ProfessorBainbridge.com

Kevin LaCroix discusses "Cash-Crunched Companies Face Insolvency; Will Directors Face Claims?"

From D&O Diary:

The current disruption to normal business operations across the country means that many businesses will soon be under significant financial pressure, if they are not there already. As their companies edge toward insolvency, directors are going to have to make significant decisions about the companies and their operations. Boards may be concerned, as they make critical and difficult decisions, that creditors or others may later attempt to claim that they violated their legal duties.  This concern in turn leads to the question about exactly what duties directors face as their companies approach insolvency.

In general, directors of solvent companies do not owe creditors fiduciary duties. A solvent company’s duties to its creditors are instead defined in other ways – for example, by the law of contract, bankruptcy laws, general commercial law, and creditors’ rights.

Whether companies take on fiduciary duties to creditors when they approach the “zone of insolvency” is very much a matter of state law. Under the law of Delaware, the state under whose laws many companies are organized, “duties of directors are fundamentally the same whether a corporation is solvent, insolvent, or trending towards insolvency,” according to March 26, 2020 memo from the Stinson law firm entitled “The Director’s Dilemma: An Overview of Director Fiduciary Duties when Insolvency Looms” (here), “ with the goal of pursuing ‘value maximizing strategies for the benefit of the corporation and its ‘residual stakeholders.’”

There's much more, including  when a company becomes insolvent for purposes of Delaware law.

Although it is now somewhat dated, those readers interested in this issue may wish to consult my article on the subject: 

Bainbridge, Stephen Mark, Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency. Journal of Business and Technology Law, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 05-26. Available at SSRN: https://ssrn.com/abstract=832504

Critics of Corporate Stock Buybacks Leveraging COVID19 Crisis to Advance Policy Goals

Our friend Harvard law professor Jesse Fried posted an essay coauthored with Charles Wang on the titular topic at the Harvard Forum:

Critics of stock buybacks, heeding Rahm Emanuel, are not letting a serious crisis go to waste. They found a way to blame repurchases for COVID-19’s economic fallout, and are exploiting COVID-19 to try to curb their use. But critics’ claims are faulty, and proposed buyback restrictions may well exacerbate COVID-19’s ill effects.

Buyback critics have long asserted that repurchases starve firms of cash, with little supporting evidence. But COVID-19 seems to provide a perfect poster child for the anti-buyback cause: bailout-seeking airlines. Citing a Bloomberg analysis that 96% of airlines’ total free cash flow over the last decade was spent on repurchases, critics blamed buybacks for the firms’ desperate plight. But this 96% figure is misleading. It does not take into account equity and debt issuances by airlines, which largely offset the cash paid out in buybacks. “Unfunded” payouts to shareholders were much lower.

Kindly go read the whole thing.

Comparing the 2008 financial crisis to the COVID-19 market upheaval

From a Willis Towers Watsonpost at the Harvard Forum:

Books I've Read During the Lockdown

Stuff I've been buying to sustain Helen and myself during this time of troubles

University of Chicago Law an Outlier on Pass/Fail Grading

From the UCLA Faculty Association:

Grading has emerged as a flash point of discord at law schools amid the coronavirus pandemic, with students and faculty pushing administrators to choose between traditional grades and a pass/fail system.

The University of Chicago Law School on Tuesday became the first among the top 10 schools, as ranked by U.S. News & World Report, to tell students that it plans to stick with its traditional grading scale for the spring semester, instead of moving to pass/fail grading. That decision comes in contrast to a growing number of elite schools that have already committed to pass/fail grades for the spring semester or winter quarters, including Yale Law School, Stanford Law School; Harvard Law School; Columbia Law School; the University of Virginia School of Law; the University of Pennsylvania School of Law; the University of California, Berkeley School of Law; and the University of Michigan, which is allowing students to choose whether they want to stick with the traditional grading scale or go pass/fail. ...

Meanwhile, law professors also are at odds over the right way to handle grades among the pandemic. Noah Zatz, a professor at the University of California at [sic] Los Angeles School of Law, posted a letter on Facebook that he sent to his faculty colleagues about grading, which advocates for a mandatory pass/fail scheme. ...

Others have argued that law schools should maintain their grading curve. Josh Blackman, a professor at South Texas College of Law—Houston, wrote on the Volokh Conspiracy blog that grades help identify which students are struggling and need more academic support or are in danger of failing the bar exam. This is particularly true at non-elite schools, he noted. And law students should learn that lawyers cannot abandon their responsibilities, even amid a pandemic.

 

 

Zoombombing at UCLA

From the UCLA Faculty Association:

A barrage of vulgar words and messages interrupted several UCLA classes held Tuesday on the video conference application Zoom.

 

“Zoombombing”, a new type of internet trolling, occurs when an individual or a group of individuals use Zoom features to interrupt a meeting or class. Following the cancellation of in-person classes due to the novel coronavirus outbreak, many professors have been using Zoom to hold classes, discussions, labs and office hours.

When Is An Emergency An Emergency For Purposes of Emergency Bylaws?

Keith Paul Bishop has the answer.

Governor Newsom suspends requirement that shareholders consent to virtual-only annual shareholder meetings

But does he have authority to do so? Here.

Unions and strikes

In re the strikes at #Instacart and #Amazon: my take on unions and strikes. It may surprise you. #InstacartStrike #AmazonStrike https://t.co/icjCMnDVCx

— Professor Bainbridge (@ProfBainbridge) March 30, 2020

Dodd-Frank's requirement that companies disclose the ratio of CEO to median employee pay hasn't worked

Knust, Lucas and Oesch, David, On the Consequences of Mandatory CEO Pay Ratio Disclosure (February 17, 2020). Available at SSRN: https://ssrn.com/abstract=3540009 or http://dx.doi.org/10.2139/ssrn.3540009

We examine the consequences of the highly anticipated and controversial Section 953(b) of the Dodd-Frank Act, which mandates companies to disclose the CEO-to-median employee pay ratio starting from 2018. We address endogeneity concerns by using a regression discontinuity design around the public float of companies. Contrary to one of the main arguments of the supporters of the rule, the disclosure requirement does not reduce CEO compensation. We also find no evidence that investors are substantially influenced by the disclosure since firms that disclose the ratio experience no change in investor attention and no change in say-on-pay voting outcomes.

High cost. Low benefit. Repeal it.

A purported list of changes in grading policies law schools are making in response to COVID19

You can find one here. There's a second list sorted by US News ranks here.