ProfessorBainbridge.com

Rethinking comments

In the comment section of my post on corporate personhood, "Greg" lets loose with a couple of strongly worded attacks on the position yours truly has staked out and on the state of yours truly's soul. It's a classic example of why I occasionally think about just banning comments. He's got a point, but it's expressed so uncivilly as to deter rather than invite reasoned discourse. (Yes, I know the principal post used words like "egregiously wrong" but I've explained why elsewhere.) Unlike big sites with regular commenters who have formed a sort of community, what I tend to get are mostly drive by shooters and trolls.

The drive by shooters are especially annoying. Consider lgm who complains of my Libya post: "Why are you not cheering for Obama the way you cheered for Bush?" Excuse me? Cheering for Bush? Memo to lgm: You're commenting on the site of the guy who wrote "Bush 43 has been a disaster for conservatives," in which I opined that:

In foreign policy, Bush opted to treat terrorism as a war rather than a problem for police and intelligence agencies. This choice remains problematic. Even if he was right to do so, he has waged the war incompetently. Osama bin Laden remains at large to taunt America. Even if bin Laden is essentially powerless, he remains a potent symbol. And the Taliban threatens to make a comeback in Afghanistan, where we seemingly have far too few troops to maintain control.

As for Bush’s war of choice in Iraq, it is clear that the administration lacked a plan for succeeding with the occupation. We still don’t have a handle on the security problems in Iraq. Our feckless handling of the country looks likely to breed another generation of jihadists, and there is no sign that Bush has a viable exit plan. Worse yet, he created an American gulag: Abu Ghraib, Guantanamo, secret renditions, the use of water-boarding and other coercive interrogation techniques that are little short of torture.

Making no effort to learn anything about the site before you start wailing away is classic troll behavior. It elicits as a response just a disgusted shrug instead of an effort to engage the argument (not that it amounts to much of an argument).

Drive by shooter Greg's even worse. He complains that the post on which he comments lacked "Even the slightest bit of negative effects from corporations." There's a search box in the upper right hand side of the site. Had Greg taken 30 seconds to search for corporate externalities, he would have discovered numerous posts that deal with various aspects of the point that "Corporate conduct doubtless generates negative externalities":

Cowen on CSR: Part 2

Obama Preaches the False Religion of Corporate Social Responsibility

Strine on Excessive Risk

Bainbridge on Corporate Social Responsibility: Selected Readings, which collects references and links to my voluminous scholarship on the issue.

Replying to Bruce Kesler and Tom Smith re Corporate Management and Social Responsibility

To mention just a few of the relevant posts. And if typing a search term into a box is too much effort, there's always the link to the category archive on corporate social responsibility.

But that's too much effort for a drive by troll like Greg. Easier just to complain that the one blog post he's bothered to read and then leave with a nasty parting shot. Well, frak him and the horse he came in on. He's joined the list of banned commenters.

In sum, I've developed a pretty thick skin over years of reading student evaluations and blog comments, but I'm getting seriously fed up with the state of the comments section of the blog.

I'd like to hear from regular readers/commenters like save the rustbelt, KG, Cornellian and so on before I do anything drastic. But I have to admit that right now I'm thinking pretty seriously about permanently closing the comment section.

Update: My thanks to all who provided feedback. Based on that feedback I'm going to keep the comment section open and, for the most part, stick to my existing policy:

My policy on comment moderation is based on the moment in the 1980 Presidential campaign when Ronald Reagan declared "I paid for this microphone."

This is not a public forum. I pay for it. So there are no rules. There is simply an arbitrary despotism in which freedom of speech depends mainly on how cranky I'm feeling at the moment. Granted, long time readers get more slack than newbies, but nobody has a "right" to be heard in this space any more than you would in my house. If you think that's censorship, you're wrong. It's just private property.

In order to deter the anonymous, drive by trolls (and cut down on the spam), however, I am going to require that commenters sign in using TypePad, Twitter, Facebook or another service. This is an experiment. If it gets too clunky, we'll reconsider it. In return for imposing this restriction, however, I am going to give up ex ante moderation, while reserving the right to delete comments that are racist, sexist, abusive, or just really annoying. So comments from registered users will appear immediately.

Also, to try to build more of a community in the comments, I plan to be a more active participant therein.

Product of the day

I use mine incessantly. I especially love that the blade section comes loose and can be washed in the dishwasher. Why did it take so long for immersion blender makers to figure that out?

Chopped liver, that's me

Leiter:

"National Jurist": I am one of 23 Law Profs "to take before you die"

Ascertained via a robust scientific method.  No Bainbridge or Kerr, who are also leading authories in their areas, as well as bloggers?  Curious indeed.

No corporate law professors at all, in fact.

Scalzi on corporate personhood

John Scalzi, one of my favorite science fiction writers, weighs in on the subject of corporate personhood. Let's take a look (Scalzi quotes in blue):

That corporate “personhood” exists is non-controversial, but their “personhood” is not of a manner that tracks precisely with being a real, human person.

No and yes. The notion that the corporation is a legal person is highly contested. I think the law is clear and that the corporation is a legal person. Others think that the corporation is not a legal person. They're entitled to their opinion, of course, even though they are egregiously wrong. Still others agree that the the corporation is a legal person under current law but argue that current law is ahistorial and/or bad public policy. They're wrong too, but less egregiously so. In any case, it is certainly true that corporate personhood doesn't track that of natural persons. The corporation lacks several of the constitutional rights possessed by natural persons, for example. See, e.g., Hale v. Henkel, 201 U.S. 43 (1906) (corporation gets Fourth Amendment protection against unreasonable searches and seizures but not protected by Fifth Amendment privilege against self-incrimination); Blake v. McClung, 172 U.S. 239 (1898) (corporation not covered by the privileges and immunities clause of the Fourteenth Amendment or of the comity clause of Article IV).

I don’t think it’s accurate or useful to describe their behavior with reference to the behavior of real live individual humans.

Huzzah. My point exactly:

In discussing corporations, it is easy to lose sight of the overriding fact—that firms are nothing more than groups of people. We often find ourselves ... engaged in a form of reification—treating firms as though they were things having an existence separate from the people who comprise them—when we say things like “General Motors did so and so.” General Motors is a firm; it is pure fiction to say General Motors did anything. Reification is often useful, or even necessary, because it permits us to utilize a form of shorthand—it is easier to say General Motors did so and so than to attempt in conversation to describe the complex process which actually may have taken place. Indeed, it is very difficult to think about large firms without reifying them. Reification, however, can be dangerous. It becomes easy to lose sight of the fact that firms aren't things, they are simply a group of people for whom the law has provided an off-the-rack relationship we call the corporation.

Back to Scalzi:

I disagree with the notion that most of them act like clinical sociopaths. Rather, I think the majority corporations act logically and rationally and in a manner consistent with the general reason for their existence. And the reason most corporations exist — and most large multinational corporations in particular — is simple: To maximize shareholder value.

The notion that corporations are sociopaths got widespread publicity in the egregiously awful documentary The Corporation. But how can a legal fiction be a sociopath? If's the dumbest form of reification. The corporation is a collection of people. It acts in accordance with the wishes of those people as expressed through the corporation's governance structure. Corporate actions thus will reflect the ethos of those who work for it. Unless you are prepared to say that some substantial majority of corporate America's leaders are all sociopaths, the claim that corporations are sociopathic thus makes no sense. And if you are prepared to say so, you clearly have never met them. I have met a lot of corporate leaders over the years and their ethics strike me as no worse (and in many cases) better than those of any one else.

Moreover, there is evidence that corporate leaders do have a social conscience: A 1995 National Association of Corporate Directors (NACD) report, for example, stated: “The primary objective of the corporation is to conduct business activities with a view to enhancing corporate profit and shareholder gain,” albeit subject to the qualification that “long-term shareholder gain” may require “fair treatment” of nonshareholder constituents. The 2000 edition of Korn/Ferry International’s well-known director survey found that when making corporate decisions directors consider shareholder interests most frequently, albeit also finding that a substantial number of directors feel some responsibility towards stakeholders. As someone who thinks shareholder wealth maximization within the boundaries of the law is the appropriate normative goal of board decision making, I don't endorse these views. But I pass them on because they do tend to undercut the sociopath claims.

In any case, corporations acting in ways their decision makers find economically rational have conferred massive benefits on mankind. “The limited liability corporation is the greatest single discovery of modern times... Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it.” So said Progressive Era leader Nicholas Murray Butler.

The corporation provided a vehicle for small and impecunious entrepreneurs to start and grow new businesses. Without the shield of limited liability, only very wealthy persons would dared go into business.

At the same time, however, the limited liability corporation provided an essential vehicle for vast industrial enterprises that produced the goods and services that we now take for granted in modern life. The numerous technological changes wrought by the Industrial Revolution, especially the development of modern mass production techniques in the nineteenth century, gave great advantages to firms large enough to achieve economics of scale. In turn, those advantages gave rise to giant industrial corporations. These firms required enormous amounts of capital, far exceeding the resources of any single individual or family. They could be financed only by aggregating many small investments, which was accomplished by selling stock or bonds to many investors—each of whom held only a tiny fraction of the firm’s total capital.

Limited liability corporations thus also contributed to society by making it possible for anyone to invest their savings in corporate stock. Under conditions of limited liability and diversification, shareholder passivity is possible because the shareholders stand to lose only a small portion of their individual wealth in the event one of their portfolio firms goes bankrupt. Indeed, if the bankruptcy of Firm A redounds to the benefit of competitor Firm B, diversified shareholders who own stock in both might even be better off. If the shareholders are personally liable for damages, however, they will want to monitor not only how the corporation conducts its business, but also the creditworthiness of their fellow investors. Hence, without the development of the limited liability corporation, we would not have a burgeoning class of investors holding corporate stock, because the costs of holding a diverse portfolio would be too large. The corporate form thus has done much to help the middle class build and preserve wealth.

The corporation's contribution, of course, comes not only in the material but also in the political. The corporation acts as a vital counterweight against the state – an alternative island of power within society. Hence, Novak argues the corporation has proven to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest. Or, as Novak put it, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, the corporation gives “liberty economic substance over and against the state.”

In sum, I stand with Micklethwait and Wooldrige's The Company: A Short History of a Revolutionary Idea, in believing that far from being a sociopath, the corporation is the "most important organisation in the world." It is "the basis of the prosperity of the west and the best hope for the future of the rest of the world."

Back to Scalzi:

To maximize shareholder value. There is also a general need to do so on a regular schedule; the one that is most familiar is a quarterly one, consistent with the SEC requirement that publicly-held corporations must file 10-Q forms. There may be other goals or aspirations a publicly-held corporation might have, but when it comes down to it, those are the two that count.

If you acknowledge that in the final analysis the purpose of a corporation is to maximize value to the shareholders, and make sure that each quarterly report shows such value maximization as its trend line, then their actions make perfect, reasonable sense — and might even if you employed them on a human scale. Why do corporations avoid paying corporate taxes whenever possible? Because that maximizes shareholder value — and don’t you take every possible tax deduction you can?

There are a couple of things going on here. First, the claim that corporations tend to act in ways that maximize short term rather than long term shareholder wealth (see, even I can't avoid reification).There is an active debate as to whether corporations really do have a short term focus. I tend to think that, to the extent there is a short term bias in corporate decision making, it results from the incentives created by paying executives mostly in stock options rather than the need to file a 10-Q. Having said that, the introduction of the quarterly report probably did eventually help shape the current focus on quarterly results.

Second, and more important, Scalzi is making the ethical claim that if it is okay for individuals to make economically rational decision--to be maximizers of their personal utility--it is okay for corporate decision makers to make decisions that are economically rational for the organization. To quote Adam Smith:

It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.

Yes, I know Smith said some nasty things about joint stock companies. So what? "Even Homer nods."

Back to Scalzi:

But! You say! Like Soylent Green, corporations are made of people!

Great line.

And he's right, of course. And that's a very good thing! Properly understood, the corporation is a set of relationships among people who have various stakes in the enterprise. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management coordinates the activities of all the firm’s stakeholders. The corporation thus is not a thing, but rather a nexus or web of explicit and implicit contracts establishing rights and obligations among the various people making up the firm. It is a fundamentally human endeavor. Indeed, the business corporation is really a community of human beings, acting together to provide goods and services to other human beings.

Within that larger corporate community, moreover, we often find sub-communities of people whose shared values and goals gives meaning to their lives. If it is true that we now bowl alone, it is also true that those who work for corporatio0ns do not work alone. Instead, As Michael Novak observes, “Some persons today are closer to their colleagues in the workplace than to their family.”

Back to Scalzi:

Here’s the deal: In order to change corporate behavior, you have to change the underlying goals of the corporation. If for example the reason for the existence of the corporation was not to maximize shareholder value but instead to offer steady, well-compensated employment to its workers here in the US, would that have a significant impact on how the corporation acted?

Bad idea. Very bad idea. Would most investors be willing to invest their retirement savings in corporate stock if this approach became law? If not, why not? Probably because most investors do not regard their investment in corporate stock as a charitable donation made to benefit nonshareholder constituencies. Their investment in corporate stock must bring them a rate of return commensurate with the risks they are taking. If it does not, they will divest stock in favor of other investments or, at least, monitor management more closely. In either case, the cost of equity capital will rise. Ironically, this approach to corporate goals thus will ultimately redound to detriment of nonshareholder constituencies and society as a whole, because the firms with the greatest need for infusions of equity capital are the very same small and medium size firms that produce most of our economic growth.

I don’t think you have to change the fundamental nature of corporations, personally, even if I think they’re stupid to think in quarterly terms rather than focus on longer-term strategy. What I do think you need to do is let their single-minded focus on maximizing shareholder value work for the overall benefit of the country. How you do this is of course a matter of some debate ....

That's Adam Smith's point, isn't it? Set up the rules of the game so that people's incentives direct them towards desirable ends. I happen to believe that the market does a better job of doing so than do government bureaucrats. I am right in so believing, of course, but I'm open-minded enough to admit that it is "a matter of some debate."

From the comments:

There’s also the matter that morality, civic duty, etc aren’t built into the ground rules for what it means to be a corporation.

Au contraire. As the American Law Institute's Principles of Corporate Governance Section 2.01(a) explains, a corporation “should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.” Subsection (b) thereof provides, however, that “[e]ven if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business: (1) Is obliged, to the same extent as a natural person, to act within the boundaries set by law; (2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and (3) May devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes." I think that's a pretty fair statement of the law.

... inasmuch as shareholders can sell at any time, they have an interest in gains now rather than corporate health later (i.e., when they may not be holding the stock).

If markets are even remotely efficient, the current market price will reflect the equilibrium beliefs of all investors as to the present discounted value of the stream of income the stock will generate in the future:

A company is valuable to stockholders for the same reason that a bond is valuable to bondholders: both are expected to generate cash for years into the future. Company profits are more volatile than bond coupons, but as an investor your task is the same in both cases: make a reasonable prediction about future earnings, and then "discount" them by calculating how much they are worth today. (And then you don't buy unless you can get a purchase price that's less than the sum of these present values, to make sure ownership will be worth the headache.)

Ergo, even the most short term focused shareholders have an interest in the long run.

In sum, I think it's fair to say that Scalzi did a better job of writing an essay on corporate personhood than I would do of writing a science fiction story. Even so, John, let's bear in mind Ricardo's law, shall we?

Will SEC Charge Fannie and Freddie execs?

Wash Po says it's close to doing so:

The Securities and Exchange Commission is moving toward charging former and current Fannie Mae and Freddie Mac executives with violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter. ... Over the past eight weeks, the SEC sent notices to the executives saying they may face civil charges. The SEC has not yet formally filed such charges and ultimately may choose not to.

The agency alleged that executives at both companies misled investors about their exposure to dangerous mortgage products, such as subprime loans, sources familiar with the matter said.

Fraud charges at the quasi-governmental GSEs will provide a golden opportunity to highlight the role government policy played in the housing and credit crises.

An interesting take on corporate personhood

SF writer John Scalzi:

Like Soylent Green, corporations are made of people!

Product of the Day

A cardboard emergency toilet:

As demonstrated by Top Gear's Jeremy Clarkson:

Law school rankings prompt usual whining

Whenever schools drop significantly in the US News law school rankings, it is obligatory for the dean to send out emails to the students and alumni explaining how US News is evil, the system is rigged, etcetera. With the ink hardly dry on the latest rankings, ATL passes along the Emory (dropped from 22 to 30) and Miami (60 to 77) editions. My favorite example of the genre, however, remains the letter former Northwestern Dweeb Dean David Van Zandt sent out the year Illinois topped Northwestern. It was a thing of beauty -- lathering lipstick on the proverbail pig. I wish I could find it on line, but have googled to no avail.

Galleon, Danielle Chiesi, and the vexing question whether sex counts as the personal benefit for Dirks purposes?

The Supreme Court addressed the scope of insider trading liability for those who tip inside information and those who trade on such tips in a 1983 decision called SEC v. Dirks. The court explained that:

We were explicit in [the earlier Chiarella case] in saying that there can be no duty to disclose where the person who has traded on inside information “was not [the corporation’s] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence.” Not to require such a fiduciary relationship, we recognized, would “[depart] radically from the established doctrine that duty arises from a specific relationship between two parties” and would amount to “recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.”

This formulation posed problems for tipping cases, because the tippee typically is not an agent or fiduciary of the issuer. To deal with that problem, the court held that a tippee’s liability is derivative of that of the tipper, “arising from [the tippee’s] role as a participant after the fact in the insider’s breach of a fiduciary duty.” A tippee therefore can be held liable only when the tipper breached a fiduciary duty by disclosing information to the tippee, and the tippee knows or has reason to know of the breach of duty.

The mere fact that an insider tips nonpublic information is not enough under Dirks. What Dirks proscribes is not merely a breach of confidentiality by the insider, but rather the breach of a fiduciary duty of loyalty to refrain from profiting on information entrusted to the tipper. Looking at objective criteria, courts must determine whether the insider-tipper personally benefited, directly or indirectly, from his disclosure. Secrist tipped off Dirks in order to bring Equity Funding’s misconduct to light, not for any personal gain. Absent the requisite personal benefit, liability could not be imposed.

In Dirks, the Supreme Court identified several situations in which the requisite personal benefit could be found. The most obvious is the quid pro quo setting, in which the tipper gets some form of pecuniary gain. Nonpecuniary gain can also qualify, however. Suppose a corporate CEO discloses information to a wealthy investor not for any legitimate corporate purpose, but solely to enhance his own reputation. Dirks would find a personal benefit on those facts. Finally, Dirks indicated that liability could be imposed where the tip is a gift. A gift satisfies the breach element because it is analogous to the situation in which the tipper trades on the basis of the information and then gives the tippee the profits.

The subtext of several insider trading cases over the years has been whether sex between tipper and tippee constitutes the requisite personal benefit. (I here manfully resist the temptation to refer to "friends with benefits")

As Bruce Carton observes, the issue has once again reared its prurient head in the Galleon insider trading case:

So what is the over/under on the number of people Danielle Chiesi will ultimately be alleged to have become "intimate" with in order to gain information for insider trading? We are already up to two and we're still on the first witness in the Rajaratnam trial. I'm conservatively setting the over/under at three.

As I wrote back in 2009 ("'Sexuality' and Insider Trading") as the Galleon news began to break, Chiesi--"a blond, blue-eyed former teenage beauty queen"--is said to have used her sexuality to build sources at male-dominated tech companies. She reportedly

wore short skirts, low-cut tops and outfits such as a "tight red suit with red fishnet stockings" as part of her effort to develop her network, Bloomberg says. According to the article, one of Chiesi's go-to "ploys" was to go barhopping with a group, and then peel a potential source off to talk to on the dance floor.

I noted at the time that this appeared to be the first time that "sexuality" had surfaced as a factor in the usually dry world of insider trading cases (with the exception of some "untrustworthy mistress" cases).

Actually, the SEC has pretty consistently taken the position that a tiper who gets sexual benefits from the tippee has gotten the requisite personal benefits to satisfy the Dirks test: See, e.g., SEC v. Thayer, [1983-1984 Transfer Binder] Fed. Sec. Litig. Rep. (CCH) ¶ 99,718 (S.D.N.Y. Jan 5, 1984) (complaint coyly alleged "personal private relationship” to show tipper benefitted from trades by his mistress/tippee); SEC Litig. Rel., Court Enters Final Judgment Against James J. McDermott And Kathryn B. Gannon (Jun. 7, 2005) (coyly noting that McDermott and porn star Gannon "were involved in a relationship" when the tips took place).

RIP Bill Stuntz

Harvard law announced the passing of Professor William Stuntz:

William Stuntz, a renowned scholar of criminal justice at Harvard Law School,  an evangelical Christian and a teacher much beloved by students and colleagues, died March 15 after a long battle with cancer.

Stuntz, 52, joined the HLS faculty in 2000 and was named the Henry J. Friendly Professor of Law in 2006. His influential scholarship over the past three decades addressed the full spectrum of issues related to criminal justice and procedure, from the overcrowding of prisons and racial disparities in incarceration to the appropriate role of faith, emotion and mercy in the penal system. He authored three dozen law review articles and essays on criminal law, and published articles and op-eds in the New York Times, Christianity Today, First Things, The New Republic and The Weekly Standard.  This fall,  Harvard University Press will publish a book he authored on the collapse of the criminal justice system. 

In a statement to the Harvard Law School community today, Dean Martha Minow observed: “Bill was extraordinary; his wisdom and compassion touched our lives in so many ways, large and small.  His gifts to society through his scholarship and teaching on criminal law and justice changed and improved academic inquiry and policies on the ground.  His scholarship and teaching of Christian legal theory and of confronting life's burdens inspire people in our community and well beyond it.  He imbued his work and his life with a vision of mercy and compassion.  The Harvard Law School, the larger community of scholars, and the communities connected through Bill's writings are better, wiser, kinder because of Bill.”

That kindness—and a personal style marked also by good humor and generosity—profoundly affected those who knew Stuntz or knew of him through his writing. As Minow wrote: “Among his many gifts to us was the grace with which he lived his life.  In knowing Bill, we couldn't help but be reminded to live life as our better selves.  Bill once wrote, ‘We understand that the world is not what it should be, and that our own capacities to understand it are severely limited.’  He described and lived his life in recognition of the need for humility and also for judgment and work to repair what we find around us.  His devotion to family and friends remains legendary. Those of us lucky enough to have been able to consult with him for personal or professional advice will never forget his insights and generosity.”

Go read the whole thing for an extended tribute to this wonderful man.

I had the privilege of meeting Bill in law school and to thereafter count him among my friends. He was a good man with infinite kindness and grace under terrible difficulties. I shall miss him more than I can say. My thoughts and prayers are with his family and friends.

More Dodd-Frank unintended consequences

Steven Davidoff finds another one; this time with respect to whether derivatives count as a form of beneficial ownership of stock.

David Zarig tags me in on the Schedule 13D ten day window

David Zarig reports that:

Hedge funds and other investors have been acquiring large stakes in a very small number of companies within the ten day window before they have to report the stake to the SEC. Wachtell wants the SEC to change that to a one day reporting requirement and then a two day standstill in the acquisition of further shares.  The SEC sounds like it is inclined to address the problem. 

He then tags me in:

I wonder what Professor Bainbridge, the corporate-law-should-protect-boards theorist, thinks about it.

First, some background. As I relate in Mergers and Acquisitions:

For the would be acquirer, keeping its interest in the target and takeover plans secret for as long as possible is crucial. As soon as a possible bid is disclosed, the target’s stock price jumps. Target management may begin erecting defenses against the bid or seeking alternative transactions. Other potential acquirers may begin looking at the target with the idea of making a competing bid, such that the initial bidder’s disclosures may simply serve to identify the target and publicize its vulnerability. Prior to adoption of the federal Williams Act in 1968, it was common for a prospective acquirer to quietly buy up substantial amounts of target stock before initiating its public offer. In some cases, bidders managed to acquire de facto control before going public. Today, however, Securities Exchange Act § 13(d) and the SEC rules thereunder form an early warning system effectively mandating early disclosure of impending control contests.

Securities Exchange Act § 13(d) requires that any person who acquires beneficial ownership of more than 5% of the outstanding shares of any class of voting equity securities registered under Securities Exchange Act § 12 must file a Schedule 13D disclosure statement within 10 days of such acquisition with the SEC, the issuer, and the exchanges on which the stock is traded.

The 10 day window begins to run on the day the acquiring person makes an acquisition which puts his holdings over the five percent threshold. Where a group is formed, the 10 day window begins to run on the day they enter into the requisite agreement to act in concert, provided their aggregate holdings exceed 5% on that date.

The statutory framework had a predictable timing effect. A bidder who intends or expects to make a hostile takeover will buy up to 4.9% as quietly as possible. It will not cross the 5% threshold until all its preparations are completed. Once it crosses that threshold, it will begin actively buying stock, attempting to acquire as many shares as possible without alerting the target during the 10 day window. Pre-filing acquisitions of 10% of the issuer’s stock are common and there are anecdotal accounts of pre-filing acquisitions of as much as 25% or more of the stock.

The 10 day window has never been changed in the 4 decades-plus that the rule has been in place. This despite the fact that most other reporting obligations have had time shaved off them ias modern technology has made it possible to prepare and file documents much faster. Insiders now have only two business days to file a Form 4 reporting transactions in their comany's shares. Issuers now have only 4 business days in which to file a Form 8-K reporting certain specified events. The 10 day filing window for Schedule 13D thus looks antiquated.

So I favor a narrowing of the window. Sunlight being the best disinfectnt and all that, after all. If an issuer can file an 8-K within 4 business days, why shouldn't an acquirer be able to file a Schedule 13D within at least that period.

The proposed one day filing period seems a bit too short. Maybe give acquirers the same 2 day window we give insiders?

Having said that, however, I agree with Zarig that the proposed 2 day standstill is unwarranted:

Why on earth should there be a two day stand-still?  It's bad enough that companies can resist the market for corporate control by creating anti-takeover defenses.  But their investors can sell.  This would be a market wide rule - the only way to sell is to leave and go to Europe.

Interestingly, the original Williams Act as proposed in 1965 would have included a 20-day standstill. It provided that a bidder could not acquire more than 5% of a target company's stock “until the expiration of twenty days after such person has" filed a disclosure document with the SEC and sent a copy to the issuer.

As I explain in Mergers and Acquisitions, such a provision would have been fatal to the nascent market for corporate control:

The first prospective bidder to identify a prospective target incurs significant search costs, which become part of the bidder’s overall profit calculation. By announcing its offer, however, the first bidder identifies the prospective target to all other potential bidders. Subsequent bidders thus need not incur the high search costs carried by the first bidder, perhaps allowing them to pay a higher price than is possible for the first bidder. If target resistance delays closing of the offer, subsequent bidders have a greater opportunity to enter the fray. At the very least, target resistance may force the initial bidder to raise its offer, reducing the gains to search.

A 20 day standstill would have given target management more than enough time to seek out white knights, erect poison pills and other defenses, and otherwise bollix up the bidder's plans.

The reasonable solution, it seems to me, is to reduce the 10 day day filing to, say, two days but with no standstill requirement. The modest number of shares a bidder is likely to pick up during the two day pre-fling period simply doesn't pose serious risks of abuse in most cases.

Product of the day

I love mine so much I got a second one for the office:

Is Delaware retreating from director primacy?

In a series of articles that culminated in my book, The New Corporate Governance in Theory and Practice, I developed a theory of corporate governance I call director primacy.

Since its inception, corporate law has separated ownership and control. Shareholders nominally own the corporation, but they are entitled to exercise almost nonce of the control rights normally associated with ownership or property. Instead, control of the corporation is vested by statute in the board of directors.

My work is premised on the assumption that corporate law tends towards efficient solutions. Accordingly, the question raised by the separation of ownership and control is why such separation has proven to have tremendous survival value.

The director primacy model was developed to provide just such a rationale. Grounded in Kenneth Arrow’s work on how organizations make decisions, this essay argues that shareholders lack both the information and the incentives necessary to make sound decisions. Overcoming the collective action problems that prevent meaningful involvement by the shareholders, moreover, would be difficult and costly. Under these conditions, Arrow predicts, it is “cheaper and more efficient to transmit all the pieces of information once to a central place” and to have the central office “make the collective decision and transmit it rather than retransmit all the information on which the decision is based.” The board of directors serves as the requisite central office.

In contrast to most other legal academics, who focus exclusively on the problem of accountability, my work therefore argues that a fully specified account of corporate law must also incorporate the value of authority—i.e., the need to develop a set of rules and procedures that provides the most efficient decision-making system. At the core of the director primacy model therefore lies the normative claim that the virtues of authority, in terms of corporate decision-making efficiency, can be ensured only by respecting the board’s decision-making authority.

The problem is that achieving an appropriate mix between authority and accountability is a daunting task. Ultimately, authority and accountability cannot be reconciled. At some point, greater accountability necessarily makes the decision-making process less efficient, while highly efficient decision-making structures necessarily entail non-reviewable discretion.

This is so because the power to review is the power to decide. As Arrow observed: “If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.” Shareholder oversight of board decisions—whether through the vote or in courts—would effect just such a shift. It contemplates outside review of management decisions, with shareholders or judges stepping in to make corrections and changes when management performance falters. If it were easy for shareholders to obtain such reviews, directors might be more accountable, but the board’s power of fiat would become merely advisory, rather than authoritative. The efficient separation of ownership and control that makes the modern corporation possible thus is inconsistent with routine shareholder review of board decisions.

The predictive power of director primacy is demonstrated in the host of legal doctrines and governance structures that resolve the tension between authority and accountability in the favor of the former. Because only shareholders are entitled to elect directors, for example, boards of public corporations are insulated from pressure by non-shareholder corporate constituencies, such as employees or creditors. At the same time, the diffuse nature of U.S. stockownership and regulatory impediments to investor activism insulate directors from shareholder pressure. As such, the board has virtually unconstrained freedom to exercise business judgment.

Other commenators have observed the close fit betwen my work and Delaware corporate jurisprudence:

“Although ‘Delaware has not explicitly embraced director primacy,’ the relevant statutory provisions and the [cases] have largely intimated that directors retain authority and need not passively allow either exogenous events or shareholder action to determine corporate decision-making.” Harry G. Hutchison, Director Primacy And Corporate Governance: Shareholder Voting Rights Captured By The Accountability/Authority Paradigm, 36 Loy. U. Chi. L.J. 1111, 1194 (2005).

"Delaware jurisprudence favors director primacy in terms of the definitive decisionmaking power, while simultaneously requiring directors to be ultimately concerned with the shareholders’ interest. ... The Delaware jurisprudence, while not explicitly affirming ‘director primacy,’ does implicitly leave the directors to make decisions with shareholders expressing their views only in specific and limited situations.” Kevin L. Turner, Settling The Debate: A Response To Professor Bebchuk’s Proposed Reform Of Hostile Takeover Defenses, 57 Ala. L. Rev. 907, 927-28 (2006).

A recent article in Corporate Board Member, however, suggests that Delaware courts are wandering away from the true gospel of director primacy in favor of the false prophets of shareholder primacy:

[Delaware's Court of] Chancery has been taking its lumps from ... critics who see a creeping erosion of its support for corporate prerogatives. The leading advocate for this position is Carney, a senior scholar who has written a standard textbook on M&A law. In 2008, he published a 94-page polemic entitled “The Mystery of Delaware Law’s Continuing Success,” arguing that: “The dominant phenomena present in recent Delaware judicial decisions are a loss of the courts’ faith in the good faith of directors and a significant erosion of the deference formerly granted under the business judgment rule.” He suggested firms would do better these days incorporating in one of the many states whose law is based on the Model Business Corporation Act, a generic code drawn up by the American Bar Association.

Chandler shot back a 36-page response maintaining that Carney “cherry-picked data to provide a superficially plausible characterization” of Delaware law. He then took to the road, debating Carney live at Emory and other law schools. Carney stuck to his guns, but gained personal respect for the chancellor. “He’s a lovely man,” he comments.

Yet more measured observers than Carney also observe a subtle tilt in Chancery’s rulings away from defending management and board dictat. A decision last year by Vice Chancellor Travis Laster, the court’s newest member, increased minority shareholder rights in tender offers and other actions, such as “freeze-out” consolidations of corporate subsidiaries.

Chandler himself has delivered two “anti-management” judgments in recent years that were overturned by the Supreme Court, suggesting he is gently pushing the juridical envelope for shareholders. Last October he found that a would-be acquirer, Air Products and Chemicals Inc., could use a shareholder resolution to shift the annual meeting of its target, Airgas Inc., with the aim of ousting a staggered board that opposed the purchase. Chandler reached a potentially more incendiary decision in late 2008 in the case of Lyondell Chemical Corp., whose board had approved an acquisition by European competitor Basell AF. He refused to dismiss a shareholder suit that sought personal damages from the directors on the grounds that they pushed through the unsolicited deal in just seven days without exploring the market for rival bids. The Supreme Court saw it differently and granted summary judgment for the defense. “The Court of Chancery has become more attuned to the complaints of shareholders,” one Delaware lawyer observes. "I don’t know whether the Supreme Court has.”

I have to finish my book Corporate Governance After the Crises for Oxkford, writie a book on the role and place of employees in corporate governance for Edward Elgar, and edit an anthology on insider trading for Elgar. I've also got to write an article on insider trading for that anthology and another article on the corporation sole for a symposium. All of which should keep me occupied until 2014 or thereabouts. In the interim, however, I plan on continuing to monitor the Delaware case law. If I detect a continued retreat from director primacy, a project taking them to task will go to the top of the pile.

The Life and Times of Delaware Chancellor William Chandler

A nice retrospective on Chandler's career as the chief judge on the nation's top corporate law court.

Conservatism is a big part of being best, says Chandler—who agreed to answer written questions for this article—keeping Delaware an island of stability amid the legal and attitudinal changes swirling beyond its borders. “The beauty of Delaware law is that it evolves slowly to meet or address changing conditions,” the chancellor explains. “Our constituents, shareholders, and firms can rely on this gradual and careful development and adjust their affairs in an orderly way.” ...

Chandler himself is widely revered as a scholar and a gentleman. ... Chandler’s opinions are “entertaining to read,” Yale’s Romano says, with erudite references to authors like Shakespeare and Lewis Carroll. In one recent decision, Chandler footnoted Macbeth to underline a chaotic line of reasoning by the plaintiff. Moreover, the chancellor’s courtroom demeanor is courteous and unruffled. “He is one of the most even-keeled people I have ever met,” one seasoned Delaware litigator observes.