Lenore Skenazy: Fear and Loathing at Wellesley - WSJ.com:
Once we equate making people feel bad with actually attacking them, free expression is basically obsolete, since anything a person does, makes or says could be interpreted as abuse....
Since when is it a "civil right" not to feel disturbed by a piece of art? And who gets to decide which art we chuck? You don't like the "Sleepwalker," but I don't like "Winged Victory." It stirs scary thoughts of decapitation. Dear Louvre, please stash that headless gal in the attic.
Where does it stop? Cultural critic Jonathan Rauch coined the term "offendedness sweepstakes" to describe our present condition: We've gotten to the point where almost any group can declare almost anything unnerving or politically incorrect and demand its removal. These censors automatically win because anyone who demurs is criminally callous.
This compact text (260 pp) is for use in law school classes on insider trading, securities regulation, or business associations. It offers a clear and direct exposition of the law and policy concerns raised by this important and high-profile area of the law. The author provides sufficient detail for a complete understanding of the subject without getting bogged down in minutiae. Faculty interested in teaching a short course on insider trading or making insider trading a major part of a course in securities or corporate law will find the text highly teachable, while students taking such a course using other materials will find it a useful study aid.
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
In the course of the article, I propose "a three-pronged version of R VP that should be adopted in the mandate cases:"
Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?
How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?
Would reverse piercing this corporation’s veil advance significant public policies?
With respect to the second prong, I argue that:
... the government contends it has an interest in ensuring that Americans have access to the health insurance coverage required by the mandate. Whether or not that interest rises to the level of a compelling one that would justify infringing on free exercise and RFRA rights remains to be deter- mined. In evaluating the government’s interest, however, courts should note that the government has already undermined the man- date by carving out exemptions for grandfathered plans, employers with fewer than 50 employees, “member[s] of a recognized religious sect or division thereof” who have religious objections to the con- cept of health insurance, or religious employers [as defined in the regulations].” As Judge Walton observed, a “law cannot be regarded as protecting an interest of the highest order . . . when it leaves appreciable damage to that supposedly vital interest unprohibited.”
All of which brings us to the announcement that President Obama has unilaterally exempted (purportedly temporarily) a whole new category of employers. The WSJ explains:
ObamaCare requires businesses with 50 or more workers to offer health insurance to their workers or pay a penalty, but last summer the Treasury offered a year-long delay until 2015 despite having no statutory authorization. ...
Under the new Treasury rule, firms with 50 to 99 full-time workers are free from the mandate until 2016. And firms with 100 or more workers now also only need cover 70% of full-time workers in 2015 and 95% in 2016 and after, not the 100% specified in the law.
The new rule also relaxes the mandate for certain occupations and industries that were at particular risk for disruption, like volunteer firefighters, teachers, adjunct faculty members and seasonal employees. Oh, and the Treasury also notes that, "As these limited transition rules take effect, we will consider whether it is necessary to further extend any of them beyond 2015." So the law may be suspended indefinitely if the White House feels like it.
I agree with the Journal that Obama's cavalier attitude towards the Constitutional separation of powers grows ever more troubling:
Changing an unambiguous statutory mandate requires the approval of Congress, but then this President has often decided the law is whatever he says it is. His Administration's cavalier notions about law enforcement are especially notable here for their bias for corporations over people. The White House has refused to suspend the individual insurance mandate, despite the harm caused to millions who are losing their previous coverage.
But I write today mainly to note that Obama's action further eviscerates the argument that the government has a compelling interest in preventing Hobby Lobby and its ilk from following the religious beliefs of their shareholders. To paraphrase Judge Walton, a law cannot be regarded as protecting an interest of the highest order when the President gets to eviscerate that supposedly vital interest anytime he feels like it.
Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.
What then would partnership fiduciary duty law be like if it were organized around the value of agape? This essay concludes that partners need not love one another, at least as a matter of legal obligation. Agape is simultaneously too indeterminate and too demanding a standard to be suitable for business relationships. On the other hand, however, I conclude that partners ought to love one another. An analysis of Cardozo’s rhetoric and the intent behind it suggests that agape has great instrumental value. Partners who love one another can trust one another. In turn, partners who trust one another will expend considerably less time and effort — and thus incur much lower costs — monitoring one another. Agape thus should not be the law, but the law should promote agape as best practice.
To be presented at the Law and Love Conference, to be held at Pepperdine University School of Law, on February 7-8, 2014.
Bainbridge, Stephen M., Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties (October 8, 2013). UCLA School of Law, Law-Econ Research Paper No. 13-17. Available at SSRN: http://ssrn.com/abstract=2337659.
Here's what I intend to say in the 10 minutes I've been allocated (for citations see the draft of the original paper):
The call for our conference brought to mind Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced ….” The parallels between Cardozo’s framing of the partner’s fiduciary duties and common formulations of agape are obvious and striking.
This observation suggests several questions. First, did Cardozo intend the analogy to agape? Second, is agape an appropriate legal standard? Third, if not, does agapic love have any relevance to the governance of partnerships?
In Meinhard, Cardozo cloaked the fiduciary principle in rhetorical finery: “Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. …. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
Somewhat later in the opinion, Cardozo observed that Salmon “was much more than a coadventurer. He was a managing coadventurer.” In that capacity, Salmon owed Meinhard an even higher duty than the one already articulated for equal partners. “Salmon had put himself in a position in which thought of self was to be renounced, however hard the abnegation.”
Agape is often described in ways that strikingly resemble Cardozo’s description of a fiduciary’s duties. Agape, for example, is said to be the “‘perfect love,’ which seeks the good of the beloved beyond thought of self.” It is “a devotion that gives whatever is best for others without thought of self-gain.” Agape thus “is the willingness to let the self be destroyed rather than that the other cease to be; it is the commitment of the self by self-binding will to make the other great.” All of which sounds remarkably like Cardozo’s articulation of the “punctilio principle,” which has been described as requiring “a loyalty that pricks one’s own possible rationalizations of self-interest with the sharp point of selflessness.”
Did Cardozo intend to analogize partnership fiduciary duties to agapic love?
Geoffrey Miller observes that Meinhard is replete with religious imagery: “The image is one of religion, transcendence and mysticism. The connotation is that when it comes to dealings with co-partners, a person must behave with monastic purity, placing always the other’s interests above his own.”
It is plausible, moreover, that Cardozo encountered the concept of agape in his early life. Cardozo’s college studies included philosophy and he had received sufficient religious training to celebrate his bar mitzvah. In his judicial career, as Judge Posner has noted, Cardozo demonstrated a highly “moralistic streak.”
Ultimately, of course, such inquiries are bootless. Although it is interesting to speculate on Cardozo’s intentions, we simply don’t know.
Let me turn then to the more pertinent question: Is agapic love suitable as a legal standard? I am afraid not, even if one sets aside such standard objections as the purported inadmissibility of religious norms in making civil law for a secular society.
First, agape is too indeterminate a standard. In discussing the problem with a broad conception of fiduciary duty, under which the fiduciary has “a duty to act in the best interests of the beneficiary,” Lionel Smith aptly observes that “the indeterminacy of such a duty is such that any lawyer would agree that this cannot be its correct formulation.” When one adds an agape-based duty to renounce thought of self to Smith’s standard, the duty becomes less rather than more determinate.
Second, agapic love is too high of a standard. To see why, suppose we could put the question back to Cardozo by asking whether it is possible for the law to elevate the behavior of the market to some moral pinnacle. We might observe, as a learned economist has done, that “… we bourgeois are neither saints nor heroes. The age is one of mere iron—or aluminum or plastic—not pagan gold or Christian silver.”
Accordingly, no realistic social order can assume “heroic or even consistently virtuous behavior” by its citizens. Everybody puts love of self ahead of love of neighbor at least some of the time.
As Martin Luther King Jr. recognized in a profound commentary, obligations such as agapic love thus are “beyond the reach of the laws of society. They concern inner attitudes, genuine person-to-person relations, and expressions of compassion which law books cannot regulate and jails cannot rectify. Such obligations are met by one's commitment to an inner law, written on the heart.”
What then can the law do? Dr. King famously extended his argument by observing that “the law could not make people love their neighbors, but it could stop their lynching them.” What law does is to provide a “coercive backstop”: “Doubts about the prevalence of [love] in the population can be mitigated by a backstop regime of legal protection that enforces [love].” But the difficulty with of Cardozo’s rhetoric now becomes obvious. Bringing to bear the state’s monopoly on the use of coercive force on those who fall short of the legal standard is the very antithesis of agape.
While the law therefore should not mandate agape, the law can point to it as an aspirational ideal. In other words, if we understand Cardozo’s rhetoric as having a teaching function, we see that what he is really teaching is not the law but morals. Meinhard thus is properly understood as an example of how courts influence best practice.
This is a familiar concept to business lawyers. We frequently see courts seeking to influence not just the minimal standards of law, but also to set aspirational standards of best practice.
If that’s what Cardozo was trying to do, what makes agape an appropriate aspirational ideal? An answer is to be found in the common observation that those who engage each other in agapic love inevitably come to trust each other. This is so because agape promotes and preserves community. “Agape is a willingness to go to any length to restore community.” If one partner knows that his fellow partner will go to such lengths, trust inevitably follows.
This insight is critical because trust has considerable instrumental value in business settings. Just as friction reduces the efficiency of a machine, transaction costs are a dead weight loss making transacting less efficient. Trust lubricates business relationships and thus reduces transaction costs, especially those known as agency costs.
Contracts are a useful, but ultimately imperfect, device for minimizing agency and other transaction costs. Accordingly, parties frequently rely on noncontractual social norms to minimize transaction costs. Trust’s role as a social lubricant is especially important in this context. If I trust you to refrain from opportunistic behavior, I will not invest as many resources in ex ante contracting. After all, “Whoever can be trusted with very little can also be trusted with much ....” If you prove trustworthy, moreover, I also will not need to incur ex post enforcement costs. Trust thus is not only honorable; it is socially useful. In turn, by promoting trust, agape as an aspirational ideal therefore has considerable social value.
I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities. I have written about this before (here, here, and here), but it continues to frustrate me.
One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate. There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company." In her post, she makes a couple references to incorporation in the context of LLC formation. But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.
Courts, however, should be more careful. The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases. Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is: "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ." That is wrong. Washington LLC law provides that an LLC is a limited liability company. Even more significant, Washington LLC law provides specifically that an LLC's name "[m]ust not contain any of the words or phrases: . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,' . . . ." Wash. Stat. 25.15.010(d) (2014).
A quick search of Westlaw provides ten more cases using the term "limited liability corporation" in reference to an LLC since January 23, 2014. Maybe it doesn't matter much in most cases, but in cases dealing with new issues under LLC law, it sure can (see, e.g., here). And until courts start getting more precise, from time to time I'll keep reporting on their lack of precision.
As a group, these briefs provide compelling legal and policy justifications for leaving Basic alone, arguing, in essence, that this Supreme Court would be overstepping its judicial bounds if it reversed its own precedent, defied Congress, and undermined the regulation and enforcement of the securities laws.
Well, yes, but let's not forget that there are some pretty damn big guns on Halliburton's side, as Wachtell Lipton noted in the CLS Blue Sky Blog:
As we have described in our prior memos (here and here), in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317,the Supreme Court will decide whether or not to abandon the “fraud on the market” presumption of reliance that has facilitated class-action treatment of claims brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5. The case will be argued before the Court on March 5, and a decision will likely come by the end of June. As our earlier memos explained, Halliburton is potentially the most important securities case that the Court has heard in a long time.
Last week, various amici curiae supporting the overturning of the fraud-on-the-market presumption filed briefs in the Supreme Court. Our Firm and Stanford law professor Joseph Grundfest filed a brief (available here; printed copies available on request) on behalf of a distinguished group of law professors and former commissioners and officials of the SEC, arguing that, under settled principles of statutory interpretation, the Exchange Act should not be read to permit a presumption of reliance. Our brief argues that the judicially created right of action under Section 10(b) should be construed similarly to the comparable, express right of action established in Section 18(a) of the Exchange Act. Because Section 18(a) requires proof of actual reliance, we argue that Section 10(b) should likewise require it. Our brief also rebuts the argument that the fraud-on-the-market presumption deserves stare decisis effect, as well as the argument that Congress, by failing to overturn the presumption, has acquiesced in it.
Yours truly is one of the amici who signed the brief:
The Honorable Paul S. Atkins served as a Commissioner of the SEC from 2002 to 2008.
Professor Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at the University of California, Los Angeles School of Law.
Brian G. Cartwright served as General Counsel of the SEC from 2006 to 2009.
Elizabeth Cosenza is Associate Professor of Law and Ethics, Fordham University.
Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
Professor Allen Ferrell is the Greenfield Professor of Securities Law at Harvard Law School.
The Honorable Edward H. Fleischman served as a Commissioner of the SEC from 1986 to 1992.
The Honorable Joseph A. Grundfest is the William A. Franke Professor of Law and Business at Stanford Law School and served as a Commissioner of the SEC from 1985 to 1990.
Professor M. Todd Henderson is a Professor of Law at the University of Chicago Law School.
Professor Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School.
Professor Kenneth E. Scott is the Ralph M. Parsons Professor of Law and Business, Emeritus, at Stanford Law School.
The Honorable Steven Wallman served as a Commissioner of the SEC from 1994 to 1997.
[The brief] argues that the Court “need not wade into the complex and highly technical debate over the efficient markets hypothesis to answer the question presented here. Instead, the Court can, and should, decide this case by applying well-established principles of statutory construction.” It argues that, to infer how the 1934 Congress would have addressed the issues had the 10b–5 action been included as an express provision in the 1934 Act, the Court should consult the express causes of action in the securities laws, and borrow from the most analogous one. The brief argues that
that “most analogous” provision is Section 18(a) of the Securities Exchange Act of 1934. Section 18(a) is the only express right of action in existence in 1934 that authorizes damages actions for misrepresentations or omissions that affect secondary, aftermarket trading. It is the only express right that provides a cause of action for damages in favor of openmarket purchasers and sellers against those (such as issuers or their executives) who allegedly made false or misleading statements, but did not transact with the plaintiffs—the quintessential Section 10(b) class claim today.
Section 18(a) explicitly states that plaintiffs must demonstrate that they transacted “in reliance upon such [false or misleading] statement[s].” 15 U.S.C. § 78r(a). They must, in other words, demonstrate actual, “eyeball” reliance.14 Section 18(a)’s legislative history, moreover, underscores the need for plaintiffs to demonstrate actual reliance for aftermarket fraud. As originally drafted, Section 18(a) contained no reliance requirement, but Congress rejected that no reliance version in the face of a torrent of criticism. As enacted, Section 18(a) thus prohibits recovery “unless the buyer bought the security with knowledge of the [false or misleading] statement and relied upon the statement.” 78 CONG. REC. 7701 (1934) (statement of Rep. Sam Rayburn), cited in Basic, 485 U.S. at 258 (White, J., dissenting). The Court should construe the Section 10(b) right accordingly.
As I noted last August, the Delaware Court of Chancery now believes that:
A transaction involving a third party and a company with a controller stockholder is entitled to review under the business judgment rule if the transaction is (1) recommended by a disinterested and independent special committee and (2) approved by stockholders in a non-waivable vote of the majority of all the minority stockholders.
Richard Booth has an excellent new paper on this trend, Majority-of-the-Minority Voting and Fairness in Freezeout Mergers (January 16, 2014), available at SSRN: http://ssrn.com/abstract=2380041, in which he argues that:
In a landmark decision now on appeal, In re MFW Shareholders Litigation, the Delaware Chancery Court ruled that a freezeout merger negotiated by an independent special negotiating committee (SNC) and conditioned in advance on approval by a majority-of-the-minority (MOM) vote should be reviewed under the business judgment rule. Before MFW, the practice was to review all such mergers for entire fairness, albeit with the burden on the plaintiff if the merger is either negotiated by an independent SNC or ratified in a fully-informed MOM vote. In contrast, review under the business judgment rule requires plaintiffs to plead and prove their case – to show that the deal was not the product of good faith bargaining.
The stated rationale for the ruling in MFW is that subjecting a freezeout merger to both conditions is equivalent to the protections afforded to stockholders in an arms-length merger with a third-party buyer. As the MFW court notes, routine fairness review seldom results in any significant increase in consideration and likely decreases stockholder wealth. Moreover, routine fairness review induces deals to be structured as a tender offer followed by a short-form merger, neither step of which is reviewed for fairness – even though such a structure may coerce minority stockholders to accept a lower price for fear of being left with an illiquid stub of shares following the tender offer.
Although these are powerful arguments, the MFW court understates the case for the approach it endorses. As shown here, the MOM vote does more than merely ratify the proposed deal. Rather, it assures that the price to be paid is at least sufficient to satisfy the median price that would be demanded by the minority stockholders in a hypothetical stairstep auction. Since MOM voting permits minority stockholders to register their opinions as to the adequacy of the offered price without the pressure to tender, the vote can be trusted to reflect stockholder opinion free from the distorting effects of the coercion inherent in a tender offer. To be sure, majority rule means that higher valuing stockholders may be under-compensated while lower valuing stockholders will be over-compensated. But the aggregate premium paid by the controlling stockholder will be equal to the aggregate of the premiums that would be demanded individually by the minority stockholders. Since most stockholders are diversified, they will be overcompensated at least as often as they are undercompensated – on the average and over time. Thus, stockholders should favor the MFW approach not only because it assures fair price but also because it assures the maximum number of deals by minimizing the uncertainties inherent in fairness review – if not also assuring controlling stockholders against the danger of over-payment. Finally, negotiation by independent SNC assures that the minority will get any higher price that may result from a bilateral negotiation. In short, the MFW approach assures minority stockholders will get the better of the prices that would result from either approach alone. Thus, the price paid is by definition fair and should be protected by the business judgment rule subject only to review in an appraisal proceeding as is the general rule for mergers not involving a controlling stockholder.
Santa Clara University law professor David Yosifon has a podcast series on Corporate Social Responsibility and I was his most recent interviewee. You can access the podcast here.
As I mentioned a while back, I am working on a project on shareholder versus director primacy in New Zealand company law. In the course of it, I was reading Professor Susan Watson's very helpful article The Board of Directors, in Company and Securities Law in New Zealand 297 (John Farrar & Susan Watson eds., 2d ed. 2013). In it, she observes that "A director must be a natural person." (p. 321). The same thibng is true in the USA, of course, but why?
Professor Todd Henderson and I have an article in press at the Stanford Law Review, entitled Boards-R-Us: Reconceptualizing Corporate Boards, in which we challenge the requirement that bioards be comprised of natural persons:
State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms – we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.
At age 12, Pine Ridge's flagship wine had thrown a lot of sediment, requiring very careful decanting, but still was a medium-deep ruby with no signs of bricking at the rim. The strong bouquet suggested raspberry, black cherry, and a touch of cedar. The flavor associations on the palate were somewhat darker, suggesting blackberry, black currant, plums, and a touch of earthy minerals. Grade: A-/A
In my experience Pine Ridge wines are rarely mind-blowing, but they are incredibly reliable and good value for money. The sub-regional AVA designated wines, such as Oakville and Rutherford, are especially good values. They are pleasant to drink when young but have good potential to improve with cellaring. At age 12, this Oakville bottle is still showing as a very young wine. It's a medium ruby with a slight hint of brick red at the rim. Strong bouquet leaning towards black fruits, such as black currant, black cherry, prunes, and plums. Ditto the palate. There is a surprising amount of tannins on the finish, leaving one's palate quite puckered. Sadly this was my only bottle, as I suspect it would have continued to improve for many years. Grade: A-
Bright ruby with some purple left at the core. Big bouquet suggesting currants, black cherries, blackberries, and a hint of pencil shavings. Jammy black fruit on the palate. Very nice but probably not a lot of additional aging potential. If I had any left, I'd drink it up over the next couple of years. Grade: B+
. From the book description:
