ProfessorBainbridge.com

Is Hillary Clinton Embarrassed By Her Corporate Law Past? Surely not. Corporate Lawyers are the Salt of the Earth!

The WSJ reports:

The future presidential contender worked for 15 years as a corporate litigator at the Rose Law Firm in Arkansas’s capital, longer than any other position in or out of government. Her portrait still hangs in the firm’s downtown offices.

Yet that chapter in her life has been all but excised from the official Hillary Clinton story. She hardly ever mentions it on the campaign trail. Her husband skipped past it when telling of her life story at the Democratic National Convention. Until August, it wasn’t even mentioned on her campaign’s official biography....

In her 2003 book, Mrs. Clinton writes only briefly about her work at Rose. She highlights a couple of cases, including her first jury trial, where she defended a canning company sued by a man who found the rear end of a rat in his pork and beans. He claimed he couldn’t kiss his fiancée because every time he thought about the situation he would spit.

Mrs. Clinton argued the man hadn’t suffered any real damages and because the rodent part had been sterilized it would be considered edible in parts of the world. She said the plaintiff won “only nominal damages.” Mrs. Clinton didn’t identify the name of the man or the company involved. ...

[Heh.]

The bulk of her cases involved defending large corporations, a Wall Street Journal review of court records suggests. ...

“We hated seeing her on the other side of the table,” says Wade Rathke, founder of Acorn, who was friends with her husband at the time. “We had never been confronted with the reality of her as a corporate lawyer. But there she was and there we were. We didn’t win this one.”

So why doesn't Ms Clinton celebrate her past? After all, being a corporate lawyer is an honorable and highly socially beneficial career. As I wrote in Reflections on Twenty Years of Law Teaching:

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.”

There is no doubt that the corporation is now the key economic institution in Western nations. In the United States, for example, the corporation is the predominant form of business organization by every measure except sheer number of firms. According to recent census data, although corporations account for only about one fifth of all business organizations, they bring in almost 90% of all business receipts.

The corporation also has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest. Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.” ...

The rise of the corporate form thus has “improved the living standards of millions of ordinary people, putting the luxuries of the rich within the reach of the man in the street.” The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, enhancing personal and social mobility. Many of the wealthiest businessmen of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.

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.

The goal isn’t just to make my students feel better about themselves. I firmly believe that too many of our students, when they get out in practice, may be more willing to act in ways that are ethically gray—to act as facilitators rather than gatekeepers—if they’ve been told repeatedly that they’ve already “sold out.” If more legal academics were to celebrate the pro-social aspects of corporate practice, perhaps our students would be better gatekeepers once they get out in practice.

It might help even more if a certain presidential candidate were to celebrate the pro-social aspects of her career as a corporate lawyer.

Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement By Proposal

My article Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement By Proposal, 85 Fordham Law Review 705 (2016), is now available online here

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called “Shareholder Proposal Rule”) to not just manage but even micromanage corporate decisions.

The Rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micromanagement. The Rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion of proposals relating to ordinary business operations under Rule 14a-8(i)(7) is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. For example, corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters. This creates a gap through which countless proposals have made it onto corporate proxy statements.

 

This Article proposes an alternative standard that is not only grounded in relevant state corporate law principles but is easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.

You've got to love the NY Post

I have to admit, this completely cracked me up:

The Economist reviews 2 new books on white collar crime

The review reports that:

One thing right-wing populists and left-wing progressives can agree on is that society is too soft on white-collar crime. Conservatives abandon their admiration for business when it comes to “crooked bankers”. Left-wingers forget their qualms if locking up “corporate evil-doers”. Hillary Clinton’s line that “there should be no bank too big to fail but no individual too big to jail” would go down equally well at a Donald Trump rally.

But is society really soft on corporate wrongdoing? And would locking up bankers and businessmen and throwing away the key really solve any problems? Two new books try to inject reason and evidence into a discussion more commonly driven by emotion and hearsay: “” by Eugene Soltes, of Harvard Business School, and “Capital Offenses: Business Crime and Punishment in America's Corporate Age” by Samuel Buell, the lead prosecutor in the Enron case, who now teaches at Duke University. ...

The strongest populist argument is about double standards: it is wrong to let the rich get away with a slap on the wrist while poor youths are put in prison for possessing an ounce of cocaine. Messrs Soltes and Buell have clearly demonstrated that the rich aren’t getting away with a slap. But even if they were, this would argue for reforming criminal law for the poor rather than extending the lock-’em-up mentality to the rich. Society should by all means punish white-collar criminals if they have obviously committed crimes and imposed harm. But it should resist the temptation to criminalise new businesses testing the rules. And it should certainly resist the temptation to single people out for harsh punishment simply because they are rich and successful.

I agree that over-criminalization can be a concern. But it also would be a mistake to ignore the relationship between punishing corporations and their executives.

There is an argument for imposing civil liability on corporations and other institutions (i.e., legal persons) where their agents commit torts or breach contracts. A major function of civil liability, after all, is compensation of victims of malfeasance and misfeasance. The legal person will often have far deeper pockets than any of the natural persons amongst its stakeholders. Having one defendant rather than many, moreover, reduces tertiary costs for both parties and society. (Note, BTW, that because compensation is a key goal of civil liability, burning the place down would seem counterproductive.)

Having said that, however, I'm not completely convinced. In the first place, most major corporate misconduct implicates senior corporate officials, such that a regime of personal--rather than corporate--liability would provide them with incentives to cause the corporate entity to insure against the risk of such losses, which satisfies the goal of compensation.

More important, however, the role of compensation as a justification for corporate liability is more compliucated than one might think. In an important article, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691, Jennifer Arlen and William Carney, tackled this question with regard to corporate liability for securities frauds committed by agents of the firm. As they demonstrate, when a corporation pays a large fine the resulting balance sheet effect is to reduce assets on the left side. On the right hand side, liabilities remain constant. To offset the decline in net assets, accordingly, shareholder equity must fall. As a result, the effect of civil monetary liability is to replace "one group of innocent victims with another: those who were shareholders when the fraud was revealed. Moreover, enterprise liability does not even effect a one-to-one transfer between innocent victims: a large percentage of the plaintiffs' recovery goes to their lawyers. Finally, enterprise liability may injure innocent people in addition to shareholders. For example, employees are injured if enterprise liability sends a firm into bankruptcy or causes it to lay off employees." Id. at 719.

The case for corporate criminal liability is even weaker. The principal functions of criminal liability are retribution and deterrence. As I have argued elsewhere in the context of corporate reparations:

A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation - there is nothing there to be punished.

So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation's treasury, it reduces the value of the residual claim on the corporation's assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong. Retributive justice is legitimate only where the actor to be punished has committed acts to which moral blameworthiness can be assigned. Even if you assume the corporation is still benefiting from alleged wrongdoing that happened decades or even centuries ago, which seems implausible, the modern shareholders are mere holders in due course. It is therefore difficult to see a moral basis punishing them. They have done nothing for which they are blameworthy.

As always in corporate accountability, both efficiency and morality require that punishment be directed solely at those who actually commit wrongdoing. In this context, it would be the directors, officers, or controlling shareholders who actually enslaved people. Since they're long dead, there is nobody left who properly can be punished.

That conclusion was influenced in part by the Arlen and Carney paper, which argues for imposing liability on the corporation's agents:

... we find that there is little reason to believe that enterprise liability is the superior rule from the standpoint of deterrence, and there are many reasons to suspect the contrary. The deterrent effect of the available monetary sanctions under agent liability probably exceeds the deterrent effect of enterprise liability because a civil judgment against an agent hurts his reputation more than does a sanction imposed by the firm in private. Moreover, the threat that sanctions will be imposed appears to be greater under agent liability. Agent liability places the responsibility of sanctioning wrongful agents with the victims, who have no reason not to proceed against them and have every reason to proceed. Enterprise liability, by contrast, places the responsibility of proceeding against the wrongful agents with the firm, and thus with the very agents (and their close associates) most likely to have committed fraud. Moreover, agent liability in effect enlists insurance companies as corporate monitors and disciplinarians, thereby eliminating the agency costs associated with firm managers monitoring and disciplining each other. Furthermore, the judgment proof problem under agent liability can be completely eliminated if, in addition to civil liability, the government imposes sufficient nonmonetary criminal penalties on agents, such as imprisonment.

Although they are discussing civil liability, their comments on deterrence seem equally applicable to the criminal law.

UCLA School of Law announced two new scholarship programs

The School announces:

UCLA School of Law has announced the creation of two new scholarship programs, both of which will provide full tuition to recipients for the duration of their legal education.

Both programs are available for students applying now for the fall semester of 2017. The UCLA Law Distinguished Scholarships will be awarded to students with exceptional academic records who make a binding commitment to UCLA Law through an early-decision application process, with a January 1 application deadline. The UCLA Achievement Fellowships, which do not require an advance binding commitment, are open to talented, high-achieving students who have overcome significant hurdles such as disabilities, socio-economic hardship or educational disadvantages, or those who are the first in their families to pursue a graduate or professional degree. The application deadline for this program is February 1.

Go here for more information. 

The Securities and Exchange Commission has no sense of humor and hates fun

Walter Olson:

The Securities and Exchange Commission has settled an enforcement action against Forcerank, LLC, a provider of a mobile phone game that enables players to engage in fantasy stock trading for a small charge, much of which was refunded to players in the form of prizes for successful predictions. The SEC takes the position that the transactions involved, however small, fall into the class of swaps and derivatives that, under Dodd-Frank, cannot be offered to the public except under intensively regulated conditions.

Talk about using a nuke to kill a fly.

Adrian Vermule on crossing the Tiber

As someone who was also an adult convert to Catholicism, I was fascinated to read this interview with Harvard law professor Adrian Vermule about his own conversion.

"The Geography of MFW-Land"

Itai Fiegenbaum has posted an interesting paper, The Geography of MFW-Land (October 11, 2016), Delaware Journal of Corporate Law (DJCL), available at SSRN: https://ssrn.com/abstract=2850900, which argues that:

In a highly celebrated decision, the Delaware Supreme Court concluded that positive approval by both a special board committee of disinterested directors and an informed and uncoerced majority of minority stockholders justifies de-escalation of the standard of review for going private mergers with a controlling stockholder. Prior to the MFW decision, Delaware case law declined to provide a ratification avenue that results in a deferential standard of review for these types of transactions.  

While helpful, the decision lacks any reference to the multitude of other factual situations that compel heightened judicial review. Thus, business planners are left pondering whether MFW created a ratification procedure that encompasses all manner of controlling stockholder transactions. Into this void, a Chancery Court decision recently opined that the MFW framework applies to all controlling stockholder transactions.

This article argues that the intuitive application of the MFW framework to all controlling stockholder transactions is misguided. Neither the text of the Supreme Court's decision nor its context justify an expansive reading of MFW's holding. A critical look at the policy arguments espoused by the Supreme Court exposes their limitations when applied to other types of transactions. The unavoidable conclusion is that the borders of "MFW-Land" are much narrower than they appeal.

Recommended.

ICYMI: Miscellaneous tweets of potential interest to readers of the blog

Corporate Governance and Purpose at Washington https://t.co/u19doxpJwC

— Professor Bainbridge (@ProfBainbridge) October 25, 2016

Lyman Johnson on corporate legal theory https://t.co/PcFMRblSs3

— Professor Bainbridge (@ProfBainbridge) October 25, 2016

Nevada Seizes Delaware’s Business Entity Formation Crown https://t.co/RqyB6qc6ag By accident

— Professor Bainbridge (@ProfBainbridge) October 25, 2016

Sen. Elizabeth Warren wants SEC Chairman Mary Jo White fired for doing her job, writes @ArthurLevitt: https://t.co/SbfmK37f28

— WSJ Editorial Page (@WSJopinion) October 24, 2016

Is a "well-functioning independent board" really "a pillar of effective corporate governance"?

So claims the opening sentence of a CLS blog post by a trio of University of Florida economists, albeit with subsequent qualifications:

A well-functioning independent board of directors is a pillar of effective corporate governance. ...

A large body of academic literature has also highlighted the importance of board independence and has explored its effects on various measures of firm performance. Despite the strong push for greater director independence, the observed links between board independence and firm performance are often quite weak. Moreover, corporate fraud and misconduct still remain a significant problem in Corporate America (KPMG Forensic Integrity Survey, 2005-2006, 2009, and 2013) even after a decade of significant regulatory efforts that were designed to promote a board’s oversight function through director independence.

I just don't buy the empirical claim. In my book, Corporate Governance after the Financial Crisis, I review the evidence and arguments at length before concluding that:

The post-SOX regulatory environment rests on the conventional wisdom that board independence is an unalloyed good. As the preceding sections demonstrated, however, the empirical evidence on the merits of board independence is mixed. Accordingly, even though there is some reason to think independent board members are finally becoming properly incentivized and, as a result, more effective, the clearest take-home lesson from the preceding analysis is still that one size does not fit all. ...

The post-SOX standards, however, strap all listed companies into a single model of corporate governance. By establishing a highly restrictive definition of director independence and mandating that such directors dominate both the board and its required committees, the new rules fail to take into account the diversity and variance among firms. The new rules thus satisfy our definition of quack corporate governance. The one size fits all model they mandate should be scrapped in favor of allowing each firm to develop the particular mix of monitoring and management that best suits its individual needs. Unfortunately, as we will see throughout our review of the post-crisis federal regulatory scheme, neither Congress nor the SEC has given any deference to the principle of private ordering.

Winter has come for shareholder plaintiff lawyers in Delaware

Alison Frankel reports:

... according to three top-notch plaintiffs’ lawyers who talked to me on background, a series of recent decisions from the Delaware Supreme Court and Chancery Court has made it much tougher for investors to police corporate boards and advisers, to block shareholder votes on deals involving a single bidder and to recover damages for disclosure violations if shareholders have voted in favor of a merger. The net effect of this recent precedent, they said, is to encourage shareholders to file M&A class actions in federal court, alleging violations of federal disclosure laws, rather than bringing fiduciary duty suits in Delaware.

These lawyers weren’t even talking about Chancery Court’s celebrated 2015 crackdown on “deal tax” settlements. You probably remember that Delaware judges acted in concert to squelch M&A class action settlements in which corporations received broad releases from shareholder claims in exchange for additional, often immaterial, proxy disclosures.

Chancery Court’s refusal to sign off on six- or seven-figure fees for plaintiffs’ lawyers who negotiated disclosure-only settlements has already sharply reduced the number of M&A challenges filed in Delaware. According to a Cornerstone Research study published this summer, nearly two-thirds of all deals valued at more than $100 million still provoked shareholder litigation, but that’s way down from the 2013 peak of 94 percent – and shareholder lawyers are much more likely to file investor suits outside of Delaware. (Thus explaining Time Warner’s new forum selection clause.)

For all of the attention paid to the clampdown on disclosure-only settlements (including by me!), the Delaware Supreme Court’s 2015 opinion in Corwin v. KKR may turn out to have been a more important disincentive for shareholder lawyers to sue in Chancery Court. In the Corwin decision, written by Chief Justice Leo Strine, the state supreme court held that if a deal is approved by “fully informed, uncoerced” shareholders, the board’s actions during the sale process should be reviewed under the extremely forgiving business judgment standard. Effectively, the Corwin ruling spelled the end of post-closing damages claims in deals shareholders voted to approve.

...

The answer, they say, may be to stop litigating M&A challenges as fiduciary duty cases in Delaware and instead start asserting violations of federal securities law, which, after all, prohibits corporations from making false or misleading proxy filings.

I assume that exclusive forum bylaws that tried to keep such cases out of federal courts would run afoul of the securities law provisions giving federal courts exclusive jurisdiction over federal securities law claims. In which case, the onus will be on federal courts to make use of the tools given them by the PSLRA to prevent a new generation of deal tax litigation.

Verstein on "Enterprise without Entities?"

Andrew Verstein has written a really interesting article about reciprocal insurance exchanges (I know, who would think there was anything interesting to say about them, but he pulled it off). He's given a summary on the Oxford corporate law blog:

The viability of reciprocal insurance problematizes the entity-essentialism now dominant in the corporate law community and elsewhere. Without any entity, reciprocals were somehow able to secure or foreswear the supposedly essential functions that entities provide. It turns out that creative applications of contract law, agency law, and insurance law sometimes suffice to support broad coordination. How? An enterprise’s many patrons can appoint a common person (the ‘attorney-in-fact’) to act as their agent – authorizing the agent to quickly sign multifarious contracts in their names. Liability can be limited and prioritized within those contracts. These limitations are binding on third parties because insurance regulation puts potential creditors on constructive notice of these agreements. Entity-like functions follow, but sans entity.

My article ‘Enterprise Without Entities’ therefore questions the unique importance of entities, but it does not necessarily undermine all arguments of entity theorists. To the contrary, the fact that reciprocals seek and find many of the core functions provided by entities underscores the importance of those functions. Reciprocals have used agency law to overcome transaction costs, and they have alloyed contract law and insurance regulation to structure a pattern of creditors’ rights. Entity essentialism is therefore honored in the breach.

Go read the whole thing.

My life doesn't look like what I expected based on 1960s and 70s sitcoms

And neither does Charles Stross' life:

I suspect that when I was a pre-teen I internalized a model of adult behaviour that is familiar to anyone under 30 today mostly from TV shows like Mad Men. Men wore suits and hats and went out to work, women wore dresses and stayed home to raise kids, the trappings of material success included cars and maybe a black and white television and a vacuum cleaner (a luxury item in 1950s UK) and air travel was exotic.  ...

So if you're slouched in front of your laptop wearing a hoodie and joggers while listening to 80s bubblegum pop on a streaming audio channel, and if you've got a collection of bobble-heads or models of the Starship Enterprise on your desk, and your kids (assuming you have any) are wearing retro fashions that remind you of photos of your parents back when they were dating, relax: you are not a failure! 

I can relate.

Whence Comes a Partner's Actual Authority

Doug Moll has a very helpful analysis of the relevant UPA provisions and commentary.

MY SSRN stats, FWIW

Your Publicly Available (Scholarly and Other Papers) and Privately Available Papers on SSRN as of 17 October 2016 have:

121,807 TOTAL DOWNLOADS
7,802 DOWNLOADS IN THE LAST 12 MONTHS
746,607 TOTAL ABSTRACT VIEWS

(Note: The totals above are calculated specifically for this author letter as of 17 October 2016 for all your papers on SSRN (summing the data on both your publicly and privately available papers) and therefore may differ slightly from the numbers on the SSRN site.)


Your Author Statistics as of 10/01/2016 (out of 321,551 authors in SSRN, based only on Publicly Available, Downloadable Papers)

34 is your AUTHOR RANK, based on 121,483 TOTAL DOWNLOADS.
95 is your AUTHOR RANK, based on 7,837 DOWNLOADS IN THE LAST 12 MONTHS.
1,192 is your AUTHOR RANK, based on 455 TOTAL CITATIONS.

You can find the complete table of the Top Authors Ranking by Downloads and Citations at https://hq.ssrn.com/rankings/Ranking_display.cfm?TRN_gID=7