ProfessorBainbridge.com

Did nobody in Seattle take Econ 101?

Seattle’s $15 minimum wage law goes into effect on April 1, 2015. As that date approaches, restaurant across the city are making the financial decision to close shop. The Washington Policy Center writes that “closings have occurred across the city, from Grub in the upscale Queen Anne Hill neighborhood, to Little Uncle in gritty Pioneer Square, to the Boat Street Cafe on Western Avenue near the waterfront.”

via shiftwa.org

Has William Ackman added market manipulation to the shareholder activist tool box?

The WSJ reports that the feds are investigating Ackman hirelings for possible manipulation violations in connection with Acumen's efforts to profit by denigrating Herbalife.

Rickey on Delaware's fee-shifting legislation

Anthony Rickey has an article on the proposed Delaware fee shifting legislation at Law 360 (sub. req'd).

Could fee-shifting be a disruptive innovation that turns Delaware into, say, Kodak

As regular readers know, I think the Delaware state bar made a serious policy error by proposing legislation to ban fee-shifting bylaws and charter provisions. But have they also made a serious tactical error?

The US Chamber of Commerce thinks so:

Opposition from the U.S. Chamber of Commerce delayed debate last year on a similar piece of legislation. Now, Chamber officials say the new proposal could threaten Delaware's billion-dollar incorporation franchise. ...

Rickard, in a written statement, said the Bar's recommendations do "precious little to solve the broadly-recognized problem of abusive mergers and acquisitions litigation, while taking away the fee-shifting approach some companies have used to combat it.

"The only guaranteed winners will be Delaware lawyers--who've effectively strengthened their grip over these M&A lawsuits--at the expense of Delaware's corporate law franchise," Rickard said.

Delaware's dominance is so deeply entrenched that it hard to imagine Delaware losing its position as top dog in the corporate law world (except maybe to Congress). But there is a chance--however--slight that fee shifting will be a game changer. Oklahoma has already amended its corporation statute to authorize fee-shifting bylaws. It's easy to imagine Delaware competitors like Nevada and Delaware jumping on the bandwagon to try swiping some of Delaware's business. I doubt whether the ABA Corporate Laws Committee would adopt a provision authorizing fee shifting bylaws, but if they did then Delaware would really have to rethink.

Appraisal Arbitrage: And The Delaware State Bar Muffs Another One

We've already discussed the unfortunate (to put it mildly)  legislation proposed by the Delaware state bar to ban fee shifting bylaws and charter provisions. It turns out that the bill's got still more problems:

Delaware corporations and their advisers have been eagerly awaiting the response of the Delaware legislature to the recent surge in appraisal arbitrage and judicial pronouncements allowing this activity and suggesting that lawmakers should step in if they perceive a problem. It now appears based on a proposal released by the Delaware Corporation Law Council that the legislature may act as soon as this week. If the lawmakers follow the recommendations of the Council (which they usually do) the changes will likely disappoint Delaware corporations, make mergers and acquisitions in that important state more difficult, reduce deal flow, and lead to lower prices being paid to selling shareholders. The beneficiaries of this legislation will be the small (but growing) group of short term speculators specializing in appraisal arbitrage and the advisors who support that industry. ...

It has been reported that billions of dollars are now devoted to appraisal arbitrage, and with the blessing of the courts in Delaware and soon perhaps the legislature as well, it is likely that even more transactions will be subjected to appraisal claims. As a result, corporate acquirers will have to resort to self-help if they want to know in advance how much an acquisition is going to cost them (which is always important but especially critical in leveraged transactions). This self-help may take the form of the appraisal closing conditions suggested by the Council, or differential pricing (such as an automatic price reduction if too many shareholders assert appraisal). More likely it will just mean lower acquisition prices being offered to all shareholders, as buyers now know they will have to contend with a new category of hold-up artists. Some companies with near-term contingences they would like to derisk may find it hard to sell themselves at all. It is difficult to see how this shift of value from shareholders as a whole to a small group of short-term speculators is socially advantageous or in the best interests of State of Delaware.

Kindly go read the whole thing.

 

UC Irvine Law said they'd debut in the top 20. It didn't happen. Good.

David Bernstein has details on why Dean Erwin Chemerinsky and his OC mates fell short of their "very ambitious, and very public goal of debuting as a U.S. News top-20 law school (or perhaps even “a law school that would be ranked in the top 20, by every measure, from the outset”)."

Of course, IMHO, the whole thing should have been killed before it got off the ground. And I lost whatever respect I might have had for their administration when they hired the felon Bill Lerach. To teach a course on the ethics of capitalism, no less!

Update: In the interests of being fair and balanced: Here's the highly estimable UC Irvine Professor Rick Hasen on why UC Irvine is just super duper.

Soliciting thoughts on a strategy on writing an article on fee-shifting bylaws in Delaware

The announcement that the Delaware bar is proposing legislation banning fee shifting bylaws raises a conundrum. Do I try to do a quick and dirty piece that could get rushed into an online review before the legislative session ends in June? Or a more considered critique of the bill (assuming it passes) for publication in a traditional law review in the fall?

Quick and dirty would likely mean basically refurbishing blog posts--i.e., SPLAT. Personally, I have no problem with SPLAT. To the contrary, in this sort of setting, I think it makes sense. (See this post) But some law reviews (yes, I'm looking at you Stanford) get all moralistic about it.

Anyway. Thoughts would be welcome.

BTW, here are the posts I'd be splatting:

Delaware's Decision: Viewing fee shifting bylaws through a public ...   Nov 18, 2014 ... (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 ... www.professorbainbridge.com/.../delawares-decision-viewing-fee-shifting- bylaws-through-a-public-choice-lens.html

The case for allowing fee shifting bylaws as a privately ordered ...   Nov 17, 2014 ... I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy ... www.professorbainbridge.com/.../the-case-for-allowing-fee-shifting-bylaws- as-a-privately-ordered-solution-to-the-shareholder-litigat.html

A Open Letter to the Delaware Legislature on Fee Shifting Bylaws

Francis Pileggi reports that the Delaware bar has recommended to the Delaware legislature a bill that would, inter alia, "limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws":

The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill.

The key proposed statutory text follows:

Section 2.  Amend § 102, Title 8 of the Delaware Code, by adding a new section, § 102(f), shown by underline as follows:

(f) The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with an intracorporate claim, as defined in § 115 of this title.

Section 3.  Amend § 109(b), Title 8 of the Delaware Code, by making insertions as shown by underline as follows:

(b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with an intracorporate claim, as defined in § 115 of this title.

What justifications does the Delaware bar offer for this remarkably pro-plaintiff bill? The FAQ states:

There is no federal or state regulator that enforces the rights of stockholders:  they are enforced almost entirely through the mechanism of stockholder lawsuits.  A jurisprudence has developed in Delaware over the last hundred years, which has been very successful in regulating this critical relationship.  If the ability of stockholders to bring lawsuits were seriously curtailed by fee-shifting provisions, a regulator is quite likely to fill the void--perhaps the federal government. 

Fair enough. Delaware's principal competitor as the leading corporate law jurisdiction is no longer the other 49 states, but the federal government. But this just shows the true motive of the lawyers behind this bill: Both Delaware plaintiff and defense lawyers benefit from a system that keeps litigation--lots of litigation--in Delaware courts.

For more on these bylaws see my posts: 

Delaware's Decision: Viewing fee shifting bylaws through a public ...   Nov 18, 2014 ... (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 ... www.professorbainbridge.com/.../delawares-decision-viewing-fee-shifting- bylaws-through-a-public-choice-lens.html

The case for allowing fee shifting bylaws as a privately ordered ...   Nov 17, 2014 ... I had been planning on writing a law review article on fee shifting bylaws, but I suspect that events will overtake the inevitably lengthy ... www.professorbainbridge.com/.../the-case-for-allowing-fee-shifting-bylaws- as-a-privately-ordered-solution-to-the-shareholder-litigat.html

Oklahoma leads on fee shifting bylaws, will Delaware and MBCA ...   Oct 2, 2014 ... But if I were, I'd be jumping up and down to get the Committee to follow Oklahoma (of all places) lead on fee-shifting bylaws. Kevin Lacroix has ... www.professorbainbridge.com/.../oklahoma-leads-on-fee-shifting-bylaws- will-delaware-and-mbca-follow.html

An Open Letter to the Delaware Legislature re Forum Selection Bylaws

Francis Pileggi reports that the Delaware bar has recommended to the Delaware legislature a bill that would, inter alia, validate forum selection bylaws that require shareholders to bring corporate law claims exclusively in Delaware. The provision specifically "disallows bylaws that would allow shareholders to bring suit in some other state," thereby favoring Delaware courts and perhaps raising Commerce Clause issues.

In general, I favor this aspect of the bill. Contracts routinely include exclusive jurisdicton provisions and they are routinely enforced. The corporation's organic documents (i.e., the articles of incorporation and bylaws) represent a contract between the corporation and its shareholders. Hence, like any other contract, an exclusive jurisdiction provision in those documents should be enforced by the courts.

As I wrote the last time this issue was in the news:

Keeping these cases in Delaware courts [via exclusive jurisdiction provisions] strikes me as preferable [to allowing plaintiff to select any forum it wants]. Expert judges. No juries. No home state bias in favor of one side or the other, since usually both sides will have their principal place of business elsewhere. Promotes consistency of outcomes. Delaware courts more rigorous than most in policing plaintiff lawyers bringing suits not in the best interests of the corporation or its shareholders as a whole.

There's a direct analogy here to mandatory arbitration provisions of the sort Carlyle Group was going to include in its articles (until it spinelessly changed its mind). As I wrote about them:

See Charles Nathan's post on the analogous issue of the enforceability of exclusive jurisdiction provisions:

In a recent decision, In re Revlon, Inc. Shareholders Litig., newly-appointed Vice Chancellor Laster suggested a solution. In dicta, he endorsed a Delaware entity’s right to mandate in its governance documents a chosen forum for the resolution of state law-based shareholder class actions, derivative suits and other intra-corporate disputes. Vice Chancellor Laster stated that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.” Presumably, the Vice Chancellor had Delaware in mind.

Nathan goes on to discuss the legal issues at some length. In any case, assuming Laster wasn't simply trying to build up business for Delaware courts, there's no immediately obvious policy reason why the same result would not apply to mandatory arbitration provisions.

And vice-versa.

Delaware legislative proposals on fee shifting and forum selection bylaws

Francis Pileggi reports that:

Legislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill.

He goes on to explain why the bill may not get the usual legislative rubber-stamp.

Steven Lubet on anti-semitism at UCLA and the administration's lame response

“Given that you are a Jewish student and very active in the Jewish community, how do you see yourself being able to maintain an unbiased view?”  That question was posed UCLA undergrad Rachel Beyda in her appearance before the student government (USAC), as part of her application to serve on the Judicial Board.  To his credit, the student body president intervened, saying that the question was inappropriate.  Nonetheless, the questioner persisted, and Beyda was compelled to explain that being Jewish had nothing to do with being biased.  But that was not the end of it.  Three other members of the student government pursued the same line of questioning, having obviously assumed that being Jewish raised legitimate questions that had to be answered.  This story is on the front page of today’s New York Times, and it was first reported three weeks ago in an oped (by Beyda’s roommate) in the Daily Bruin.

Beyda maintained her composure while answering the offensive questions, and she was then asked to leave the room while the USAC members debated her appointment (the meeting was open to everyone but Beyda, and a videotape has been posted on Youtube).  During the discussion, which lasted over 40 minutes, four members of the USAC repeatedly questioned Beyda’s general ability to be fair, given that she belonged to a Jewish sorority and was active in Hillel.  One remarked “it’s not her fault, but she’s part of a community.”  Another actually raised the possibility of “divided loyalty.”  Initially, the USAC vote divided 4-4, and Beyda’s nomination failed.  No one had said anything negative about her qualifications; the only objection was that her Jewishness raised a “conflict of interest.”  At that point, a faculty advisor intervened and explained that the students had misunderstood “conflict of interest.”  Another vote was taken, and this time the appointment was unanimously approved.

The worst aspect of this incident is that seemingly intelligent undergraduates could so blithely discuss whether membership in the Jewish community might exclude an otherwise qualified applicant.  Although that is the very definition of bigotry – making assumptions about an individual based upon group identity – nobody at the meeting raised the very obvious issue of anti-Semitism.  Even the faculty advisor spoke only about the difference between real and perceived conflicts of interest, saying nothing about the manifest ethnic and religious prejudice that was evident from the objectors’ questions. ...

And even as he criticized the vote, UCLA Chancellor Gene Block made no reference to anti-Semitism, saying only that “No student should feel threatened that they would be unable to participate in a university activity because of their religion.” This is “a teaching moment,” Block later told a reporter, “in which the students are learning about governance.” But shouldn’t they also be learning about prejudice? In a similar incident several years ago, in which an undergraduate posted a video that disparaged Asian-Americans, Block was far more direct, saying that he was “appalled” by the video, which he found “shameful” and “indefensible.” And that was in response to the words of a single undergraduate, in contrast to official actions on an elected student body.

via www.thefacultylounge.org

Active investment fund management is a huge rip-off

WHENEVER one writes about the failure of active managers to beat the index, someone is bound to pop up online and argue that people don't pick fund managers at random. Select the right fund managers and all will be well. But how? Relying on past performance does not seem to work. Logic would also suggest that it cannot be easy to identify the best performers in advance; if it were, then why would anyone give money to the underperformers?

Many pension funds and endowments hire investment consultants to help them choose fund managers (one estimate is that 82% of US pension plans use such services, and consultants advise on $25 trillion of assets). The consultants employ highly-educated workforces, have decades of experience and charge hefty fees. But an award (the 2015 Commonfund prize) has just been granted to an academic paper that concludes

we find no evidence that these (the consultants') recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless

via www.economist.com

Après moi, le déluge

"Law professors are the 'One Percent' of academia and that means no one is going to lament their passing" http://t.co/r61wEkAAPk

— Stefan Padfield (@ProfPadfield) March 6, 2015

If the Law School Armageddon is coming, I hope it holds off 8 more years. Because come December 2023, I'm done. Helen and I will ride our RV off into the sunset.

Do not cite this blog post without my written permission

I was reading an article that had been posted on SSRN and noticed that every page had a header reading:

Work in progress. Please get permission from the author before citing this piece. 

Bold typeface and all.

Granting that I'm a cranky curmudgeon, but this is just stupid. Why would you post a draft to SSRN--which anybody anywhere in the world with access to a search engine can download, copy, cite, quote, plagiarize or what have you--and try to protect it from being cited or quoted?

Look, if your article is not ready for prime time, don't put it on the internet where everything lives forever. If it is ready, let people do what they want with it.

Update: From Larry Solum's blog:

Lee Anne Fennell (University of Chicago Law School) has posted Do Not Cite or Circulate (Green Bag 2d (2015 Forthcoming)) on SSRN. Here is the abstract:

This short essay ponders why legal scholars attach formulations such as "Do Not Cite or Circulate" to draft works. It argues against the practice in most circumstances, particularly for work posted on the internet.

And from the article:

If a draft still needs a lot of work, the phrase “preliminary and incomplete” might be added. It signals that there’s a later draft to come, but doesn’t tell readers what to do with the draft in their hands. Another alternative is something like this: “Draft [date]; contact author at [email] for the most recent version.” This works well too, assuming one does eventually generate a more recent version. Best of all is to indicate where the paper is forthcoming, once one knows. This does a world of good in inducing accurate updating without reducing the chance that you’ll be cited at all. The use of an “Academic Circulation Encouraged” or “ACE” label would also be helpful in clarifying how the work can be used.

Highly recommended & in my opinion correct.  Download it while its hot!

The SEC misspeaks about the effect of US v Newman on insider trading cases

At the recent SEC Speaks conference:

SEC Solicitor Jacob Stillman said the Newman decision would lead to confusion because it altered the recognized standard for the personal benefit that must be shown to establish insider liability. ...

Deputy Director of Enforcement Stephanie Avakian said that the Second Circuit’s decision impacted only a subset of the Commission’s insider trading cases, but could still affect its ability to bring some cases, and, therefore, could hurt efforts to maintain investor confidence in the fairness and integrity of the markets.

Nonsense. In a recent amicus brief in the Newman case filed by yours truly, Todd Henderson, and Jonathan Macey, we explained that:

The panel’s opinion in Newman is both a correct application of the personal benefit test adopted by the Supreme Court in Dirks v. SEC and an important corrective to the government’s drive to expand the limits of insider trading liability. As the Dirks court appreciated, in the economically critical area of analyst-insider communication, a liability standard that is overly broad or unclear will deter market participants from seeking quality information on which to trade and thereby damage the healthy functioning of capital markets. The Supreme Court fashioned the personal benefit test accordingly, to draw a clear line between permissible and impermissible information gathering, so that analysts and investors would know when trading was permissible and not be needlessly deterred from seeking the best information available to them.

The government now seeks to dilute the Supreme Court’s test to the point where it would become, in the Newman court’s words, “a nullity.” Newman op. at 22. Under the government’s interpretation of personal benefit, almost any non- public insider disclosure could qualify, and the recipient of information would have no way of determining when trading on that information was permitted. The government’s misreading of Dirks would fundamentally undermine the policy imperatives that led the Supreme Court to adopt the personal benefit test as an important market-protective limit on insider trading liability, and would deter valuable analyst-insider communications, to the detriment of the market and of all market participants. 

I recommend that the SEC read it before they misspeak again.