ProfessorBainbridge.com

Theories of shareholder voting

Paul Edelman and Randall Thomas have posted to SSRN a very interesting paper on The Theory and Practice of Corporate Voting at U.S. Public Companies (August 25, 2015),  available at SSRN: http://ssrn.com/abstract=2650661:

This paper develops a comprehensive theory of corporate voting and its role in corporate governance for U.S. public corporations. We begin by addressing why shareholders should vote, and then ask why no other stakeholders vote. We finish the first part of the paper by examining what shareholders should vote on. In Section II we discuss the implications of empty voting for our theory. Section III examines the current system of corporate voting in the U.S. to see how it conforms to our theory. We finish with some brief conclusions.

I recommend it highly. But for a slightly take on the same subjects see The Case for Limited Shareholder Voting Rights by yours truly:

Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. 

As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.

Bainbridge, Stephen M., The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006; UCLA School of Law, Law-Econ Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=887789

Robert Mondavi Cabernet Sauvignon Reserve (Napa Valley) 2004

Having survived the first week of my 27th year in law teaching, I decided I deserved a treat Thursday night. So I picked up some filet mignon, baby Yukon Gold potatoes, and (I know it's cheating, so sue me) Knorr Bearnaise Sauce Mix and opened the 2004 Mondavi Reserve Cabernet. It required decanting, both because it had thrown a lot of sediment and because at age 11 it was still an infant that needed to breathe. Deep, inky ruby color. As it sat in the decanter for an hour while I cooked dinner the bouquet perfumed the entire room. Blackberry, blueberry, and cassis on the nose. Black currant, mocha java, blackberries, blueberries, olives, and star anise on the palate. Will age well. Grade: 95

Foxen Winery Old Vines Ernesto Wickenden Vineyard Chenin Blanc (Santa Maria Valley) 2013

It was too damned hot last night to cook, so I made a no-cook Panzanella salad (Tuscan Bread Salad With Garlic and Capers) from a Cook's Illustrated recipe. Foxen's 2013 Ernesto Wickenden Vineyard Chenin Blanc was a great match. Fermented in stainless steel tanks and briefly aged in neutral French oak barrels. A very pretty yellow color. Bright, fresh, with good acidity. Citrus, honeydew melon, pear. Grade: 88

Qupé Bien Nacido Cuvée (Santa Maria Valley) 2013

It was still too hot to cook tonight, so I went with another no cook salad and a crisp white wine. To wit, the 2013 Qupé Bien Nacido Cuvée and Fattoush (Pita Bread Salad With Tomatoes And Cucumber) from a Cook's Illustrated recipe. The Qupé Bien Nacido Cuvée is a 50/50 blend of Viognier and Chardonnay. 13% alcohol. Pale yellow. Bright fresh apricot, peach, and pear notes. Refreshing. Grade: 88

Tweeting about LLC veil piercing

LLCs Still Don't Have Corporate Veils. Really. http://t.co/nTANsUqO8I It bugs me too.

— Stephen Bainbridge (@ProfBainbridge) August 28, 2015

What we should do is just abolish LLC veil piercing. http://t.co/rGYhYpaslJ

— Stephen Bainbridge (@ProfBainbridge) August 28, 2015

Newman was no game changer

Alison Frankel cites the defendants briefs before the SCOTUS:

In at least eight post-Newman decisions, federal district judges have rejected insider trading defendants’ arguments that the government failed to show a tipster received a personal benefit, according to the Newman and Chiasson briefs. Only one defendant, Thomas Conradt, managed to secure the dismissal of the criminal case against him – and the judge in that case cited both the 2nd Circuit’s definition of a personal benefit and its requirement that the defendant be aware of a benefit to the tipster.

Moreover, all of the district courts to have addressed the post-Newman personal benefit question have found the 2nd Circuit is in accord with the Supreme Court’s precedent in Dirks, according to Newman and Chiasson. Even the 9th Circuit’s recent decision in U.S. v. Salman– the ruling that supposedly creates a split between the 2nd and 9th Circuits on the definition of a personal benefit – said the 2nd Circuit “recognized that the personal benefit is broadly defined to include not only pecuniary gain but also  the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.” If the Salman case had been on appeal at the 2nd Circuit, Newman and Chiasson said, the result would have been the same as it was in the 9th: The court would have affirmed the conviction of a trader who profited from information passed between brothers because brotherhood establishes the tipster’s personal benefit.

A useful cautionary note on benefit corporations

I recommend reading Daryl Koehn, Why the New Benefit Corporations May Not Prove to Be Truly Socially Beneficial (July 30, 2015). Business & Professional Ethics Journal, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2638084:

The financial meltdown of 2007 and the subsequent Great Recession have led many people to believe that corporations are on the wrong track. Instead of pursuing primarily shareholder value, corporations should, the argument goes, strive to contribute to the public welfare. This point of view has served to fuel interest in a relatively new type of corporations -- social enterprises. Indeed, some commentators have argued that we are now “in the midst of a historical movement in which some of the core ideas of business, and of the law that governs it, are being reconsidered” (Greenfield, 2014,1). This social enterprises movement aims at “overturning the hegemony of shareholder value” (Nocera, 2012, A19).

Social enterprises may take a variety of legal forms (limited liability companies, nonprofit entities, etc.). This paper focuses primarily upon one particular new form increasingly popular within the United States -- the “benefit corporation.” I evaluate whether U.S. benefit corporations are likely to realize as much social benefit as is frequently claimed. Part One of the paper describes the features of benefit corporations as they are constituted in many states. Part Two lays out the benefits being extolled by supporters of this U.S. legal corporate form. Part Three challenges these claims and adduces reasons for doubting whether benefit corporations will prove to be as socially useful as they claim to be. Part Four concludes with some suggestions for future lines of research into the nature of the firm and benefit corporations in particular.

Experiential Education in the Large Lecture Hall: Starting with Learning Objectives

In hopes that an old dog can learn new tricks, I've been experimenting the last few years with trying to build experiential learning opportunities into my lecture courses. My classes tend to be in the 80-120 range, so I obviously can't give the kind of close supervision the students would (ideally) get in a small simulation or clinic. 

In thinking about how to work experiential learning into big lecture hall environment, I've benefited considerably from an article by Jessica Erickson, Experiential Education in the Large Lecture Hall, which you can download here. I recommend it very highly.

For one thing, I completely agree with Erickson's point about Socratic teaching:

In short, even if our only goal is to teach doctrine, we need to think about ways to force our students to engage with the doctrine so that it gets into their long-term memory. The Socratic Method may lead to this engagement, but it is also relatively easy for students to become passive participants in a Socratic class, especially if the class is the soft-Socratic style more common today. The next question is whether doctrinal professors should have broader goals for our students beyond simply understanding and remembering the doctrine. 

In other words, Socratic teaching doesn't work very well these days at promoting doctrinal learning and it really doesn't work at instilling practical skills like drafting and planning. (Of course, it helps that she cites me.)

I'm gradually implementing Erickson's recommendations, starting with setting out learning objectives for each course and each class within the course. Today, for example, I'll be teaching my Mergers and Acquisitions students about what motivates clients to merge. Hence, my very first PowerPoint slide will be:

Early days, of course. But I hope that developing learning objectives will help me think more deeply about what I want to accomplish on a given day, which in turn will feedback into more effective learning objectives.

Next step? Developing effective assessment tools.

Leo Strine's Greatest Hit?

Haskell Murray writes:

In this interview, Delaware Supreme Court Chief Justice Leo Strine singles out C & J Energy Services, Inc. v. City of Miami General Employees’ ("Nabors"), 107 A.3d 1049 (2014) as, perhaps, the most important opinion he has authored as CJ.

Remember Turkey Bingo? Here's Faculty Meeting Bingo

I really want to get some colleagues to play Faculty Meeting Bingo with me, because I loved Turkey Bingo.

Directors are fiduciaries but they are not agents

About four years ago Keith Paul Bishop correctly explained that "it is easy to conflate directors and agents because both owe fiduciary duties.  However, it seems to me that directors and agents are conceptually different." Nevertheless, as he recently observed, "the agency status of directors continues to be controverted." 

Agents are fiduciaries of their principals. See Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817, 824 (10th Cir. 1986) (holing that "all agents are fiduciaries 'with respect to matters within the scope of [their] agency'").

Directors are fiduciaries of the corporation and its shareholders. Marhart, Inc. v. Calmat Co., Del. Ch., CA. No. 11820, Berger, V.C., 1992 WL 212587 (Apr. 22, 1992), slip op. at 6 (reported in 18 Del. J. Corp. L. 330 (1992)) (“Delaware directors are fiduciaries and are held to a high standard of conduct ....").

But that does not mean that directors are agents. After all, "[t]here are many types of fiduciaries under the law, each with varying duties, “including agents, partners, directors and officers, trustees, executors and administrators, receivers, bailees, and guardians.” Tamar Frankel, Fiduciary Law, 71 Cal. L. Rev. 795, 795 (1983).

The law in fact is clear that "directors are not agents of the corporation." Mgmt. Technologies, Inc. v. Morris, 961 F. Supp. 640, 651 (S.D.N.Y. 1997).

As I explained in Agency, Partnerships & LLCs:

Corporate employees, especially officers, are agents of the corporation.[1] Curiously, however, neither an individual director nor even the board as a whole is regarded as agents of the corporation.[2] An individual director, as such, “has no power of his own to act on the corporation’s behalf, but only as one of the body of directors acting as a board.”[3] As for the board, when it acts collectively, the board functions as a principal rather than as agent. Unless shareholder approval is required, after all, the act of the board is the act of the corporation. Consequently, the board can be said to personify the corporate principal.

---

[1] Restatement (Second) § 14 C cmt. a. A subsidiary of a corporation will not be deemed the agent of the parent corporation even though the latter has the power to control the former. A parent corporation thus cannot be held liable for the acts of its subsidiary on a principal-agent basis; instead, a plaintiff seeking to hold the parent liable must pierce the corporate veil of the subsidiary. Bunch v. Centeon, L.L.C., 2000 WL 1741905 (N.D. Ill. 2000).

[2] Restatement (Second) § 14 C.

[3] Restatement (Second) § 14 C cmt. b. Directors thus are a type of non-agent fiduciary, as are “trustees, ... executors, guardians, ..., partners and joint adventurers, and attorneys ....” Chisholm v. Western Reserves Oil Co., 655 F.2d 94, 97 (6th Cir. 1981). See Young v. Colgate-Palmolive Co., 790 F.2d 567 (7th Cir. 1986) (holding that “the directors are not acting as agents in their management of the corporation, but as fiduciaries”); U.S. v. Griswold, 124 F.2d 599 (1st Cir. 1941) (“The directors of a corporation for profit are ‘fiduciaries’ having power to affect its relations, but they are not agents of the shareholders since they have no duty to respond to the will of the shareholders as to the details of management.”); Arnold v. Soc'y for Sav. Bancorp, 678 A.2d 533, 539-40 (Del.1996) (“Directors, in the ordinary course of their service as directors, do not act asagents of the corporation .... A board of directors, in fulfilling its fiduciary duty, controls the corporation, not vice versa.”).

Marcia Narine on Conflict Minerals Disclosure

Nobody has done a better job of tracking the conflict minerals disclosure fight than Marcia Narine, so I recommend reading her latest.

Clarity is not the mark of a weak mind; Jargon is not the mark of a great one

I want to like John Finnis. I want to respect him as a scholar. But how can you do that when he writes stuff like this? I've read this paragraph about a dozen times and I have no idea what it means. I've considered and, perhaps predictably, rejected the possibility that I'm just too dumb to get it. I think he's just a bad writer.

 

Sadly, it's not the worst example of jargon I've seen in Finnis' work.

 

And don't even get me started on Oliver Williamson!

 

Clarity is a virtue! Taking the time to make sure that your meaning is accessible to bench and bar ought to be the goal, rather than obfuscating with impenetrable jargon.

 

Sharfman versus Minow on Proxy Access

Jim McRitchie posted a very critical response to Bernard Sharfman's recent article on proxy access. Sharfman is now waging a battle with Nell Minow in the comments section. 

SEC Conflict Mineral Rule Violates 1st Amendment

Jonathan Adler:

This morning, a divided panel of the U.S. Court of Appeals for the D.C. Circuit again concluded that the Securities and Exchange Commission’s “conflict minerals” disclosure requirement violates the First Amendment. The court had initially struck down the disclosure rule in April of last year, but agreed to reconsider the decision in light of the D.C. Circuit’s en banc decision upholding the U.S. Department of Agriculture’s meat country-of-origin labeling requirements in American Meat Institute v. USDA.  

The majority opinion striking down the SEC rule in National Association of Manufacturers v. SEC was authored by senior judge Raymond Randolph and joined by senior judge David Sentelle.  Judge Sri Srinivasan dissented. ...

Now let's think about all the other ways the SEC regulates speech ....