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Carney v. Adams and the Future of Delaware Corporate Law

@ProfBainbridge on "Delaware's Judiciary in the U.S. Supreme Court" https://t.co/BUAhPlqSiR via @wlf

— Professor Bainbridge (@ProfBainbridge) December 13, 2019

We got a lovely compliment from Father Bill Dailey

questions together in a very humble and gracious way. I recommend the chapter which is both readable and insightful.https://t.co/jaMvDrsFTO

— Fr. Bill Dailey, CSC (@wrdcsc) December 10, 2019

Political Contributions by UCLA School of Law Faculty and Staff go 92.67% to Democrats/Liberal Groups

There's an article in the WSJ claiming that political diversity at Yale is 0%. Inspired by that headline, I went to opensecrets.org. I typed UCLA SCHOOL OF LAW in to the Occupation/Employer field of the advanced search engine and searched for all cycles covered by the search engine.

38 persons who claimed the UCLAW is their employer contributed solely to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs.

1 person contributed to both Republicans and Democrats. 

3 persons contributed exclusively to Republican candidates, the Republican Party, and various NRC affiliates.

As a result, 90.48% of UCLAW faculty and staff gave exclusively to Democrats.

The total amount contributed to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs was $97,959

The total amount contributed to Republican candidates, the Republican Party, and various NRC affiliates was $7750.

As a result, 92.67% of all contributions went to Democrats and affiliated groups.

(Note that some of my own contributions were attributed to UCLA as my employer, which probably was true for some of my colleagues. So the exact numbers may be off a bit.)

Lawyer run amok

This has to be seen to be believed.

Comments sections at ProfessorBainbridge.com reopened

Subject to the policies stated here.

Here's the thing I don't understand about the implied covenant of good faith and fair dealing

In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the court reviews the Delaware law of the implied covenant:

“In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). In describing the implied contractual obligation, the plaintiffs must allege facts suggesting “from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). That is because “[t]he implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” El Paso, 113 A.3d at 184. Accordingly, “[t]he implied covenant is well-suited to imply contractual terms that are so obvious . . . that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman, 155 A.3d at 361.

My question is simple: How do you know that the provision was left out because it was obvious? After all, if it was obvious, shouldn't the parties have put it in the contract? Put another way, how do you know the parties did think about it and decide to leave it out?

New Delaware guidance reaffirming the shareholder wealth maximization norm

Via our friend, prominent Delaware practitioner and blogger Francis Pileggi, we learned of Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), which he aptly describes as "notable for its application of the implied covenant of good faith and fair dealing in a partnership agreement that waives all conventional fiduciary duties, and replaces them with a contract-based standard of conduct. The decision ... is an exemplary exegesis of standards and nuances and subtleties that must be addressed before finding a breach of the implied covenant of good faith and fair dealing–especially when conventional default fiduciary duties in the alternative entity context are waived."

This decision is also worthy of attention because it finds a breach of the difficult-to-prove breach of the implied covenant of good faith and fair dealing. The court explains why, based on the facts presented, it is “reasonably conceivable” that the implied covenant was breached. See Slip op. at 48-49.  The court also reasoned that it was not surprising that there was no express term that barred manipulation of a “call price.”

If and when I ever get around to writing a long planned article on the implied covenant of good faith, this case will figure prominently. Having said that, however, here at PB.com we have been talking a lot about corporate purpose lately and so our attention was drawn to this passage from the opinion:

When exercising their authority, directors must seek “to promote the value of the corporation for the benefit of its stockholders.” “It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term.” Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135, 147 n.34 (2012). Decisions of this nature benefit the corporation as a whole and, by increasing the value of the corporation, increase the share of value available for the residual claimants. Nevertheless, “Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.”

Here we have more proof that those commentators who claim Delaware law does not mandate shareholder wealth maximization are either misinformed or disingenuous.

Nuns against director primacy

There are a handful of orders of Catholic nuns that have been active users of the SEC's shareholder proposal rule (Exchange Act Rule 14a-8). They're not happy with the SEC's plans to reform the rule to make it harder for shareholder gadflies to micromanage corporations, as Crux reports:

Sister Nora Nash, a longtime participant in the shareholder advocacy field, is part of a broad coalition of faith-based and other investors who are lining up to push the SEC to modify if not rollback the proposed steps they say would restrict their voice in seeking corporate accountability.

“I don’t think it will be a possibility for many institutions to be able to participate” at the same level of shareholder advocacy if the amendments to existing rules are implemented, said Nash, director of corporate social responsibility for her order, the Sisters of St. Francis of Philadelphia.

As I have argued:

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the traditional answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions.

This allocation of decision-making power follows from the basic principle that public corporations are not shareholder democracies. Although shareholders nominally own the corporation, they possess very few control rights normally associated with ownership. Instead, corporate law assigns virtually plenary decision-making authority to the board of directors and the subordinate managers to whom the board properly delegates authority.

This allocation of authority is essential if the corporation is to be run efficiently. Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”…

In principle, Rule 14a-8 contains protections designed to prevent it from being used as a tool for effectuating a shift in the locus of corporate decision making from the board to the shareholders. As the D.C. Circuit explained, the Rule's drafters recognized that “management cannot exercise its specialized talents effectively if corporate investors assert the power to dictate the minutiae of daily business decisions.”

Stephen M. Bainbridge, Revitalizing Sec Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016).

The problem is that the Rule has been interpreted in ways that allow the nuns and other shareholders to make proposals on a wide range of governance, social, strategic, and operational decisions that ought to be made by the board. 

Worse yet, many of the nuns' proposals are actually counter to the interests of the companies and the other investors in those companies. 

The SEC proposals put a band-aid on the problem. It's a highly imperfect solution, but at least it's start.

Christianity and Corporate Purpose

I've posted a new article to SSRN: Christianity and Corporate Purpose (December 1, 2019): https://ssrn.com/abstract=3496850

This essay is a chapter in a forthcoming book on law and Christianity. It compares and contrasts the law governing corporate purpose with the pertinent Christian teachings from Scripture and Tradition, with a special focus on catholic social thought.

Keywords: Corporate law, corporate purpose, corporate social responsibility, religion, Catholicism, Christianity, Catholic social thought

"Is There Real Virtue Behind the Business Roundtable’s Signaling?"

Economists Aneesh Raghunandan and Shiva Rajgopal have a great op-ed in today's WSJ:

The Business Roundtable made a big splash in August by “modernizing its principles on the role of a corporation.” No longer stressing the unique importance of maximizing shareholder value, the organization got 181 CEOs to sign a statement outlining a corporate commitment to various “stakeholders,” of which shareholders are only one, listed alongside customers, employees, suppliers and communities.

Why did they sign? We see two possibilities. Either they are genuinely committed to lead in socially conscious business practices, or they are trying to pre-empt criticism. One way to determine which explanation fits better is to compare the behavior of publicly listed signatory firms to that of public nonsignatory firms in the same industries, matched by firm size and financial performance.

They find four reasons to think that signatory firms are less socially responsible than non-signatories:

1. More violations of federal compliance.
2. Increase in share buybacks.
3. Larger market shares.
4. Weaker association between CEO compensation and stock-return performance.

They conclude:

These findings suggest that Business Roundtable signatories aren’t leaders in socially conscious environmental, social or governance practices or stakeholder orientation.

States extending or suspending statutes of limitation for priest abuse scandals again

Crux reports:

At the end of another long day trying to sign up new clients accusing the Roman Catholic Church of sexual abuse, lawyer Adam Slater gazes out the window of his high-rise Manhattan office at one of the great symbols of the Church, St. Patrick’s Cathedral.

“I wonder how much that’s worth?” he muses.

Across the country, attorneys like Slater are scrambling to file a new wave of lawsuits alleging sexual abuse by clergy, thanks to rules enacted in 15 states that extend or suspend the statute of limitations to allow claims stretching back decades. Associated Press reporting found the deluge of suits could surpass anything the nation’s clergy sexual abuse crisis has seen before, with potentially more than 5,000 new cases and payouts topping $4 billion.

I have been a consistent advocate of Church reforms intended to prevent sexual abuse by priests and other church officials. See my article Enhanced Accountability: The Catholic Church’s Unfinished Business, 53 University of San Francisco Law Review 165 (2019); available at SSRN: https://ssrn.com/abstract=3421795.

But I am also a strong advocate of statutes of limitation. It's important to remember that the Church has gotten its act together. Ninety-nine percent of newly reported cases occurred before 2000. So we're talking about decades-old cases. And there's a lot of good reasons why we generally don't allow cases to be brought decades after they allegedly occurred. See my memorandum against SB 131, which I wrote the last time California decided to throw the whole concept of fundamental fairness under the bus:

By extending the period within which suits may be brought indefinitely, and thus raising the specter of litigation based on decades-old events, SB 131 is completely antithetical to the proposition that litigation should be based on “reasonably fresh evidence.”  ...

SB 131 breaks faith with assurances given by the Legislature 10 years ago when it enacted SB 1779 (Burton), a one-time, one-year lifting of the statute of limitations for all of 2003 that allowed any victim of sexual abuse — regardless of how long ago it occurred — a second chance to file a lawsuit. SB 131 thus would revive claims for an unprecedented third time. ...

SB 131 is further flawed by its fundamental unfairness. SB 131 covers incidents of abuse that may have taken place in private schools, not public schools, so the 92 percent of California children who attend public schools aren’t covered. This discriminates against both public school children and operators of private schools. Why do public schools and teachers get a free ride, while their students get no relief and their private school counterparts face potentially staggering liability?

The financial impact cannot be ignored. As I pointed out in my law review article, The Bishop's Alter Ego: Enterprise Liability and the Catholic Priest Sex Abuse Scandal,(9) unlimited liability exposure for the Catholic Church will "impede, if not destroy, the ability of these ministries to serve the needs of their congregants. Indeed, the mere threat of liability might do so: 'Both church and society will suffer if the continuation of ministries prompted by compassion — ministries often involving risks — is stopped short by the nervous calculation of legal liabilities.'” (10)

As such, SB 131’s elimination of statutes of limitation raises serious concerns about the ability of religious organizations to freely exercise their religion, and thus has very serious implications for the free exercise rights that are supposed to be protected by the First Amendment.

The usual suspects--the trial lawyers, their front groups masquerading as victim representation advocates, and their anti-Church academic enablers will scream that I am being insensitive. While victims of decades-old cases deserve our sympathy, I am not sure we should bankrupt the Church to enrich trial lawyers bringing cases that are often suspect:

The problem is particularly acute in the area of childhood sex abuse litigation, where so-called “recovered memories” are often at issue. As courts have recognized, the length of time between the alleged event and the recovery of the purported memory is highly relevant to the credibility of that memory, with longer time periods being associated with reduced credibility. In addition, courts have recognized that “the presence or absence of objective, verifiable corroborative evidence of the event” is critical in assessing the credibility of a recovered memory. All too many of the cases authorized by SB 131 [and these new bills] likely will be so old that the defense may be unable to obtain evidence to challenge the credibility of purported recovered memories.

 

Insider Trading Under Sarbanes-Oxley § 807 and 18 USC § 1348

In my article, Regulating Insider Trading in the Post-Fiduciary Duty Era: Equal Access or Property Rights, in Research Handbook on Insider Trading 80 (Edward Elgar Publishing; Stephen M. Bainbridge ed. 2013), I argued that:

In Chiarella and Dirks, the Supreme Court based insider trading liability on a breach of a disclosure obligations arising out of a fiduciary relationship. The resulting narrowing of the scope of insider trading liability met substantial resistance from the Securities and Exchange Commission (SEC) and the lower courts. Through both regulatory actions and judicial opinions, the SEC and the courts gradually chipped away at the fiduciary duty rationale. In recent years, the trend has accelerated, with several developments having substantially eviscerated the fiduciary duty requirement.

The current unsettled state of insider trading jurisprudence necessitates rethinking the foundational premises of that jurisprudence from first principles. This essay argues that the correct rationale for regulation insider trading is protecting property rights in information. Although that rationale obviously has little to do with the traditional concerns of securities regulation, this article further argues that the SEC has a sufficiently substantial advantage in detecting and prosecuting insider trading that it should retain jurisdiction over the offense.

In the course of that article, I discussed insider trading Under Sarbanes-Oxley § 807 and 18 USC § 1348:

Section 807 of the Sarbanes-Oxley Act added a new § 1348 to the US Criminal Code, which provides that:

Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud any person in connection with any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934; or

(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934  or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934

shall be fined under this title, or imprisoned not more than 25 years, or both.[1]

Neither the text nor its sparse legislative history shed much light on what Congress intended it to do. About all one can say for sure is that Congress intended to significantly increase the penalties in securities fraud cases and to make it easier for prosecutors to prove such cases by eliminating the so-called “technical elements” of existing provisions such as § 10(b) and Rule 10b-5.[2] Is Powell’s fiduciary duty requirement such a technical element?

In US v. Mahaffy,[3] defendant stockbrokers tipped nonpublic information to defendant day traders in return for cash. The case could and should have been prosecuted under the misappropriation theory.  In Mahaffy, however, the prosecutors charged the defendants with violating § 1348. In upholding the charge as a proper one, the district court did not require the prosecution to prove that the tippers had breached a duty of confidence arising out of a fiduciary relationship owed either to the source of the relationship or to the persons with whom the tippees traded. Indeed, of the Supreme Court trilogy, the district court mentioned only O’Hagan and only in passing.[4]

“The Mahaffy decision [thus] reflects the first step of a potential sea change in the elements required of the government to prove a criminal insider trading violation.”[5] It casts aside, albeit sub silentio, the need for the prosecution to show a breach of a duty to disclose arising out of a fiduciary relationship or similar relationship of trust and confidence. Instead, by analogizing “§ 1348 to an honest services fraud case,” Mahaffy “requires only a material misrepresentation, not a violation of confidence.”[6] Although the SEC will be unable to avail itself of § 1348 potentially significant gutting of the fiduciary duty requirement, since the SEC lacks power to bring criminal cases, § 1348 thus must nevertheless be counted as having knocked one more brick out of the wall.

Now Karen Woody has posted an article length treatment of Section 807:

Since Sarbanes-Oxley, there has been a sleepy provision of the criminal code that could present an end-around to the morass of insider trading precedents under Rule 10b-5. Under 18 U.S.C. §1348, the government can bring an insider trading case under the more general umbrella of securities fraud, which has scant jurisprudential precedent. In other words, the heavily-litigated personal benefit test found in Dirks may not apply to a charge of insider trading under §1348. The elements required to prove a charge under §1348 are similar to other fraud-based offenses such as mail and wire fraud, health care fraud, and bank fraud. Whether §1348 was intended to apply to insider trading in particular is an open question, and a broader question is whether the jurisprudential interpretation for the elements of the crime of insider trading as defined under Rule 10b-5 should be imported into the judicial interpretation of § 1348. In other words, if the conduct that constitutes criminal insider trading under Rule 10b-5 exists only if the elements of the Dirks test are met, then a §1348 charge for criminal insider trading may create an entirely new scheme and definition of the crime. This Article analyzes the potential of this dual paradigm, and argues that, given the uncertainty and shifting parameters of insider trading prohibitions, application of §1348 to insider trading should be afforded the rule of lenity.

Woody, Karen E., The New Insider Trading (October 1, 2019). Arizona State Law Journal, Forthcoming; Washington & Lee Legal Studies Paper No. 2019-22. Available at SSRN: https://ssrn.com/abstract=3474570 or http://dx.doi.org/10.2139/ssrn.3474570

Recommended reading.