ProfessorBainbridge.com

Astonishing Dodd-Frank statistic of the day

while the Panama Canal was built in 20 million man hours, Dodd-Frank’s already-written rules span 7,365 pages, at a cost of around 24 million labor annual labor hours.

via www.nationalreview.com

Democrat-run pension fund goes after Qualcomm for info on political spending

Yahoo finance reports that:

New York State's $150-billion public pension fund has sued Qualcomm Inc., seeking to force the chipmaker to reveal its political spending, according to the state comptroller.

The suit was filed late on Wednesday in Delaware Court of Chancery, after Qualcomm refused the request by the New York State Common Retirement Fund -- a Qualcomm shareholder -- to inspect records detailing the use of corporate resources for political activities, said state comptroller Thomas DiNapoli, who oversees the fund.

"Without disclosure, there is no way to know whether corporate funds are being used in ways that go against shareholder interests," DiNapoli, a Democrat who is up for re-election in 2014, said in a statement.

The suit opens a new front in the fight over corporate political spending, which has risen dramatically since the U.S. Supreme Court's 2010 ruling in Citizens United.

In a way, it's sort of interesting that Democrat DiNapoli is going after Qualcomm. After all Qualcomm co-founder and ex-boss Irwin Jacobs is a huge Obama donor. But I don't think that renders the suit apolitical.

In any case, if the issue goes to court, things could get very interesting from a doctrinal point of view. As I explain in Corporation Law, DGCL § 220(b) authorizes shareholders to inspect the corporation’s stockholder list and other books and records upon making a written demand setting forth a "proper purpose" for the request. The statute further defines a "proper purpose" as one "reasonably related to such person's interest as a stockholder." If the corporation denies the shareholder access to its records, the shareholder may sue in the Chancery Court. Under subsection (c), where the shareholder only seeks access to the shareholder list or stock ledger, the burden of proof is on the corporation to show that the shareholder is doing so for an improper reason. Where the shareholder seeks access to other corporate records, however, the shareholder must prove that he is doing so for the requisite proper purpose.

Attempts to investigate alleged corporate mismanagement are usually deemed proper, although the shareholder must have some factual basis for making the request and is not allowed to conduct a fishing expedition. See, e.g., Nodana Petroleum Corp. v. State, 123 A.2d 243, 246 (Del.1956); Helmsman Mgmt. Servs., Inc. v. A & S Consultants, Inc., 525 A.2d 160, 165 (Del.Ch.1987); Skouras v. Admiralty Enters., Inc., 386 A.2d 674, 678 (Del.Ch.1978).

Improper purposes include attempting to discover proprietary business information for the benefit of a competitor, to secure prospects for personal business, to institute strike suits, and­—most pertinently to present purposes—to pursue one's own personal social or political goals. Tatko v. Tatko Bros. Slate Co., 569 N.Y.S.2d 783 (App.Div.1991).

The latter improper purpose—pursuit of noneconomic social or political goals—has proven an especially problematic subject for courts. In the well known State ex rel. Pillsbury v. Honeywell, Inc. decision, the plaintiff belonged to an antiwar group trying to stop Honeywell from producing anti personnel fragmentation bombs for the military. 191 N.W.2d 406 (Minn.1971) (interpreting Delaware law). After buying some Honeywell stock, plaintiff requested access to Honeywell's shareholder list and to corporate records relating to production of such bombs. In denying plaintiff access to those records, the court emphasized that plaintiff's stated reasons were based on his pre existing social and political views rather than any economic interest. Accordingly, the court carefully limited its holdings to the facts at bar: "We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long or short term economic effects on Honeywell resulting from the production of war munitions." The court further noted that the "suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell." As such, Honeywell puts more emphasis on proper phrasing of one's statement of purpose than on the validity of the purpose itself. So long as one's social agenda can be dressed up in the language of economic consequences, one gets access to the list.  See, e.g., Conservative Caucus Research, Analysis & Education Foundation, Inc. v. Chevron Corp., 525 A.2d 569 (Del.Ch.1987) (a political group successfully sought access to Chevron's shareholder list for the stated purpose of warning its fellow "stockholders about the allegedly dire economic consequences which will fall upon Chevron if it continues to do business in Angola").

Does this formalistic approach make sense? The Delaware Chancery Court seems to think not, as at least one Chancery decision opines that Delaware law has de facto rejected Honeywell's requirement that the shareholder's purpose must relate to the "enhancement of the economic value of the corporation." Food & Allied Serv. Trades Dep't, AFL-CIO v. Wal-Mart Stores, Inc., 1992 WL 111285 at *4 (Del.Ch.1992).

My guess is that the NY pension fund will be smart enough to claim they’re motivated solely by economic concerns rather than admitting that this is all part of the left’s effort to silence corporate political speech.

If so, Qualcomm’s best bet would be to argue that the request is too broad. The Delaware Supreme Court has held, however, that a request to access such records must be very narrowly tailored: “A Section 200 proceeding should result in an order circumscribed with rifled precision.” Security First Corp. v. U.S. Die Casting and Development Co, 687 A.2d 563 (Del.1997).

In addition, Qualcomm should argue that in the absence of any facts suggesting breach of duty on the part of management that the pension fund is engaged in a fishing expedition. Cf. Cooke v. Outland, 144 S.E.2d 835, 842 (N.C.1965) ("Considering the huge size of many modern corporations and the necessarily complicated nature of their bookkeeping, it is plain that to permit their thousands of stockholders to roam at will through their records would render impossible not only any attempt to keep their records efficiently, but the proper carrying on of their businesses.").

An insufficiently narrow fishing expedition should not be allowed, especially given that we all know what DiNapoli is really up to. 

Pileggi's Top Delaware Corporate Decisions of 2012

Francis Pileggi has posted the eighth annual edition of his invaluable summary of the top Delaware corporate decisions of the year. As always, it is a must read. So go read it right now.

SEC versus Citizens United

JW Verret has a great column in today's WSJ on why the SEC shouldn't try circumventing Citizens United via disclosure rules.

Bainbridge Books for Business Associations

Taking Business Associations, Corporation law, or the like? Then you need:

Becoming Europe

Last week's Economist opined that:

FOR the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. In the White House and on Capitol Hill there has been incredulity that Europe’s politicians could be so incompetent at handling an economic problem; so addicted to last-minute, short-term fixes; and so incapable of agreeing on a long-term strategy for the single currency.

Those criticisms were all valid, but now those who made them should take the planks from their own eyes. America’s economy may not be in as bad a state as Europe’s, but the failures of its politicians—epitomised by this week’s 11th-hour deal to avoid the calamity of the “fiscal cliff”—suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s ....

Apropos of which, Sam Greeg's new book Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future is a must read. Here's the summary:

“We’re becoming like Europe.” This expression captures many Americans’ sense that something has changed in American economic life since the Great Recession’s onset in 2008: that an economy once characterized by commitments to economic liberty, rule of law, limited government, and personal responsibility has drifted in a distinctly “European” direction.

Americans see, across the Atlantic, European economies faltering under enormous debt; overburdened welfare states; governments controlling close to fifty percent of the economy; high taxation; heavily regulated labor markets; aging populations; and large numbers of public-sector workers. They also see a European political class seemingly unable—and, in some cases, unwilling—to implement economic reform, and seemingly more concerned with preserving its own privileges. Looking at their own society, Americans are increasingly asking themselves: “Is this our future?”

In Becoming Europe, Samuel Gregg examines economic culture—the values and institutions that inform our economic priorities—to explain how European economic life has drifted in the direction of what Alexis de Tocqueville called “soft despotism,” and the ways in which similar trends are manifesting themselves in the United States. America, Gregg argues, is not yet Europe; the good news is that economic decline need not be its future. The path to recovery lies in the distinctiveness of American economic culture. Yet there are ominous signs that some of the cultural foundations of America’s historically unparalleled economic success are being corroded in ways that are not easily reversible—and the European experience should serve as the proverbial canary in the coal mine.

A Game of Thrones question

Rewatching Game of Thrones on HBO got me to wondering about the books. Specifically, how can George RR Martin possibly (1) bring Jon Snow back to life, (2) have the Others become a major plot element (presumably by attacking the Wall), (3) get Daenerys onto the Iron Throne and her dragons up to the Wall in time to defeat the Others, not to mention wrapping up a couple of hundred other plot elements in just two more volumes? Given how slowly his plots move, that looks like at least 5 volumes worth of material to me. If Martin really is going to pull a Robert Jordan on us, maybe he should start prepping Brandon Sanderson to finish the series in case something happens to Martin? 

Chutzpah + Corporate Personhood = Carpool Lane Access?

The California motor vehicle code defines a "person" as, inter alia, a natural person or a corporation. California's carpool lane law requires that a vehicle using the lane have two or more persons on board. So liberal activist Jonathan Frieman decided on a unique way of protesting Citizens United:

When Jonathan Frieman of San Rafael, Calif., was pulled over for driving alone in the carpool lane, he argued to the officer that, actually, he did have a passenger. 

He waved his corporation papers at the officer, he told NBCBayArea.com, saying that corporations are people under California law.

Frieman doesn't actually support this notion. For more than 10 years, Frieman says he had been trying to get pulled over to get ticketed and to take his argument to court -- to challenge a judge to determine that corporations and people are not the same. Mission accomplished in October, when he was slapped with a fine -- a minimum of $481.

Frieman has been frustrated with corporate personhood since before it became a hot button issue in 2010, when the U.S. Supreme Court ruled that corporate and union spending may not be restricted by the government under the First Amendment. ...

In an opinion piece posted to the San Rafael Patch site on May 14, 2011, Frieman broke down his argument. ... He imagined what he might say to the judge: “Your honor, according to the vehicle code definition and legal sources, I did have a ‘person’ in my car. But Officer so-and-so believes I did NOT have another person in my car. If you rule in his favor, you are saying that corporations are not persons. I hope you do rule in his favor. I hope you do overturn 125 years of settled law.”

I admire his chutzpah, but not his opinions.

Sokol won't face insider trading charges, blasts Buffett

WSJ:

Former Berkshire Hathaway Inc. executive David Sokol had harsh words for his onetime mentor, billionaire investor Warren Buffett, the day after Mr. Sokol was notified he wouldn't face regulatory action for his trading activities.

Mr. Sokol was once seen as a potential successor to Mr. Buffett, but his shot at running the Omaha, Neb., conglomerate ended with his resignation in March 2011 amid disclosures he had personally purchased stock in a chemicals company not long before recommending that Mr. Buffett buy it. 

Mr. Buffett had praised Mr. Sokol's contributions to Berkshire upon the executive's departure and said he didn't feel the trades were "in any way unlawful." But weeks after the resignation, the Berkshire Hathaway CEO made scathing remarks about Mr. Sokol's actions, calling them "inexcusable" and "inexplicable" and saying they violated the company's code of ethics.

Mr. Sokol's lawyer said Thursday that he was informed that the Securities and Exchange Commission wouldn't take action against his client.

In a sign that the rift is unlikely to heal soon, Mr. Sokol on Friday lashed out at the 82-year-old Mr. Buffett.

"I will never understand why Mr. Buffett chose to hurt my family in such a way, but given that he is rapidly approaching his judgement [sic] day I will leave his verdict to a higher power," Mr. Sokol wrote in an emailed response to The Wall Street Journal.

At the time, I argued that "It's hard to see how what Sokol did qualifies as insider trading under SEC Rule 10b-5." So I'm not surprised the SEC decided to give him a pass.

On the other hand, I also argued that Sokol likely had breached his fiduciary duties to Berkshire Hathaway: "Sokol would have state agency law problems even if he escapes, as I think he will, inside treading liability." So I don't have much sympathy for Sokol's whining about Buffett's criticisms, which strike me as on the mark.

Carney Responds to Partnoy and Eisinger

You'll recall that the other day I praised the Frank Partnoy and Jesse Eisinger article in the latest Atlantic on the problems with bank disclosure and regulation. John Carney has replied to Partnoy and Eisinger with an interesting analysis:

Eisinger and Partnoy think that a regulatory regime that threatened bank executives with jail time if it turned out that their financial statements weren't accurate and adequate would go a long way to clear away the black-boxiness. They want this standard of accuracy and adequacy to be intentionally left vague, figuring that prudent chief executive types would err on the side of better disclosure. ...

I'm not sure that's really the way things would go. The threat of jail might result in even less disclosure because it is obviously easier to prove negligence—the standard Eisinger and Partnoy would employ—for actual errors than for omissions. The best way to avoid saying things that aren't true is not to say anything at all. This is part of the reason we're in the mess to begin with.

It's no coincidence that the era of bank financial opacity has coincided with the era of securities litigation. Serious litigation reform that made it far more difficult for the securities bar to bring cases against companies for what is said in public filings would probably improve the filings. Repealing Regulation FD, for starts, would allow a company like Wells Fargo to actually answer questions put to it by people like Eisinger and Partnoy, rather than just kicking them back to the annual statement filed with the SEC.

If investors really would value more disclosure from banks—and I have no doubt that they would—banks would compete for better disclosure, absent some kind of market friction. So if banks aren't competing for investor dollars with better disclosure, something must be standing in the way. It's not collusion. Believe me,Bank of America would love to crush JP Morgan Chase with far better disclosure practices. If Eisinger and Partnoy realize that " these changes would be for the banks' own good," you can be the executives at these banks realize it also. So it's likely the very regulations already in place that are standing in the way.

You need to read both.

Short selling is capitalism at its finest

Rich Karlgaard in today's WSJ:

Cheering for a short seller goes against the American spirit, even if short sellers can usefully warn investors of frauds and hype. Warren Buffett, for one, refuses to short stocks at all. He says he wants to avoid the unlimited losses of a short sale gone bad. But I suspect that Mr. Buffett has another reason. He knows that betting against success would hurt his apple-pie image.

Bull shit. Short selling is capitalism at its finest.

Joseph Schumpeter famously taught that creative destruction was the core of capitalism. The prospect of failure is thus an essential aspect of the capitalist system. It's capitalism's opponents who think failure is something to be prevented. Hence, it's been correctly observed that:

The beauty of the capitalist system is that it allows ... changes/transformations to take place on a natural and gradual basis, unlike “static systems” such as various 20th century communist systems (such static systems tend to fall apart overnight as they were not allowed to evolve over time).

That is, increasing entropy + capitalism system = consistent short-selling opportunities.

In turn, short selling can make the process iof creative destruction more efficient:

If informed investors recognize that a stock is over-valued they perform a valuable service by selling it short and pushing down its stock price. This can both deprive the company of capital and be a signal to other actors in the market that the company might not be as healthy as is generally believed.

In sum, I agree completely with the claim that:

Free speech, an independent spirit, and free markets are key American virtues – and ones that, believe it or not, short sellers exercise every day. They’re a necessary part of the financial markets and are here to stay.

Fixing the Big Banks

In a wonderful article in the latest Atlantic, Frank Partnoy and Jesse Eisinger track the continuing major problems with the major banks, which makes for very scary reading. They then offer a new approach to bank regulation:

Until the 1980s, bank rules were few in number, but broad in scope. Regulation was focused on commonsense standards. Commercial banks were not permitted to engage in investment-banking activity, and were required to set aside a reasonable amount of capital. Bankers were prohibited from taking outsize risks. Not every financial institution complied with the rules, but many bankers who strayed were judged, and punished.

Since then, however, the rules have proliferated, the arguments about compliance have become ever more technical, and the punishments have been minor and rare. ...

What if legislators and regulators gave up trying to adopt detailed rules after the fact and instead set up broad standards of conduct before the fact? For example, consider one of the most heated Dodd-Frank battles, over the “Volcker Rule,” named after former Federal Reserve Chairman Paul Volcker. The rule is an attempt to ban banks from being able to make speculative bets if they also take in federally insured deposits. The idea is straightforward: the government guarantees deposits, so these banks should not gamble with what is effectively taxpayer money.

Yet, under constant pressure from banking lobbyists, Congress wrote a complicated rule. Then regulators larded it up with even more complications. They tried to cover any and every contingency. Two and a half years after Dodd-Frank was passed, the Volcker Rule still hasn’t been finalized. By the time it is, only a handful of partners at the world’s biggest law firms will understand it.

Congress and regulators could have written a simple rule: “Banks are not permitted to engage in proprietary trading.” Period. Then, regulators, prosecutors, and the courts could have set about defining what proprietary trading meant. They could have established reasonable and limited exceptions in individual cases. Meanwhile, bankers considering engaging in practices that might be labeled proprietary trading would have been forced to consider the law in the sense Oliver Wendell Holmes Jr. advocated.

Implementing this approach, they argue, requires just two simple rules:

First, there must be a straightforward standard of disclosure ...: describe risks in commonsense terms that an investor can understand. Second, there must be a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse.

Today's must read.

Memo to the OC Weekly

One good set of bar passage results does not a great law school make. The case against UC Irvine's law school may now be moot, since nobody's going to kill it now, but at the time it was correct.

Veasey on Bainbridge on In-House Lawyers

In an article in the latest Business Lawyer (68 Bus. Law. 57, 62-63), former Delaware Supreme Court Chief Justice E. Norman Veasey has some very nice things to say about yours truly's book Corporate Governance after the Financial Crisis:

Professor Bainbridge has put his finger on the “go along to get along” problem. In a chapter entitled “The Gatekeepers” in his recent book, he carefully analyzes the tension the corporate lawyer experiences between gatekeeping and job security:

The gatekeepers failed rather miserably during the dotcom era. Enron was primarily an accounting scandal, little different from the 150-plus other accounting fraud cases that the SEC investigates in most years. Indeed, this was true not just of Enron, but also most of the dotcom era corporate scandals ....

.... There is little doubt that lawyers played an important role in the scandals. Sometimes their negligence allowed management misconduct to go undetected. Sometimes lawyers even acted as facilitators and enablers of management impropriety ....

.... The nature of the legal market gives lawyers--both in-house and outside counsel--strong incentives to overlook management wrongdoing. As to the former, even if the board of directors formally appoints the in-house general counsel, his tenure normally depends mainly on his relationship with the CEO ....

.... Both the general counsel and outside lawyers necessarily have access to a wide range of information, including but hardly limited to information relating to law compliance by the organization. Because the management-attorney relationship tends to become the focus of the attorney's relationship with the firm, however, lawyers have strong incentives to help management control the flow of information to the board of directors. Worse yet, attorneys may be tempted to turn a blind eye to managerial misconduct or even to facilitate such misconduct .... 

While these excerpts highlight the anxieties and temptations that may face in-house counsel, the entirety of Professor Bainbridge's book paints a balanced picture of the temptations as well as the integrity of in-house lawyers.