ProfessorBainbridge.com

The enemy of my enemy may not be my friend, but she's probably acceptable

I don't know very much about Elena Kagan other than that a couple of Harvard folks for whom I have a lot of respect think highly of her. When I look at some of the lefties who are opposing her and their reasons for doing so, however, I'm tempted to conclude that she's the most acceptable--from my perspective--candidate Obama is likely to put forward for the SCOTUS. You can tell a lot about a person from who their enemies are.

Quoted re St Warren's Disclosures

SEC regulations require that anyone who owns 5% or more of a class of an issuer's equity securities must file a disclosure statement on Schedule 13D. Item 4 of that Schedule requires that the filer:

State the purpose or purposes of the acquisition of securities of the issuer. Describe any plans or proposals which the reporting persons may have which relate to or would result in:

1. The acquisition by any person of additional securities of the issuer, or the disposition of securities of the issuer;
   
   
2. An extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the issuer or any of its subsidiaries;
   
   
3. A sale or transfer of a material amount of assets of the issuer or any of its subsidiaries;
   
   
4. Any change in the present board of directors or management of the issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board;
   
   
5. Any material change in the present capitalization or dividend policy of the issuer;
   
   
6. Any other material change in the issuer's business or corporate structure, including but not limited to, if the issuer is a registered closed-end investment company, any plans or proposals to make any changes in its investment policy for which a vote is required by Section 13 of the Investment Company Act of 1940;
   
   
7. Changes in the issuer's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the issuer by any person;
   
   
8. Causing a class of securities of the issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association;
   
   
9. A class of equity securities of the issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act; or

10. Any action similar to any of those enumerated above.
    
    

SEC Rule 13d-2(a) provides that:

If any material change occurs in the facts set forth in the Schedule 13D required by Rule13d-1(a), including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned, the person or persons who were required to file the statement shall promptly file or cause to be filed with the Commission an amendment disclosing that change. An acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed "material" for purposes of this section; acquisitions or dispositions of less than those amounts may be material, depending upon the facts and circumstances.

Accordingly, if your plans as set forth in Item 4 change, you have to file an amended Schedule 13D "promptly."

In the real world, this obligation has been honored mainly in the breach. The securities bar claims--without much in the way of regulatory or case law justification--that a large shareholder's decision to merge with the target need not be disclosed via an amended Schedule 13D until the parties have reached a more-or-less final agreement.

After years of ignoring this issue, the SEC is suddenly taking an interest in the question. And doing so via a very high profile target: Warren Buffet.

Dennis Berman of the WSJ explains:

The Securities and Exchange Commission is examining the disclosures Berkshire Hathaway Inc. made about its $26 billion purchase of Burlington Northern Santa Fe Corp. railroad, said people familiar with the matter.

For a number of weeks, the SEC has been looking at how Berkshire, helmed by billionaire investor Warren Buffett, informed other Burlington shareholders about its offer to buy the company in late October 2009, these people said.

At the time, Berkshire was already a 22.6% holder of Burlington stock. ...

Mr. Buffett amended his securities holdings on Nov. 3, 2009, the day the acquisition was announced. Securities filings show that he first indicated he could pay $100 for each Burlington share to company chief executive Matthew K. Rose on the evening of Oct. 23.

The transaction was a highlight of Mr. Buffett's career, and represented his largest-ever deal. Mr. Buffett saw rail transportation as a growing industry over a coming period of higher energy costs. Mr. Buffett declared it an "all-in wager on the economic future of the United States."

... Potential buyers are loath to disclose a potential deal, fearing that it could upset their ability to complete the transaction. The SEC, meanwhile, has shown only spotty attention to this area of the law over the years, say securities attorneys.

The SEC's corporation-finance division is handling the matter, and is so far just examining the facts of the transaction. The results of that analysis will determine whether SEC's enforcement unit would open an inquiry. Even if the SEC did decide to take action against Berkshire, the penalties would likely be minor, experts say. ...

To avoid losing a company to a competitor or driving up the target stock price, deal lawyers say, buyers often interpret the early-reporting requirements broadly, saying that offers aren't "proposals" until they have guaranteed financing, for instance. ...

Other lawyers take a harder view, including Stephen Bainbridge, a professor at the UCLA School of Law. "Once the large shareholder decides that it plans to make an offer, that is a material change," said Mr. Bainbridge. "You have a duty to amend your 13D filing promptly. There is no real dispute on this."

Quoted in WSJ re Congressional Trading

The WSJ quotes yours truly in connection with the Stop Trading on Congressional Knowledge Act:

The legislation, by Democratic Reps. Brian Baird of Washington and Louise Slaughter of New York, would prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job. It would also require them to make their financial transactions public within 90 days of a purchase or sale. ...

Some critics say the proposed legislation—the Stop Trading on Congressional Knowledge, or Stock, Act—wouldn't go far enough. Stephen Bainbridge, professor of securities law at UCLA Law School, said that even if the legislation passed, members of Congress could act on insider information relating to stocks on which there was no "pending or prospective" congressional action.

You can download my article The Stop Trading on Congressional Knowledge Act from SSRN.

Ribstein Schools Specter and Coffee

Larry Ribstein spanked (IMHO) Jack Coffee and Arlen Specter at yesterday's Senate hearings on fiduciary duties of brokers. If you want to judge for yourself, Larry provides links to the statements and the video of the hearing. He also sends thanks to our fellow biz blawggers Gordon and Ted for their plugs of his adventures in DC.

Congressional Insider Trading Bill Stalls

I'm simultaneously appalled but not surprised by news that the Stop Trading on Congressional Knowledge Act is again stalled in Congress. While our rulers impetuously drive towards ill-conceived Wall Street "reform," they continue to refuse to put their own house in order. 

A bill that would require speedier disclosure of stock trades by lawmakers has languished for years on Capitol Hill, suggesting Congress has little appetite for new rules on how its members manage their money.

The legislation, by Democratic Reps. Brian Baird of Washington and Louise Slaughter of New York, would prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job. It would also require them to make their financial transactions public within 90 days of a purchase or sale.

Currently, those disclosures are filed once a year, and insider-trading laws generally do not apply to lawmakers, leaving them free to trade on nonpublic information.

At issue is the lawmakers' private financial activity. A Wall Street Journal article on Tuesday reported that several members of the House and Senate and their spouses bet against financial and real-estate markets in 2008, when markets were crumbling. Lawmakers made dozens of investments in leveraged funds that are designed to go up in value as the market goes down.

There was no evidence that any lawmaker based personal financial transactions on nonpublic information received through congressional hearings, meetings with lobbyists or private briefings with other government officials. ...

A senior Democratic aide said "it's no surprise that the legislation is unpopular [on Capitol Hill]. It means more work, more oversight and more scrutiny for members." The Democratic aide said most of the public doesn't know that lawmakers can trade on nonpublic information, adding, "It's not like there is a lot of phone-banking going on telling them to get on this bill."

You can download my article The Stop Trading on Congressional Knowledge Act from SSRN. In it, I explain that:

A 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to - and were using - material nonpublic information about the companies in whose stock they trade.

Under current law, it is uncertain whether members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.

This article analyzes present law to determine whether members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech and Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the current version of the STOCK Act, proposing several improvements.

If members of Congress had any sense of propriety, the STOCK Act would have passed years ago. But since I'm finishing up an expanded article on the Act, I guess I'm glad they're a bunch of tools.

Shareholders versus Stakeholders

Judd Sneirson makes two claims about the law of corporate social responsibility that I think are incorrect:

The big, recurring debate in corporate social responsibility is between those who think that corporate decisionmakers must aim to maximize shareholder returns and those who think that corporate decisionmakers should act in the best interests of the entire firm—its shareholders, to be sure, but also its other, non-shareholder constituencies. When shareholder and non-shareholder interests diverge, the issue comes to a head. Where does corporate law stand?

In normal corporate governance (where the company is not undergoing a change in control governed by the Revlon lines of cases), the law is pretty clear: the business judgment rule will protect decisions meant to benefit the entire enterprise, even if shareholder profits are thereby sacrificed. Constituency statutes support this position, and, importantly, no corporate statute or case requires otherwise.

As I explain in Director Primacy: The Means and Ends of Corporate Governance, however, while the BJR may sometimes have the effect of insulating director decisions favoring stakeholders from judicial review, that is not the intent of the rule:

Kudos

Brad Smith has just been awarded one of the 2010 Bradley Prizes for "for achievements ... including the promotion of liberal democracy, democratic capitalism, and a vigorous defense of American institutions." I'm assuming Brad's stalwart defense of free speech when he was Chairman of the Federal Elections Commission and his continuing advocacy of the same are big reasons for this well-justified award. Kudos to an old friend from our days as Salvatori Fellows.

"But still...." A Fitting Epitaph for Freedom

From HuffPo:

The morning after the arrest of 30-year-old Faisal Shahzad at John F. Kennedy airport on Monday evening, the usual suspects in the GOP took to print and the airwaves to whack away at the president and his top lawyer. Rep. Peter King (R-N.Y.) mocked the idea that Attorney General Eric Holder might read the suspect his Miranda rights or consider trying him in a civilian court.

"I hope that [Attorney General Eric] Holder did discuss this with the intelligence community. If they believe they got enough from him, how much more should they get? Did they Mirandize him? I know he's an American citizen but still," King said.

"But still...." It would make a fitting epitaph for freedom.

A Question About Best Efforts Clauses in Employment Agreements

A question for any employment lawyers out there:

Employment agreements often contain a best efforts clause, such as the following: "employees shall devote their full working time, attention and efforts to the Company's business and shall not, directly or indirectly, engage in any other business or commercial activities which shall conflict or interfere with or distract from in any way the performance of the employee's responsibilities to the Company or which involve any activities similar to the business conducted by the Company."

Why are these clauses necessary in light of the fiduciary duties of agents? Indeed, I have seen many cases (e.g., Singer v General Automotive and Rash v. J.V. Intermediate, Ltd in which such clauses were present, but the court decided the case on the basis of fiduciary duties. So why is the clause needed? Belt and suspenders?

Implications of the Deepwater Horizon Oil Spill

I'm sympathetic to some of the claims of those who support off shore oil drilling. In particular, I'm strongly in favor of anything that reduces our dependence on crazed oil-state despots like Hugo Chavez. 

OTOH, the massive environmental and economic costs associated with the Deepwater Horizon spill makes clear that the long-term goal has to be moving to a post-oil economy. Even if you don't believe that human burning of carbon fuels doesn't contribute to global warming, it's clear that there are still massive risks associated with oil.

I continue to believe that small-scale nuclear power plants run by the Navy need to be the core of our energy policy:

The Navy already operates dozens of small nuclear reactors in aircraft carriers and submarines, with an outstanding record of safety and reliability. They have an established training program that churns out nuclear-capable officers.

By analogy to the Army Corps of Engineering, we could create a Navy Corps of Nuclear Engineering. It would build and operate dozens of small nuclear power plants around the country. To address security concerns, the first plants would be built on military bases, where the garrison can provide security. Licensing costs would be cut because the government would own and operate the plants.

Go read the whole post.

Are Synthetic CDOs Securities?

The predicate of the SEC's suit against Goldman Sachs is that the latter committed securities fraud. But that assumes that the synthetic CDOs involved in the case are in fact securities. JSC ponders the question, concluding that they probably are securities. I'm not sure, now that I think about it.

Academics Say Financial Reform Jumped the Gun

From the NY Times:

As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis. ...

“Until we understand what the causes were, we may be implementing ineffective and even counterproductive reforms,” said Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology. “I understand the need for action. I understand the need for something to be done. But what I expect from political leaders is for them to demonstrate leadership in telling the public that we need to proceed about this in a much more deliberate and rational and thoughtful way.” ...

David A. Skeel Jr., a corporate law professor at the University of Pennsylvania, said it would be a mistake for Congress to leave the drafting of these standards to the discretion of regulators.

“Regulators working right now will be tough,” Professor Skeel said. “But we know from history that as soon as this legislative moment passes, the ball is going to shift back into Wall Street’s court. As soon as the crisis passes, what inevitably happens is that the people that are paying the most attention are the banks.”

A second group of critics say the government helped to seed the crisis through its efforts to increase home ownership, including the role of Fannie Mae and Freddie Mac in buying mortgage loans to make more money available for lending. The companies are now owned by the government after incurring enormous losses on loans that borrowers could not afford to repay.

Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation.

“It’s outrageous,” he finally said.

Indeed, it is outrageous. But so too are the corporate governance provisions that apply to all Main Street firms and have nothing to do with Wall Street reform.