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Video of the "Can Delaware be Dethroned?" Conference

The Lowell Milken Institute for Business Law and Policy and the UCLA School of Law recently sponsored a conference entitled Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law.

Although Delaware’s domination of corporate law seems now to be well entrenched, this has not always been the case. At the end of the 19th Century, it was New Jersey that was the center of the corporate law world. As is the case in Delaware today, New Jersey law then provided both tax and doctrinal advantages giving it significant competitive advantages in attracting incorporations from out-of-state businesses. In 1913, however, New Jersey adopted the so-called “Seven Sisters Acts,” a package of legislation that collectively made New Jersey much less attractive to incorporators. Delaware swooped in and attracted a flow of New Jersey corporations to Delaware. Today, 64% of the Fortune 500 companies are incorporated in Delaware, as are more than half of all companies listed on the New York Stock Exchange, NASDAQ, and other major stock exchanges.

Whether Delaware’s domination resulted from a race to the top or to the bottom has been the subject of much argument. In either case, however, there is no doubt that Delaware benefits greatly from its dominance. Delaware gets a significant percentage of state revenues from incorporation fees and franchise taxes, typically over 20% of the state's budget. Delaware’s government thus has a very strong interest in maintaining Delaware’s dominant position.

In recent years, however, some observers have suggested that Delaware’s competitive position is eroding or, at least, that it should be doing so. In a 2008 law review article, “The Mystery of Delaware Law's Continuing Success,” Emory law professors William Carney and George Shepherd challenged “the widely held view that Delaware corporate law is dominant because it possesses superior traits, such as a well-understood statute, many judicial decisions interpreting the law, and wise and experienced judges administering that law.” They contend that if Delaware ever truly possessed such advantages, they have eroded substantially.

The purpose of this conference was to explore how Delaware achieved its dominance of corporate law, the threats (if any) to Delaware’s continued dominance, and the social and economic consequences of Delaware’s dominance for shareholders, stakeholders, and the national economy.

Here is the video from Day 1:

Here is the video from Day 2:

Château Lynch-Bages (Pauiliac) 2002

Disappointing even considering the vintage. Generic and anonymous dark fruit. Modest tannins. Lacks grip and complexity. No faults but nothing to write home about.

Grade: 79

Ridge Monte Bello (Santa Cruz Mountains) 1997

As this is the last weekend before Lent, we pushed the boat right out. Butter basted Wagyu beef ribeye steaks and Three Cheese Hasselback Potatoes. If you looked up decadence in the dictionary, it would have this meal's picture in the definition. Green vegetables, you ask? For once my view that green vegetables are not food, but rather what food eats, prevailed.

To drink I opened one of my two bottles of the 1997 Ridge Monte Bello. I last had this wine at a restaurant in 2007, when it was a tannic beast. An additional ten years of bottle age transformed it into a mellow and amiable companion. Ruby red in color. Strong bouquet of cassis, blackberry, tobacco, leather, and anise. On the palate, the tannins have softened considerably. Indeed, the texture is now velvety smooth. Lingering finish. A truly great wine at its peak.

Grade: 98

(No. I don't know why Typepad sometimes flips the photos on their side. Grumble.)

"Unconstitutionally Appointed Administrative Law Judges Continue to Haunt SEC"

The WLF has put out a briefing paper by Lawrence Ebner, which notes that a "recent Tenth Circuit decision has exacerbated a split among federal courts over whether the method used to appoint Securities and Exchange Commission ALJs violates the Constitution’s Appointments Clause."

Sea Smoke Pinot Noir "Ten" (Sta. Rita Hills) 2009

Last noted August 2012. With an additional five years in the cellar, it is much less of a beast. Moderate sediment required decanting. I let it breathe about an hour before drinking. Still a deep ruby color. Big nose. The bouquet is sour cherry, some funky flinty earth, and raspberry. Ditto the palate. It's still big for a Pinot Noir with a firm acidic structure and a strong tannic backbone. I think it will improve, but with three bottles left in the cellar I'll probably drink at least two over the next couple of years and leave one for extended aging to see what happens.

Grade: 90

"Hedge Fund Activism as a Conflict of Entrepreneurship"

A new paper by Alessio Paces puts a new and potentially very helpful spin on hedge fund activism (I say potentially only because I'm still thinking through the implications):

In my recent article, I discuss the policy response to hedge fund activism. I argue that the short-termism debate cannot shed light on the desirability of such activism. Rather, hedge fund activism should be regarded as a conflict of entrepreneurship, namely a conflict about the most efficient horizon to maximize profit. The choice of this horizon, which is uncertain, belongs to the entrepreneur. An engagement by hedge funds reveals that their views about this particular point differ from that of the incumbent management. Because the efficient horizon to maximize profit varies with the individual company and with time, companies should be able to choose whether to be exposed to hedge fund activism and to alter this choice during their existence. In particular, companies should be allowed to introduce dual-class shares after they have gone public, subject to a majority-of-minority shareholder vote. Such transactions would only be acceptable for institutional investors in the presence of investor protection guarantees, such as board representation, and sunset clauses. I argue that this solution is more efficient than general curbs on activism, including loyalty shares. ...

In my paper, I argue that institutional investors cannot always be trusted to make the right decision. Although there are no studies on which category of investors are decisive in hedge fund campaigns, conceptually the key investors are those that vote without having the option to exit strategically, namely the index funds. Empirical evidence reveals that most index fund managers vote actively and independently. However, asset managers usually base their voting on low-cost policies that tend to enhance the returns on their portfolio as a whole. As a result, the judgment by index fund managers is trustworthy as far as standard behaviors, such as expropriation or mismanagement of free cash, is concerned. The same judgment, however, cannot be relied upon when the issue is more about the strategy that a company should pursue. ...

This solution would provide the following advantages. First, the veto right by the institutional investors would screen for the companies for which curbing hedge fund activism can arguably increase value. Second, managers would have to commit to protecting investors against expropriation and mismanagement while the dual-class structure is in place. Third, institutional investors could only accept the restriction if it expires within a defined period, after which managerial performance will again be assessed by the market. In this way, dual-class shares would deliver one unfulfilled promise of loyalty shares, namely the temporary character of the departure from one-share-one-vote.

The article is available here.

I've written about dual class stock a couple of times, one of which is available at SSRN: The Short Life and Resurrection of SEC Rule 19c-4. Washington University Law Quarterly, Vol. 69, Pp. 565-634, 1991. Available at SSRN: https://ssrn.com/abstract=315375 or http://dx.doi.org/10.2139/ssrn.315375

Revised version of "Interest Group Analysis of Delaware Law" now available

A substantially revised version of my paper, Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study (January 5, 2017). UCLA School of Law, Law-Econ Research Paper No. 17-01. Available at SSRN: https://ssrn.com/abstract=2894577

Although the prohibition on taking of organizational opportunities is well established, the standards applied to this problem in corporate law disputes are vague and imprecise. Corporate directors and officers lack clear guidance as to when a business venture may be taken for themselves or must first be offered to the corporation. This article reviews the relevant Delaware case law, focusing on the ambiguities inherent therein. It then offers a proposed alternative regime, providing greater certainty and predictability.

The article then turns the question of why Delaware courts have resisted adopting a more determinate standard, such as the one offered here. It argues that — at least in this context — Delaware judges are concerned neither with maximizing the number of Delaware incorporations or promoting the interests of the Delaware bar. Instead, mandatory indeterminacy with respect to corporate opportunities is driven by the Delaware courts’ self-interest in maximizing their reputation.

"Progressive" Corporate Law Redux?

Christopher Bruner has posted a very interesting paper, Center-Left Politics and Corporate Governance: What Is the 'Progressive' Agenda? (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2917253 or http://dx.doi.org/10.2139/ssrn.2917253, which he summarizes as follows:

For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter. This is hardly surprising given the economic and political stakes involved with control over vast and growing "corporate" resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms. In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the corporation have long been described as politically right-leaning while stakeholder-oriented conceptions have conversely been described as politically left-leaning. When the frame of reference for this normative debate shifts away from state corporate law, however, a curious reversal occurs. Notably, when the debate shifts to federal political and judicial contexts, one often finds actors associated with the political left championing expansion of shareholders' corporate governance powers, and those associated with the political right advancing more stakeholder-centric conceptions of the corporation.

The aim of this article is to explain this disconnect and explore its implications for the development of U.S. corporate governance, with particular reference to the varied and evolving corporate governance views of the political left - the side of the spectrum where, I argue, the more dramatic and illuminating shifts have occurred over recent decades, and where the state/federal divide is more difficult to explain. A widespread and fundamental reorientation of the Democratic Party toward decidedly centrist national politics fundamentally altered the role of corporate governance and related issues in the project of assembling a competitive coalition capable of appealing to working- and middle-class voters. Grappling with the legal, regulatory, and institutional frameworks - as well as the economic and cultural trends - that conditioned and incentivized this shift will prove critical to understanding the state/federal divide regarding what the "progressive" corporate governance agenda ought to be and how the situation might change as the Democratic Party formulates responses to the November 2016 election.  

I begin with a brief terminological discussion, examining how various labels associated with the political left tend to be employed in relevant contexts, as well as varying ways of defining the field of "corporate governance" itself. I then provide an overview of "progressive" thinking about corporate governance in the context of state corporate law, contrasting those views with the very different perspectives associated with center-left political actors at the federal level.  

Based on this descriptive account, I then examine various legal, regulatory, and institutional frameworks, as well as important economic and cultural trends, that have played consequential roles in prompting and/or exacerbating the state/federal divide. These include fundamental distinctions between state corporate law and federal securities regulation; the differing postures of lawmakers in Delaware and Washington, DC; the rise of institutional investors; the evolution of organized labor interests; certain unintended consequences of extra-corporate regulation; and the Democratic Party's sharp rightward shift since the late 1980s. The article closes with a brief discussion of the prospects for state/federal convergence, concluding that the U.S. corporate governance system will likely remain theoretically incoherent for the foreseeable future due to the extraordinary range of relevant actors and the fundamentally divergent forces at work in the very different legal and political settings they inhabit.

Christopher kindly cites several of my papers, including the one most relevant to his thesis, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship (January 1997). Available at SSRN: https://ssrn.com/abstract=10335 or http://dx.doi.org/10.2139/ssrn.10335.

Recommended.

Ridge Rousten Cabernet Franc (Santa Cruz Mountains) 2013

This 100% Cabernet Franc is sourced from a small patch of 5 year old vines in Ridge's famous Monte Bello Vineyard. Deep purple-ruby. No sediment yet. Pleasant aroma of dark berry fruit, anise, and coffee. On the palate, the tannins are firm but not oppressive. They come through especially on the lingering finish, where they have a distinct puckering effect. Blackberry jam, cassis, anise, and leather. Will improve but drinkable now.

Grade: 92

Generals, yes. Law Professors, no?

Francis Pileggi reports:

The National Association of Corporate Directors is hosting a seminar later this week for retired, or nearly retired, generals in the U.S. armed services who aspire to be on a board of directors. 

How about helping a corporate law professor land a board slot?

SEC Acting Chair Piwowar goes to war with his own enforcement lawyers

ICYMI (as I did), the WSJ last week reported that:

Michael Piwowar—named acting head of the agency in late January by the Trump administration—... revoke[d] subpoena authority from about 20 senior enforcement officials and limits it to the enforcement division director. ...

Now, only the SEC’s enforcement director can authorize subpoenas for records or oral testimony.

That reins in powers authorized in 2009 through then-SEC Chairman Mary Schapiro,who was appointed by former President Barack Obama, to give more investigative authority to senior enforcement attorneys following the financial crisis and the agency’s failure to catch frauds such as money manager Bernard Madoff, who confessed to a $65 billion Ponzi scheme.

In a speech in 2013 shortly after he became and SEC commissioner, Mr. Piwowar called for reviewing the staff’s powers granted under Ms. Schapiro. While the changes made it “easier” for the agency to launch probes, “I question whether the processes currently in place are sufficient for the commission to exercise the appropriate level of oversight,” he said at a legal conference in Los Angeles.

Hat tip to Broc Romanek, who also reports that:

Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it.  Here’s an excerpt from his 2013 remarks to the LA County Bar:

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.

This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.

There's a difficult trade off here. OTOH, requiring that the Commission sign off on every subpoena probably did crimp investigations too much. It's especially problematic when, as now, the Commission itself is understaffed. OTOH, freely allowing enforcement attorneys to get subpoenas without any oversight created accountability issues and denied the Commission the ability to decide what investigations were worth expending resources on. The result of Piwowar's action is to leave the division director with power to issue subpoenas. Since he works directly under Commission supervision, that's probably a reasonable compromise between efficiency and accountability.

Bishop's Panel at the Can Delaware be Dethroned? Conference

I was delighted to have esteemed practitioner and fellow corporate law blogger Keith Paul Bishop moderate one of the panels at the UCLA/Lowell Milken Institute's "Can Delaware be Dethroned?" conference last weekend. Keith blogged a summary of his panel here.

Introduction to the Catholic Faith: Week 6: Morality

This week STEP class is about church teachings on morality. This week's assignment asks:

Explain the basic principle of Christian morality. What is at the heart of all behaviors and actions?

As usual no more than 200 words, so here goes:

Love is at the core of Christian morality. "This is my commandment: love one another as I love you. No one has greater love than this, to lay down one’s life for one’s friends." (John 15:12-13) "So faith, hope, love remain, these three; but the greatest of these is love." (1 Cor 13:13) "I say to you, love your enemies, and pray for those who persecute you" (Matt 5:44)

Loving our neighbor is hard. Loving our enemy is even harder. But CS Lewis put it well:

“Do not waste time bothering whether you ‘love’ your neighbor; act as if you did. As soon as we do this we find one of the great secrets. When you are behaving as if you loved someone, you will presently come to love him.”

Yet, as this week's reading explained, love is not enough. "Love alone, set adrift from moral direction, can easily descend into sentimentality ...." By itself, love is undirected and uniformed. It needs norms and principles to channel feeling into action. And then the Grace to obey the rules and put love into action.

 

Introduction to the Catholic Faith: Week 6: Morality and a puzzle re alcohol

This week STEP class is about church teachings on morality. As Catholics, we distinguish between mortal and venial sin. The readings inform that:

There are three conditions for a sin to be a mortal sin: grave matter, full knowledge, and deliberate consent (freedom). Mortal sin destroys the loving relationship with God that we need for eternal happiness. If not repented, it results in a loss of love and God’s grace and merits eternal punishment in hell, that is, exclusion from the Kingdom of God and thus eternal death.

Is becoming intoxicated a grave matter especially when one knows the consequences from past experience? But can one deliberately consent if one's judgment is impaired as one gradually becomes intoxicated? Is it the ex ante consent to the first drink that matters?

Relatedly, suppose one commits what would ordinarily be a mortal sin when one is intoxicated. Does being intoxicated negate deliberate consent? But what if you got intoxicated on purpose?

Frankly, I often get confused when one digs down into the weeds of Catholic theology on (among other things) sin. The best advice a priest ever gave me on this issue was to make frequent use of the Sacrament of Reconciliation, tell the priest everything on your conscience and let God sort it out.

Introduction to the Catholic Faith: Week 6: Who knew there are categories of virtue?

As previously noted, I'm enrolled in Notre Dame's STEP program and currently taking the Core Course: Introduction to the Catholic Faith. This week's class focused on Morality. 

One of the discussion questions asked "What are the Theological Virtues," which sent me to the Catechism (para, 1803 ff):

Human virtues are firm attitudes, stable dispositions, habitual perfections of intellect and will that govern our actions, order our passions, and guide our conduct according to reason and faith. They make possible ease, self-mastery, and joy in leading a morally good life. The virtuous man is he who freely practices the good.

Four virtues play a pivotal role and accordingly are called "cardinal"; all the others are grouped around them. They are: prudence, justice, fortitude, and temperance. "If anyone loves righteousness, [Wisdom's] labors are virtues; for she teaches temperance and prudence, justice, and courage."

The human virtues are rooted in the theological virtues, which adapt man's faculties for participation in the divine nature: for the theological virtues relate directly to God. They dispose Christians to live in a relationship with the Holy Trinity. They have the One and Triune God for their origin, motive, and object.

The theological virtues are the foundation of Christian moral activity; they animate it and give it its special character. They inform and give life to all the moral virtues. They are infused by God into the souls of the faithful to make them capable of acting as his children and of meriting eternal life. They are the pledge of the presence and action of the Holy Spirit in the faculties of the human being. There are three theological virtues: faith, hope, and charity.

I was unaware of that distinction. So, yet again, I've learned something new and, at least to me, interesting from this course. It's been a great experience. I'm sad that this is the last week, but a new course starts next week.