ProfessorBainbridge.com

Ragamuffin

Tobias Buckell was kind enough to send me a signed copy of his new science fiction novel Ragamuffin. I liked Crystal Rain, his first novel, to which Ragamuffin is a sequel, but I loved the latter.

From Publishers Weekly: Set in the same far-future universe as Crystal Rain (2006), in which the ruling alien Satrapy has confined humanity to the fringes of a confederation of worlds linked by wormholes, Buckell's second SF novel provides plenty of gun play and close calls for his heroes. The Satraps now seek the all-out destruction of the Raga, descendants of an Earth island culture. A young Raga woman, Nashara, attempts to evade capture from a determined pursuer, just as the wormhole to her home, Nanagada, mysteriously reopens. Meanwhile, the aliens who control Nanagada struggle for power, Teotl against Loa, while humans play them against each other, hoping to break their iron control. As the political situation destabilizes, Nashara and her friends appear, and total war for the right of humanity to live free becomes inevitable. Buckell plays with Caribbean and Aztec cultures, bending their exotic flavor to technology-flavored ends. Though the ending is never in doubt, the twisty ride getting there is a lot of fun.

Paul di Filippo gave Ragamuffin an "A":

Tobias Buckell comes as close as anyone in the opening chapters of this book to reproducing the frissons of one of my favorite novels: Earthblood (1966), by Keith Laumer and Rosel George Brown. The sense of humans downtrodden by aliens, with the lone-wolf protagonist bravely fighting to restore the race's glory—all of that comes across delightfully, and it's grand stuff. Like Laumer and Brown, Buckell also has a keen grasp of sensory detail. His future environments are incredibly rich in smells, tactility and visuals. One gets instantly immersed in the sense of a truly lived-in future. ...

Buckell keeps all his plates spinning wildly and entertainingly enough to make the whole scenario ultimately a cohesive, comprehensible and entertaining one. This book is full of wild-eyed action—such as Nashara's mad escape down the axis of the O'Neill colony—feats of bravery, exotic beings and odd ways of thought, startling uses of technology and bold manifestos on freedom. And although it comes to a satisfying conclusion, I expect that this is not the last we'll be seeing of these "duppy conquerors."

This is modern space opera at its finest. I can't wait for the next installment.

SOX Silliness at HuffPo: US Capital Markets are Becoming Less Competitive

From the Journal:

Treasury Secretary Henry Paulson, concerned that regulators may not be best positioned to properly oversee fast-moving capital markets, said he is launching an internal review to recommend changes to the regulatory system. "To maintain our capital markets' leadership, we need a modern regulatory structure complemented by market leaders embracing best practices," Mr. Paulson said in a statement. (Read the statement.)

Which prompted this silly burst of populism from Huffington Post Sean-Paul Kelley:

Nowhere in the article or Paulson's plan is any recognition of the real cause for the decline in our capital markets competiveness: greed. As I posted about three weeks ago, the reason Wall Street is losing out on listings, M&A deals and all the other goodies of globalization has absolutely nothing to do with Sarb-Ox. Can anyone honestly tell me that the market regs coming out of Brussels are less stringent than Sarb-Ox? No, you can't. The bottom line here is that Goldman, Morgan, Merrill, Citi, Bear Stearns, etc. charge excessive fees and they are loosing business because of it. Greed, plain and simple.

The trouble, of course, is that facts are stubborn things and the fast are that SOX and the totality of the US regulatory regime are reducing US competitiveness even viz-a-viz the EU markets overseen by the admittedly regulatory folks in Brussels. The best evidence on this score is from Kate Litvak's paper, Sarbanes-Oxley and the Cross-Listing Premium. Litvak looked at foreign firms that are cross-listed; i.e., have their shares listed for trading both in their home stock market and in the US. If Kelley's hypothesis were correct, passage of SOX should not have affected such firms differentially than non-cross listed foreign firms. Unfortunately for Kelley's hypothesis, Litvak found that:

the Tobin’s q and market/book ratios of foreign companies subject to SOX ... declined significantly, relative to Tobin’s q and market/book ratios of both (i) matching non-cross-listed foreign companies from the same country, the same industry, and of similar size, and (ii) cross-listed companies from the same country that are not subject to SOX ..., whose Tobin’s q and market/book ratios declined only slightly and increased in some specifications, compared to matching non-cross-listed companies.

Litvak concludes that her results are "consistent with the view that investors in foreign cross-listed companies expected SOX to have a net negative effect on the value of ... cross-listed firms." Hence, we can honestly tell Kelley that the regulations coming out of DC versus those coming out of Brussels are eroding the relative competitiveness of US capital markets.

Diversity

In a study bound to have a huge impact on debates over such topics as immigration policy and affirmative action in employment and education, Harvard political scientist Robert Putnam has reportedly found that:

... immigration and diversity not only reduce social capital between ethnic groups, but also within the groups themselves. Trust, even for members of one’s own race, is lower, altruism and community cooperation rarer, friendships fewer. The problem isn’t ethnic conflict or troubled racial relations, but withdrawal and isolation. Putnam writes: “In colloquial language, people living in ethnically diverse settings appear to ‘hunker down’—that is, to pull in like a turtle.” ...

Diversity does not produce “bad race relations,” Putnam says. Rather, people in diverse communities tend “to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more, but have less faith that they can actually make a difference, and to huddle unhappily in front of the television.” Putnam adds a crushing footnote: his findings “may underestimate the real effect of diversity on social withdrawal.”

Giuliani's Marriage and the Church

A few days ago, I noted that Pope Benedict XVI's aggressive posture on Catholic politicians who depart from Church teachings potentially presented problems for both "(a) Catholic Democratic candidates who support abortion rights and (b) Republican Catholic candidates who support the war in Iraq." As for Rudy Giuliani, of course, he potentially has problems on both scores. A long expose in the Village Voice, however, points out that Giuliani has an even more serious problem viz-a-viz the Church:

Married three times, Giuliani simply isn't the Catholic candidate he claims to be. He can't have a confessor. He can't receive the sacraments of penance, the Eucharist, or marriage. While bishops disagree about whether or not a Catholic politician who supports abortion rights can receive the sacraments, there is no disagreement about the consequences of divorcing and remarrying outside the church, as Giuliani did a few years ago.  ...

"Any Catholic who remarries without annulment" assumes an "irregular status" within the church, says Monsignor Joseph Giandurco, who until recently was the canon-law expert at the seminary run by the Archdiocese of New York. Also a judge on the appeals court of the archdiocese's marriage tribunal and a canon-law adviser to Cardinal Edward Egan, Giandurco declined to answer questions about Giuliani individually, but speaking in general terms about someone with Giuliani's marital history, Giandurco added: "The marriage is not recognized by the church, and the person cannot receive communion or confession. He's not supposed to play a public role in the church." While a baptized Catholic is "Catholic forever," says Giandurco, a remarriage "breaks the covenant and objectively contradicts what the marriage bond signifies."  ...

John Kerry, a Catholic whose prior marriage was annulled, was dogged by controversy about his abortion position during his 2004 run for president, with a dozen prelates publicly insisting that he could not receive communion. That led to the National Conference of Catholic Bishops adopting a position paper on "Catholics in Political Life" that left it up to individual bishops to make a determination in their diocese. What went largely unnoticed in the press, however, was an interim task force report written by Cardinal Theodore McCarrick of Washington, D.C., that June. McCarrick cited his exchanges with Cardinal Ratzinger, now Pope Benedict XVI.

"Cardinal Ratzinger outlines how a bishop might deal with these matters," said McCarrick, starting with efforts to inform such persons privately "that if they reject Catholic moral teaching in their public actions, they should not present themselves for Holy Communion until their situation has ended." Most significantly for Giuliani, Ratzinger used "the precedent of our teaching and practice in the case of a person in an invalid marriage" as his guide as to what should be done with a Catholic politician who is pro-choice. According to McCarrick, Ratzinger specifically characterized an invalid marriage as "circumstances in which Holy Communion may be denied" and likened it to abortion, making Giuliani a two-time target. Ratzinger said that "in these cases, a warning must be provided before the Eucharist can be denied."

Does this mean a Catholic voter shouldn't vote for Rudy? I discussed the obligations of Catholic voters in a 2004 post entitled Catholic Voting, in which I came down on the side of Oregon Archbishop Vlazny, whose statement on the reception of communion by pro-choice candidates and those who vote for them opined that pro-choice candidates and those who vote for them because of their pro-choice views should refrain from receiving the Eucharist. In contrast, the Archbishop says that those who vote for a pro-choice candidate despite the candidate's pro-choice position should not refrain:

Should Catholics who choose to vote for pro-choice politicians refrain from reception of the Holy Communion? If they vote for them precisely because they are pro-choice, I believe they too should refrain from the reception of Holy Communion because they are not in communion with the Church on a serious matter. But if they are voting for that particular politician because, in their judgment, other candidates fail significantly in some matters of great importance, for example, war and peace, human rights and economic justice, then there is no evident stance of opposition to Church teaching and reception of Holy Communion seems both appropriate and beneficial.

Presumably nobody would vote for Guiliani because he is out of communion with the Church due to the irregular status of his marriage. Catholics who wish to vote for Rudy because of his stand on substantive issues and/or because the positions of other candidates are unacceptable should be free to do so. Yet, surely Giuliani's irregular marital status is a relevant consideration. It goes to questions of character and judgment.

The Implications of the $54 Million Missing Pants Verdict

Remember the case in which Roy Pearson, a federal administrative law judge, sued his dry cleaner for millions of dollars for losing his pants? Of course you do. In reality, the claim that went to trial was consumer fraud. The dry cleaner had posted a sign, "Satsfaction Guaranteed." The judge was dissatisfied, ergo the sign constituted fraud. In turn, under Washington DC's consumer protection law, he was entitled to statutory damages of $1,500 per violation per day per defendant, which he claimed added up to over $50 million.

In a decision replete with common sense, Judge Judith Bartnoff dissected and dismissed Pearson's claim.

"A reasonable consumer would not interpret 'Satisfaction Guaranteed' to mean that a merchant is required to satisfy a customer's unreasonable demands or to accede to demands that the merchant has reasonable grounds to dispute," the ruling said. " . . . The plaintiff is not entitled to any relief whatsoever." (Link: WaPo)

Obviously, this is the right result. The sign was classic puffery, which no reasonable person would believe is meant to be taken literally. Hopefully the decision will call into question the many consumer "protection" laws who breadth and veagueness invite just this sort of frivoulous litigation. Yet, part of me is a little sad. Think of the opportunities we've lost:

• Run into a grumpy flight attendant on United, sue because you didn't experience the "Friendly Skies"
• Disappointed to find only gasoline in your tank, sue Exxon for failing to provide the "tiger in your tank" they promised
• Your insurance agent fails to hold you close, sue Allstate for not providing "good hands"
• Think Fox News leans GOP, sue them for not being "fair and balanced"
• Get bitter coffee dregs, sue Maxwell house for not being "good to the last drop"

Imagine, we might have had a world without puffery. (Yeah, right.)

Conservative Wins?

The Supreme Court today issued five decisions, summarized for us by The SCOTUS blog:

In the first of several rulings on the merits, the Court split 5-4 in deciding that a federal agency that is required by law to take a specific action under one federal law does not have to follow the conflicting mandate of the Endangered Species Act. The decision, written by Justice Samuel A. Alito, Jr., came in National Association of Home Builders v. Defenders of Wildlife (06-340) and a companion case.

In the second decision of the day, also written by Alito and again dividing the Court 5-4, the Justices ruled that taxpayers do not have standing to sue to challenge the White House program on federal aid to faith-based organizations. The Court did not overrule Flast v. Cohen, as two Justices in the majority urged it to do so. The case was Hein v. Freedom from Religion Foundation (06-157).

The third decision, written by Justice David H. Souter, found over two Justices' partial dissents that government employees carrying out their official duties and not for personal benefit are not subject to damage claims against them personally based on a lawsuit asserting that they violated the RICO anti-racketeering law or private property rights. The decision came in Wilkie v. Robbins (06-219).

The fourth ruling, written by Chief Justice John G. Roberts, Jr., over three full dissents and one partial dissent, declared that public school officials do not violate a student's free speech rights by punishing the student for words or actions that promote a drug message. The ruling in Morse v. Frederick (06-278) also should count as a 5-4 decision because Justice Stephen G. Breyer would have decided the case on qualified immunity grounds, and not reach the First Amendment issue.

The Court issued its fifth ruling of the day, concluding that a Wisconsin abortion rights group had a First Amendment right to aid during election season campaign ads that named a candidate running for the Senate. Three of the five Justices in the majority urged the Court to overturn the part of a 2003 ruling that upheld the constitutionality of the federal law restricting such radio and TV ads close to elections. The Chief Justice's main opinion, joined fully by Justice Alito, said the case did not provide an occasion to revisit that ruling. Justice Souter recited at length from the bench for the four dissenters -- who were in the minority in four of the five rulings on Monday. The ruling came in Federal Election Commission v. Wisconsin Right to Life (06-969) and a companion case.

The Justice's busy day prompted WaPo reporter Andrew Cohen to offer up a story headlined Conservatives go 4-4 today at the Supreme Court:

Legal and political conservatives hit for the cycle Monday morning when they "won" four long-awaited rulings from the United States Supreme Court. The Justices further chipped away at the wall that separates church and state, took some of the steam out of the McCain-Feingold campaign finance law, neutered federal regulators in environmental cases to the benefit of developers and slammed a high school kid who had the temerity to put up a silly sign near his high school.

Nonsense on stilts. Cohen's attempt to fit these cases into a pre-conceived left-right model is a few french fries short of a happy meal.

1. There were five opinions issued today, not 4.
2. Cohen criticized the majority for having "slammed a high school kid who had the temerity to put up a silly sign near his high school." This case shouldn't count as a "conservative win." After all, as AP reported "Conservative groups that often are allied with the administration [backed the student] out of concern that a ruling for Morse would let schools clamp down on religious expression, including speech that might oppose homosexuality or abortion."
3. Cohen says the majority "neutered federal regulators in environmental cases to the benefit of developers." The ESA case hardly amounts to a spaying of federal officials. It simply held that a conflict between the general rules of the ESA and a specific requirement of another statute is to be resolved in favor of the latter. The ruling only comes into play where it is not legally possible for a federal agency to "simultaneously obey" the relevant ESA provision and a conflicting mandatory provision of another statute.
4. Hein v. Freedom from Religion Foundation doesn't change First Amendment Establishment Clause doctrine or the so-called wall of separation. Instead, it's just a standing case. And it is well-established that taxpaters qua taxpayers generally do not have standing to challenge federal spending programs. Although there is an Establishment Clause exception to that rule, the plurality correctly indicates that it needs to be interpreted narrowly and the concurrence makes a convincing case for getting rid of it.
5. As for the case that "some of the steam out of the McCain-Feingold campaign finance law," anybody who cares about free speech ought to say "huzzah!"

Lawyer Billing Practices

Here's an interesting news report:

Think of an ethical billing dilemma in these terms:

A lawyer is on an eight-hour flight from Tampa to Seattle. The lawyer's client has agreed to pay for business travel. In flight, the lawyer reviews the file of another client and drafts several letters, which takes four hours.

Can the lawyer bill the first client for the eight-hour flight time and the second client for the four hours of case work?

The American Bar Association released an opinion in 1993 that said lawyers should never bill for hours that were not worked. Therefore, it would be unethical to bill for travel time and for work performed during that travel time.

A recent anonymous survey of 251 lawyers from across the country, however, shows that 46.6 percent of lawyers see nothing unethical about it. Of those lawyers who thought this was OK, nearly half said there was no need to tell the client about the practice, which many experts say is the real ethical problem.

PB.com has addressed this issue before, noting that:

Some stuff strikes me as clearly unethical

• Charging time you didn't actually spend on a matter (duh).
• Double billing: You're on a plane flying to meet a client, so you charge travel time, while working on another matter and charging another client for the same time.

But other stuff strikes me as arguably more unsavory than unethical:

• "But for" billing: But for the stupid client, I wouldn't be getting up at 4 AM to catch a flight, so I'm billing time from the moment my feet hit the bedroom floor (or leave the house).
• Strategic phone/email practices: When I was in practice, we billed in quarter-hour blocks. This let you pile up your phone messages. You'd set aside an hour, say at 4 PM, to return all the day's calls. Call Client A. "Is he there?" "No." "Tell him I called." That could be billed as 15 minutes. Repeat for the next hour. If you had enough phone emssages, you could clock several hours billable time during an hour or so of real time. Today, most firms bill in 5 or 6 minute blocks, so it wouldn't work as well. On the other hand, you could try the same thing with email.
• Recycling memos: You wrote a memo to Client A on some topic. You spent 100 hours researching and writing the memo, for which you charged Client A in full. Client B later asks for advice on the same topic. You send Client B essentially the same memo and charge it for 100 hours of work, even though you just changed the names. (According to Downey, the ABA regards this as unethical and maybe even illegal.)
• Billing time for billing: Charging the client for time spent preparing the bill. Ethical?
• Not stopping the clock when taking a coffee or potty break.

Some stuff strikes me as clearly unethical

• Charging time you didn't actually spend on a matter (duh).
• Double billing: You're on a plane flying to meet a client, so you charge travel time, while working on another matter and charging another client for the same time.

But other stuff strikes me as arguably more unsavory than unethical:

• "But for" billing: But for the stupid client, I wouldn't be getting up at 4 AM to catch a flight, so I'm billing time from the moment my feet hit the bedroom floor (or leave the house).
• Strategic phone/email practices: When I was in practice, we billed in quarter-hour blocks. This let you pile up your phone messages. You'd set aside an hour, say at 4 PM, to return all the day's calls. Call Client A. "Is he there?" "No." "Tell him I called." That could be billed as 15 minutes. Repeat for the next hour. If you had enough phone emssages, you could clock several hours billable time during an hour or so of real time. Today, most firms bill in 5 or 6 minute blocks, so it wouldn't work as well. On the other hand, you could try the same thing with email.
• Recycling memos: You wrote a memo to Client A on some topic. You spent 100 hours researching and writing the memo, for which you charged Client A in full. Client B later asks for advice on the same topic. You send Client B essentially the same memo and charge it for 100 hours of work, even though you just changed the names. (According to Downey, the ABA regards this as unethical and maybe even illegal.)
• Billing time for billing: Charging the client for time spent preparing the bill. Ethical?
• Not stopping the clock when taking a coffee or potty break.

Is Tony Blair going to convert to Catholicism? Blair's wife and kids are Catholics and Blair reportedly attends Mass far more often than Anglican services. According to a UK press report, Blair told Pope Benedict XVI that he is ready to convert and in response got a welcoming spanking on Iraq:

Tony Blair yesterday used his last official foreign engagement before leaving office to tell Pope Benedict he wanted to become a Roman Catholic, a Vatican source said last night.

But, in talks lasting more than half an hour, the outgoing Prime Minister was left in no doubt that the Pope took a dim view of his record in office. A statement issued afterwards by the Vatican said there had been a 'frank exchange of views'. This is highly unusual language for the Vatican, which habitually describes meetings between the pontiff and other heads of state and government as 'cordial'. 'Frank' is code for unstinting criticism.

Vatican sources said the Pope remained unmoved in his view that Blair had been wrong over Iraq. To an even greater extent than his predecessor, Benedict feels that Catholic politicians cannot separate their public lives from their private.

As we enter the 2008 presidential season, it will be interesting to see whether Benedict do anything substantial about (a) Catholic Democratic candidates who support abortion rights and (b) Republican Catholic candidates who support the war in Iraq. To be sure, there's a technical difference between the two in that Catholic candidates who support abortion rights are flouting magisterial teaching while those who support the war in Iraq are merely disagreeing with a prudential judgment. But that's a pretty fine - even legalistic - distinction. My guess is that Benedict will have something to say on both scores, which will make an already interesting race even more ... shall we say, entertaining.

Larry reviews The Complete Guide to Sarbanes-Oxley:

I've now obtained my very own copy and can vouch for its usefulness. If you are somebody who has to deal with corporate disclosure and you want a nutshell on what this SOX thing is all about, this is your book – a clear and concise description and background. It's a very useful companion to my and Henry Butler's policy analysis, The Sarbanes-Oxley Debacle. Check out, as well, Steve's recent Examiner column on SOX and risk-taking, and his list of SOX resources.

When I was in New York to promote The Complete Guide to Sarbanes-Oxley at a Manhattan Institute luncheon, I mentioned a number of SOX books and articles that I recommend. I promised to post them to the blog, so here they are:

Henry Butler & Larry Ribstein, The Sarbanes-Oxley Debacle

The Sarbanes-Oxley Act of 2002 (SOX) is a colossal failure, poorly conceived and hastily enacted during a regulatory panic. SOX should be repealed, but failing that, there is some hope that a recent lawsuit could provide the leverage to enact some major changes. The Sarbanes-Oxley Debacle seeks to salvage some lessons from the ruins of SOX.

Ehud Kamar et al., Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis

We investigate whether the Sarbanes-Oxley Act of 2002 (SOX) has driven firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, large firms do not appear to have been affected.

Ehud Kamar et al, Sarbanes-Oxley's Effects on Small Firms: What is the Evidence?

This article presents an overview of the regulatory regime created by the Sarbanes-Oxley Act of 2002 (SOX) and its implications for small firms. We review the available evidence in three distinct domains: compliance costs, stock price reactions, and firms' decisions to exit regulated securities markets.

Kate Litvak, Sarbanes-Oxley and the Cross-Listing Premium

This article tests whether the Sarbanes-Oxley Act (“SOX”) affected the premium that investors are willing to pay for shares of foreign companies cross-listed in the United States. I find that from year-end 2001 (pre-SOX) to year-end 2002 (after SOX adoption), the Tobin's q and market/book ratios of foreign companies subject to SOX (cross-listed on levels 2 or 3) declined significantly, relative to Tobin's q and market/book ratios of both (i) matching non-cross-listed foreign companies from the same country, the same industry, and of similar size, and (ii) cross-listed companies from the same country that are not subject to SOX (listed on levels 1 or 4), whose Tobin's q and market/book ratios declined only slightly and increased in some specifications, compared to matching non-cross-listed companies. Thus, the premium associated with trading in the United States was roughly constant, while the premium associated with being subject to U.S. regulation declined. The biggest losers were companies that were more profitable, riskier, and smaller, companies with a higher level of pre-SOX disclosure, and companies from well-governed countries. These results are consistent with the view that investors expected SOX to have greater costs than benefits for cross-listed firms on average, especially for smaller firms and already well-governed firms.

In a related paper, Kate Litvak, The Effect of the Sarbanes-Oxley Act on Foreign Companies Cross-Listed in the U.S., Journal of Corporate Finance (forthcoming 2007), I conduct an event study of the reaction of level-23 cross-listed companies, and find that their prices declined during SOX-relevant event periods, relative to level-14 cross-listed companies and non-cross-listed companies.

Roberta Romano, The Advantage of Competitive Federalism for Securities Regulation

In this incisive analysis of securities regulation, Roberta Romano demonstrates that the current approach toward United States securities regulation by the SEC should be revamped by implementing a regime of competitive federalism.

Of course, at the end of the day, your best SOX resource is still The Complete Guide to Sarbanes-Oxley.

Three prominent Wachtell Lipton lawyers offer a paper opining that:

Lucian Bebchuk's "case for increasing shareholder power" is exceedingly weak. It demonstrates that Bebchuk's proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bechuk's case is unsupported by any persuasive empirical data; that Bebchuk's premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower); and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach.

C'mon guys. Don't pull your punches. What do you really think? Anyway, yours truly is cited a few times:

Bainbridge persuasively argues in his separate reply to Bebchuk, in-formed IPO investors have historically chosen and continue to choose the default, director-centric governance terms provided under Delaware law.

Bebchuk ..., armed with little more than a theory and a smattering of concededly inconclusive data, urges a fundamental reapportionment of the balance of decisionmaking power between shareholders and directors. Make no mistake: Bebchuk is after a revolution. As Bainbridge puts it, Bebchuk wishes "to replace the existing, mostly permissive rules disempowering shareholders with a new set of mostly mandatory rules em-powering them."

A while back, Tor kindly sent me an ARC of John Scalzi's The Last Colony. A copy of the final version arrived in today's mail, which leads me to Paul di Filippo's middling review (grade B) of TLC. Here's what di Filippo liked:

Our protagonist is still the same lovable, embraceable, reluctant tough guy he was. Family life agrees with him and Jane. The relationship between the spouses and with their daughter are rich and real. Likewise, Scalzi's depiction of how the world works—group interactions among bickering colonists, government bureaucratic nonsense, etc.—is still sharp and accurate. His handling of action scenes—when they occur—is still vibrant. And his dialogue is always witty and forceful.

Here's what he didn't like:

This book is a mashup of two separate books, and they don't really play off each other very well.

The first book is an intended remake of Heinlein's Tunnel in the Sky (1955). This could have been a very good thing. Cast away without hope of return, settlers make a fresh life amid strange circumstances and dangers. But guess what? When the interstellar realpolitik comes onstage, this whole scenario is just thrown away. And I mean totally discarded. The intelligent natives of Roanoke, supposedly a major threat to the colony, simply vanish without explanation. And the colony is reunited with the rest of humanity, so the pressure to succeed on their own is off. It gives a sense of "Why bother?" about the whole enterprise. Why bother caring?

Next, the substance of the parallel narrative of the mashup, the Conclave and its demands, is a totally Keith Laumer/ Christopher Anvil kind of alien threat. While this worked perfectly in Scalzi's The Android's Dream (2006), here it's merely a straw man for Perry and company to dismantle. Moreover, much of the action of the engagements is told necessarily at a second-hand remove, since Perry is stuck on Roanoke. Gone is the immediacy of a combatant on the field of action.

I liked TLC a lot better than di Filippo did (see my generally positive review here), although I agree with di Filippo about the plot line involving the "intelligent natives of Roanoke." As I wrote in my review:

There's one subplot involving spears whose purpose I haven't quite figured out and about which I won't say more for risk of offering spoilers. But once you've read it, maybe you can explain to me whether that story line is anything more than local color.

When I first read TLC, moreover, I had a problem suspending disbelief with respect to one plot device (below the fold for those who want to avoid spoilers):

I wrote John as follows:

I didn't put this up on the blog yet, but I probably will after the book comes out (with appropriate spoiler warnings). I'm prepared to suspend disbelief on cloning and genetic engineering (easy), skipdrive (harder), consciousness transfers (harder still), and so on. But I have a very hard time suspending disbelief with respect to the basic plot device; namely, that the CU could successfully keep the Conclave and all the rest secret.

"Three men can keep a secret if two of them are dead."

Even the Soviets couldn't eliminate samizdat. You posit a universe in which there is space travel and trade. Once somebody on Phoenix knows about the Conclave, they'll eventually tell their domestic partner, who will tell their hairdresser, who will tell his client who's leaving on the next liner to Earth.

To which John kindly responded as follows, subsequently granting me permission to quote him:

I don't think they *are* keeping it secret among the people who travel and trade through the stars, and indeed in the book I use the "Three men can keep a secret..." rule to the CU's advantage to "leak"  the whereabouts of the colony. Remember also that in both TGB and TLC  there's discussion on how long the CU can keep status of the Conclave  officially off the books -- i.e., there's the expectation that sooner  or later the CU is going to have to come clean on the Conclave. And  finally, remember that the CU does intend to officially tell the  colonies of The Conclave... after they've destroyed it by vaporizing  its fleet and undermining its leadership.

What the CU is doing is keeping an "official" secret -- i.e., using information management to keep the Conclave's official status  ambiguous until the CU is ready to deal with information in a way  favorable to it. In managing information the CU has several  advantages. First, it maintains a monopoly on the timely transmission  of official information -- the colonies are light years from each  other so all data are sent through the CU fleet (and we know from the  book the CU is not above looking at the data). Second, it also  maintains a monopoly on trade and the space-going military, so it has  a very strong lever against colonial governments and official news  sources.

Third and, I think, importantly, the CDF is *not* comprised of  colonists -- the colonists don't see the horrors of war when their  boys and girls come back home, nor are there any homecoming soldiers  to tell them what's really happening on the front. Fourth, the vast 
majority of colonists do not  actually travel -- it's established  that most colonists don't actually leave their home worlds. None of  them join the military, and the size of the merchant fleet is small  relative to the colonist populations; the number of colonists working  in the CU federal government is also likewise very small relative to  the overall population. All of that works to slow down (but not stop)  the transmission of rumor and to decrease the verifiability of  information as it filters through colonial populations.

All of these elements are useful in the CU developing an official  story and having it better compete with more truthful rumors.  Moreover, the levers of official information management are more  *efficient* in the CU universe than in ours, since by dint of 
distances and the organization the CU brings to bear, which is simply  not possible in our world of porous national and informational borders.

Do I think there samizdat in the CU? I would assume there is,  although I don't spend any time on it because it's not core to the  plot. But I do think the CU would keep a tight rein on official news  by the carrot of appealing to the need for secrecy on one hand and  the stick of real economic sanctions on the other. Indeed, to go back  to the story about the "leak" of the colony's whereabouts, you'll  remember the CU informing the various colonial news organs that  officially the Roanoke Colony was still lost and that unofficially 
that going to print with the information that it had been found would  have impressively negative consequences.

In other words, there's the reality of the situation, and then  there's the "official" reality. If I remember correctly (I lent my  ARC to my mother in law), in respect to the Conclave, the eventual  official line is that there's some allied alien races pitting  themselves against the CU, but it's not called "The Conclave" and the  scope of the alliance is left ambiguous. There's just enough truth in  that to make the official line plausible and leave the rumors of the  Conclave still believable as mere rumors.

I think I'm persuaded. Certainly, I'm impressed.

On a corporate law professor list serv to which I subscribe, the following question was posted:

Are Revlon duties triggered if a corporation receives a(n unsolicited) time-sensitive offer for an acquisition (say 3 days) at an obviously large premium (say twice the valuation of the corporation) and the board is convinced that there can possibly be no better deal down the line?

If indeed Revlon duties are triggered, can one say they are satisfied anyway by procedurally structuring the deal to be an arms-length transaction e.g. getting proper fairness opinion that convinces the board it is in the best interests of the shareholders to sell? Differently put, does the board have to actually seek other potential acquirers (or at least spend some reasonable time seeking) for it to discharge its Revlon duties?

I replied as follows:

First, it’s important to note that the so-called "Revlon duties" are really just the general Unocal rules applied to a special fact situation. To be sure, the courts have waffled on this issue, although the latter interpretation seems to have ultimately prevailed. In 1987, for example, the Delaware supreme court drew a rather sharp distinction between the Unocal standard and what it then called "the Revlon obligation to conduct a sale of the corporation."  Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1338 (Del.1987). Two years later, however, the court indicated that Revlon is "merely one of an unbroken line of cases that seek to prevent the conflicts of interest that arise in the field of mergers and acquisitions by demanding that directors act with scrupulous concern for fairness to shareholders." Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). While subsequent cases and commentators still occasionally use phrases like “Revlon duties” or even “Revlon-land,” the court has continued to indicate that Revlon is properly understood as a mere variant of Unocal rather than as a separate doctrine. See my Unocal at 20.

Second, the Delaware Supreme Court appears to have settled on three triggers for invoking the Revlon variant of Unocal:

The directors of a corporation “have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders,” in at least the following three scenarios: (1) “when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company”; (2) “where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company”; or (3) when approval of a transaction results in a “sale or change of control.” In the latter situation, there is no “sale or change in control” when “‘[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.’” Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994) (citations and footnotes omitted).

The scenario posed doesn’t invoke any of the conditions for implicating Revlon. Hence, the relevant standard of review would be the requirement of process due care established by Van Gorkom. (See my Mergers and Acquisitions at 166-172.)

The more difficult issue, I think, would be whether the board in tihs scenario can do anything to lock up the deal for the favored bidder. Although Van Gorkom neither invalidated exclusivity provisions nor mandated inclusion of a fiduciary out, recent Delaware case law has trended in that direction. See my Mergers and Acquisitions at 179-92.

I find the Delaware courts’ hostility to no shops and other forms of exclusive merger agreements very puzzling.  Precommitment strategies are commonplace. Think of Odysseus lashing himself to the mast so that he can hear the Sirens’ song without running his ship aground. Hostility to precommitment strategies certainly does not follow a fortiori from the mere fact that directors are fiduciaries. Why should informed directors acting in good faith not be allowed to lash themselves to the mast of a particular deal? Case law in other jurisdictions allows them to do precisely that.  See, e.g., Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc., 741 F.2d 1555 (9th Cir. 1984), which specifically validated no shop clauses by permitting the target’s board to “lawfully bind itself in a merger agreement to forbear from negotiating or accepting competing offers until the shareholders have had an opportunity to consider the initial proposal.” Id. at 1564.

No Delaware court has yet offered a persuasive reason for their hostility to no shop clauses and the like. Instead, the invalidity of such strategies has been asserted by mere fiat. See my Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law.

In sum, I think the answer is that provided the board has gathered all material information reasonably available to it, the board may take this deal without shopping the company. However, the board’s ability to use lockups, no shops, best efforts clauses, and the like will be sharply constrained. As I explain in my Mergers and Acquisitions at 187-88:

Van Gorkom, however, does not require target boards to shop the company among competing bidders in order to satisfy their duty of due care. [FN: Van Gorkom, however, was decided before the duty to auction control emerged in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Subsequent Delaware decisions suggest that the Revlon auctioneering duty may apply where the merger would result in a change of control, such as where a publicly held corporation goes private by means of a merger. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003).] Rather, the court seems to be saying that target boards must have some credible basis for determining that a proposed merger is in the best interest of their shareholders. An unfettered market test is merely one means of satisfying the board's duties. A determination of the firm's "intrinsic value," preferably in the form of a fairness opinion by an independent financial expert, is another. A combination of both techniques is probably the safest approach, but the duty of due care should be satisfied even if only the latter device is utilized. [FN: Cf. In re TW Services, Inc. Shareholders Litigation, [Current] Fed. Sec. L. Rep. (CCH) 94,334 at 92,179 n.8 (Del. Ch. 1989) ("alternatives to an auction for collecting the information that directors need to make an informed choice may be appropriate"); In re Amsted Indus. Inc. Litigation, No. 8224, slip op. (Del. Ch. Aug. 24, 1988) (alternatives to auction procedures acceptable).]

-----
COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/13/2007 12:59:44 PM
Why doesn't this situation fit condition #3:  the transaction will result in a change of control?
 
In this situation, the board could fulfill its Revlon duties by agreeing to the premium offer, provided that it would have adequate time to conduct a post-signing market check.  The post-signing market check can be done through a no-shop that has a fiduciary out (although the transaction should be publicly announced and there must be sufficient time between announcement and closing for a topping bid to emerge).  See Barkan; Fort Howard; Pennaco; Wheelabrator.  Revlon, of course, is not a duty to auction, but just a duty to obtain the best price reasonably available.  If the board satisfied its care obligations on the front-end  and determined that this was a tremendous deal, then it could act reasonably by seizing it without an informal pre-signing market check or an auction so long as the deal protection measures would not unduly preclude a topping bid under Unocal (see Omnicare).
 
 
-----
COMMENT:
AUTHOR: Steve Bainbridge
URL: http://www.professorbainbridge.com
DATE: 06/13/2007 01:49:55 PM
I don't think the third Revlong trigger is per se present. I addressed this issue in Unocal at 20, where I asked:
"Does a change of control occur in a triangular transaction, in which the target ends up as a wholly-owned subsidiary of the acquirer? Does a change of control occur when target shareholders receive cash or debt securities, rather than surviving company shares? In both cases, there has been a change in the ownership structure, but are these charges sufficient to trigger Revlon or Unocal?
QVC provides some support for finding a change of control in these situations. For example, the QVC court refers to the “diminution of the current stockholders’ voting power” and to the loss of future control premia. Id. at 45. Elsewhere in the opinion, the court notes the effect of the transaction would be “to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom.” Id. at 48. Support for such an argument can also be found in Chancellor Allen’s Time decision, which found that the Time-Warner merger would not constitute a change of control because it was a merger of equals in which the existing Time shareholders’ interests were merely being diluted. Time, [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) at 93,280, reprinted in 15 DEL. J. CORP. L. at 739.
So long as the acquiring entity is publicly-held, however, neither triangular nor non-stock for stock mergers should be deemed a sale of control. Pre-Time cases in which Revlon was deemed applicable, other than auctions triggered by a proposed defensive merger with a white knight, were largely limited to management buyouts and defensive restructurings. See supra notes 149-54 and accompanying text. The former category necessarily involves the elimination of public ownership. The latter also typically involves a transfer of control from public investors to corporate insiders or their allies. Both then involve the creation of a large block of stock held by an identifiable control group. In contrast, where the acquirer in a negotiated merger is publicly held, voting control before and after the merger rests in the hands of the acquirer’s public shareholders. Control of the combined entity there remains “in a large, fluid, changeable and changing market.” QVC, 637 A.2d at 47 (emphasis omitted)."
-----
COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/14/2007 05:56:35 AM
If the scenario you pose is a cash offer and there is no target-company controlling stockholder, then Revlon applies.  See also In re Lukens Inc. S'holders Litig., 757 A.2d 720 (Del. Ch. 1999) (stating that a stock and cash transaction "in which over 60% of the consideration is cash" triggered duties under Revlon).  If you are talking about a stock-for-stock deal (including a reverse triangular where the target stockholders receive shares of the parent) and no control group emerges in the surviving parent entity, then it seems Revlon doesn't apply under Time Warner. 
 
I do think the Revlon doctrine has been mangled in an overly technical way.  Put more simply, directors have a duty to act in the best interests of the corporation and its stockholders.  In the context of a sale of the company, that duty requires them to obtain the best price possible.  That seems like common sense.  In the context of a merger of equals, that duty may require them to pursue a viable corporate strategy despite a subsequent unsolicited offer.
 
P.S. I enjoyed your Unocal at 20 article.
-----

... are two things investors don't care about, at least at Countrywide Financial. It's another defeat for the self-appointed shareholder rights activists. Yet, the geniuses in DC want to mandate say on pay despite the fact that shareholder resolutions on the subject are going down in flames all over the place:

... at most large companies whose shareholders had the chance to request similar say-on-pay referendums this spring, the idea was rejected.

Countrywide shareholders rebuffed the idea by an even larger margin than in 2006, when the measure also appeared on the proxy ballot. It got 43% of the vote last year.

The lack of majority backing for the measures has frustrated some corporate governance activists, who had high hopes at the start of proxy season that anger over executive compensation would be reflected in shareholders' balloting. Instead, most of the votes suggest "nothing close to the level of outrage being voiced at the start of the proxy season," said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises investors on corporate governance issues, including executive pay. ...

Despite the general lack of shareholder backing for the measures, some Democrats and Republicans in Congress want to make say-on-pay votes universal: A bill that has passed the House, and has been introduced in the Senate, would require every public company to hold an annual advisory referendum on executive compensation.

I wonder how our representatives will try finessing this one.

In a post examining the Hollywood left money behind a certain comedian's run for the US Senate, Paul characterizes Ben Stein as:

Legendary Ferris Beuhler actor, game show host, and brilliant conservative. Former speech writer for Richard Nixon and columnist for the American Spectator and Yahoo Finance, among other outlets. One of the finest writers around on politics, economics, and culture, as demonstrated in this listing. In particular, he's one the most articulate and persuasive speakers advocating the pro-life stance in the country.

I myself have not infrequently enjoyed Stein's wit and talent. Yet, of late, the guy seems to have gone nuts. First, he seems to have completely lost his grip on economic issues. Tom Kirkendall and Larry Ribstein have repeatedly ripped Stein's columns for the Times to tiny shreds. As the latter observed:

I find his continued presence in a national newspaper more disturbing than entertaining. Why, we must ask, do NYT editors not only give him the space, but let him call himself an economist?  Is this why the Times needs a governance structure that insulates its managers from markets?

But now Stein has well and truly gone off the deep end. How so, you ask? He's contributed to Al Franken's Senate campaign. Al Franken? Al Franken! The man who wants to do for Minnesota what he did for Air America?

Blair Spanked at the Tiber: Implications for US Catholic Candidates?

Is Tony Blair going to convert to Catholicism? Blair's wife and kids are Catholics and Blair reportedly attends Mass far more often than Anglican services. According to a UK press report, Blair told Pope Benedict XVI that he is ready to convert and in response got a welcoming spanking on Iraq:

Tony Blair yesterday used his last official foreign engagement before leaving office to tell Pope Benedict he wanted to become a Roman Catholic, a Vatican source said last night.

But, in talks lasting more than half an hour, the outgoing Prime Minister was left in no doubt that the Pope took a dim view of his record in office. A statement issued afterwards by the Vatican said there had been a 'frank exchange of views'. This is highly unusual language for the Vatican, which habitually describes meetings between the pontiff and other heads of state and government as 'cordial'. 'Frank' is code for unstinting criticism.

Vatican sources said the Pope remained unmoved in his view that Blair had been wrong over Iraq. To an even greater extent than his predecessor, Benedict feels that Catholic politicians cannot separate their public lives from their private.

As we enter the 2008 presidential season, it will be interesting to see whether Benedict do anything substantial about (a) Catholic Democratic candidates who support abortion rights and (b) Republican Catholic candidates who support the war in Iraq. To be sure, there's a technical difference between the two in that Catholic candidates who support abortion rights are flouting magisterial teaching while those who support the war in Iraq are merely disagreeing with a prudential judgment. But that's a pretty fine - even legalistic - distinction. My guess is that Benedict will have something to say on both scores, which will make an already interesting race even more ... shall we say, entertaining.

Ribstein's review

Larry reviews The Complete Guide to Sarbanes-Oxley:

I've now obtained my very own copy and can vouch for its usefulness. If you are somebody who has to deal with corporate disclosure and you want a nutshell on what this SOX thing is all about, this is your book – a clear and concise description and background. It's a very useful companion to my and Henry Butler's policy analysis, The Sarbanes-Oxley Debacle. Check out, as well, Steve's recent Examiner column on SOX and risk-taking, and his list of SOX resources.

SOX Resources

When I was in New York to promote The Complete Guide to Sarbanes-Oxley at a Manhattan Institute luncheon, I mentioned a number of SOX books and articles that I recommend. I promised to post them to the blog, so here they are:

Henry Butler & Larry Ribstein, The Sarbanes-Oxley Debacle

The Sarbanes-Oxley Act of 2002 (SOX) is a colossal failure, poorly conceived and hastily enacted during a regulatory panic. SOX should be repealed, but failing that, there is some hope that a recent lawsuit could provide the leverage to enact some major changes. The Sarbanes-Oxley Debacle seeks to salvage some lessons from the ruins of SOX.

Ehud Kamar et al., Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis

We investigate whether the Sarbanes-Oxley Act of 2002 (SOX) has driven firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, large firms do not appear to have been affected.

Ehud Kamar et al, Sarbanes-Oxley's Effects on Small Firms: What is the Evidence?

This article presents an overview of the regulatory regime created by the Sarbanes-Oxley Act of 2002 (SOX) and its implications for small firms. We review the available evidence in three distinct domains: compliance costs, stock price reactions, and firms' decisions to exit regulated securities markets.

Kate Litvak, Sarbanes-Oxley and the Cross-Listing Premium

This article tests whether the Sarbanes-Oxley Act (“SOX”) affected the premium that investors are willing to pay for shares of foreign companies cross-listed in the United States. I find that from year-end 2001 (pre-SOX) to year-end 2002 (after SOX adoption), the Tobin's q and market/book ratios of foreign companies subject to SOX (cross-listed on levels 2 or 3) declined significantly, relative to Tobin's q and market/book ratios of both (i) matching non-cross-listed foreign companies from the same country, the same industry, and of similar size, and (ii) cross-listed companies from the same country that are not subject to SOX (listed on levels 1 or 4), whose Tobin's q and market/book ratios declined only slightly and increased in some specifications, compared to matching non-cross-listed companies. Thus, the premium associated with trading in the United States was roughly constant, while the premium associated with being subject to U.S. regulation declined. The biggest losers were companies that were more profitable, riskier, and smaller, companies with a higher level of pre-SOX disclosure, and companies from well-governed countries. These results are consistent with the view that investors expected SOX to have greater costs than benefits for cross-listed firms on average, especially for smaller firms and already well-governed firms.

In a related paper, Kate Litvak, The Effect of the Sarbanes-Oxley Act on Foreign Companies Cross-Listed in the U.S., Journal of Corporate Finance (forthcoming 2007), I conduct an event study of the reaction of level-23 cross-listed companies, and find that their prices declined during SOX-relevant event periods, relative to level-14 cross-listed companies and non-cross-listed companies.

Roberta Romano, The Advantage of Competitive Federalism for Securities Regulation

In this incisive analysis of securities regulation, Roberta Romano demonstrates that the current approach toward United States securities regulation by the SEC should be revamped by implementing a regime of competitive federalism.

Of course, at the end of the day, your best SOX resource is still The Complete Guide to Sarbanes-Oxley.

Bebchuk's Case for Increasing Shareholder Power: An Opposition

Three prominent Wachtell Lipton lawyers offer a paper opining that:

Lucian Bebchuk's "case for increasing shareholder power" is exceedingly weak. It demonstrates that Bebchuk's proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bechuk's case is unsupported by any persuasive empirical data; that Bebchuk's premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower); and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach.

C'mon guys. Don't pull your punches. What do you really think? Anyway, yours truly is cited a few times:

Bainbridge persuasively argues in his separate reply to Bebchuk, in-formed IPO investors have historically chosen and continue to choose the default, director-centric governance terms provided under Delaware law.

Bebchuk ..., armed with little more than a theory and a smattering of concededly inconclusive data, urges a fundamental reapportionment of the balance of decisionmaking power between shareholders and directors. Make no mistake: Bebchuk is after a revolution. As Bainbridge puts it, Bebchuk wishes "to replace the existing, mostly permissive rules disempowering shareholders with a new set of mostly mandatory rules em-powering them."

Scalzi's Last Colony

A while back, Tor kindly sent me an ARC of John Scalzi's The Last Colony. A copy of the final version arrived in today's mail, which leads me to Paul di Filippo's middling review (grade B) of TLC. Here's what di Filippo liked:

Our protagonist is still the same lovable, embraceable, reluctant tough guy he was. Family life agrees with him and Jane. The relationship between the spouses and with their daughter are rich and real. Likewise, Scalzi's depiction of how the world works—group interactions among bickering colonists, government bureaucratic nonsense, etc.—is still sharp and accurate. His handling of action scenes—when they occur—is still vibrant. And his dialogue is always witty and forceful.

Here's what he didn't like:

This book is a mashup of two separate books, and they don't really play off each other very well.

The first book is an intended remake of Heinlein's Tunnel in the Sky (1955). This could have been a very good thing. Cast away without hope of return, settlers make a fresh life amid strange circumstances and dangers. But guess what? When the interstellar realpolitik comes onstage, this whole scenario is just thrown away. And I mean totally discarded. The intelligent natives of Roanoke, supposedly a major threat to the colony, simply vanish without explanation. And the colony is reunited with the rest of humanity, so the pressure to succeed on their own is off. It gives a sense of "Why bother?" about the whole enterprise. Why bother caring?

Next, the substance of the parallel narrative of the mashup, the Conclave and its demands, is a totally Keith Laumer/ Christopher Anvil kind of alien threat. While this worked perfectly in Scalzi's The Android's Dream (2006), here it's merely a straw man for Perry and company to dismantle. Moreover, much of the action of the engagements is told necessarily at a second-hand remove, since Perry is stuck on Roanoke. Gone is the immediacy of a combatant on the field of action.

I liked TLC a lot better than di Filippo did (see my generally positive review here), although I agree with di Filippo about the plot line involving the "intelligent natives of Roanoke." As I wrote in my review:

There's one subplot involving spears whose purpose I haven't quite figured out and about which I won't say more for risk of offering spoilers. But once you've read it, maybe you can explain to me whether that story line is anything more than local color.

When I first read TLC, moreover, I had a problem suspending disbelief with respect to one plot device (below the fold for those who want to avoid spoilers):

I wrote John as follows:

I didn't put this up on the blog yet, but I probably will after the book comes out (with appropriate spoiler warnings). I'm prepared to suspend disbelief on cloning and genetic engineering (easy), skipdrive (harder), consciousness transfers (harder still), and so on. But I have a very hard time suspending disbelief with respect to the basic plot device; namely, that the CU could successfully keep the Conclave and all the rest secret.

"Three men can keep a secret if two of them are dead."

Even the Soviets couldn't eliminate samizdat. You posit a universe in which there is space travel and trade. Once somebody on Phoenix knows about the Conclave, they'll eventually tell their domestic partner, who will tell their hairdresser, who will tell his client who's leaving on the next liner to Earth.

To which John kindly responded as follows, subsequently granting me permission to quote him:

I don't think they *are* keeping it secret among the people who travel and trade through the stars, and indeed in the book I use the "Three men can keep a secret..." rule to the CU's advantage to "leak"  the whereabouts of the colony. Remember also that in both TGB and TLC  there's discussion on how long the CU can keep status of the Conclave  officially off the books -- i.e., there's the expectation that sooner  or later the CU is going to have to come clean on the Conclave. And  finally, remember that the CU does intend to officially tell the  colonies of The Conclave... after they've destroyed it by vaporizing  its fleet and undermining its leadership.

What the CU is doing is keeping an "official" secret -- i.e., using information management to keep the Conclave's official status  ambiguous until the CU is ready to deal with information in a way  favorable to it. In managing information the CU has several  advantages. First, it maintains a monopoly on the timely transmission  of official information -- the colonies are light years from each  other so all data are sent through the CU fleet (and we know from the  book the CU is not above looking at the data). Second, it also  maintains a monopoly on trade and the space-going military, so it has  a very strong lever against colonial governments and official news  sources.

Third and, I think, importantly, the CDF is *not* comprised of  colonists -- the colonists don't see the horrors of war when their  boys and girls come back home, nor are there any homecoming soldiers  to tell them what's really happening on the front. Fourth, the vast 
majority of colonists do not  actually travel -- it's established  that most colonists don't actually leave their home worlds. None of  them join the military, and the size of the merchant fleet is small  relative to the colonist populations; the number of colonists working  in the CU federal government is also likewise very small relative to  the overall population. All of that works to slow down (but not stop)  the transmission of rumor and to decrease the verifiability of  information as it filters through colonial populations.

All of these elements are useful in the CU developing an official  story and having it better compete with more truthful rumors.  Moreover, the levers of official information management are more  *efficient* in the CU universe than in ours, since by dint of 
distances and the organization the CU brings to bear, which is simply  not possible in our world of porous national and informational borders.

Do I think there samizdat in the CU? I would assume there is,  although I don't spend any time on it because it's not core to the  plot. But I do think the CU would keep a tight rein on official news  by the carrot of appealing to the need for secrecy on one hand and  the stick of real economic sanctions on the other. Indeed, to go back  to the story about the "leak" of the colony's whereabouts, you'll  remember the CU informing the various colonial news organs that  officially the Roanoke Colony was still lost and that unofficially 
that going to print with the information that it had been found would  have impressively negative consequences.

In other words, there's the reality of the situation, and then  there's the "official" reality. If I remember correctly (I lent my  ARC to my mother in law), in respect to the Conclave, the eventual  official line is that there's some allied alien races pitting  themselves against the CU, but it's not called "The Conclave" and the  scope of the alliance is left ambiguous. There's just enough truth in  that to make the official line plausible and leave the rumors of the  Conclave still believable as mere rumors.

I think I'm persuaded. Certainly, I'm impressed.

Revlon Duties in Negotiated Acquisitions

On a corporate law professor list serv to which I subscribe, the following question was posted:

Are Revlon duties triggered if a corporation receives a(n unsolicited) time-sensitive offer for an acquisition (say 3 days) at an obviously large premium (say twice the valuation of the corporation) and the board is convinced that there can possibly be no better deal down the line?

If indeed Revlon duties are triggered, can one say they are satisfied anyway by procedurally structuring the deal to be an arms-length transaction e.g. getting proper fairness opinion that convinces the board it is in the best interests of the shareholders to sell? Differently put, does the board have to actually seek other potential acquirers (or at least spend some reasonable time seeking) for it to discharge its Revlon duties?

I replied as follows:

First, it’s important to note that the so-called "Revlon duties" are really just the general Unocal rules applied to a special fact situation. To be sure, the courts have waffled on this issue, although the latter interpretation seems to have ultimately prevailed. In 1987, for example, the Delaware supreme court drew a rather sharp distinction between the Unocal standard and what it then called "the Revlon obligation to conduct a sale of the corporation."  Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1338 (Del.1987). Two years later, however, the court indicated that Revlon is "merely one of an unbroken line of cases that seek to prevent the conflicts of interest that arise in the field of mergers and acquisitions by demanding that directors act with scrupulous concern for fairness to shareholders." Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). While subsequent cases and commentators still occasionally use phrases like “Revlon duties” or even “Revlon-land,” the court has continued to indicate that Revlon is properly understood as a mere variant of Unocal rather than as a separate doctrine. See my Unocal at 20.

Second, the Delaware Supreme Court appears to have settled on three triggers for invoking the Revlon variant of Unocal:

The directors of a corporation “have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders,” in at least the following three scenarios: (1) “when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company”; (2) “where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company”; or (3) when approval of a transaction results in a “sale or change of control.” In the latter situation, there is no “sale or change in control” when “‘[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.’” Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994) (citations and footnotes omitted).

The scenario posed doesn’t invoke any of the conditions for implicating Revlon. Hence, the relevant standard of review would be the requirement of process due care established by Van Gorkom. (See my Mergers and Acquisitions at 166-172.)

The more difficult issue, I think, would be whether the board in tihs scenario can do anything to lock up the deal for the favored bidder. Although Van Gorkom neither invalidated exclusivity provisions nor mandated inclusion of a fiduciary out, recent Delaware case law has trended in that direction. See my Mergers and Acquisitions at 179-92.

I find the Delaware courts’ hostility to no shops and other forms of exclusive merger agreements very puzzling.  Precommitment strategies are commonplace. Think of Odysseus lashing himself to the mast so that he can hear the Sirens’ song without running his ship aground. Hostility to precommitment strategies certainly does not follow a fortiori from the mere fact that directors are fiduciaries. Why should informed directors acting in good faith not be allowed to lash themselves to the mast of a particular deal? Case law in other jurisdictions allows them to do precisely that.  See, e.g., Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc., 741 F.2d 1555 (9th Cir. 1984), which specifically validated no shop clauses by permitting the target’s board to “lawfully bind itself in a merger agreement to forbear from negotiating or accepting competing offers until the shareholders have had an opportunity to consider the initial proposal.” Id. at 1564.

No Delaware court has yet offered a persuasive reason for their hostility to no shop clauses and the like. Instead, the invalidity of such strategies has been asserted by mere fiat. See my Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law.

In sum, I think the answer is that provided the board has gathered all material information reasonably available to it, the board may take this deal without shopping the company. However, the board’s ability to use lockups, no shops, best efforts clauses, and the like will be sharply constrained. As I explain in my Mergers and Acquisitions at 187-88:

Van Gorkom, however, does not require target boards to shop the company among competing bidders in order to satisfy their duty of due care. [FN: Van Gorkom, however, was decided before the duty to auction control emerged in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Subsequent Delaware decisions suggest that the Revlon auctioneering duty may apply where the merger would result in a change of control, such as where a publicly held corporation goes private by means of a merger. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003).] Rather, the court seems to be saying that target boards must have some credible basis for determining that a proposed merger is in the best interest of their shareholders. An unfettered market test is merely one means of satisfying the board's duties. A determination of the firm's "intrinsic value," preferably in the form of a fairness opinion by an independent financial expert, is another. A combination of both techniques is probably the safest approach, but the duty of due care should be satisfied even if only the latter device is utilized. [FN: Cf. In re TW Services, Inc. Shareholders Litigation, [Current] Fed. Sec. L. Rep. (CCH) 94,334 at 92,179 n.8 (Del. Ch. 1989) ("alternatives to an auction for collecting the information that directors need to make an informed choice may be appropriate"); In re Amsted Indus. Inc. Litigation, No. 8224, slip op. (Del. Ch. Aug. 24, 1988) (alternatives to auction procedures acceptable).]

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COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/13/2007 12:59:44 PM
Why doesn't this situation fit condition #3:  the transaction will result in a change of control?
 
In this situation, the board could fulfill its Revlon duties by agreeing to the premium offer, provided that it would have adequate time to conduct a post-signing market check.  The post-signing market check can be done through a no-shop that has a fiduciary out (although the transaction should be publicly announced and there must be sufficient time between announcement and closing for a topping bid to emerge).  See Barkan; Fort Howard; Pennaco; Wheelabrator.  Revlon, of course, is not a duty to auction, but just a duty to obtain the best price reasonably available.  If the board satisfied its care obligations on the front-end  and determined that this was a tremendous deal, then it could act reasonably by seizing it without an informal pre-signing market check or an auction so long as the deal protection measures would not unduly preclude a topping bid under Unocal (see Omnicare).
 
 
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COMMENT:
AUTHOR: Steve Bainbridge
URL: http://www.professorbainbridge.com
DATE: 06/13/2007 01:49:55 PM
I don't think the third Revlong trigger is per se present. I addressed this issue in Unocal at 20, where I asked:
"Does a change of control occur in a triangular transaction, in which the target ends up as a wholly-owned subsidiary of the acquirer? Does a change of control occur when target shareholders receive cash or debt securities, rather than surviving company shares? In both cases, there has been a change in the ownership structure, but are these charges sufficient to trigger Revlon or Unocal?
QVC provides some support for finding a change of control in these situations. For example, the QVC court refers to the “diminution of the current stockholders’ voting power” and to the loss of future control premia. Id. at 45. Elsewhere in the opinion, the court notes the effect of the transaction would be “to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom.” Id. at 48. Support for such an argument can also be found in Chancellor Allen’s Time decision, which found that the Time-Warner merger would not constitute a change of control because it was a merger of equals in which the existing Time shareholders’ interests were merely being diluted. Time, [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) at 93,280, reprinted in 15 DEL. J. CORP. L. at 739.
So long as the acquiring entity is publicly-held, however, neither triangular nor non-stock for stock mergers should be deemed a sale of control. Pre-Time cases in which Revlon was deemed applicable, other than auctions triggered by a proposed defensive merger with a white knight, were largely limited to management buyouts and defensive restructurings. See supra notes 149-54 and accompanying text. The former category necessarily involves the elimination of public ownership. The latter also typically involves a transfer of control from public investors to corporate insiders or their allies. Both then involve the creation of a large block of stock held by an identifiable control group. In contrast, where the acquirer in a negotiated merger is publicly held, voting control before and after the merger rests in the hands of the acquirer’s public shareholders. Control of the combined entity there remains “in a large, fluid, changeable and changing market.” QVC, 637 A.2d at 47 (emphasis omitted)."
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COMMENT:
AUTHOR: AnonCorpLawyer
DATE: 06/14/2007 05:56:35 AM
If the scenario you pose is a cash offer and there is no target-company controlling stockholder, then Revlon applies.  See also In re Lukens Inc. S'holders Litig., 757 A.2d 720 (Del. Ch. 1999) (stating that a stock and cash transaction "in which over 60% of the consideration is cash" triggered duties under Revlon).  If you are talking about a stock-for-stock deal (including a reverse triangular where the target stockholders receive shares of the parent) and no control group emerges in the surviving parent entity, then it seems Revlon doesn't apply under Time Warner. 
 
I do think the Revlon doctrine has been mangled in an overly technical way.  Put more simply, directors have a duty to act in the best interests of the corporation and its stockholders.  In the context of a sale of the company, that duty requires them to obtain the best price possible.  That seems like common sense.  In the context of a merger of equals, that duty may require them to pursue a viable corporate strategy despite a subsequent unsolicited offer.
 
P.S. I enjoyed your Unocal at 20 article.
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Executive Compensation and the Franchise ...

... are two things investors don't care about, at least at Countrywide Financial. It's another defeat for the self-appointed shareholder rights activists. Yet, the geniuses in DC want to mandate say on pay despite the fact that shareholder resolutions on the subject are going down in flames all over the place:

... at most large companies whose shareholders had the chance to request similar say-on-pay referendums this spring, the idea was rejected.

Countrywide shareholders rebuffed the idea by an even larger margin than in 2006, when the measure also appeared on the proxy ballot. It got 43% of the vote last year.

The lack of majority backing for the measures has frustrated some corporate governance activists, who had high hopes at the start of proxy season that anger over executive compensation would be reflected in shareholders' balloting. Instead, most of the votes suggest "nothing close to the level of outrage being voiced at the start of the proxy season," said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises investors on corporate governance issues, including executive pay. ...

Despite the general lack of shareholder backing for the measures, some Democrats and Republicans in Congress want to make say-on-pay votes universal: A bill that has passed the House, and has been introduced in the Senate, would require every public company to hold an annual advisory referendum on executive compensation.

I wonder how our representatives will try finessing this one.

Ben Stein

In a post examining the Hollywood left money behind a certain comedian's run for the US Senate, Paul characterizes Ben Stein as:

Legendary Ferris Beuhler actor, game show host, and brilliant conservative. Former speech writer for Richard Nixon and columnist for the American Spectator and Yahoo Finance, among other outlets. One of the finest writers around on politics, economics, and culture, as demonstrated in this listing. In particular, he's one the most articulate and persuasive speakers advocating the pro-life stance in the country.

I myself have not infrequently enjoyed Stein's wit and talent. Yet, of late, the guy seems to have gone nuts. First, he seems to have completely lost his grip on economic issues. Tom Kirkendall and Larry Ribstein have repeatedly ripped Stein's columns for the Times to tiny shreds. As the latter observed:

I find his continued presence in a national newspaper more disturbing than entertaining. Why, we must ask, do NYT editors not only give him the space, but let him call himself an economist?  Is this why the Times needs a governance structure that insulates its managers from markets?

But now Stein has well and truly gone off the deep end. How so, you ask? He's contributed to Al Franken's Senate campaign. Al Franken? Al Franken! The man who wants to do for Minnesota what he did for Air America?