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Chancellor William Allen, RIP

The Delaware Judiciary has announced "the passing on Sunday of retired Chancellor William T. Allen, a giant of the corporate bar, academia, and the Delaware Bench." 

“Our nation lost one of the finest jurists of the last fifty years yesterday,” said Delaware Supreme Court Chief Justice Leo E. Strine, Jr. “Chancellor Allen set a standard of excellence that made Delaware stand out in the eyes of all sophisticated observers. Bill Allen, the person, set a standard as a husband, father, friend, and caring professor to which we should all aspire. For me personally, he was a mentor, source of wisdom, and an inspiration. Everyone in Delaware owes him a debt of gratitude for what he did for our state, and our Judiciary’s hearts are with his wife and children, as they endure the loss of this special man.” ...

Chancellor Allen’s decisions, often produced under extreme time pressure, were known for their lucid and lively writing style and incisive analysis. His rulings also showed a deep concern for the integrity of the law, the need for those with power to use it with fidelity to those they represented, and for their understanding of scholarship relevant to the matters before the Court. For that reason, Chancellor Allen was considered to be one of the finest corporate law judges of the era and, even more broadly, as one of the finest judges of his generation on any court. ...

Chancellor Allen wrote hundreds of opinions related to corporate law during his time on the bench. Among the most notable were his iconic rulings in two corporate law cases. In Caremark, the Chancellor addressed the duty of corporate directors to monitor corporate legal compliance and called on corporate boards to recognize the duty of Delaware corporations to obey the law and act ethically toward society and the corporation’s stakeholders. And in the Blasius case, Chancellor Allen articulated a stringent standard of judicial review to make sure that corporate elections are conducted with scrupulous fairness and integrity.

As I have observed: "To paraphrase a television commercial of my youth, when Chancellor Allen speaks, people listen." Stephen M. Bainbridge, The Board of Directors As Nexus of Contracts, 88 Iowa L. Rev. 1, 33 (2002).

I only had the privilege of meeting him on one occasion. But I admired his skill and wisdom greatly, even on those rare times I disagreed with him.

 

Holmesian "bad man theory" and law & economics

Over on Twitter, Rob Anderson posts the following:

Is Holmesian "bad man theory" the foundation for law & economics?

— Rᴏʙᴇʀᴛ Aɴᴅᴇʀsᴏɴ (@ProfRobAnderson) October 12, 2019

Although it's not directly on point, Rob's question called to mind my essay Law and Economics: An Apologia, in Christian Perspectives on Legal Thought, in which I posited that:

[Some might argue that] theological insights on human nature lead to different behavioral predictions than those premised on Economic Man. But is that necessarily true? Consider a restaurant located on one side of a busy street. Although crossing the street is dangerous, some people will nonetheless do so in order to eat at the restaurant. Basic economic theory, however, tells us some things about the likelihood that people will do so. The more dangerous the crossing becomes, the less likely people are to venture across. Conversely, the more attractive the restaurant becomes, the more risk people are willing to bear. And so forth. All of which seems quite obvious, but these predictions about human behavior, when extrapolated and generalized, become the foundation for price theory. Here’s the kicker: price theory tells us how people will choose, but “it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from [economists] even though we know that, if the risk is increased sufficiently, he will forego seeking that pleasure.”[1] In other words, economics has no good account of the character or origins of human preferences.

As a Christian practicing law and economics, however, my faith brings something to the table in grappling with the question of preference formation. Christianity is not a utopian faith, but rather is quite realistic about human beings. In particular, our central doctrine of the Fall of Man tells a coherent story about the nature and origins of human preferences in an unredeemed world. In my view, the assumptions about human behavior made by economists are largely congruent with the fallen state of man. If Economic Man is a fair description of Adam after the Fall, the rational choice model used in economics is not a bad model for predicting the behavior of fallen men. At the same time, however, because Christianity’s account of how man fell and the consequences of that Fall provide an answer to Coase’s question, our faith gives Christian practitioners of economic analysis a more fully realized account of human behavior.

To be sure, Christians are called to a higher standard of behavior than that of fallen man. If the purpose of economic analysis is to predict how people will respond to changes in legal rules, however, can we assume Christian behavior by the masses of a secular and God-less society? No realistic social order can assume “heroic or even consistently virtuous behavior” by its citizens.[2] A realistic social order therefore must be designed around principles that fall short of Christian ideals. In particular, the rules must not be defined in ways that effectively require every citizen to be a practicing Christian. Christian visions of Justice therefore cannot determine the rules of economic order. Instead, legal rules and predictions about human behavior must assume the fallen state of Man, which is precisely what I have tried to suggest Economic Man permits us to do.

Much Buzz About the Internal Affairs Doctrine

Francis Pileggi:

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

A Harvard Forum post by Grundfest himself summarizes the paper. It explains the core problem and is typically punchy:

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect.

Moshen Manesh:

During a four-month span in late 2018, two events occurred at opposite ends of the country that could dramatically reshape the regulation of corporations in America. First, in September 2018, California enacted the nation’s first law mandating board gender diversity for all public corporations that are physically headquartered in California.[1] Second, in December 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg ruled that a corporation may not in its governing documents regulate the rights of its shareholders arising under federal securities law.[2] Although seemingly unrelated, I argue in a forthcoming article that both events share at their core a challenge to the internal affairs doctrine – a doctrine that is at the foundation of the state-based system of corporate law in the United States. ...

Challenges at the edges of the internal affairs doctrine, like those that emerged in late 2018, are a problem unlikely to go away for Delaware. Since California enacted its first-in-the-nation board diversity statute, state legislatures in Illinois and New Jersey have considered similar bills. And earlier this year, an activist  shareholder initiated litigation against the New Jersey-chartered Johnson & Johnson, pressing it to adopt a bylaw provision mandating arbitration for all shareholder claims brought under federal securities law. These developments suggest that skirmishes at the frontiers of the internal affairs doctrine are likely to persist. And these skirmishes could both erode Delaware’s hegemony and fundamentally reshape the regulation of corporate America.

Ann Lipton:

By now, regular readers of this blog are aware that I’ve been especially forceful in arguing that litigation limits in corporate charters and bylaws can only address matters of corporate internal affairs, and that federal securities claims are beyond their scope.  Vice Chancellor Laster adopted a similar view in his Sciabacucchi v. Salzbergdecision, where he invalidated charter provisions that purport to require that all Section 11 claims against the company be brought in federal court.  Now that the matter is on appeal to the Delaware Supreme Court (Docket No. 346,2019) – and the opening brief is due today –  a lot of articles about the scope of the internal affairs doctrine are dropping. [She links a number of them]

Kevin LaCroix:

After the U.S. Supreme Court’s March 2018 decision in the Cyancase that state courts retain concurrent jurisdiction for ’33 Act liability actions, one idea that circulated was that companies could avoid securities class action lawsuits in state court by adopting a charter provision designating a federal forum for these kinds of suits. Unfortunately, in December 2018, Delaware Chancery Court Vice Chancellor Travis Laster held in Sciabacucchi v. Salzburg that under Delaware law federal forum provisions are invalid and ineffective, as discussed here. The Sciabacucchi decision, which is now on appeal, is the subject of a comprehensive critique in a recent article by Stanford Law Professor Joseph Grundfest, entitled “The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi” (here). Professor Grundfest argues that Sciabacucchi was wrongly decided and that a under a “straightforward” application of applicable Delaware statutory law, federal forum provisions are valid and permitted.

I recommend reading all of them.

 

India's Experience with Corporate Social Responsibility Offers a "Cautionary Tale"

From CLS Blog:

The debate about the purpose of corporations seems to have heated up after Larry Fink’s annual letter to the CEOs of companies in which BlackRock invests and again after the statement from the Business Roundtable. Both Fink’s letter and the Business Roundtable statement referred to global problems and how companies should embrace a greater responsibility to address them. The statement by the Business Roundtable has been perceived variously as a major shift in corporate law or as a PR exercise to prevent government regulation.

Irrespective of its motivations, while an acknowledgement that a consideration of stakeholder interests is useful, an invitation for government to require actions by companies to address these world problems would be problematic. As Professor Jeffrey Gordon posted here on this blog, it is the government’s responsibility to address these problems via taxation and redistribution as well as regulation in areas other than corporate law. Although Professor Tim Wu argued here that this amounts to passing the buck to government, a situation where we allow the government to require companies to perform public duties would amount to the government passing the buck to corporations. The example of India’s CSR law provides a cautionary tale.

Kindly read the whole thing.

A Truth and Reconciliation Process for the Catholic Sex Abuse Scandal

As regular readers know, I have a long-standing interest in legal aspects of the Catholic sex abuse scandal, which intersects both my vocational interests and my faith as a Roman Catholic. I read with great interest a new paper proposing a truth and reconciliation component to the legal processes:

This article outlines the history of cleric sexual abuse from 1950 through contemporary times, and surveys past civil and criminal prosecutions of Roman Catholic sexual abuse cases. Contemporary theories of criminal liability may be either an alternative to – or an adjunct with – civil tort lawsuits, and injunctive relief is increasingly sought to investigate as well as to deter future abuse. Time will tell the impact of ongoing state and federal RICO Act prosecutions not just on perpetrators but also clerics and Church decision-makers remaining in active ministry. Restorative justice, forums for listening and sharing, through stories and prayer, may well offer the most opportunity for fostering healing and reconciliation within the bounds of the law yet not directly involving courts or legal processes. Restorative justice strongly shines the light of the Gospel on this scourge, where agents of such justice are mindful of the words of the Apostle Paul, in his Second Epistle to the Corinthians that “[a]ll this is from God, who reconciled us to himself through Christ and gave us the ministry of reconciliation.” Remediative and restorative measures outside the courts must augment legal remedies within halls of justice for multifaceted and effective means to address the past and ongoing criminal and civil law and public health crises arising from cleric sexual abuse, and to help prevent future abuses from taking place.

Govern, Kevin H., Truth, Justice, and Reconciliation in the Wake of Clerical Sexual Abuse in America (May 2019). Baku State University Law Review, Volume 5, Issue 2, 2019. Available at SSRN: https://ssrn.com/abstract=3450826

Justifying Benefit Corporations

I liked very much Brett McDonnell's new article, The Corrosion Critique of Benefit Corporations:

This Article evaluates what it labels the corrosion critique of benefit corporation statutes. These statutes have emerged as the leading new statutory alternative to enable and encourage social enterprises, businesses which seek both to generate financial returns for their investors while also pursuing social missions. Some persons who strongly support social enterprises have criticized benefit corporation statutes, arguing that they create a mistaken impression that companies organized under ordinary corporation statutes cannot consider the interests of non-shareholder stakeholders except insofar as doing so benefits shareholders in the long run. This corrosive effect on the understanding of most corporations may impede the adoption of socially responsible behavior.

The Article distinguishes three conceptions of the legal purpose of corporations and whose interests officers and directors should consider: shareholder-only, stakeholder-optional, and stakeholder mandatory. It also identifies two leading justifications of benefit corporation statutes. The enabling justification asserts that corporate law constrains the ability of directors and officers to consider the interests of stakeholders other than shareholders because it imposes the shareholder-only conception of corporate purpose. The branding justification asserts that benefit corporations help companies attract investors, customers, and employees by giving them a way to credibly commit to considering the interests of other stakeholders through adopting the stakeholder-mandatory conception.

Having established these categorizations, the Article offers a mixed verdict as to the validity of the corrosion critique. The critique does not apply to the branding justification. For the enabling justification, the critique is mostly valid in states with corporate constituency statutes, since such states have adopted the stakeholder-optional conception for ordinary corporations, and thus it is false to imply (as the enabling justification does) that ordinary corporations are constrained in considering the interests of various stakeholders. The corrosion critique does not, however, apply in Delaware and probably other non-constituency statute states, which have adopted the shareholder-only conception for ordinary corporations. The Article concludes that advocates of benefit corporations should stop using the enabling justification, which is subject to the corrosion critique in over half of all states (those with constituency statutes), and which justification is weak on other grounds as well. Focusing on the branding justification will direct transactional lawyers and businesses to the right reasons for considering becoming a benefit corporation, and will focus policymakers and scholars on the right questions to ask in evaluating the usefulness of benefit corporation statutes.

McDonnell, Brett H., The Corrosion Critique of Benefit Corporations (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=3450747

An announcement for adopters of the Klein, Ramseyer, Bainbridge Business Associations Casebook

Attention adopters of Klein, Ramseyer & Bainbridge Business Associations casebook: We have posted updated PowerPoint slides for the entire book to our website https://t.co/fWddPKpi8e Free to use. Request password from your Foundation Press account rep. #lawtwitter #corporatelaw

— Professor Bainbridge (@ProfBainbridge) September 20, 2019

My Review of Conservatives Against Capitalism: From the Industrial Revolution to Globalization by Peter Kolozi

Conservatives Against Capitalism: From the Industrial Revolution to Globalization by Peter Kolozi https://t.co/jisXENO5ru

— Professor Bainbridge (@ProfBainbridge) September 18, 2019

Yours Truly on The Economist's Podcast on Corporate Social Responsibility

This was a fun podcast to do. My thanks to @TheEconomist and @tamzinbooth. https://t.co/AeNIq0xMyQ

— Professor Bainbridge (@ProfBainbridge) September 18, 2019

Mesa Petroleum's T Boone Pickens has died, RIP

T. Boone Pickens Jr. Dies. Lots of memories, including the landmark case, Unocal v. Mesa Petroleum. And representing him at Baker Botts. And meeting him on Capitol Hill. And his role in Anatomy of a Merger. RIP https://t.co/i18Gg4ERip

— Gordon Smith (@professor_smith) September 11, 2019

I once talked to Pickens about old stories of his raids, particularly Gulf, and the reception he got then vs activists today. My favorite quote: "One said 'He’s a fast buck artist.' Who in the hell wants to be a slow buck artist?" https://t.co/yUx33lMgsR

— Dave Benoit (@DaveCBenoit) September 11, 2019

There’s a great moment in this documentary at about 17:20 where T Boone Pickens calls himself a geologist and Sir James Goldsmith calls himself a grocer. If you were engaged in the corporate takeover wars of the 1980s, that’s Robin Williams level comedy. https://t.co/8lyitpfpg6 pic.twitter.com/3V5L2qUthz

— Professor Bainbridge (@ProfBainbridge) January 4, 2019

A First Challenge to California’s Board Gender Diversity Law

Cydney Posner:

As reported here on Bloomberg, a conservative activist group has filed a lawsuit, Crest v. Alex Padilla, in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826, California’s Board gender diversity legislation. This appears to be the first litigation filed to challenge the new law. Framed as a “taxpayer suit,” the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. 

I don't know enough about taxpayer standing under California constitutional law to know whether the lawsuit will survive a standing challenge. Nor do I know enough about equal protection law under the California constitution to know if the suit has substantive merit.

Interestingly, the issue about which I do know something is not involved in the suit:

Interestingly, there was no challenge to the legislation as a violation of the “internal affairs doctrine,” which generally provides that the law of the state of incorporation governs those matters that pertain to the relationships among or between the corporation and its officers, directors and shareholders. The new gender diversity mandate would likely be viewed as a matter of internal corporate governance, and Section 2115.5 of the new law purports to make the mandate expressly applicable to foreign corporations with outstanding shares listed on a major U.S. stock exchange—to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated. Of course, because of standing issues, different plaintiffs would have been required to make a claim of that nature.

Nell Minow on the Business Roundtable Corporate Purpose

Ms Minow and I have frequently disagreed over the years, but we're largely on the same page in disparaging the new BRT statement on corporate purpose. She's got an excellent 6-point commentary over at the Harvard Forum that is well worth reading.