the laity’s role being limited to experts who will act as assistants to the metropolitan.[17]The laity thus will continue to be denied a decision-making role in the accountability process. Instead, Cardinal Cupich’s proposal leaves decision-making power in the hands of those authorities that Church members trust least; namely, the bishops and the Vatican hierarchy.

Assigning primary responsibility for investigated claims against a bishop to that bishop’s metropolitan is especially problematic, because “metropolitan archbishops often have a lot of say in who becomes bishops in their province.”[18]Church members likely will lack confidence in the metropolitan’s ability to be objective with respect to someone who likely will be regarded as a protégé, friend, or ally of the metropolitan.[19]

The relationship between a metropolitan and his suffragan bishops becomes even more problematic when it is the metropolitan himself who is the accused. Recall that now defrocked Cardinal Theodore McCarrick served as a metropolitan twice, as Archbishop of Newark and then of Washington.[20]If Cardinal Cupich’s proposal had been in effect, one of McCarrick’s victims would have had to go outside the archdiocese and file a report with the senior suffragan bishop in the province, who would then be responsible for conducting the investigation. During much of the time McCarrick was Archbishop of Newark, the senior suffragan bishop for that province was Bishop Frank Rodimer of Paterson.[21]Rodimer reportedly shared a summer house with Father Peter Osinski, who was later convicted of having molested a young boy at that house over a seven-year period in the 1980s.[22]A civil suit alleged that Rodimer was negligent in failing to recognize the abuse, but the suit was settled.^[23]Rodimer apologized and also admitted to having mishandled other abuse cases in his diocese.^[24]Yet, it would have been Rodimer who would have been responsible for conducting any investigation of McCarrick.

Obviously not every senior suffragan bishop is as compromised as Rodimer would have been, but the mere possibility of such cases calls into question the validity of the Metropolitan Model. And even if the suffragan bishop is not compromised by himself being an abuser or enabler, why would the laity trust anyone who is a subordinate and likely protégé of the metropolitan to conduct a fair and impartial investigation? In the corporate world, after all, we don’t ask a Vice President to investigate allegations against the CEO. Instead, we ask the board of directors to do so.

In sum, as Charles Collins observes:

The biggest problem facing the [proposal] is the lack of trust people have in the bishops right now. The national review panel originally proposed by the U.S. bishops was an acknowledgement of this fact. The “metropolitan model” is, in effect, the bishops saying, “Don’t worry. You can trust us.”[25]

As Ronald Reagan famously observed, however, “trust but verify.” The proposals made in this article provide the necessary verification by taking the investigatory and disciplinary processes out of the hands of local bishops and assigning them to a national panel with lay members and are thus far more likely to restore confidence in the Church.

My latest column on reforming the Catholic Church's approach to sex abuse cases

My column Lay Review With Teeth: What (Didn’t) Happen at the Vatican’s Sexual Abuse Summit is up at Public Discourse. Here's the very short version:

The Vatican’s recent Meeting on the Protection of Minors in the Church failed to produce any new reforms. Cardinal Cupich’s proposal would leave decision-making power in the hands of those authorities that Church members trust least: the bishops and the Vatican hierarchy. Instead, the Church needs to take investigatory and disciplinary processes out of the hands of local bishops and assign them to a national panel with lay members.

But please go read the whole thing.

Individual shareholder proposal proponents are bad for your portfolio - So why doesn't the SEC limit the number of companies a gadfly can target per year?

I am reading with interest Nickolay Gantchev and Mariassunta Giannetti, The Costs and Benefits of Shareholder Democracy (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3269378

There's a lot here to unpack. But for me the most interesting finding is this:

As shareholders with a minimal investment in a company are allowed to submit proposals to be voted on at the company’s annual meeting, unskilled or uninformed shareholders are able to post a large number of proposals to many different companies.3As a result, a small number of individuals and other sponsors, such as associations and unions, submit an unusually large number of proposals every year. In contrast, investment companies submit very few proposals. Since the most active sponsors are unlikely to have organizational capabilities to analyze dozens of companies, many proposals fail to address the specific firm and its particular context, instead spreading the most recent corporate governance fads, such as the elimination of staggered boards (Cremers, Litov, and Sepe, 2017).

We show that the proposals submitted by the most active individual sponsors produce negative abnormal returns if they pass with a majority vote in the shareholder meeting. These proposals are also less likely to be implemented by management and, if implemented, produce negative long-term abnormal returns. Importantly, the remaining proposals appear to generate positive short- and long-term abnormal returns, especially if they are submitted by individual sponsors, indicating that low-cost shareholder activism may be beneficial because it reaches firms that are unlikely to be targeted by hedge fund activists.

The findings make a certain amount of sense. They suggest that proposals made by persons who are better informed have a more positive impact. In contrast, gadflies who use a fire hose to submit countless proposals every season have a negative impact.

Here's the top ten individual proponents:

And here's the effect they have on those unfortunate to hold stock in the targeted companies:

Panel A of Table 4 provides clear evidence that proposals submitted by the top 10 individual sponsors generate negative short- and long-term abnormal returns. Proposals submitted by other individual sponsors generate strongly positive abnormal returns both in the short- and the long-run, possibly because these sponsors target firms that are less likely to be targeted by hedge fund activism. In contrast, there is no evidence that the top 10 institutional sponsors generate short-term returns different from zero, even though non-top 10 institutional sponsors appear to generate negative long-term returns.

At present, Rule 14a-8 allows a proponent to submit only one proposal per company per year. But the rule allows a proponent to submit a proposal to an unlimited number of companies per year. As a result, gadflies can submit proposals to dozens of companies per year. Given the evidence that gadflies are hurting rather than harming the corporations they target, it's about time the SEC looked at capping the number of proposals folks like John Chevedden can make in a year.