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Richard Epstein raises "Hard Questions On Same-Sex Marriage"

Highly recommended reading

Fee Shifting: Delaware's Self-Inflicted Wound

I've just posted a new article to SSRN:

Abstract: In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.

In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.

This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the state’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.

Bainbridge, Stephen M., Fee Shifting: Delaware's Self-Inflicted Wound (June 29, 2015). UCLA School of Law, Law-Econ Research Paper No. 15-10. Available at SSRN: http://ssrn.com/abstract=2624750

Now it just needs to find a law review home.

Bebchuk and Jackson are carrying the Democrat's proxy water

Lucian Bebchuk and Robert Jackson opine that:

Last week, the House Appropriations Committee included in its 2016 appropriations bill for financial services agencies a provision that would prevent the SEC from developing rules that would require public companies to disclose their political spending. Although this provision is unlikely to become law, its adoption is regrettable. In our view, Congress should let the SEC do its job and use its expert judgment—free of political pressures in any direction—to determine what information should be disclosed to public-company investors.

The notion that the SEC process will be apolitical and lead to a technocratic solution is, of course, risible. The activists who are backing this proposal are folks like unions, liberal NGOs, and Democrats. These interest groups think political spending disclosure will defund the right by deterring corporations from contributing to GOP candidates:

The resignation of Mozilla CEO Brendan Eich over a personal $1,000 donation he made in 2008 in support of California’s Proposition 8 shows the dark side of campaign disclosure laws and how liberals are using them to intimidate, harass, and bully anyone who disagrees with them on social and cultural issues. ...

What has been happening in recent years is no different then what racist government officials in Alabama were trying to do in the late 1950s when they subpoenaed the NAACP’s membership lists.

The left-liberal community therefore will bring enormous pressure to bear on the three Democrat members of the SEC, whose increasing willingness to push through highly partisan rules on a 3-2 basis will make them easy targets.

What people like Bebchuk, Jackson, ands the other securities law professors they've recruited are doing is giving academic cover to a highly partisan attack. Their efforts to add a neutral patina to a biased project must be resisted.

Delaware SB 75 will not kill fee shifting bylaws

Craig Eastland has an extensive and detailed analysis of why many fee shifting bylaws will survive the Delaware legislature's misguided effort to ban them.

Heminway on Smith on the Business Judgment Rule

Joan Heminway writes:

I had the privilege of sitting in on a stimulating paper session on "Private Fiduciary Law" at the Law and Society Association conference in Seattle last month.  The program featured some super work by some great scholars.  My favorite piece from the session, however, is a draft book chapter written by Gordon Smith that he recently posted to SSRN.  Aptly entitled The Modern Business Judgment Rule, the chapter grapples with the current state of the business judgment rule in Delaware by tracing its development and reading the disparate doctrinal tea leaves.  Here is a summary of his "take," as excerpted from his abstract (spoiler alert!):  "The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference." 

In the mere 18 pages of text he uses to engage his description, analysis, and conclusion, Gordon gives us all a great gift. His summary is useful, his language is clear, and his analysis and conclusions are incredibly useful, imho.  I am no soothsayer, but I predict that this will be a popular piece of work.

I concur. It's a really good article with some excellent insights. Not to mention a very fair summary of my argument that the business judgment rule is an abstention doctrine.

Gordon's inviting comments over at the Conglomerate blog.

SEC Chairman Mary Jo White wants to further empower shareholder activists

From the WSJ:

Securities and Exchange Commission Chairman Mary Jo White, speaking in Chicago on Thursday, said the SEC is developing rules that would make it easier for shareholders to vote on board candidates offered by investors, in competition with those pushed by the company’s management.

The possible new rules, which are at an early stage of development, focus on what is known as a “universal ballot,” a single voting form in contested corporate elections. Currently, voters in contested elections receive two sets of ballots, each featuring a rival slate of board candidates.

For investors and governance advocates, the proposed rules could bolster activist campaigns, as the universal ballot is widely seen as more helpful to outsiders trying to get a seat on a board, especially in seeking the votes of smaller investors.

The problems with this proposal are numerous:

1. It's a further federalization of issues best left to state corporate law.
2. It's another example of how the SEC is tilting the playing field between directors and shareholders in favor of activists.
3. As usual, many of the users will be activist union and state or local government pension funds seeking to advance a political agenda.

New Delaware Corporate Legislation

Richard Layton Fingers reports:

Senate Bill 75, which contains several important amendments to the General Corporation Law of the State of Delaware (the “DGCL”), was signed by Delaware Governor Jack Markell on June 24, 2015. As described in this alert, the 2015 legislation includes, among other things:

• Prohibition on Fee Shifting. The legislation amends Sections 102 and 109 to prohibit “fee shifting” provisions in certificates of incorporation and bylaws of stock corporations.
• Authorization of Delaware Forum Selection Clauses. The legislation adds new Section 115 to validate provisions in certificates of incorporation and bylaws that select the Delaware courts as the exclusive forum for “internal corporate claims.”
• Flexibility in Stock and Option Issuances. The legislation amends Section 152 to provide greater flexibility in stock issuances, and makes corresponding amendments to Section 157 in respect of the authorization of rights and options to purchase stock.
• Ratification of Defective Corporate Acts and Stock. The legislation amends Sections 204 and 205 to clarify and streamline the procedures for ratifying defective corporate acts and stock.
• Public Benefit Corporations. The legislation amends Section 363 to loosen the restrictions on (x) an existing corporation becoming a “public benefit corporation” and (y) a public benefit corporation ceasing to be a public benefit corporation. It also adds a “market out” exception to the appraisal rights provided in Section 363(b) in connection with a corporation becoming a public benefit corporation.

The post goes on to provide a pretty detailed analysis of each provision.

Black Thursday

In reviewing today's Supreme Court decisions on Obamacare and disparate impact, I'm feeling pretty betrayed by Roberts and Kennedy. Why is it that so many purportedly conservative justices slide so far to the left once they're on the court?

In any case, Black Thursday prompts me to observe that the opposite of schadenfreude is gluckschmerz - i.e., experiencing pain from observing someone else's pleasure - which is precisely what I'm feeling about liberals and the SCOTUS.

Yet more evidence in favor of permitting CEO/Chairman of the Board duality

It is a common refrain from corporate governance "reformers" that a company's CEO should not also serve as the firm's chairman of the board of directors. I have argued that a hard rule requiring such separation makes no sense:

Should the CEO also be the Chairman of the Board ...   Aug 4, 2009 ... One of the most obvious areas of abuse concerns the resolute insistence by most public companies to have the CEO serve as chairman of the ... www.professorbainbridge.com/.../should-the-ceo-also-be-the-chairman-of- the-board.html

Separating the CEO and Chairman of the Board ...   Sep 14, 2010 ... Marty Robins: It's common knowledge that separating the roles of CEO and Board Chairman (see Chairmen's Forum) is considered by most the ... www.professorbainbridge.com/.../separatring-the-ceo-and-chairman-of-the- board.html

Davis Polk on ISS Policy re Combined CEO and Chairman of the ...   Nov 3, 2014 ... I previously commented on the 2015 ISS Benchmark Policy Consultation re Independent Chair Shareholder Proposals and praised Randi Val ... www.professorbainbridge.com/.../davis-polk-on-iss-policy-re-combined-ceo- and-chairman-of-the-board-and-iss-lousy-process.html

"holistic"--ie, bogus--approach to independent chairman of the board ...   Nov 6, 2014 ... Davis Polk on ISS Policy re Combined CEO and Chairman of the ... on the 2015 ISS Benchmark Policy Consultation re Independent Chair ... on ... www.professorbainbridge.com/.../iss-adopts-a-new-holistic-ie-bogus- approach-to-independent-chairman-of-the-board-proposals.html

Remove the CEO/Chairman of the Board Provision of the Dodd Bill ...   Apr 25, 2010 ... Section 973 of the Dodd Wall Street reform bill mandates new disclosures from all firms -- Main Street as well as Wall Street -- explaining "the ... www.professorbainbridge.com/.../remove-the-ceochairman-of-the-board- provision-of-the-dodd-bill.html

A new study offers additional support for my position:

Many scholars have been quick to criticize the merits of CEO duality, a situation where a company's Chief Executive Officer is also the Chair of the Board, by claiming that CEO duality undermines the board's ability to effectively monitor and constrain self-interested CEOs. These criticisms are often based on empirical studies that use firm outcomes — aggregate performance measures — as proxies to evaluate the merits of an incentive structure such as duality on the behavior of CEOs. In this paper, I construct a novel and more direct measure of CEO behavior by gathering information submitted by companies to the Securities and Exchange Commission. This variable measures how aggressively a CEO whose company is being sold negotiates with a prospective buyer during the pre-announcement sale process. I find that dual CEOs act in the interest of their shareholders by bargaining 16.1% more aggressively in takeover negotiations than do single role CEOs. The paper’s main finding is consistent with the view that managers, when given higher levels of responsibility, act as good stewards on behalf of the firm and its shareholders.

Ghazal, Victor A., CEO Duality and Corporate Stewardship: Evidence from Takeovers (June 9, 2015). Available at SSRN: http://ssrn.com/abstract=2616464

Silecchia on "Evangelization and the Catholic Lawyer"

Silecchia, Lucia Ann, A Witness First Lives the Life He Proposes: Evangelization and the Catholic Lawyer (2015). “A Witness First Lives the Life He Proposes”: Evangelization and the Catholic Lawyer (May 21, 2015). Available at SSRN: http://ssrn.com/abstract=2616323:

This essay was presented at the lecture for legal professionals in Baltimore, Maryland, on May 21, 2015. The roots of the word evangelization are, literally, in the words that mean “to bring good news.” We live in a world that craves good news and, by virtue of our Baptism, all of us – lawyers included – are called to bring good news to a world that, despite all appearances to the contrary, aches for good news and deeply yearns to know the God from whom all good news comes, and to whom all good news leads. I am convinced that there is a powerful role for us in the legal profession to play in this great task of evangelization by being joyful, hopeful witnesses to what is good, just, and simply right. Each are called to respond to the call to evangelize in our own circumstances. This essay explores, briefly, the opportunities that we may have to evangelize, or “bring good news” as lawyers, in three distinct settings: in the ways in which we educate future lawyers; in the way in which our profession is practiced; and, in the substantive law of our land itself.

Recommended reading!

Cunningham on "The AIG Case and the Rule of Law"

I like Larry Cunningham's take on the AIG case:

Eight years of official, media-sanctioned cover-up of the U.S. government’s trampling of the rule of law may be coming to an end.

Go read the whole thing.

LoPucki on "Disciplinary Legal Empiricism"

My UCLA colleague Lynn LoPucki has posted an interesting article on empirical legal scholarship:

Disciplines tend to develop their own empirical methods. This article reports on a study of one hundred and twenty empirical legal studies published in the non-peer-review leading law reviews and in the peer-review Journal of Empirical Legal Studies ("JELS"). The study reveals four important categories of differences between disciplinary legal empiricism, defined as legal empiricism conducted by persons holding Ph.D. degrees (whether or not they also hold law degrees), and native legal empiricism, defined as legal empiricism conducted by persons holding only law degrees. First, the study found that Ph.D.s and J.D.-Ph.D.s collaborate more than J.D.s, but the collaboration is largely among the Ph.D. holders themselves. Second, JELS appeared to value methodological expertise over legal expertise. Only 15% of the JELS articles had no author holding a Ph.D., while 35% had no author holding a J.D. Third, the J.D.s were more likely to draw their data from published sources, while Ph.D.s and J.D.-Ph.D.s were more likely to draw their data from prior research, survey, or experiment. Lastly, the J.D.s were almost twice as likely to code their own data. These differences are important because law schools are rapidly hiring J.D.-Ph.D.s in an effort to increase the quantity and quality of legal empiricism. The study concludes that law school Ph.D. hiring is unlikely to achieve large increases in collaboration between Ph.D.s and J.D.s. It also concludes that the reduction in coding resulting from the hiring of more J.D.-Ph.D.s will escalate legal empiricism’s methodological sophistication while reducing its legal sophistication.

LoPucki, Lynn M., Disciplinary Legal Empiricism (May 17, 2015). UCLA School of Law Research Paper No. 15-17. Available at SSRN: http://ssrn.com/abstract=2607129

In other words, law schools are hiring people who are better at crunching numbers than legal analysis. Which makes no fraking sense. We're supposed to be teaching people how to be lawyers, not statisticians. We're supposed to be doing research that helps lawyers and judges solve difficult legal questions, not engaging in mathematical masturbation. 

More reading recommendations

Best book on religion I've read so far in 2015: Jesus: A Biography from a Believer. By Paul Johnson http://t.co/wQ5IbAJyqy Inspiring.

— Stephen Bainbridge (@ProfBainbridge) June 14, 2015

My all time favorite work of military history: A History of Warfare by John Keegan http://t.co/G57gVLS4OU

— Stephen Bainbridge (@ProfBainbridge) June 14, 2015

Another great Great War read: The First World War by John Keegan http://t.co/ZqEuCJqBnu via @amazon

— Stephen Bainbridge (@ProfBainbridge) June 14, 2015

Taub asks "Is Hobby Lobby a Tool for Limiting Corporate Constitutional Rights?"

Taub, Jennifer, Is Hobby Lobby a Tool for Limiting Corporate Constitutional Rights? (May 20, 2015). Constitutional Commentary, Forthcoming. Available at SSRN: http://ssrn.com/abstract=261242:

Critics lament that with Burwell v. Hobby Lobby Stores, Inc., the Supreme Court further expanded corporate personhood powers. This article offers an alternative reading. It suggests that Hobby Lobby might actually provide a tool for limiting previously recognized corporate constitutional rights. To those who oppose the decision, this assertion might seem unduly optimistic. After all, the court did determine that three family-owned business corporations were “persons” with sincere religious beliefs entitled to use the Religious Freedom Restoration Act (“RFRA”) to deprive employees of federally mandated healthcare insurance coverage. Given that the Court determined that certain “closely held” business corporations possessed statutory rights previously thought reserved to real human beings, it would not seem to presage the future restriction of corporate constitutional rights. However, by designating (thus far) just closely-held corporations as persons with free-exercise rights under RFRA the Court invites us to question whether other corporations (that lack similar attributes) would be denied such personhood. And, if so, whether a distinction between closely-held corporations and others could be applied to curtail corporate constitutional rights.

Determining how Hobby Lobby restricts corporate personhood rights is not a mere thought experiment. It has become immediately necessary as a practical matter. Because the Court held that the contraceptive mandate under The Patient Protection and Affordable Care Act (“ACA”) as applied to the three corporate litigants violated RFRA, the Department of Health and Human Services (“HHS”) was obligated to fashion an exemption for them and similar organizations. Yet, notwithstanding the apparent importance of the term to its central holding, the Court majority failed to define what it meant by a “closely-held corporation.” Moreover, there is no uniform state or federal law defining this now critical category. Further, the decision seemed to discourage “discriminating” between classes of corporate entities. Wrestling with this apparent indefiniteness, HHS sought through a proposed rulemaking to create a diagnostic test (what I will refer to as a type of “Hobby Lobby Tool”) to identify the circumstances when business corporations could become eligible for the exemption from the contraceptive mandate.

The Hobby Lobby majority opinion does provide some guidance. The Court’s threshold determination that the three corporations were persons under RFRA appears to have depended upon the existence of three conditions. First, upon looking-through the corporate entity, the Court was able to see human owners that were co-extensive with the corporation. This move ignored the “separateness” that state corporate law recognizes between a corporation and its owners. Second, it appears that only because the identified human owners held (or agree to share) the same sincere religious beliefs, and third, openly ran the corporation in accordance with those beliefs, did the Court conclude the beliefs of these human beings could be attributed to the corporate entity. Arguably, only with these three factors present, did the Court determine that the contraceptive mandate substantially burdened the sincere religious beliefs of each corporation. The majority opinion, written by Justice Samuel Alito, suggests that to be deemed a person under RFRA, a corporation would not need to be closely-held. Thus, so long as each of these three conditions was met a corporation could be considered a person under RFRA. Conversely, not all closely held corporations could meet the test.

The decision arguably provides tools to curtail certain corporate constitutional rights. The rights that could be subject to restriction are those that the Court has recognized as deriving from looking through the entity to the owners. This would include the First Amendment corporate political spending rights recognized in Citizens United. A statute should be upheld that limits corporate political spending to those entities where there is an identity of interest between the human owners and the corporation, where there is majority shareholder consent to the specific spending, and where there is public disclosure of such spending.

It's an interesting and thoughtful article, which I recommend, but I basically don't buy it. As Jennifer notes, "Many corporate law scholars have studied the opinion seeking guidance to distinguish between those business corporations that could or should have free-exercise rights."

IMHO, all of these scholars are making the same basic mistake, which is that they think there is something coherent going on in the Supreme Court's corporate personhood doctrine. But that's just wrong. The Supreme Court has no idea what it is doing in this area and is just making it up as it goes along. Precedent and stare decisis mean a lot less than constructing an opinion that can somehow attract the votes of 5 justices.

As I noted in an earlier post:

The Economist's Schumpeter has an interesting column on corporate personhood in the most recent issue. He (?) argues:

The legal conceit that companies are natural persons is vital to capitalism. It simplifies litigation greatly: companies can act like individuals when it comes to owning property or making contracts. Timur Kuran of Duke University argues that the idea of corporate personhood goes a long way to explaining why the West pulled ahead of the Muslim world from the 16th century onwards. Muslim business groups were nothing more than temporary agglomerations which dissolved when any partner died or withdrew. Legal personhood gave Western firms longevity. ...Western companies turbocharged the industrial revolution and laid the foundations for mass prosperity.

I agree, as regular readers know. I also agree with Schumpeter's implicit concern that US law confers personhood on the corporation without a coherent theory of why it does so or where the boundaries of that legal fiction are to be located. As I complained after the recent AT&T decision:

Chief Justice Roberts could have summed up his opinion far more succinctly: "Because at least 5 of us say so."

The Citizens United decision last term attracted much criticism--not least from Con Law Professor-in Chief Obama--for holding that a corporation is a person and as such has certain constitutional rights. While I agreed with the holding, I was disturbed that the Chief Justice's majority opinion for the Supreme Court so obviously lacked a coherent theory of the nature of the corporation and, as such, also lacked a coherent theory of what legal rights the corporation possesses.

The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts  has failed to articulate  a plausible analytical framework for this important problem.

Sokol on "Teaching Compliance"

I've been thinking about teaching a course on compliance and Daniel Sokol's new paper has been tremendously helpful in thinking about how to structure it:

Compliance is a growing field of practice across multiple areas of law. Increasingly companies put compliance risk among the most important corporate governance issues facing them. Moreover, as “JD plus” jobs proliferate, the demand for hiring both at the entry level and for former students currently in practice who are experienced in the compliance field will continue to grow. The growth in compliance jobs comes at a time in shifting demand for legal jobs for law school graduates. Traditional law firm entry level jobs at large law firms, which were the staple of on campus recruiting before 2007, have not returned to pre-2007 levels even with the end of the recession. Technological changes, greater in-house hiring, and better creation of efficiencies have reduced demand for large law firms, which were the traditional training ground for in-depth legal skills and soft skills. 

Law schools have responded to the demand shift in entry level hiring with a supply side response - classes in compliance. In some cases, law schools have set up compliance certificates or degrees in areas such as health care and business law. There is now even a casebook devoted to compliance. Yet, with all of these efforts at creating opportunities for careers in compliance, many programs and classes in compliance are nothing other than dressed up versions of classes in white collar crime or regulation or lectures on latest case developments that one might find in a continuing legal education program. These courses do not focus on the substantive areas needs practice with the highest demand for compliance (in-house legal and JD plus jobs) and do not teach the analytical skills necessary to succeed in such jobs. Nor do they focus on the special context within which compliance operates – ideally independent of the “business” but always a part of it. Essentially, law schools have misdiagnosed the demand side - it is not merely the particular type of class (compliance) but also the substance of such classes with the type of quality offering necessary to maximize student short term (entry level hiring) and long term (preparation for ever-shifting analytically complex practice challenges). 

This Essay suggests an alternative approach to teaching compliance – one that focuses on the design and implementation of compliance programs. The Essay explores the determinants of why teaching compliance is important, the pitfalls of current approaches and the types of teaching innovations that sophisticated compliance practice requires. First, it explains what compliance is. Then, it explains the basis for the current economic drivers of the increased focus on compliance by firms. Next, it identifies the drivers of illegality before explaining how law school and in-house compliance training might be better structured in both analytical approach and substance. Finally, the Essay concludes with some thoughts about issues in compliance in which courses might place greater emphasis.