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Sorting shareholder activists between the sheep and the goats

The Gospel reading last Sunday was Matthew 25:31-46, which is the Parable of the Sheep and the Goats, in which Jesus tells us that:

When the Son of Man comes in his glory, and all the angels with him, he will sit on his glorious throne. All the nations will be gathered before him, and he will separate the people one from another as a shepherd separates the sheep from the goats.  He will put the sheep on his right and the goats on his left.

“Then the King will say to those on his right, ‘Come, you who are blessed by my Father; take your inheritance, the kingdom prepared for you since the creation of the world."

“Then he will say to those on his left, ‘Depart from me, you who are cursed, into the eternal fireprepared for the devil and his angels."

I was reminded of that parable this morning when I read the WSJ's article on activist investors. There are sheep hedge funds whose managers help corporations solve problems and enhance value. Oddly, and to my confessed disbelief, in at least one case cited by the article Carl Icahn seems to be one of the sheep. As Terry Pratchett's Discworld characters might say, "a leopard can't change his shorts." But maybe this is the exception that proves the rule that you wouldn't want Icahn running a business (see, e.g., TWA).

In contrast, Sardar Biglari is painted as one of the goats:

Her first day on the job, Sardar Biglari, owner of about 9% of the company at the time, notified Cracker Barrel he would fight for board seats. He argued that his experience turning around burger chain Steak ’n Shake would make him a strong board member. Investor adviser Glass Lewis & Co. agreed he deserved a spot.

Executives stood firm against him. Ms. Cochran and finance chief Lawrence Hyatt hit the road for several weeks ahead of the shareholder vote, meeting investors and proxy advisers to promote her plan and warn against jeopardizing early results. She said there already were new board members and that Mr. Biglari was solely bent on taking control.

Ms. Cochran prevailed, keeping Mr. Biglari off the board. But unlike many activists, he didn’t go away after the loss. He soon doubled his stake to nearly 20% and went on to pursue three more campaigns aimed at forcing board change. He has repeatedly criticized Ms. Cochran’s strategy and pressed for moves such as opening restaurants abroad and selling real estate, advice she rejected.

Her battles with Mr. Biglari have made headlines in Tennessee, where the company is based, prompting discussion among parents on the sidelines of her children’s lacrosse games. One day, her son came home from high school with inquiries of his own: Mr. Biglari’s campaign was the subject of his economics class.

Throughout the conflict, Ms. Cochran has stuck to what advisers say is one of the best defenses: a clearly defined and well-articulated strategy. She keeps talk of Mr. Biglari to a minimum in meetings with executives, one of whom has a Google Alert for the activist to keep tabs on what he does outside Cracker Barrel. “I work very hard to keep it from distracting the management team,” she says.

Meanwhile, some of Mr. Biglari’s actions alienated executives and board members. He uses sharp language and often hangs up on them, according to people familiar with the calls. And his holding company recently bought the publisher of racy men’s magazine Maxim, raising eyebrows at Cracker Barrel, which doesn’t serve alcohol and strives to project a folksy, family-friendly image. ...

This spring, Mr. Biglari called a special meeting to try to force a sale and suggested he would like to buy Cracker Barrel—after saying for years he wasn’t interested in doing so. Investors, already well-versed in the arguments, told Ms. Cochran and Mr. Hyatt there was no need to meet with them in person to make their case.

Glass Lewis, which hadn’t backed Mr. Biglari since his first push for board seats, delivered particularly harsh words this time. “Biglari asserts in its primary proxy filing that the incumbent board is ‘out of touch with reality,’ a sweeping and perplexing conclusion we find grates coarsely against the sobering realities of Biglari’s own success,” the proxy adviser wrote. 

At the special meeting, in April, 93% of shares that voted, excluding Mr. Biglari’s, rejected his motions.

Unlike proponents of shareholder activism, I recognize that not all hedge fund interventions are created equal. In my essay Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415, I argued that:

Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.

There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.

This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.

It's time to start implementing those proposals so that we can start sorting the sheep from the goats.

A $21 Check Prompts Toyota Driver to Wonder Who Benefited from Class Action - Law Blog - WSJ

Jonathan Sourbeer, a computer science student in Redmond, Wash., says he recently got a check in the mail for $20.91. As a Toyota customer, the money was his share of the $1.1 billion that Toyota Motor Corp. agreed to pay in 2012 to settle a class-action lawsuit stemming from complaints of unintended acceleration in its vehicles.

The check was one of millions distributed to millions of Toyota, Lexus and Scion owners who qualified as class members and were eligible to receive cash payments as compensation for economic losses due to problems with the vehicles.

Mr. Sourbeer, in an op-ed in Monday’s Wall Street Journal, is less than appreciative. He compares the amount he got against the $227 million in fees and costs distributed to the roughly 85 plaintiffs lawyers who worked the case.

via blogs.wsj.com

Please go read the whole thing. Seriously.

Bishop versus Bebchuk and Jackson on political spending disclosure

Keith Paul Bishop argues that Lucian Bebchuk and Robert Jackson's defense of political spending disclosure is flawed. He is, of course, correct.

Will the State Dept try to prevent victims of Palestinian terror from getting their day in court?

Probably not, but Alison Frankel does a nice job of parsing the State Deartment's mealy mouthed record on the issue.

Walter Olson ties fee shifting bylaws to a broader debate over freedom of contract

His excellent post begins:

To the extent America has made progress in recent years in rolling back the extreme litigiousness of earlier years, one main reason has been the courts’ increased willingness to respect the libertarian and classical liberal principle of freedom of contract. Most legal disputes arise between parties with prior dealings, and if they have been left free in those dealings to specify who bears the risks when things go wrong, the result will often be to cut off the need for expensive and open-ended litigation afterward.'

He goes on to tie my recent discussion of fee shifting bylaws to that large movement. Please go read the whole thing.

As long as Presidents aren't enforcing laws, why not add a few from Dodd-Frank and Sarbanes-Oxley?

In yesterday's WSJ, Kimberly Strassel had a great column on President Obama's decision to rewrite the nation's immigration law via "prosecutorial discretion." Her premise is that a Republican has won the 2016 POTUS election and his advisers have suggested a few laws the new POTUS might want to stop enforcing, such as:

We’ve been analyzing the Obama team’s justifications. Some are p-r-e-t-t-y creative, but they boil down to this: Whenever a law is “unworkable,” or inadequately “funded”—and Congress won’t do anything—the president gets to act! How is that for new precedent? ...

Prosecutorial discretion: Love this. Your top item? Cutting taxes. We have two words and one number for you: Tax Code, 73,954 pages. Is there a more unworkable law? ROFL! We’ve got an executive order ready instructing IRS agents not to enforce the code on any person or company who refuses to pay more than our new rates. Goodbye Alternative Minimum Tax, death tax, capital gains, restrictions on nonprofits. Hello, flat tax on a postcard.

And so on.

The President doesn't have the same powers over the Securities and Exchange Commission that he does over the Justice Department, of course, but still the President could do a few things to unilaterally unwind some of the damage that the Sarbanes-Oxley and Dodd-Frank laws have done. First, the Justice Department could be told to exercise prosecutorial discretion not to pursue criminal cases arising out some of the worst provisions of those laws. No more criminal cases under SOX section 906, for example. No more criminal cases to be brought under Section 807 where the defendant did not act with scienter and no more cases in which the alleged fraud was not committed in connection with the purchase or sale of a security.

As for Dodd-Frank, it's replete with provisions that are "unworkable." The Bureau of Consumer Financial Protection is a travesty, of course, so stop enforcing the criminal provisions of Dodd-Frank that relate to it.

The most important thing the new President could do, of course, would be to install SEC Commissioners--especially a Chairman--who are equally committed to exercising prosecutorial discretion over the agency's civil enforcement program so as to gut the more egregious provision of SOX and Dodd-Frank. Maybe starting with conflict minerals disclosure?

Usha Rodrigues on fee shifting bylaws

Typically excellent post. Kind words about yours truly an added bonus.

Delaware's Decision: Viewing fee shifting bylaws through a public choice lens

In a recent WSJ column, Lisa Rickard did a great job analyzing the decision Delaware's legislature will sonn face with respect to fee shifting bylaws:

Specifically, the controversy hinges on whether a company can adopt bylaws allowing it to claw back some of its legal costs if plaintiffs lawyers bring an abusive shareholder lawsuit and lose in court. ...

The debate over fee shifting was ignited in May, after ATP Tour Inc., the Delaware-incorporated company that oversees men’s professional tennis, tried to enforce a fee-shifting provision in its bylaws after it won a lawsuit brought by members challenging changes to the tour schedule and format. The Delaware Supreme Court ultimately determined that ATP was within its rights to adopt the provision under state law. 

Weeks after the court’s ruling, the Delaware legislature, cheered on and supported by the powerful state plaintiffs bar, attempted to pass a law “fixing” the Delaware Supreme Court’s decision. Far from a fix, the bill would have outlawed a company’s ability to use the fee-shifting tool to protect itself against frivolous litigation.

Loud protests from national, state and local business groups, as well as individual companies caused the legislature to rethink its approach. But the legislature hit only the pause button, asking the Delaware Bar’s leadership to “study” the matter this fall before recommending to the legislature a revised provision to be considered early next year.

In an earlier post, I made the case that the Delaware legislature ought to authorize and validate fee shifting bylaws. But will it?

In this post, I view the problem through a public choice lens. As I see it, there are two questions: (1) What's in the state of Delaware's best interest? (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have different answers. Predicting what Delaware will decide is thus quite difficult.

The Legislature's Incentives to Preserving Delaware's Dominance

Back in the nineteenth century state corporation laws gradually moved in the direction of increased liberality, making the incorporation process simpler on the one hand, while at the same time abandoning any effort to regulate the substantive conduct of corporations through the chartering process. In later years, this process became known as the “race to the bottom.”[1] Corporate and social reformers believed that the states competed in granting corporate charters. After all, the more charters (certificates of incorporation) the state grants, the more franchise and other taxes it collects. According to this view, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders.

Many legal scholars reject the race to the bottom hypothesis.[2] According to a standard account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not make loans to such firms without compensation for the risks posed by management’s lack of accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from adopting excessively pro-management statutes. The empirical research appears to bear out this view of state competition, suggesting that efficient solutions to corporate law problems win out over time.[3]

Whether state competition is a race to the bottom or the top,[4] there is no question that Delaware is the runaway winner in this competition. More than half of the corporations listed for trading on the New York Stock Exchange and nearly 60% of the Fortune 500 corporations are incorporated in Delaware. Proponents of the race to the bottom hypothesis argue that Delaware is dominant because its corporate law is more pro-management than that of other states. Those who reject the race to the bottom theory ascribe Delaware’s dominance to a number of other factors: There is a considerable body of case law interpreting the Delaware corporate statute (DGCL), which allows legal questions to be answered with confidence. Delaware has a separate court, the Court of Chancery, devoted largely to corporate law cases. The Chancellors have great expertise in corporate law matters, making their court a highly sophisticated forum for resolving disputes. They also tend to render decisions quite quickly, facilitating transactions that are often time sensitive.[5]

Whether one thinks Delaware’s dominance is because the state is winning the race to the top or the race to the bottom, there is no doubt that Delaware benefits significantly from its dominance. Delaware does get an astonishing percentage of state revenues from incorporation fees and franchise taxes. In some years, Delaware's annual revenues from these sources constitute up to 30% of the state's budget – an estimated equivalent of $3,000 for each household of four in the state. Given the importance of franchise taxes and other corporate fees to Delaware’s budget it would be surprising if such competition did not suffice to keep Delaware on its toes. If Delaware isn’t racing, it is at least fast walking.

The question thus becomes: How would banning fee shifting bylaws affect Delaware’s competitive position. In my view, Delaware’s competitive position would be adversely affected by doing so.

As I observed in an earlier post, quoting Kevin LaCroix:

… while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. ...

... the “loser pays’ model that the Oklahoma legislation adopts is extraordinary —  It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.

If more states follow Oklahoma's lead, Delaware's need to remain at the forefront of corporate law may be enough to overcome the self-interested lobbying by lawyers (both defense and plaintiff) who hate loser pays.

John Coffee has similarly observed that a ban by “Delaware might fuel an interjurisdictional competition, as other, more conservative states (think, Texas) might seek to lure companies to reincorporate there to exploit their tolerance for such provisions.”

The effect of banning fee shifting bylaws on Delaware’s dominance might only be marginal, but Delaware has kept its position at the top of the corporate law heap by responding to even marginal threats.

So what’s in Delaware’s best interest? If you’re a Delaware taxpayer, the answer is clear: Endorse and validate fee shifting bylaws.

The Interest Group that Matters

My late friend Larry Ribstein once observed that:

Professors Jonathan Macey and Geoffrey Miller argue that lawyers may be the group that most influences Delaware corporate law. Delaware lawyers have all of the attributes of a politically powerful interest group: they are already organized into bar associations and maintain an advantage over other groups because they continually learn about the law as a consequence of their profession; they are centered in a single city (Wilmington), in a small state and, therefore, can communicate with each other at minimal costs; and they provide an important service for legislators in drafting legislation on complex commercial and corporate matters.

Delaware lawyers, in essence, are the Delaware legislature, at least insofar as corporate law is concerned. Delaware has one of the three smallest legislatures in the country. Its legislative committees are virtually inactive. Most striking, however, is that few of Delaware's legislators are lawyers. Such legislators are likely to rely on lawyers to supply sophisticated commercial and business legislation. As a result, virtually all of Delaware corporate law is proposed by the Delaware bar, and the bar's proposals invariably pass through the legislature.[6]

The Macey and Miller article to which Ribstein refers exhaustively reviews the various interest groups that might influence the production of Delaware law and conclude that “the bar is the most important interest group within this equilibrium. Thus, the rules that Delaware supplies often can be viewed as attempts to maximize revenues to the bar, and more particularly to an elite cadre of Wilmington lawyers who practice corporate law in the state.”[7] They further explain that:

The Delaware bar is interested in maximizing one specific portion of the indirect costs of Delaware incorporation—fees to Delaware lawyers paid for work on behalf of Delaware corporations. These legal fees are functionally related to the number of charters in Delaware in the sense that the expected legal revenues will increase as the number of corporations chartered in the state increases. Accordingly, the bar would tend to favor low franchise fees, because keeping the fees low will tend to increase the number of Delaware corporations. But the bar could also benefit from legal rules that increase the amount of expected legal fees per corporation, even if such rules, by imposing additional costs on Delaware corporations, reduced the absolute number of firms chartered in the state. If the legal fees gained exceed the fees lost by deterring Delaware incorporation, the bar would prefer to adopt rules that did not serve the interests of the other interest groups within the state. In this respect, the bar's interests are opposed to the interests of all other groups.[8]

How then would fee shifting bylaws affect the income of Delaware lawyers? It seems fair to assume that there will be a net reduction in shareholder litigation as a result of fee shifting bylaws becoming widespread. As Kevin LaCroix observed, quoting the Delaware Supreme Court’s ATP Tour decision:

Fee shifting provisions “by their nature, deter litigation.”

This would adversely affect not just plaintiff lawyers, but also defense lawyers. After all, fewer lawsuits mean less work for defense litigators too:

The bar … does benefit from increasing the amount of litigation and accordingly would tend to favor litigation-increasing rules …. Delaware could stimulate litigation [by making] litigation cheaper by reducing the costs to the parties, especially plaintiffs who make the initial choice of forum.[9]

Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Such bylaws would raise plaintiff costs, deterring lawsuits, reducing fees for all litigators.

Widespread adoption of fee shifting bylaws could also adversely affect transactional lawyers. Litigation risk is a major driver in the level of advisory work. As Jonathan Macey observed, for example, Delaware case law has given corporate directors “significant incentives to cloak their decisions in a dense shroud of process and to take other steps that will generate high fees for lawyers, investment bankers, and other advisors (who, incidentally, are precisely the same people who advise companies to incorporate in Delaware in the first place).”[10] Fee shifting bylaws would reduce those incentives and thus decrease the demand for advisory work by lawyers.

All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws. Hence, it was no surprise that the Delaware legislature—dominated in this area by the Delaware bar—leaped to ban such bylaws. The business groups that favor fee shifting bylaws were able to delay that action. But the final decision remains pending.

Update: You should check out Brett McDonnell's comment below. Also consider the point being made by Usha Rodrigues:

Certainly litigators want litigation.  But deal lawyers don't want it--at least, not this particular kind of litigation.  Indeterminacy over doctrinal areas like good faith is good for transactional types as well as litigators, because it gives them more nuances and risks to have to explain at length to boards as they advise on various types of action.  The type of fee-shifting bylaw we're discussing, in contrast, is bad for deal lawyers--at least, if you think, as Steve does, that

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.[23]

If these suits amount to nothing more than a litigation tax on deals, then they discourage deals.  And that's bad for deal lawyers.

Conclusion

The debate over fee shifting bylaws will come to a head in the Delaware legislature early in 2015. It is shaping up to be a fascinating test of whether the Delaware bar’s grip on Delaware corporate law will be strong enough to overcome the incentives Delaware legislators have to remain the most attractive state of incorporation. Because endorsing fee shifting bylaws is the right answer from a policy perspective, those of us who do not have a dog in that specific fight can only hope that the latter position prevails. To end with a classic cliché, however, only time will tell. 

 

Behrens Family Spare Me Cabernet Sauvignon (Napa Valley) 2009

With Helen out of town and having no obligations tomorrow, I decided to revive an old PB.com tradition: bachelor dinner night. As longtime readers will recall, a bachelor night dinner consists of steak, potatoes, and an obligatory-but very, very small portion of-green vegetable, accompanied by a good bottle of red wine and followed by a Dunhill Peravia (smoked indoors no less!) and Dow Tawny 20 Year Old Tawny.

Tonight's red wine was a 2009 Cabernet Sauvignon from longtime PB.com favorite Behrens Family (a.k.a. Erna Schein and Behrens & Hitchcock). Reportedly it includes 10% each of Cabernet Franc and Merlot. A pretty ruby color. Spicy and toasty aromas of vanilla (new oak, I assume), blueberry, raspberry, cherry, and nutmeg. On the palate, blueberry and blackberry are the dominant flavor associations. Firm tannins suggest some aging potential, but it is very drinkable now and it is hard to resist the temptation to drink it up. I have 3 bottles left in my cellar and will probably drink up two between now and, say, 2017. I'll save the last until 2024 on the theory that 15 years is the usual outer limit for Napa Cabernet.

Grade: A-

The case for allowing fee shifting bylaws as a privately ordered solution to the shareholder litigation epidemic

I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy publishing process. This seems to be one of those times when blog publishing is the most effective way of getting the ideas out there.

In 2006, the board of directors of ATP Tour, Inc. (ATP), a Delaware nonstock membership corporation^[1] that operates a professional men's tennis tour, amended ATP’s bylaws to provide in pertinent part that:

In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”) ] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.^[2]

The Delaware Supreme Court upheld the bylaw as valid.

These fee shifting “bylaws impose a ‘loser pays’ rule that transfers a company’s costs and expenses in shareholder litigation to the plaintiff shareholder if the plaintiff is unsuccessful.”[3] At least 24 for profit Delaware business corporations have now adopted them. It is widely assumed that the legal basis for upholding such a bylaw in the context of a membership corporation will carry over to a stock corporation.

As a WSJ opinion column recently reminded us, however, the Delaware legislature may yet intervene:

Weeks after the [Delaware Supreme Court’s ATP] ruling, the Delaware legislature, cheered on and supported by the powerful state plaintiffs bar, attempted to pass a law “fixing” the Delaware Supreme Court’s decision. Far from a fix, the bill would have outlawed a company’s ability to use the fee-shifting tool to protect itself against frivolous litigation.

Loud protests from national, state and local business groups, as well as individual companies caused the legislature to rethink its approach. But the legislature hit only the pause button, asking the Delaware Bar’s leadership to “study” the matter this fall before recommending to the legislature a revised provision to be considered early next year.[4]

The purpose of this essay is to explain the case for fee shifting bylaws and, accordingly, to argue that the Delaware legislature should not ban them legislatively.

Why are Fee Shifting By Laws Needed?

In 2006-2007, there were three major reports studying the declining competitiveness of U.S. capital markets: the Bloomberg-Schumer Report,[5] the Paulson Committee Interim Report, [6] and the Chamber Report.[7] Taken together, and evaluated in light of subsequent developments, the evidence they gathered confirmed that the U.S. capital markets became less competitive vis-à-vis other markets in the last decade. By why?

In 2008, the Supreme Court handed down one of the most consequential securities cases to come before it in many years, Stoneridge Investment Partners v. Scientific-Atlanta.[8] What makes Stoneridge instructive for our purposes is not the specific legal issues or the holding, but rather the Supreme Court majority’s explicit reliance on policy considerations and the content of those considerations:

The practical consequences of an expansion [of Rule 10b-5 liability] … provide a further reason to reject petitioner's approach. In Blue Chip, the Court noted that extensive discovery and the potential for uncertainty and disruption in a lawsuit allow plaintiffs with weak claims to extort settlements from innocent companies. Adoption of petitioner's approach would expose a new class of defendants to these risks. As noted in Central Bank, contracting parties might find it necessary to protect against these threats, raising the costs of doing business. Overseas firms with no other exposure to our securities laws could be deterred from doing business here. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.[9]

Like all three of the capital market competiveness reports, the Supreme Court majority thus explicitly recognized the risk that our expansive securities anti-fraud legal regime poses to the competitiveness of our markets.

The point is not that we should live in a world of caveat emptor. An effective anti-fraud regime has obvious benefits. It serves to compensate defrauded investors. It deters fraud. It provides a bond making issuer disclosures more credible and thereby lowers the cost of capital. The question remains, however, whether the current U.S. anti-fraud regime imposes costs that may outweigh or, at least, reduce these benefits.

An affirmative answer to that question is suggested by a survey of global financial services executives, which found that the litigious nature of U.S. society and capital markets has a negative impact on the competitiveness of those markets.[10] The key problem appears to be the prevalence of private party securities fraud class actions, which do not exist in most other major capital market jurisdictions.

Between 1997 and 2005 there was a steady increase in both the number of securities class action filings and the average settlement value of those suits.[11] The total amount paid in securities class actions peaked in 2006 at over $10 billion, even excluding the massive $7 billion Enron settlement.[12] The vast majority of such settlement payments historically have been made either by issuers or their insurers, rather than by individual defendants.[13] As a result, the vast bulk of securities settlement payments come out of the corporate treasury, either directly or indirectly in the form of higher insurance premia. In either case, settlement payments reduce the value of the residual claim on the corporation's assets and earnings. In effect, the company’s current shareholders pay the settlement, not the directors or officers who actually committed the alleged wrongdoing.

The effect of securities class actions thus is a wealth transfer from the company’s current shareholders to those who held the shares at the time of the alleged wrongdoing. In the case of a diversified investor, such transfers are likely to be a net wash, as the investor is unlikely to be systematically on one side of the transfer rather than the other. Because there are substantial transaction costs associated with such transfers, moreover, the diversified investor is likely to experience an overall loss of wealth as a result of the private securities class actions. Legal fees to plaintiff counsel typically take 25-35% of any monetary class action settlement, for example, and the corporation’s defense costs are likely comparable in magnitude.[14]

The circularity inherent in the securities class action process reduces the effectiveness of private anti-fraud litigation as both a deterrent and means of compensation. As to deterrence, because it is the company and not the individual wrongdoers that pays in the vast majority of cases, the system fails to directly punish those individuals. As to compensation, the transaction costs associated with securities litigation ensure that investors are unlikely to recover the full amount of their claims. Indeed, there is evidence that investors recover only two to three percent of their economic losses through class actions.

The analysis to this point has implicitly assumed that all securities fraud class actions are meritorious. When one considers the potential for frivolous or nuisance litigation, the potential impact of litigation on the capital markets is compounded. To be sure, the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998 heightened the pleading standards for securities fraud claims, allowed an automatic stay of discovery while a motion to dismiss is pending, created a uniform federal cause of action, and otherwise tried to reduce frivolous securities class action. While there is some empirical evidence that the PSLRA and SLUSA have reduced—but not eliminated—the number of frivolous suits, there is also evidence that they have had the unintended effect of reducing meritorious suits in which pre-filing indicia of fraud are more difficult to identify and plead with particularity as required by the new pleading standard.[15]

The accurate perception that exposure to the U.S. capital markets significantly increases an issuer’s litigation risk has a measurable impact on the attractiveness of those markets. A study of domestic issuers found, for example, that issuers with prior experience with securities fraud class actions and those in standard industry classifications having a high incidence of such litigation tended to resort to offshore financing more often than other issuers.[16] As for foreign issuers, they are “deeply” concerned by the “cost of litigation” associated with securities class actions and “risk of huge enforcement actions.”[17]

When asked which aspect of the legal system most significantly affected the business environment, senior executives surveyed indicated that propensity toward legal action was the predominant problem. Worryingly for New York, the city fares far worse than London in this regard: 63 percent of respondents thought the UK (and by extension London) had a less litigious culture than the United States, while only 17 percent felt the US (and by extension New York) was a less litigious place than the United Kingdom (Exhibit 20). This is a dramatic result, and it is echoed even more strongly by the CEOs surveyed: 85 percent indicated that London was preferable, and not a single one chose New York. …

… Only about 15 percent [of surveyed senior executives] felt that the US system was better than the UK’s in terms of predictability and fairness, while over 40 percent favored the UK in both these regards. The CEOs interviewed also shared this sentiment, although they felt that London’s advantage was particularly strong in terms of the predictability. Legal experts indicated that this is a major reason why many corporations now choose English law to govern their international commercial contracts.[18]

Because “the only way foreign companies can protect themselves” from litigation risk “is to move out of the United States altogether,” “a lot of companies are doing” precisely that.[19]

The litigation risk problem is not limited to securities class actions. We see essentially identical concerns in areas such as state corporate law derivative litigation. In a seminal empirical study of derivative litigation, Professor Roberta Romano found that derivative litigation is relatively rare.^[20] Of those cases that go to trial, shareholder-plaintiffs almost always lose. As is generally true of all litigation, however, most derivative suits settle. Only half of the settled derivative suits resulted in monetary recoveries, with an average recovery of about $6 million. In almost all cases, the legal fees collected by plaintiff counsel exceeded the monetary payments to shareholders. Romano further concluded that nonmonetary relief typically was inconsequential in nature.

Like securities class actions, derivative litigation mainly serves as a means of transferring wealth from investors to lawyers. At best, derivative suits take money out of the corporate treasury and return it to shareholders minus substantial legal fees. In many cases, moreover, little if any money is returned to the shareholders, but legal fees are almost always paid.

As for deterrence, there is no compelling evidence that derivative litigation deters a substantial amount of managerial shirking and self-dealing. To the contrary, there is evidence that derivative suits do not have significant effects on the stock price of the subject corporations, which suggests that investors do not believe derivative suits deter misconduct.^[21] There is also substantial evidence that adoption of a charter amendment limiting director liability has no significant effect on the price of the adopting corporation’s stock, which suggests that investors do not believe that duty of care liability has beneficial deterrent effects.^[22]

Conclusion

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.[23]

Fee shifting bylaws are an appropriate means of addressing the problem through private ordering. On the one hand, they likely will prove an effective deterrent to frivolous litigation:

Fee-shifting bylaws, if widely adopted, would raise the risk associated with filing these lawsuits and could weed out the weakest ones, said Sean Griffith, a professor at Fordham University's law school.

“This could be a gut check for plaintiffs' lawyers,” Mr. Griffith said. “They would have to ask—for the first time, really—how good is my case?”[24]

It is, of course, a question that plaintiff lawyers should have been asking all along. The problem, of course, is that they never do.

On the other hand, bylaws are subject to shareholder amendment, so the most likely result will be a process of give and take between directors and shareholders that results in bylaws whose terms are broadly acceptable to the key constituencies (other than lawyers, of course).

Delaware should uphold these bylaws. But will it? That will be the subject of my next essay.

Catholic Social Thought and the Law: Usury

In my seminar on Catholic Social Thought (CST) and the Law tonight’s discussion focuses on usury. Why does the Church oppose usury? What is the current teaching on usury? What is usury? Has the Church’s definition of usury and/or its position on usury changed over time? If so, what does that mean for other Church teachings?

Modern American law defines usury using a four factor test: “1) A loan, express or implied. 2) An understanding between the parties that the money loaned must be repaid. 3) In consideration of the loan, a greater rate of interest than is allowed by law is paid or agreed to be paid by the borrower. 4) A corrupt intent to take more than the legal rate for the use of the money loaned.” Kraft v. Mason, 668 So. 2d 679 (Fla. Dist. Ct. App. 1996).

How well does that definition map to CST’s understanding of usury?

Our discussion is bookended by statements from two Popes named Benedict. First, Vix Pervenit (On Usury and Other Dishonest Profit) by Pope Benedict XIV, issued in 1745. Second, Pope Benedict XVI’s Encyclical Letter Caritas in Veritate (Charity in Truth), which was issued in 2009.

Candidly, I find neither to be very helpful at first glance. Benedict XIV, for example, wrote that “it is essential for these people, also, to avoid extremes, which are always evil. For instance, there are some who judge these matters with such severity that they hold any profit derived from money to be illegal and usurious; in contrast to them, there are some so indulgent and so remiss that they hold any gain whatsoever to be free of usury.”

The implication that not all investment profit is usurious is seemingly confirmed by Benedict’s further statement that:

“We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.”

Likewise, Benedict XVI was careful to draw a distinction between microcredit (of which he approved) and usury (which he condemned):

“The weakest members of society should be helped to defend themselves against usury, just as poor peoples should be helped to derive real benefit from micro-credit, in order to discourage the exploitation that is possible in these two areas.”

But where then is the line between what is licit and what is not? (Or, as one of my students asked, is this ambiguity a feature or a bug?)

In An Essay on Mediaeval Economic Teaching (1920), George O’Brien explains that the origins of CST’s position on usury can be traced far back even into Scripture, but that it was Saint Thomas “Aquinas who really put the teaching on usury upon the new foundation, which was destined to support it for so many hundred years, and which even at the present day appeals to many sympathetic and impartial inquirers.” O’Brien quotes Aquinas at some length:

“… we must observe that there are certain things the use of which consists in their consumption; thus we consume wine when we use it for drink, and we consume wheat when we use it for food. Wherefore in such-like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing is granted the thing itself; and for this reason to lend things of this kind is to transfer the ownership. Accordingly, if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. In like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.

“On the other hand, there are other things the use of which does not consist in their consumption; thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted; for instance, one man may hand over to another the ownership of his house, while reserving to himself the use of it for a time, or, vice versa, he may grant the use of a house while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate [i.e., “to bring action under civil law to enforce rights in specific property whether corporeal or incorporeal or movable or immovable’] the house from the person to whom he has granted its use, as happens in renting and letting a house.

“But money, according to the philosopher, was invented chiefly for the purpose of exchange; and consequently the proper and principal use of money is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury; and, just as a man is bound to restore other ill-gotten goods, so he is bound to restore the money which he has taken in usury.”

Aquinas’ analysis rests on the proposition that a loan for consumption—a so-called contract of mutuum in Roman law—is a sale. In turn, Aquinas reasoned, the essential moral and ethical requirement in any sale was “the fixing of a just price.” Because the contract of mutuum “was nothing else than a sale of fungibles,” “the just price in such a contract was the return of fungibles of the same value as those lent.” Finally, a loan of money was deemed to be a loan for consumption of the money. Accordingly, one who lent money was entitled to nothing more than “the return of the same amount of money.” O’Brien thus concludes:

“The scholastic teaching … on the subject was quite plain and unambiguous. Usury, or the payment of a price for the use of a sum lent in addition to the repayment of the sum itself, was in all cases prohibited. The fact that the payment demanded was moderate was irrelevant; there could be no question of the reasonableness of the amount of an essentially unjust payment. Nor was the payment of usury rendered just because the loan was for a productive purpose--in other words, a commercial loan.”

This would seem to render the entire edifice of modern finance morally indefensible. As one of my students noted: “When credit cards, consumer credit, student loans, home mortgages, and car payments run virtually everyone’s lives, who seriously considers what it would mean for the charging of interest to be potentially immoral, at least as usury was understood biblical and in ancient and medieval Church doctrine?”

We turn then to Judge John T. Noonan’s book A Church that Can and Cannot Change: The Development of Catholic Moral Teaching. According to Wikipedia:

“John Thomas Noonan, Jr. (born October 24, 1926) is a Senior United States federal judge on the United States Court of Appeals for the Ninth Circuit, with chambers in San Francisco, California. … Noonan was the 1984 recipient of the Laetare Medal, awarded annually since 1883 by Notre Dame University in recognition of outstanding service to the Roman Catholic Church through a distinctively Catholic contribution in the recipient's profession. Noonan has served as a consultant for several agencies in the Catholic Church, including Pope Paul VI’s Commission on Problems of the Family, and the U.S. Catholic Conference’s committees on moral values, law and public policy, law and life issues. He also has been director of the National Right to Life Committee.”

There is no doubt that Noonan is a brilliant lawyer and a devout Catholic. Yet, his view of Church history has been controversial. In its review of Noonan’s book, the NY Times wrote:

“Noonan drives home the point that some Catholic moral doctrines have changed radically. History, he concludes, does not support the comforting notion that the church simply elaborates on or expands previous teachings without contradicting them.”

In contrast, Avery Cardinal Dulles warned in a review of Noonan’s book published in First Things “that Noonan manipulates the evidence to make it seem to favor his own preconceived conclusions. For some reason, he is intent on finding ‘discontinuity’ but he fails to establish that the Church has reversed her teaching in any of the four areas he examines.” So we proceed with the proverbial grain of salt close at hand.

Noonan starts by drawing the reader’s attention to the Parable of the Talents. The power of teaching by parables is that the audience accepts the secular analogy as obviously correct. When the master praises the two servants who doubled the sums they had been given and condemns the one who simply buried (unproductively) the sum he had been given, the import was that earning a return by productively investing money was legitimate. Indeed, the point is rammed home when the master tells the bad servant that, at the bare minimum, he should have taken the talent to the moneylenders to be lent out for a return.

Yet, Noonan cautions that there are aspects of the parable that implicate ancient Hebrew teachings on usury. (The Old Testament contains many injunctions against usury. See William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 192 (2012).) In addition, of course, the other famous Gospel passage in which money changers” appear is that in which Jesus drives them from the Temple, which would seem to condemn money lending. Yet, here again, Noonan is cautious, suggesting that “money changers” may not have been bankers.

 Instead, Noonan identifies the key Gospel passage as being Luke 6:35:

“…love your enemies and do good to them, and lend expecting nothing back; then your reward will be great and you will be children of the Most High, for he himself is kind to the ungrateful and the wicked.”

The Church’s teaching on usury, Noonan argues, springs from the phrase “expecting nothing back.” The Early Church Fathers saw this passage as a “fulfillment of Mosaic law by way of expansion; the Christians were to love their enemies and to lend without seeking any benefit.” The Fathers thus refused to acknowledge a distinction between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and a creditor taking interest where the borrower used the loan proceeds to buy food to survive.

Personally, I find that distinction a valid one. The Church teaches that there is a preferential option for the poor. The relevant consideration in assessing the morality of lending thus might not be the paying and receiving of interest, but rather the impact of various lending practices on the poor. Put another way, as one of my students argued, the problem is when “a financially stronger party is exploiting a financially weaker or less financially knowledgeable party to an extent which can be said to be morally unjust.” (Note that Benedict XVI’s distinction between usury and beneficial micro-credit might be seen as reflecting this distinction. Note also the discussion below in which Cardinal Dulles embraces this distinction.)

In any case, Noonan argues that during the Middle Ages and continuing right up until the middle of the 1800s the Church’s canon lawyers developed a complex set of rules under which, for example, it was licit for a capitalist to invest money in a partnership (societas) with the expectation of earning a profit.[*] Eventually the exceptions swallowed the rule.

All of which leads us to the $64 question: If Noonan is right about usury, does that mean the entire Magisterium is up for grabs? But that is also a question for a another day.

Returning to the narrower question of usury, Avery Cardinal Dulles does not dispute Noonan’s presentation of “the interplay between moral teaching and the emergence of new economic systems.” but Cardinal Dulles argues that there was no “reversal of the original teaching but rather a nuancing of it.” 

“The biblical strictures on usury were evidently motivated by a concern to prevent the rich from exploiting the destitution of the poor. But when capitalists of early modern times began to supply funds for ventures of industry and commerce, the situation became different. Moralists gradually learned to place limits on the ancient prohibition, so as to allow lenders fair compensation for the time and expenses of the banking business, the risks of loss, and the lenders’ inability to use for their own advantage what they had loaned out to others. 

“These concessions do not seem to me to be a reversal of the original teaching but rather a nuancing of it. The development, while real, may be seen as homogeneous. In view of the changed economic system the magisterium clarified rather than overturned its previous teaching. Catholic moral teaching, like contemporary criminal law, still condemns usury in the sense of the exaction of unjust or exorbitant interest.”[†]

In this telling, as Woodyard and Marzen note, the key insight was that usury “was not defined as taking interest on a loan, but rather the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.” This definition allowed the development of modern finance once theologians and canon lawyers recognized that “most banks and commercial entities undertook some amount of risk in lending money in the era of Renaissance commerce.”

What then are we to make of Benedict VXI’s seeming revival of the condemnation of usury? Woodyard and Marzen argue that Benedict’s major point in fact was that:

“… in today's modern economic world, regulation of the financial industry is essential to protect the weakest and most vulnerable in society. It is, in essence, a reaffirmation of contemporary Catholic teaching of the preferential option for the poor, which dictates that the greatest of care must be taken for the most vulnerable in society.”

Note, however, that this does not mean one must embrace Elizabeth Warren’s view of financial regulation. Recall that, insofar as prudential judgments about the economy are concerned, Pope John Paul II emphasized that the “church has no models to present.” (Centesimus Annus ¶ 13) As the Catechism (¶ 899) thus teaches, the Church especially encourages lay initiative “when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” There thus is a space in which those of us who are both Christians and fans of free markets may work to develop regulatory schemes that optimally protect the poor and stimulate economic growth and vitality.

I thus do not read Caritas in Veritate as changing our understanding of usury as being focused on excessive interest rates, especially “the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.”

The problem in operationalizing that insight, of course, is the difficulty of determining what is an “excessive” rate:

“When contracts appear to have very high price terms, a court could determine only with great difficulty whether the high price is due to market power or fluctuations in the costs of inputs. A high interest rate, for example, could result from the creditor's judgment about the risk of default posed by a particular debtor, and generally courts should defer to such judgments. A determination that the creditor has market power requires an evaluation of the structure of the market, a notoriously difficult enterprise usually reserved for antitrust litigation. A seller or creditor with temporary market power as a result of a patent, or some innovation that other market participants have not had a chance to imitate, should (arguably) be permitted to reap above-market returns, for that is how innovation is encouraged in a market economy.

“When contracts appear to have harsh nonprice terms, there is another reason for thinking that these terms are unobjectionable. Even if the seller or creditor has market power, it has the right incentive to supply the terms that parties desire. For example, a debtor might be willing to consent to a harsh remedial term in return for a low interest rate.”

Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 Yale L.J. 829, 843 (2003).

Given that reality, as one of my students asked, “What can be gained by continuing to talk about usury and how it should influence individual moral decisions, even when it will only have a marginal influence on the broader society?” His answer was that “it may lead individuals as Christians to approach their business affairs with more a grain of salt, shattering what is all too often a complacency with which Christians engage in the affairs of the world and the assumptions the demands of justice do not conflict with our behaviors as workers, business people, and consumers in a capitalist economy.” He also noted that “A return to a traditional understanding on usury might provide an impetus to restore Catholic charitable civic institutions, which can provide a more Christian alternative to the corrupt institutions of a secular society.” Indeed.

---

[*] One of my students argued that:

The principal practical difference between a loan and an investment into a capitalist venture is the parties who are likely to be involved in such transactions. The parties making and receiving the investment are almost certainly to be relatively sophisticated businessman with some degree of financial literacy. Additionally, those investing in a business or seeking an investment are more likely to have the financial means so that the loss of an investment will not result in abject poverty.

If find that a plausible justification for the distinction, but I am not sure that that is how the Church justified the difference. In the passage from Aquinas quoted above, for example, we see a distinction being drawn between a loan—which is regarded as a transfer of ownership of the money in question—and a temporary lease of a house—in which ownership does not change hands. “For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.”

[†] This understanding of usury as the “exaction of … exorbinant interest” may also be reflected in Pope Leo XIII’s condemnation of  “Rapacious usury” in Rerum Novarum (1891). As has been noted elsewhere, “To condemn ‘rapacious usury’ is perhaps to indicate that there may be usury that is not ‘rapacious.’ Perhaps, given new economic conditions, there could be interest rates on loans that are not motivated by greed or excess.” The same commentator further notes that:

Leo XIII gives a clearer idea later on in the encyclical about what he might mean by rapacious usury: "The rich must religiously refrain from cutting down the workman's earnings… by usurious dealing." In this paragraph, he lays down the principle that makes usury evil. He writes, "To make one's profit out of the need of another, is condemned by all laws, human and divine.” He makes clear that rich employers must refrain from "usurious dealing" against their poor workers "because the poor man is weak and unprotected, and because his slender means should be sacred in proportion to their scantiness." Usury, then, is an evil because it deprives the poor of even the little they have earned – thus keeping them poor and beholden to their creditors. The poor must be given aid and opportunity to overcome their poverty, not loans designed to keep them bereft even of the little they could otherwise accumulate. The Church always opposed usury due to its tendency to oppress the poor.

Pope Leo XIII thus appears to be articulating a version of the distinction I advanced above between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and, for example, a creditor taking interest where the borrower used the loan proceeds to buy food to survive.

Does Duke's law school get a boost in the rankings because of a halo effect from the basketball team?

A friend suggested this to me. I suspect s/he's right.

Lawrence Trautman on evolution of the National Association of Corporate Directors

Lawrence Trautman has posted Present at the Creation: Reflections on the Early Years of the National Association of Corporate Directors (July 21, 2014). Available at SSRN: http://ssrn.com/abstract=2296427:

Abstract: Effective corporate governance is critical to the productive operation of the global economy and preservation of our way of life. Excellent governance execution is also required to achieve economic growth and robust job creation in any country. In the United States, the premier director membership organization is the National Association of Corporate Directors (NACD). Since 1978, NACD plays a major role in fostering excellence in corporate governance in the United States and beyond.

The NACD has grown from a mere realization of the importance of corporate governance to become the only national membership organization created by and for corporate directors. With a membership in excess of 14,000, today’s NACD is a reliable source of essential resources that assist board directors in strengthening board leadership. Now a member of the Global Network of Director Institutions (GNDI.org), NACD has worldwide impact. Even during the early years, NACD was a significant source of quality education and qualified directors to companies striving to achieve excellence in corporate governance. 

My interest in corporate governance covers more than thirty years. During my career, I have found the job of the corporate director both fulfilling and intellectually challenging. My involvement with the NACD dates back to 1978. At that time the Washington, DC-based organization was in its infancy; just a few months old. During NACD’s early months, I was a 28 year-old entrepreneur, serving as chairman and CEO of a Washington, DC-based financial services start-up. I needed to learn about corporate governance and recruit a board of directors capable of governing a national financial services entity, while communicating to the investor community that we were deserving of their support as we contemplated our initial public offering. 

NACD’s focus has changed over the years to reflect those issues receiving the most attention in corporate boardrooms at any given time. The Foreign Corrupt Practices Act, signed into law December 19, 1977, was a major development confronting directors as NACD was founded. Next, the SEC’s Advisory Committee on Corporate Disclosure, chaired by A.A. Sommer, held hearings focusing attention on the broad topic of corporate governance and served to highlight the need for increased professionalism by corporate directors. The 1985 decision in Smith v. Van Gorkom held that directors who make an uninformed decision are unprotected by the business judgment rule and, accordingly, face substantial personal liability exposure. Van Gorkom triggered a huge demand for director education. Focus on the need for effective audit committees resulted from the National Commission on Fraudulent Financial Reporting of 1987 (the “Treadway Commission”). 

NACD has also proven to be a great source of directors over the years for my involvement with early-stage companies. Experienced senior executive talent, in the form of independent outside board members, can prove to be a profoundly valuable intangible asset of any start-up enterprise. A lifetime of experience teaches that entrepreneurs may enhance the likelihood of ultimate enterprise success by recruiting the assistance of experienced executive talent. Corporate directors provide a useful mechanism in which to tap this asset and leverage many years of experience and personal relationships. 

This article discusses the growth of the New York and Baltimore/Washington, DC NACD chapters during these early days, especially at the local level. NACD’s primary strength is found in its local chapter system; these are the “grass roots” that make governance a viable field.

The NACD is a very important and effective organization, so Trautman's account was quite interesting.

Catholic Social Thought and Antitrust Law

My thanks to Daniel Sokol for calling this paper to my attention:

Is There a Vatican School for Competition Policy? - Tihamer Toth (Competition Law Research Centre, Hungary ; Peter Pazmany Catholic University - Faculty of Law)

ABSTRACT: This paper examines whether the Catholic Church’s social teaching has something to tell to antitrust scholars and masters of competition policy. Although papal encyclical letters and other documents are not meant to provide an analytical framework giving clear answers to complex competition questions, this does not mean that these thoughts cannot benefit businessmen, scholars and policy makers. The Vatican teaching helps us remember that business and morality do not belong to two different worlds and that markets should serve the whole Man. It acknowledges the positive role of free markets, the exercise of economic freedom being an important part of human dignity, yet warns that competition can be preserved only if it is curbed both by moral and statutory rules. It is certainly not easy to find a balance between the commandments to ‘love your neighbor’ and ‘you shall not collect treasure on earth.’ I argue that market conduct that undermines business virtues should be prohibited, either by antitrust or other forms of self- or government-regulation.

LLCs are not corporations. Why can't more judges realize that?

Joshue Fershee reviews the frustration many of us share with judicial attempts to shoehorn LLCs into corporate law doctrines that don't fit.