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"Economic of Corporate Law": Seminal Articles in the Field Collected

Including one by yours truly:

Economics of Corporate Law (Economic Approaches to Law series)

Edited by Claire A. Hill, Professor and James L. Krusemark Chair in Law and Brett H. McDonnell, Professor and Dorsey & Whitney Chair in Law, University of Minnesota Law School

Scholarly analysis of corporate law in the United States has come to be dominated by an economic approach. Professor Hill and Professor McDonnell here draw together seminal articles which represent major milestones along the road that economics has traveled in coming to play this central role in corporate law scholarship. The focus is on the analysis of corporate law, drawing mainly upon legal scholarship and particularly on US scholarship, which is the originator of the application of modern economic analysis to corporate law and has had much influence in other countries.

Contents:

Introduction
Claire A. Hill and Brett McDonnell

PART I ECONOMICS OF THE FIRM
1. Ronald Coase (1937), ‘The Nature of the Firm’, Economica, 4, 386–405

2. Michael C. Jensen and William H. Meckling (1976), ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics, 3 (4), October, 305–60

3. Oliver Williamson (1984), ‘Corporate Governance’, Yale Law Journal, 93 (7), June, 1197–230

PART II THE BOARD AND PURPOSE
4. A.A. Berle, Jr. (1931), ‘Corporate Powers as Powers in Trust’, Harvard Law Review, XLIV (7), May, 1049–74

5. E. Merrick Dodd, Jr. (1932), ‘For Whom are Corporate Managers Trustees?’, Harvard Law Review, XLV (7), May, 1145–63

6. Stephen M. Bainbridge (2003), ‘Director Primacy: The Means and Ends of Corporate Governance’, Northwestern University Law Review, 97 (2), 547–606

7. Margaret M. Blair and Lynn A. Stout (1999), ‘A Team Production Theory of Corporate Law’, Virginia Law Review, 85 (2), March, 247–328

8. Sanjai Bhagat and Bernard Black (1999), ‘The Uncertain Relationship Between Board Composition and Firm Performance’, Business Lawyer, 54 (3), May, 921–63

9. Donald C. Langevoort (2001), ‘The Human Nature of Corporate Boards: Law, Norms, and the Unintended Consequences of Independence and Accountability’, Georgetown Law Journal, 89, 797–832

PART III STATE COMPETITION
10. William L. Cary (1974), ‘Federalism and Corporate Law: Reflections Upon Delaware’, Yale Law Journal, 83 (4), March, 663–705

11. Ralph K. Winter, Jr. (1977), ‘State Law, Shareholder Protection, and the Theory of the Corporation’, Journal of Legal Studies, 6 (2), June, 251–92

12. Roberta Romano (1985), ‘Law as a Product: Some Pieces of the Incorporation Puzzle’, Journal of Law, Economics, and Organization, 1 (2), Fall, 225–83

13. Bernard S. Black (1990), ‘Is Corporate Law Trivial?: A Political and Economic Analysis’, Northwestern University Law Review, 84 (2), 542–97

14. Robert Daines (2001), ‘Does Delaware Law Improve Firm Value?’, Journal of Financial Economics, 62 (3), December, 525–58

15. Ehud Kamar (1998), ‘A Regulatory Competition Theory of Indeterminacy in Corporate Law’, Columbia Law Review, 98 (8), December, 1908–59

16. Mark J. Roe (2003), ‘Delaware’s Competition’, Harvard Law Review, 117 (2), December, 588–646

Volume II

An introduction to both volumes by the editors appears in Volume I

PART 1 TAKEOVERS AND TAKEOVER DEFENCES
1. Henry G. Manne (1965), ‘Mergers and the Market for Corporate Control’, Journal of Political Economy, 73 (2), April, 110–20

2. Frank H. Easterbrook and Daniel R. Fischel (1981), ‘The Proper Role of a Target’s Management in Responding to a Tender Offer’, Harvard Law Review, 94 (6), April, 1161–204

3. Ronald J. Gilson and Reinier Kraakman (1989), ‘Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?’, Business Lawyer, 44 (2), February, 247–74

4. Jeffrey N. Gordon (1997), ‘”Just Say Never?” Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett’, Cardozo Law Review, 19 (1–2), September–November, 511–52

5. Lucian Arye Bebchuk, John C. Coates IV and Guhan Subramanian (2002), ‘The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy’, Stanford Law Review, 54 (5), May, 887–951

PART II SHAREHOLDER SUITS AND OTHER AGENCY MECHANISMS
6. Janet Cooper Alexander (1991), ‘Do the Merits Matter? A Study of Settlements in Securities Class Actions’, Stanford Law Review, 43 (3), February, 497–598

7. Melvin Aron Eisenberg (1993), ‘The Divergence of Standards of Conduct and Standards of Review in Corporate Law’, Fordham Law Review, 62 (3), 437–68

8. Edward B. Rock (1997), ‘Saints and Sinners: How Does Delaware Corporate Law Work?’, UCLA Law Review, 44, 1009–107

9. Bernard Black, Brian Cheffins and Michael Klausner (2006), ‘Outside Director Liability’, Stanford Law Review, 58 (4), February, 1055–159

10. Lucian Arye Bebchuk, Jesse M. Fried and David I. Walker (2002), ‘Managerial Power and Rent Extraction in the Design of Executive Compensation’, University of Chicago Law Review, 69, 751–846

11. John C. Coffee, Jr. (2002), ‘Understanding Enron: “It’s About the Gatekeepers, Stupid”’, Business Lawyer, 57 (4), August, 1403–420

12. Tom Baker and Sean J. Griffith (2006), ‘The Missing Monitor in Corporate Governance: The Directors’ and Officers’ Liability Insurer’, Georgetown Law Journal, 95, 1795–842

PART III OTHER PERSPECTIVES
13. Mark J. Roe (1991), ‘A Political Theory of American Corporate Finance’, Columbia Law Review, 91, 10–67

14. Henry Hansmann and Reinier Kraakman (2001), ‘The End of History for Corporate Law’, Georgetown Law Journal, 89 (2), June, 439–68

15. Henry Hansmann and Reinier Kraakman (2000), ‘The Essential Role of Organizational Law’, Yale Law Journal, 110 (3), December, 387–440

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Dodd Frank Invades Canada

Contracting out of Fiduciary Duties: The Case of Corporate Opportunities

There's a very important new paper out by Rauterberg and Talley, which reports:

For centuries, the duty of loyalty has been the hallowed centerpiece of fiduciary obligation, widely considered one of the few “mandatory” rules of corporate law. That view, however, is no longer true. Beginning in 2000, Delaware dramatically departed from tradition by granting incorporated entities a statutory right to waive a crucial part of the duty of loyalty: the corporate opportunities doctrine. Other states have since followed Delaware’s lead, similarly permitting firms to execute “corporate opportunity waivers.” Surprisingly, more than fifteen years into this reform experiment, no empirical study has attempted to measure either the corporate response to these reforms, or to evaluate the implications of that response.

This Article presents the first broad empirical investigation of the area. Contrary to conventional wisdom, we find that hundreds of public corporations have adopted waivers – often with capacious scope and reach. We thus establish a central empirical fact that is an important baseline for further discussion: public corporations have an enormous appetite for contracting out of the duty of loyalty when freed to do so. Our analysis further sheds light on the high-stakes normative debate around the relationship between fiduciary principles and freedom of contract. What types of corporations choose to contract around default rules? When they do so, do such measures tend to bolster or thwart shareholder welfare? We develop an efficient contracting approach to explain why corporations – and their shareholders – might favor tailoring the duty of loyalty, and provide empirical evidence that Delaware’s experiment has generally been a success.

Rauterberg, Gabriel V. and Talley, Eric L., Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers (August 12, 2016). Columbia Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2822248

 

Highly recommended.

Sec Reg News: Conflict Mineral Disclosure is Costly and Ineffective

Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains:

...  directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten.

Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to an emergency humanitarian crisis. 

It was foisted on companies by left-wing activists and liberal Democrat legislators, who presumably felt all warm and fuzzy as they used their various tech toys containing conflict minerals. Some of us predicted that misbegotten wretch of a rule would prove costly and ineffective. According to a new GAO study, we were right:

As a result of country-of-origin inquiries, an estimated 19 percent more companies that filed a specialized disclosure form (Form SD) with the Securities and Exchange Commission (SEC) reported that they knew or had reason to believe they knew the source of the conflict minerals in their products in 2015 than in 2014, based on a generalizable sample of filings GAO reviewed. However, after an estimated 79 percent of the companies that filed a Form SD performed due diligence, an estimated 67 percent of them reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent of them reported that they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (DRC) and adjoining countries. ...

Sourcing and chain-of-custody complexities, which companies reported to be a challenge, may increase the cost required for disclosure efforts or result in missing information. ...

OECD reported in 2016 that upstream companies and certification initiatives have struggled with the significant cost of conflict minerals traceability programs and voiced their concerns about downstream companies not sharing the burden sufficiently while benefiting from those programs.

A big part of the problem is that the federal government is basically clueless and has failed to implement requirements under the act that might have somewhat alleviated the problem:

[The Department of] Commerce is required under the act to submit, starting in January 2013, an annual report that includes, among other things, an assessment of the accuracy and recommendations for improvement of the IPSA described by the act that are filed by relevant companies with their conflict minerals report. The agency has, so far, not assessed or submitted a report on any IPSAs, despite acknowledging that 29 companies have filed IPSAs with their disclosures between 2014 and 2016. Following repeated GAO inquiries about the status of the IPSA assessments, Commerce officials have yet to estimate when they will assess the IPSAs because, as they stated, Commerce does not yet have the knowledge or skills to conduct IPSA reviews or establish best practices. Without these assessments, Congress lacks needed information on the accuracy of the IPSAs and other due diligence processes used by filing companies. Additionally, these filing companies lack information about best practices for responding to the conflict minerals rule that, according to SEC, was intended by Congress to reduce violence in the region.

This is but one piece of a much larger problem, which is the continuing efforts by left-wing activists to use disclosure rules to effect their preferred social policies. No one denies that conflict minerals are a serious humanitarian problem, but the disclosure requirements were a stupid, largely useless, costly, and ineffective means of addressing that legitimate problem. And that is usually the case with these sort of proposals, which is point worth making again and again as the tide rolls on.

Corporate law is public interest law

There's been a lot of griping at Harvard Law School recently about political correctness, multiculturalism, and the usual left-liberal causes. Now Harvard Magazine notes that some are trying to extend the activist heat to Harvard's status as a giant of corporate lawyer training:

There’s an inherent tension in HLS’s role as an institution devoted to advancing justice and public welfare, and its role as an elite professional school. Much as undergraduates from institutions like Harvard flock to high-paying business jobs, HLS graduates are drawn in vast numbers to corporate-interest law firms, almost exclusively representing wealthy clients. Of HLS’s class of 2015, more than 60 percent took jobs at private firms or in business. The vast majority of them work at firms of more than 500 lawyers in New York, Washington, San Francisco, and Boston. The class of 2015 had a median starting salary of $160,000, the standard offer for first-year associates—higher than the $130,000 median starting salary for Harvard Business School graduates. 

Ralph Nader, LL.B. ’58, a long-time critic of HLS’s pipeline to corporate law, argues that last year’s activism missed an opportunity to question the prominence of corporate law or ask questions about students’ debt to society after graduation. Asked about how well HLS is meeting its stated mission of advancing justice and the well-being of society, Nader seemed surprised by the question: “Well, largely they’re training corporate lawyers,” he says plainly. Early last fall, he gave a talk on campus in which he asked, “What is the purpose of the Harvard Law School?” and urged students to allow their moral and civic conscience, and not the hiring demands of corporate firms, to answer that question. “Harvard Law,” he said then, “is not an institution that provokes any kind of consternation or fear among the power structure.” 

The school’s administration points out that it offers a wealth of resources for public interest—and indeed students interested in public service have at their disposal a full office devoted to public-interest advising; generous loan forgiveness; and funding for legal-aid work after graduation. But between the well-established path to corporate law and the demands of a just society, HLS takes no position on where its graduates ought to work, and struggles to articulate a role for itself in a broader justice system. Career options are framed as a matter of personal choice or market demand rather than public need, reflected in the recruiting structure that accommodates corporate law. How pervasive should corporate law be at a top law school? What do Harvard graduates owe to the public? These are questions Harvard hasn’t answered—but the controversies of the last year, and the ones sure to come, suggest that perhaps it needs to. 

If the leadership of HLS have a spine (dubious) they'll answer such complaints with a resounding defense of corporate law as public interest law.

I addressed this point in my essay Reflections on Twenty Years of Law Teaching: Remarks at the Rutter Award Ceremony (April 2008), which is available at http://ssrn.com/abstract=1122577. In it, I wrote that:

Legal education pervasively sends law students the message that corporate lawyering is a less moral and socially desirable career path than so-called “public interest” lawyering. The corporate world is viewed as essentially corrupting and alienating, while true self-actualization is possible only in a Legal Aid office.

Our students get these messages not only in law school, of course, but also in the media. Films like “A Civil Action” or “Erin Brockovich” illustrate the general ill repute in which corporations—and corporate lawyers—are held, at least here in Hollywood.

In my teaching, I have chosen to unabashedly embrace a competing view. I tell my students about Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”

I tell them about journalists John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.” ...

And so I put it to my students this way: You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.

Therapeutic Disclosure: My First Post as a WLF "Featured Expert Commentator"

Here

What I'm Reading

Memo to Students: Don't call me Steve. Or Stephen. And especially not Steven.

From WSJ Law Blog:

When University of Utah law professor Shima Baradaran Baughman introduces herself to her students each year, she refers to herself as “Professor Baughman.” Or “Prof. B.” if she’s signing off an email to her class.

Her students, though, prefer to call her “Shima,” lopping off the academic honorific.

That wasn’t always the case. When she started out teaching six years ago, most students addressed her using her last name and the professor title. But such formality among her millennial pupils is now the exception.

She explains:

I actually think the legal profession is one of the few remaining professions where there is a sense of formality in our practice of law. We have to address judges by a certain title (or they will correct you at oral argument), we have to carefully include exact language, color, and formatting on briefs or they are rejected, addressing of opposing counsel and often clients often has to do this by their full name and title. And I believe an awkward situation may arise where a student may call his judge by her first name and it may be seen as a sign of disrespect.

Ms. Baughman argues that the first-name calling is a symptom of the “growing casual nature of law teaching”:

Students have called me on my cell phone regularly (I’m not sure how they have obtained this number) and two students asked me if I could Skype their study group before one of my finals since they had a few extra questions and email responses just didn’t suffice. I regularly am asked if I can review a student’s 40+ page outline to see if there are any mistakes. These are requests I would never have made in law school even if I was paid a large amount of money. I worry that students have an extremely casual view of their professors and calling them by their first names may be exasperating what I think is an already bigger issue of casual Millennials and respect.

I'm with Professor Baughman. I haven't worked this hard in my life to have some millennial kid call me Stevie. It's Professor Bainbridge, damn it.

Will non-Delaware courts effectively gut Trulia?

Alison Frankel reports that:

There were two big takeaways from a new Cornerstone Research study of shareholder suits challenging big M&A announcements. First, Cornerstone confirmed what other analysts have previously reported: Plaintiffs’ lawyers are filing fewer cases in the wake of a 2015 crackdown on disclosure-only settlements by Delaware’s Chancery Court. The drop-off is dramatic (assuming that, like me, you accept the premise that the filing rate of shareholder M&A suits is the stuff of drama). At the 2013 peak of shareholder M&A litigation, plaintiffs’ lawyers sued to challenge 94 percent of announced deals valued at more than $100 million. In the first half of 2016, the rate was down to 64 percent – lower than we’ve seen since 2009.

Cornerstone’s second big finding is that when plaintiffs’ lawyers do sue over M&A transactions, they are much more likely to file cases outside of Delaware. In the first three quarters of 2015 – before Chancery Court judges began rejecting settlements that granted defendants broad releases in exchange for immaterial additional proxy disclosures – shareholders sued in Delaware in 61 percent of the M&A deals that prompted litigation. After the crackdown, only 26 percent of the deal challenges were filed in Delaware. Even when the acquired company is incorporated in Delaware, shareholders’ lawyers sued in Chancery Court in only 36 percent of all cases, compared to 74 percent in 2015.

As Frankel points out, this raises a key question:

In Delaware, plaintiffs’ lawyers know they can’t collect six-figure fees for bringing unwarranted deal challenges and defendants know they can’t buy global releases for the low, low price of a few hundred thousand bucks in fees to shareholders’ counsel. But will other judges countenance those agreements?

Fordham law professor Sean Griffith is worried that they will. As you may recall, Griffith is one of the academics who stirred the debate over disclosure-only settlements, co-authoring the 2015 paper, “Confronting the Peppercorn Settlement in Merger Litigation.” He then pledged to put his theories into practice. Griffith bought shares of recently acquired companies in order to object to disclosure-only settlements in shareholder class actions challenging the transactions. He made a splash last summer as an objector in a Delaware case involving Riverbed Technologies. (Griffith’s objection didn’t squelch the Riverbed settlement but provoked an opinion expressing skepticism about the viability of future disclosure-only settlements; the judge nevertheless awarded the professor’s lawyer only $10,000 in fees because he was worried about encouraging meritless objections.)

Now Griffith is busy warning courts outside of Delaware about disclosure-only settlements. 

One answer is forum selection bylaws. I'm surprised they aren't almost universal by now.

Active management loses out (again) to passive investment management

The WSJ today reported that:

A growing exodus from hedge funds extended to two of the biggest names in the industry Tuesday, Tudor Investment Corp. and Brevan Howard, as disenchanted investors increasingly shun what was once the hottest place to put money.

The funds’ problem is clear: They just aren’t performing.

Hedge funds and actively managed mutual funds have been underperforming since financial markets began their rebound in early 2009. The average hedge fund is up 3% this year through the end of July, according to researcher HFR Inc., less than half the S&P 500’s rise, including dividends.

This comes as no surprise, of course. It is well-established that you're better off, over the long haul, investing in passively-managed index funds rather than actively-managed mutual or pension funds. Over time, as numerous studies have shown, nobody meets the market once you adjust for risk and the survivor bias. Why? In part, at least, because the managers of active funds are subject to a whole slew of cognitive biases and errors that tend to adversely affect their decisionmaking.

Don't believe me? Fine. But before we talk about it go read Burton Malkiel's magisterial work A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing and then we'll talk. It lays out the evidence in favor of passive investment management "in terms so plain and firm as to command their assent."

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Columbia law prof Merritt Fox blasts NY AG suit against Exxon as an abuse of power

Chris White reports:

The Exxon subpoena into the company’s knowledge about internal climate change reports is an abuse of extraordinary powers. It allowed attorneys general (AGs) to subpoena private documents without either obtaining a court order or filing a complaint, Merritt Fox, a professor of law at Columbia Law School, wrote Monday at National Law Journal.

Fox was referencing New York Attorney General Eric Schneiderman’s investigation into Exxon, which, according to a New York Times report, demanded “extensive financial records, emails and other documents” from the oil producer dating all the way back to the 1970s. The New York attorney general also demanded information on global warming skeptic groups Exxon had once helped fund. ...

Yet another legal expert has joined at least 12 others in calling New York Attorney General Eric Schniederman’s investigation of ExxonMobil legally flimsy.  This morning, Columbia Law Professor Merritt B. Fox published an op-ed in the National Law Journal with a scathing review of Schneiderman’s use of the Martin Act to investigate ExxonMobil, noting that the whole affair is an “abuse” of “extraordinary powers.” As Fox states, “The Martin Act grants the attorney general extraordinary powers to subpoena private documents without either obtaining a court order, which is required in most ordinary New York criminal proceedings, or the filing of a complaint, which is required in an ordinary civil action and is subject to court review. The Exxon subpoena is an abuse of these extraordinary powers.” (emphasis added)

What went wrong with Yahoo

UCLA's George Geis explains:

There are three major reasons for M&A failure — flawed strategy, misguided valuation and ineffective integration. And Yahoo is a classic case study in how these three factors can destroy company value.

Go read the whole thing.

The ABA joins the PC speech police: It's time to fight back

Sigh:

It is official. The American Bar Association says it is professional misconduct to discriminate against or harass opposing counsel, or anyone else for that matter, in the course of practicing law.

The ethics rule now forbids comments or actions that single out someone on the basis of race, religion, sex, disability and other factors. Nearly two dozen state bars and the District of Columbia bar have similar rules. But there has been no national prohibition of such behavior, which, many female lawyers complain, results in too many “honeys,” “darlings” and other sexist remarks and gestures toward them while they are trying to practice their profession.

You know what else is official? The ABA just reconfirmed its status as a left-liberal special interest group that no longer represents the interests of all lawyers but only those that belong to the PC crowd.

And we let these yahoos act as a gatekeeper on judicial appointments?

My friend and colleague Eugene Volokh comments:

This also goes beyond existing hostile-work-environment harassment law under Title VII and similar state statutes. That law itself has potential First Amendment problems, as I’ve argued and as some courts have recognized (though others have disagreed); see, for instance, the recent “Don’t Tread on Me” controversy. But in most states, it doesn’t include sexual orientation, gender identity, marital status or socioeconomic status. It also generally doesn’t cover social activities at which co-workers aren’t present; but under the proposed rule, even a solo practitioner could face discipline because something that he said at a law-related function offended someone employed by some other law firm.

Hostile-work-environment harassment law is also often defended (though in my view that defense is inadequate) on the grounds that it’s limited to speech that is so “severe or pervasive” that it creates an “offensive work environment.” This proposed rule conspicuously omits any such limitation. Though the provision that “anti-harassment . . . case law may guide application of paragraph (g)” might be seen as implicitly incorporating a “severe or pervasive” requirement, that’s not at all clear: That provision says only that the anti-harassment case law “may guide” the interpretation of the rule, and in any event the language of paragraph (g) seems to cover any “harmful verbal . . . conduct,” including isolated statements.

Many people pointed out possible problems with this proposed rule — yet the ABA adopted it with only minor changes that do nothing to limit the rule’s effect on speech. My inference is that the ABA wants to do exactly what the text calls for: limit lawyers’ expression of viewpoints that it disapproves of. I’ll blog again shortly on other aspects of the proposal (such as the remarkable implications of banning discrimination based on “socioeconomic status”); but here I just wanted to focus on the new ABA speech code, and why state courts and state bars should resist the pressure to adopt it.

David French comments:

Legal conservatives will either conform or resist. They should resist. Earlier this week, the American Bar Association amended its Model Rules of Professional Conduct to include a speech code — the exact kind of speech code that’s been struck down repeatedly on campuses. Keen to address the crisis of female lawyers occasionally being addressed as “honey” or “darling” (at least that’s how the New York Times addressed the alleged need for the rules), the ABA endorsed sweeping speech rules that, if adopted by state bar associations, will apply not just to courtroom conduct but also to participation in any “bar association, business or social activities in connection with the practice of law.” The new rule prohibits “harmful verbal or physical conduct that manifests bias or prejudice toward others” and defines harassment as “derogatory or demeaning verbal or physical conduct.” At the same time, the rule claims that it doesn’t apply to “legitimate” advice or advocacy. It’s good to know that the ABA is now in the business of determining when my legal arguments are “legitimate.”

...

If my state board of professional responsibility adopts these new rules, then I’m clearly in trouble. Just in the past year I’ve engaged in the following kinds of speech that many people, including fellow lawyers, find biased or derogatory. I have argued that men cannot become women. Many would claim I’m “biased” against the transgendered and engaged in derogatory speech every time I scorn the notion of a woman with a penis or the idea of a pregnant man. I have argued that the right to same-sex marriage is not protected by the Constitution, and I do not believe that any same-sex union is legitimate in the eyes of God. In other words, it’s not truly a marriage. Once again many of my legal colleagues would consider me “biased” and “derogatory” — this time against gays and lesbians.

But as with many speech codes, actual enforcement isn’t the point. It’s about the fear of enforcement — the chilling effect. It’s about creating the impression that certain ideas are completely out of bounds — specifically, any idea or expression that offends favored victim groups. The application to “social activities” is particularly disturbing. Are dinner conversations at bar association events now within the jurisdiction of the thought police? Lawyers live in fear of ethical complaints. A mere allegation can ruin a career, and defending yourself from ethics boards can be painful and expensive even if your law practice remains intact. The safest course is always silence. The safest course is compliance. After all, you don’t want to be one of those people — the bigots and the haters.

The ABA is beyond reform. It's time for conservatives to quit it, instead of allowing their fees to fund this sort of stupidity, and to become active in their state bars. After all, the ABA's word is not law--only state ethics rules are. Fight the power.

Explaining the cool down in the IPO market

There was an insightful letter to the editor in today's WSJ:

Regarding “IPO Market Cools As Private Deals Rise” (page one, Aug. 1): Is it really hard to understand why a company would prefer to sell shares to a private-equity firm staffed with highly educated professionals who not only will serve on the board but contribute value as opposed to going public and being second guessed by every plaintiffs’ lawyer, SEC staffer and Justice Department enforcer who has never held a job outside of the regulatory quagmire in Washington? 

The IPO is no longer the desired outcome because of litigation and burdensome and expensive regulation. The end result is that affluent investors in private-equity funds continue to hold stakes in promising upstarts while common investors get stuck with their parent’s and grandparent’s portfolio options.

I made a similar argument at length in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-13. Available at SSRN: http://ssrn.com/abstract=1696303:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

"Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations"

Alicia E. Plerhoples' article argues that:

Nonprofits dominate the charitable sector. Until recently, this statement was tautological. Charity is increasingly being conducted through for-profit entities, raising concerns about the marketization of the charitable sector. This article examines for-profit charity conducted through the public benefit corporation, a new corporate form that allows its owners to blend mission and profit in a single entity. Proponents of public benefit corporations intended it as an alternative to a for-profit corporation and largely ignored its impact on the charitable sector. While public benefit corporations are ripe for conducting charity because they can pursue dual missions, they lack the transparency and accountability mechanisms of charitable organizations.

This article chronicles the supply and demand for public benefit corporations that conduct charity (i.e., “charitable public benefit corporations”) and hypothesizes the micro and macro level harms caused by them. At the micro level, the harm is fraud or “greenwashing”, i.e., deceiving unwitting stockholders, customers, or other stakeholders into investing or spending their time and money in the negligent or fraudulent enterprise. At the macro level, the more pernicious harm is that “market- based charity” injects individualistic and autocratic business values and methods into charitable work.

Curiously, however, the article fails to grapple with the cogent arguments made by Evelyn Brody about the agency cost problems that pervade the nonprofit sector:

Are nonprofit organizations 'different' from firms with owners? The accepted economic account holds that nonprofits are more trustworthy than business firms because nonprofits cannot distribute profits to owners. However, all firms, nonprofit or proprietary, have converged into similar patterns of behavior. Firms, whether nonprofit or proprietary (or even public), are subject to many of the same economic forces, such as resource dependency, institutional isomorphism, and organizational slack. Even in the absence of shareholders somebody still has to run the enterprise: to decide what objectives to pursue, and how; to manage its financial and human resources; and to span the boundaries of the organization in interacting with the key constituencies, other organizations, and the public. While nonprofits have shareholders privileged with rights of accountability, in most of the business sector shareholders have long lost effective control to firm management. In short, management in both sectors has decisional authority, whether de facto, as in the proprietary sector, or de jure, as in the nonprofit sector. 

Moreover, the 'nondistribution constraint' cannot guarantee that the nonprofit operates better or worse than a proprietary enterprise in overcoming information asymmetries. The absence of shareholders demanding profits enables the organization to relax into productive inefficiencies, or to cross-subsidize activities the patron would not want to pay for (could she only observe them). Such inefficiencies or cross-subsidization might 'cost' more than the profits the enterprise might otherwise distribute to shareholders if it operated in a proprietary form. Separately, in an industry with more than one nonprofit, the nondistribution constraint cannot help patrons choose between competing nonprofits. 

Agents Without Principals: the Economic Convergence of the Nonprofit and For-Profit Organizational Forms. New York Law School Law Review, Vol. 40, No. 3, pp. 547-536, 1996. Available at SSRN: http://ssrn.com/abstract=918230

Trustees of charitable trusts and directors of nonprofit corporations operate under legal regimes designed for their for-profit cousins. In the absence of private beneficiaries or shareholders to look after their own interests, however, charity fiduciaries frequently escape accountability for their self-dealing and neglect or mismanagement. Few charities have members endowed with voting rights, and state attorneys general have limited resources to devote to monitoring the nonprofit sector. Similarly, at the federal level, the Internal Revenue Service is a tax collector, not a policing agency (although its new powers to tax excess benefits will undoubtedly draw it further into charity operations). As a result, the charitable sector must improve its own efforts to educate and review the behavior of fiduciaries, in order to retain the confidence of the donating public and the independence so cherished by all charities.

The Limits of Charity Fiduciary Law. Yale University, Program on Non-Profit Organizations Working Paper No. 242; Maryland Law Review, Vol. 57, p. 1400, 1998. Available at SSRN: http://ssrn.com/abstract=11344.

Brody's work demonstrated that the supposed greater accountability of non-profits is pretty much bogus. Coupled with the standard arguments against stakeholderism, I'm unpersuaded by Plerhoples' argument.

Verret on UK PM Theresa May's corporate governance proposals

Regular readers may recall that I recently gave short critiques of several corporate governance proposals put forward by UK Prime Minister Theresa May: pay ratio disclosure, mandatory say on pay, and worker representation on boards.

Our friend JW Verret has now published a commentary on May's proposals:

It appears May seeks to supplant conservative principle with political expediency and more socialist ideology. Her proposals will replace the discipline of the market with the cronyism of special interest governance. Thatcher's government drew a firm distinction with her Conservative Party platform, built on the values of free enterprise and the unforgivable business discipline of market competition. The Iron Lady knew what she believed, and she governed from those beliefs.

Prime Minister May's speech provides a road map that merges some conservative rhetoric with a series of top priorities for liberals and the Labour Party. A Conservative Party platform cannot survive however with such a cafeteria approach to principal.

Go read the whole thing.