ProfessorBainbridge.com

Caremark only requires a reporting and information system, not a reasonable one

Anne Tucker reports:

In early January, the Second Circuit Court of Appeals ruled in Cent. Laborers’ Pension Fund v. Dimon to affirm the dismissal of purported shareholder derivative claims alleging that directors of JP Morgan Chase--the primary bankers of Bernard L. Madoff Investment Securities LLC (“BMIS”) for over 20 years--failed  to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme.  The suit was dismissed for failures of demand excuse.  Plaintiffs contended that the District Court erred in requiring them to plead that defendants “utterly failed to implement any reporting or information system or controls,” and that instead, they should have been required to plead only defendants’ “utter failure to attempt to assure a reasonable information and reporting system exist[ed].” (emphasis added).  The Second Circuit declined, citing to In re General Motors Co. Derivative Litig., No. CV 9627-VCG, 2015 WL 3958724, at *14–15 (Del. Ch. June 26, 2015), a Chancery Court opinion from earlier this year that dismissed a Caremark/oversight liability claim.  In In re General Motors the Delaware Chancery Court, found that plaintiffs' allegations that:

[T]he Board did not receive specific types of information do not establish that the Board utterly failed to attempt to assure a reasonable information and reporting system exists, particularly in the case at hand where the Complaint not only fails to plead with particularity that [the defendant] lacked procedures to comply with its . . . reporting requirements, but actually concedes the existence of information and reporting systems. . . .

In other words, the Plaintiffs complain that [the defendant] could have, should have, had a better reporting system, but not that it had no such system.

Caremark and Enterprise Risk Management | Hide Abstract | Download This Paper | Open PDF in Browser |  UCLA School of Law, Law-Econ Research Paper No. 09-08 Number of Pages in PDF File: 33	Bainbridge, Stephen M. University of California, Los Angeles (UCLA) - School of Law	Posted: 19 Mar 09	1,209 (10,286)	1
		Abstract:  The financial crisis of 2008 revealed serious and widespread risk management failures throughout the business community. Shareholder losses attributable to absent or poorly implemented risk management programs are enormous. Efforts to hold corporate boards of directors accountable for these failures likely will focus on so-called Caremark claims. The Caremark decision asserted that a board of directors has a duty to ensure that appropriate information and reporting systems are in place to provide the board and top management with timely and accurate information. Although post-Caremark opinions and commentary have focused on law compliance programs, risk management programs do not differ in kind from the types of conduct that traditionally have been at issue in Caremark-type litigation. Risk management failures do differ in degree from law violations or accounting irregularities. In particular, risk taking and risk management are inextricably intertwined. Efforts to hold directors accountable for risk management failures thus threaten to morph into holding directors liable for bad business outcomes. Caremark claims premised on risk management failures thus uniquely implicate the concerns that animate the business judgment rule's prohibition of judicial review of business decisions. As Caremark is the most difficult theory of liability in corporate law, risk management is the most difficult variant of Caremark claims. board of directors, risk management, enterprise risk management, oversight, Caremark

The Convergence of Good Faith and Oversight | Hide Abstract | Download This Paper | Open PDF in Browser |  UCLA School of Law, Law-Econ Research Paper No. 07-09 Number of Pages in PDF File: 52	Bainbridge, Stephen M. University of California, Los Angeles (UCLA) - School of Law Lopez, Star University of California, Irvine - School of Social Sciences Oklan, Benjamin University of California, Los Angeles - School of Law	Posted: 14 Aug 07	964 (14,672)	4
		Abstract:  In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation's employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that although good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being split out as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance.  As to the duty of oversight, Stone confirmed former Chancellor William Allen's dicta in Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed that Caremark articulates the necessary conditions for assessing director oversight liability. Stone, 911 A.2d at 365.  This article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leaves both sides worse off. New and unnecessary doctrinal uncertainties have been created. This article identifies those uncertainties and suggests how they should be resolved. corporation, corporate governance, board of directors, good faith, oversight, Caremark, Delaware corporate law

Rep. Carolyn Maloney (D-NY) Urges Incomplete Political Correctness at the SEC

The Corporate Counsel Blog informs us that:

In response to this new GAO report on board gender diversity, Rep. Carolyn Maloney (D-NY) sent a letter to SEC Chair White earlier this month urging amendments to the proxy statement rules to require that companies disclose each board nominee’s gender, race, and ethnicity – as was proposed by nine large public pension funds in a March 2015 petition to the SEC.

That petition seeks this amendment to Item 407(c)(2)(v) of Regulation S-K (proposed new text underlined):

Describe any specific minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the registrant’s board of directors, and describe any specific qualities or skills that the nominating committee believes are necessary for one or more of the registrant’s directors to possess. When the disclosure for this paragraph is presented in a proxy or information statement relating to the election of directors, these qualities, along with the nominee’s gender, race, and ethnicity should be presented in a chart or matrix form.

At the risk of committing one or more micro-aggressions, I can't help but note that the Rep. Carolyn Maloney's list of qualities to be disclosed is several generations of politically correct/multicultural thought behind the times. Here at UCLA, for example, we define diversity to include:

• race
• color
• national origin
• religion
• sex
• gender identity
• pregnancy
• physical or mental disability
• medical condition (cancer-related or genetic characteristics)
• genetic information (including family medical history)
• ancestry
• marital status
• age
• sexual orientation
• citizenship
• service in the uniformed services (as defined by the Uniformed Services Employment and Reemployment Rights Act of 1994)
• status as a covered veteran

Maybe Rep. Maloney needs to attend a diversity workshop.

The effect of the Zillow/Trulia decision

Congratulations to Fordham Law Professor Sean Griffith, whose outstanding crusade against the pernicious wave of disclosure-only settlements is now coming to fruition. As Forbes reports:

Plaintiff lawyers were warned last year, and now a Delaware judge has delivered a potentially crippling blow to “disclosure-only” settlements that reward lawyers with rich fees but give their clients nothing.

In a detailed, 42-page ruling issued today, Chancery Court Judge Andre Bouchard formally rejected a settlement lawyers at Rigrodsky & Long and several other firms  negotiated with Zillow last year over its $3.5 billion takeover of Trulia. That settlement, as is typical with these sorts of cases, provided nothing for their shareholder clients except for “supplemental disclosures” of information beyond the 200-page proxy statement they had already received detailing the terms of the merger. It did promise something of great value to Zillow: a global release of all claims stemming from the merger, including “unknown claims” the plaintiffs weren’t even aware of yet.

Going forward, plaintiff lawyers won’t be able to staple such broad releases to their settlement deals. And that means those lawyers won’t have nearly as much leverage to negotiate their fees, since one of the main things they had to offer in exchange was court-approved protection from any further litigation.

“From the perspective of some defendants in some cases, this isn’t so good because they just lost their $400,000 global release,” said Sean Griffith, a professor at Fordham Law School who successfully challenged the Zillow settlement. “But for defendants overall, it will mean fewer cases challenging mergers.”

I think Prof. Griffith is right that this decision may be a game changer. A new study of takeover litigation by Matthew Cain and Steven Davidoff Solomon finds that:

Takeover litigation was substantially disrupted in 2015 by the Delaware courts' willingness to challenge "disclosure only" settlements. For the full year, lawsuits were brought in 87.7% of completed takeovers versus 94.9% in 2014. However, the lawsuit rate dropped precipitously in the fourth quarter of 2015 to 21.4% of all transactions in the wake of Delaware's challenge. There were also substantial delays in the approval of litigation settlements and attorneys' fee awards. Multi-jurisdictional litigation continued its sharp decline, falling approximately 50% from its 2012 high. Despite the higher rates of dismissals, large awards and settlements were give in litigation arising from the Rural/Metro, Dole and Freeport-McMoRan transactions, among others.

Another likely outcome will be accelerated adoption of forum selection clauses. Indeed, investors now have a strong incentive to insist that companies adopt such bylaws, so that their companies are less subject to meritless litigation and so that there is less incentive for plaintiff lawyers to settle meritorious cases on terms that benefit only themselves and the defendants who get global releases in return for a few worthless disclosures. And that's a good thing, because as Chancellor Bouchard observed, under the current regime:

... far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.

So how will these cases be handled in the future? Bouchard explained the problem to which he was responding as follows:

In such lawsuits, plaintiffs’ leverage is the threat of an injunction to prevent a transaction from closing. Faced with that threat, defendants are incentivized to settle quickly in order to mitigate the considerable expense of litigation and the distraction it entails, to achieve closing certainty, and to obtain broad releases as a form of “deal insurance.” ...

Once the litigation is on an expedited track and the prospect of an injunction hearing looms, the most common currency used to procure a settlement is the issuance of supplemental disclosures to the target’s stockholders before they are asked to vote on the proposed transaction. The theory behind making these disclosures is that, by having the additional information, stockholders will be better informed when exercising their franchise rights. Given the Court’s historical practice of approving disclosure settlements when the additional information is not material, and indeed may be of only minor value to the stockholders, providing supplemental disclosures is a particularly easy “give” for defendants to make in exchange for a release.

Once an agreement-in-principle is struck to settle for supplemental disclosures, the litigation takes on an entirely different, non-adversarial character. Both sides of the caption then share the same interest in obtaining the Court’s approval of the settlement. ...

It is beyond doubt in my view that the dynamics described above, in particular the Court’s willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defendants and six-figure fees to plaintiffs’ counsel in the process, have caused deal litigation to explode in the United States beyond the realm of reason. ... [PB: Kudos to the Chancellor for taking accountability and responsibility for his court having helped create the problem.]

So here's the solution:

... practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently. In using the term “plainly material,” I mean that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.

In addition, Bouchard specifically endorsed the emergent practice of mootness dismissals in which "defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims." The defendants then move to dismiss the case on mootness grounds.  In response, it is increasingly common for the plaintiffs to dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified)." The Chancery Court then "reserves jurisdiction solely to hear a mootness fee application." As Bouchard pointed out, "[i]n that scenario, where securing a release is not at issue, defendants are incentivized to oppose fee requests they view as excessive."

 

SCOTUS Grants Cert in Salman--Dirks' Personal Benefit Test at Stake

The Supreme Court has granted cert in Salman v. United States, posing the following question for argument:

Whether the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.

The WSJ reports:

In the New York case, U.S. v. Newman, an appeals panel said prosecutors had to prove the insider disclosed the information for a personal benefit that included something valuable being exchanged. The decision upended multiple convictions and top prosecutors complained that the ruling could make it legal for traders to obtain and use confidential information from friends.

Mr. Salman, citing Newman, argued that evidence of a family relationship between the tipper and the tip recipient wasn’t enough to demonstrate that the insider received a personal benefit.

The San Francisco-based Ninth U.S. Circuit Court of Appeals rejected that argument in a ruling last July. The Supreme Court will review the decision and could hear oral arguments as soon as April. Mr. Salman has been serving his prison sentence since August 2014.

Salman and Newman have been frequent topics. Here's some posts that may be of interest:

With Newman down, will Salman go? - ProfessorBainbridge ...

www.professorbainbridge.com/.../insider-trading-at-the-supreme-court-w...

 

Oct 9, 2015 - The Supreme Court's decision to deny cert in US v. Newman was hardly surprising. In the first place, the procedural posture of the case made it ...

Newman was no game changer - ProfessorBainbridge.com

www.professorbainbridge.com/.../newman-was-no-a-game-changer.html

 

Aug 27, 2015 - 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 ...

 

Supreme Court denies cert in US v. Newman insider trading ...

www.professorbainbridge.com/.../supreme-court-denies-cert-in-us-v-new...

 

Oct 5, 2015 - Newman, a portfolio manager at Diamondback Capital Management, made about $4 million in gains and Chiasson, a co-founder of Level ...

Insider Trading at the Supreme Court: With Newman down ...

www.professorbainbridge.com/.../insider-trading-at-the-supreme-court-w...

 

Oct 9, 2015 - The Supreme Court's decision to deny cert in US v. Newman was hardly surprising. In the first place, the procedural posture of the case made it ...

 

US v Newman: A big win for coherence and fairness in insider

www.professorbainbridge.com/.../us-v-newman-a-big-win-for-coherence...

 

Dec 11, 2014 - The appeal is being pursued by Todd Newman and Anthony Chiasson, two portfolio managers whose 2012 insider-trading convictions were a ...

The personal benefit element of insider trading tipping ...

www.professorbainbridge.com/.../the-personal-benefit-element-of-inside...

 

Dec 15, 2014 - Michael Perino has a Dealbook post about the state of insider trading law after US v. Newman. It's an lengthy and thoughtful argument, but ...

Alison Frankel on our brief in the US v. Newman insider ...

www.professorbainbridge.com/.../alison-frankel-on-our-brief-in-the-us-v...

 

Feb 27, 2015 - Frankel: I was intrigued by another amicus brief filed on the defendants' behalf. Not the brief by onetime SEC defendant and billionaire sports ...

 

Evaluating the Government's cert petition in US v. Newman ...

www.professorbainbridge.com/.../evaluating-the-governments-cert-petiti...

 

Jul 31, 2015 - Newman, which overturned the insider trading convictions of two hedge fund managers. The move comes after the United States Court of ...

Pritchard on Newman's Interpretation of Dirks' Personal ...

www.professorbainbridge.com/.../pritchard-on-newmans-interpretation-o...

 

Aug 10, 2015 - Pritchard on Newman's Interpretation of Dirks' Personal Benefit Standard. Adam Pritchard reviews the evolution of the personal benefit element ...

Cardinal Pell on the market economy

In my essay Catholic Social Thought and the Corporation (available at SSRN: http://ssrn.com/abstract=461100), I wrote:

In Toward a Theology of the Corporation, for example, Novak asserted that Christian theologians tend to be poorly trained in economics and inexperienced with the business world: They “are likely to inherit either a pre-capitalist or a frankly socialist set of ideals about political economy.”[1] Consequently, theologians “are more likely to err in this territory than in most others.”[2]

A persistent error “in this territory” is the tendency towards what Milton Friedman called “the collectivist moral strain” in Catholic social thought.[3] Indeed, it is fair to assert that some documents in the social teaching more closely resemble “the platforms of European social democratic parties” than Biblical exegesis.[4]

So it was refreshing to read Cardinal Pell's keynote address to the Global Foundation roundtable on the global economy:

He began by observing that:

... it remains true that market economics have brought unprecedented prosperity and represent, despite their many faults and deficiencies, an extraordinary human achievement.

Dr Johnson famously remarked that when a dog walks on its hind legs, it walks badly. But, he continued, “you are surprised to find it done at all”. So too with the market economy.

Granted, that's not the most spirited defense of capitalism a Catholic ever penned. (That would be Michael Novak's The Spirit of Democratic Capitalism.) Indeed, it calls to mind Churchill's defense of democracy. And he goes on to detail some of market capitalism's admitted foibles.

But then we get to some good stuff:

I like to quote Maggie Thatcher who pointed out that if the Good Samaritan had been without capital he could not have paid for the care of the man who was beaten and robbed on the road to Jericho. It was also useful that the innkeeper trusted him sufficiently to accept his promise to cover any extra costs when he returned (Lk 10:25-37).

Even more usefully the parable of the talents shows that Jesus understood that money should be used profitably to produce income. The man with one talent who was condemned had not wasted his money or thrown it away. He was condemned for burying it and not generating a proper return.

(Watch this space for more on the parable of the talents.)

He also went on to recall Pope Francis' comments on business as a vocation:

“Business is a noble vocation, directed to producing wealth and improving the world. It can be a fruitful source of prosperity for the area in which it operates, especially if it sees the creation of jobs as an essential part of its service to the common good”. (Laudato Si', 129)

(On the vocational aspects of business, see Novak's book Business as a Calling.) Pell went out of his way to praise the entrepreneurial spirit:

We should work to encourage among our young men and women the emergence of effective entrepreneurs who will contribute to sustainable growth, especially through job creation.

Recent reading

Just finished Declare by Tim Powers for $15.53 https://t.co/cCmr1PwWhu Loved it. Wash up of religion, horror, and spy thriller. Well done.

— Stephen Bainbridge (@ProfBainbridge) January 18, 2016

Oops.I meant "Mash up."

@markowenmartin Thanks. I'm starting over with Tim Powers in order. Up nextThe Drawing of the Dark https://t.co/Xcwz2YKCgj

— Stephen Bainbridge (@ProfBainbridge) January 18, 2016

Right now I'm switching between 2 books: If Your Mind Wanders at Mass by Thomas Howard https://t.co/fdHRcpuQfk via @amazon

— Stephen Bainbridge (@ProfBainbridge) January 18, 2016

And I am still reading John Hawkwood: An English Mercenary by William Caferro https://t.co/qekMr3v5sm via @amazon

— Stephen Bainbridge (@ProfBainbridge) January 18, 2016

FT: Vatican finance chief sings praises of free markets

Financial Times:

A senior cardinal chosen by Pope Francis to manage the Vatican’s finances has launched into a spirited defence of free markets, countering the perception that the Catholic church under the Argentine pontiff has turned against capitalism and business.

George Pell, the head of the Holy See’s secretariat for the economy, told a conference hosted by The Global Foundation in Rome on Sunday that “no better model is available at the moment” than market economies, citing their capacity to “rejuvenate” after the Great Depression and recent global financial crisis, and their failure to produce the “massive alienation” predicted by Karl Marx.

 

Caymus Cabernet Sauvignon (Napa Valley) 2003

For dinner tonight I wanted Chinese and a cabernet sauvignon, which I admit is not always a propitious mix. But I ended up opting for Beef with Broccoli from Cook's Illustrated and a 2003 Caymus, which ended up being a very pleasant match.

The Caymus had shed most of its tannin, leaving behind a mix of soft fruit and a few markers of a mature cabernet. Cassis, blackberry, star anise, mint, cedar. Grade: 89

Foxen Pinot Noir Block 43 Bien Nacido Vineyard (Santa Maria Valley) 2012

This is an exceptional Pinot Noir. Very drinkable now, but should improve for at least the next 5 years or so. Medium ruby color. Big bouquet, suggesting red berries, black tea, pepper, and a complex mix of warm spices. On the palate, I tasted strawberries, grape stems steeped in black tea, mushrooms, and a lot of spice. Excellent match for mushroom risotto. Grade: 93

Why are There so Few Conservatives and Libertarians in Legal Academia?

New article by James Cleith Phillips tries to shed some light on the titular question:

There are few conservatives and libertarians in legal academia. Why? Three explanations are usually provided: the Brainpower, Interest, and Greed Hypotheses. Alternatively, it could be because of Discrimination. This paper explores these possibilities by looking at citation and publication rates by law professors at the 16 highest-ranked law schools in the country. Using regression analysis, propensity score matching, propensity score reweighting, nearest neighbor matching, and coarsened exact matching, this paper finds that after taking into account traditional correlates of scholarly ability, conservative and libertarian law professors are cited more and publish more than their peers. The paper also finds that they tend to have more of the traditional qualifications required of law professors than their peers, with a few exceptions. This paper indicates that, at least in the schools sampled, conservative and libertarian law professors are not few in number because of a lack of scholarly ability or professional qualifications. Further, the patterns do not prove, but are consistent with, a story of discrimination. The downsides to having so few conservatives and libertarians in the legal academy are also briefly explored.

(HT: Adler)

Does proxy access matter?

I'm not a fan of proxy access. As I wrote in my book Corporate Governance after the Financial Crisis:

… because proxy access’ effect will be to increase the number of short slates, albeit to an uncertain extent, its impact on corporate governance likely will be analogous to that of cumulative voting. Both result in divided boards representing differing constituencies. Experience with cumulative voting suggests that adversarial relations between the majority block and the minority of shareholder nominees commonly dominate such divided boards.

The likely effects of proxy access therefore will not be better governance. It is more likely to be an increase in interpersonal conflict (as opposed to the more useful cognitive conflict). There probably will be a reduction in the trust-based relationships that are the foundation of effective board decision making. There may also be an increase in the use by the majority of pre-meeting caucuses and a reduction in information flows to the board as a whole. Not surprisingly, early research suggests that proxy access reduces shareholder wealth.

In his dissent [to the SEC’s adoption of former Rule 14a-11], Commissioner Paredes pointed to additional pre-Rule 14a-11 studies undercutting the SEC’s position:

The mixed empirical results do not support the Commission’s decision to impose a one-size-fits-all minimum right of access. Some studies have shown that certain means of enhancing corporate accountability, such as de-staggering boards, may increase firm value, but these studies do not test the impact of proxy access specifically. Accordingly, what the Commission properly can infer from these data is limited and, in any event, other studies show competing results. Recent economic work examining proxy access specifically is of particular interest in that the findings suggest that the costs of proxy access may outweigh the potential benefits, although the results are not uniform. The net effect of proxy access — be it for better or for worse — would seem to vary based on a company’s particular characteristics and circumstances.

To my mind, the adopting release’s treatment of the economic studies is not evenhanded. The release goes to some length in questioning studies that call the benefits of proxy access into doubt — critiquing the authors’ methodologies, noting that the studies’ results are open to interpretation, and cautioning against drawing “sharp inferences” from the data. By way of contrast, the release too readily embraces and extrapolates from the studies it characterizes as supporting the rulemaking, as if these studies were on point and above critique when in fact they are not.

In sum, proxy access is bad public policy, unsupported by the empirical evidence, and the pet project of a powerful interest group. In other words, quack corporate governance.

Yet, institutional investors remain fixated on forcing corporations to adopt proxy access:

For those that can remember, as noted in this Davis Polk blog, it was the NYC Comptroller’s office who really took the proxy access movement to the next level last year. Now, the Comptroller has issued a new list of 72 companies that have received proxy access shareholder proposals – 36 of them repeats from last year’s list of the 75 that received shareholder proposals…

What I find even more curious, however, is the fact that so many companies are caving on the issue:

American businesses are increasingly bowing to investors’ demands for greater boardroom clout, with dozens of companies revising their bylaws in recent weeks ahead of this year’s annual meetings.

Proxy access, embraced by 117 U.S. companies during 2015, gives shareholders more power to oust directors and influence corporate strategy by letting them list competing board candidates on ballots for annual meetings. About 21% of S&P 500 companies have adopted proxy access, up from about 1% in 2014, according to Institutional Shareholder Services, a major proxy-advisory firm.

I can think of several reasons why companies may be caving:

• Corporate managers are generally spineless wimps.
• Over half of shareholder proxy access bylaws are passing and directors are scared by ISS' policy of recommending against reelection of directors who do not comply with proposals that receive a majority vote.
• Because over half of shareholder proxy access bylaws are passing, companies are preempting shareholder activists by adopting access systems that are weaker than those being proposed by shareholders.

But maybe there's a simpler answer. Maybe companies have decided that proxy access really doesn't mater all that much. Marcel Kahan and Ed Rock have argued that "proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who does get elected will have little impact." 

When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages, while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contests expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxycards; and the company retains exclusive access to preliminary voting information. 

So my current bottom line is: If proxy access came into fruition, cases in which shareholder nominees succeed in being elected, undesirable results will follow, but maybe those cases will be rare and proxy access will turn out to be yet another flop.

Hein says I am the # 72 legal author

Via Seth Tillman (via David Zarig), I learn of Hein's ranking of the top 250 legal authors. I come in at # 72. They explain:

The following list is calculated based on an analysis of all articles in HeinOnline. We then ranked each author in each category: number of times cited by articles, number of times cited by articles written in the past 10 years, number of times cited by cases, and number of times accessed and averaged the rankings to produce this list of the 250 authors that scored the highest when averaging all categories.

Corporate-law types ahead of me include:

3. Easterbrook, Frank H.

4. Coffee, John C. Jr.

7. Fischel, Daniel R.

22. Macey, Jonathan R.

38. Gilson, Ronald J.

52. Ribstein, Larry E. (I miss him, don't you?)

58. Langevoort, Donald C.

Greenfield on Delaware and democracy

Anne Tucker writes:

Kent Greenfield recently published a provocative article with Democracy on ending Delaware's dominance over corporate law.  As is Greenfield's way, he makes a familiar story sound fresh and raises an interesting question.  Is it democratic for a state with less than 1% of the country's population to have its laws control more than half of the Fortune 500 companies?  Greenfield says no.

Power without accountability has no democratic legitimacy. If companies could choose which state’s environmental, employment, or anti-discrimination law applied to them, we’d be outraged. We should be similarly outraged about Delaware’s dominance in corporate law.

Outraged? Really? Look, we don't live in a democracy, we live in a federal republic, and that has consequential implications.

In particular, as the Supreme Court majority recognized in Justice Lewis Powell’s CTS decision, the country as a whole benefits from the existing scheme under which Delaware has achieved its dominance. As Justice Powell explained in that case, the markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.”

And who says Delaware is not accountable? In a federal republic, accountability doesn't just come out of a ballot box. Even if state competition is not a spring to the top, it is at least walking race in which competition from other states limits what Delaware can do. In addition, of course, Delaware faces competition from the federal government (see Mark Roe's work on the topic), although that usually results in quack corporate governance.

Haters are going to hate. Academics like Greenfield and Bebchuk will always bust Delaware's chops. After all, academics are rewarded for developing novel ideas, without much regard to those ideas’ validity or viability, which biases them (us) against the status quo. Meanwhile, Delaware chugs along producing the best corporate law in the world. Not perfect, to be sure. There is much to be criticized in Delaware law and I have done my fair share of criticism (how the Delaware Chancery Court so consistently misapplies the boundaries of Revlon, to cite but one example). But as an investor or business person, I'd rather that my business be run under Delaware corporate law than anyone else's (I mean, have you looked at California corporate law?).

Trading on market information about volatility

Steve Bradford has an interesting post on an interesting paper dealing with the following interesting question:

Assume you acquire some nonpublic information about a company that will have no predictable effect on the company’s stock price, but will affect the volatility of that stock price. Is that information material nonpublic information for purposes of the prohibition on insider trading?

Interested? Go here.

Should we give Adolf Berle credit for enterprise liability? No.

The modern doctrine of enterprise liability is usually traced to a law review article by Professor Adolf Berle,[1] in which he wrote that

In effect what happens is that the court, for sufficient reason, has determined that though there are two or more personalities, there is but one enterprise; and that this enterprise has been so handled that it should respond, as a whole, for the debts of certain component elements of it. The court thus has constructed for purposes of imposing liability an entity unknown to any secretary of state comprising assets and liabilities of two or more legal personalities; endowed that entity with the assets of both, and charged it with the liabilities of one or both.[2]

In fact, however, Berle’s theory differs considerably from the modern doctrine. Most notably, under Berle’s formulation, “a high degree of unity alone would be sufficient to justify piercing without any additional requirement of unfair injury arising from the unity.”[3] In fact, however, the test for enterprise liability—like the test for veil piercing—requires something more than a mere showing of control or unity.

[1] See Stephen B. Presser, The Bogalusa Explosion, "Single Business Enterprise," "Alter Ego," and Other Errors: Academics, Economics, Democracy, and Shareholder Limited Liability: Back Towards A Unitary "Abuse" Theory of Piercing the Corporate Veil, 100 Nw. U. L. Rev. 405, 420 (2006) (“To a great extent, this ‘single business enterprise’ language is traceable to the landmark article by Columbia law professor Adolf A. Berle, which advocated the removal of limited liability when there had been ‘excessive fragmentation’ of a business into presumably artificial corporate forms.”).

[2] Adolf A. Berle, The Theory of Enterprise Entity, 47 Colum. L. Rev. 343, 350 (1947).

[3] Mary Elisabeth Kors, Altered Egos: Deciphering Substantive Consolidation, 59 U. Pitt. L. Rev. 381, 435 (1998).