ProfessorBainbridge.com

Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study

I recently presented my paper, Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study (available at SSRN: https://ssrn.com/abstract=2894577 ), at BYU's law school. Here's the slide deck for the presentation:

Interest group analysis of Delaware law from Stephen Bainbridge

The Law and Economics of the Parable of the Talents

I was pleased to go out to Pepperdine today to give a talk based on my essay on The Parable of the Talents at their annual Nootbaar Conference on Law and Religion.

Here's the slide deck:

The Law and Economics of the Parable of the talents from Stephen Bainbridge

Here's the abstract and link:

On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished.

Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship.

This project seeks to fill that gap.

Bainbridge, Stephen M., The Parable of the Talents (August 15, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-10. Available at SSRN: https://ssrn.com/abstract=2787452

Bishop responds re Gantler v Stephens

Keith Paul Bishop responds here.

Revised version of The Parable of the Talents on line

Only minor tweaks, but there you have it:

On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished. 

Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship. 

This project seeks to fill that gap.

Bainbridge, Stephen M., The Parable of the Talents (August 15, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-10. Available at SSRN: https://ssrn.com/abstract=2787452

Is it time for a Benedict option law school? I'm starting to think so.

I love being a professor. I love studying law. I love teaching law. And right now, I'm worried. I've always had to deal with the underrepresentation of people of faith and conservatives on faculties. I once dismissed that as a mere network effects problem, but now I'm not so sure. Like my fellow conservative law professors who sent that prophetic (in the correct sense of the word) letter to the AALS calling for affirmative efforts to promote intellectual diversity, I am increasingly persuaded that the problem is one of actual bias.

But now things are going past the constant annoyance of not having any like minded colleagues to discuss ideas or problems with, being told that being on the same faculty with someone of my views makes a colleague "sad," having left-wing students try to get me fired by making a one-time ill-tempered molehill into a mountain, hearing jokes in the faculty lounge about people I like, and all the other crap I've put up with for nearly 30 years.

For sometime now, of course, there has been a purge on college and university campuses directed at, well, people like me. "Bias Response Teams" chilling free speech. Protests over "controversial" speakers on campuses. Safe spaces for everybody but conservatives.  Campus sponsored wakes to mourn Hillary's defeat. You know the drill. 

But now things are getting scary.  Milo at Berekely. Charles Murray at Middlebury, where the mob injured a professor. The attack on the pro-Trump rally in Berkeley. Violence now seems to be a routine tool of choice for the campus left. How long before it is turned on faculty and students who don't fit the secular progressive model?

Which brings me to Rod Dreher and his Benedict Option:

The “Benedict Option” refers to Christians in the contemporary West who cease to identify the continuation of civility and moral community with the maintenance of American empire, and who therefore are keen to construct local forms of community as loci of Christian resistance against what the empire represents. Put less grandly, the Benedict Option — or “Ben Op” — is an umbrella term for Christians who accept MacIntyre’s critique of modernity, and who also recognize that forming Christians who live out Christianity according to Great Tradition requires embedding within communities and institutions dedicated to that formation. ...

As we try to determine which forms of community, which institutions, and which ways of life, can answer that question, we should draw on the wisdom of St. Benedict and his Rule. We should innovate ways to adapt it to forms of non-monastic living in the world. ...

I think schools can be a form of the Benedict Option. Consider St. Jerome’s, a classical school in the Catholic tradition, in Hyattsville, Maryland, or the Scuola G.K. Chesterton in San Benedetto del Tronto, Italy, which is run by Catholics for Catholic children, following the vision of the late Stratford Caldecott (see his essay, “A Question of Purpose”). ...

Rod has a long post up at The American Conservative where he discusses the need and potential for implementing the Benefit option in higher education. Please go read the whole thing. But there's the key section for present purposes:

To put it in a MacIntyrean way, small-o orthodox Christians and all — including secular people — who treasure the traditional humanities need to “stop shoring up the academic imperium” and create new institutions within which the life of the humanities can thrive amid the barbarism of the contemporary university (and I’ll have a lot more to say about the events at Middlebury College in a separate post). ...

N., who is a believing Christian and a cultural conservative, told me that he has become so discouraged by the environment within academia that he is having trouble contemplating giving the next 40 or 50 years of his professional life to making a place for himself within the university. He gave examples of the chronic political correctness that he says is suffocating the life of the mind within the university. He talked about a friend of his within the academy, an ethnic and religious minority who is quite progressive, but who will not use social media for fear that progressive things she might say today will be deemed intolerable bigotry tomorrow, and cost her her job, her professional reputation, and more.

“You know, these people come after your personal life, even your family,” said my friend.

N. doesn’t just want to run away from something corrupt. He wants to run towardsomething good. He just wants to teach, to pass on real knowledge and wisdom, to honor the tradition he has devoted his scholarly life so far to learning. His field has nothing to do with Christianity, just so you know. He is afraid that ideological tyranny in academia, plus the deliberate forgetting of traditions within the humanities, are causing precious things to die.

I used to think the answer was to stand and fight. For the most part, I still do. But as things get worse and I get more tired of it all, the more a Benedict Option School of Law looks like an idea whose time has come.

 

Paul Caron Named Dean Of Pepperdine Law School

Congratulations to Paul Caron, the new dean of the Pepperdine law school. I hope he held out for one of those great on campus homes with the spectacular views of the Malibu.

Assessing Keith Paul Bishop's Beef with Gantler v Stephens

Keith writes:

I have never been reconciled to the Delaware Supreme Court’s pronouncement in Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009) that “the fiduciary duties of officers are the same as those of directors”.  Officers are, as I’ve previously noted, agents of the corporation while directors are not.  This means that an officer’s duties are sourced in agency law.  Professor Deborah A. DeMott forcefully makes this point in a forthcoming paper:

Making agency central to understanding officers’ positions and responsibilities helps to differentiate officers from directors.  Like a director, an officer is a fiduciary, but distinctively so, not as a mere instance of a generic “corporate fiduciary” who owes duties of loyalty and care to the corporation.”

Corporate Officers as Agents, 74 Wash. & Lee L. Rev. __ (no. 2, 2017).

Understanding that officers are agents also brings into focus the often overlooked question of what law governs an officer’s performance of his or her duties.  Remarkably, the Delaware Supreme Court made no mention in Gantler v. Stephens of the law of agency or the possible application of Ohio law, where the corporation was headquartered and operated a bank.  In my view, the Court should have analyzed the actions of the defendants qua officers under agency law and determined under applicable choice of law principles whether to apply Delaware or Ohio law. ... Because officers typically exercise authority over corporate employees, the title of officer has come to imply authority.  

First question, if officers are agents--pure and simple--why did the drafters of the Model Business Corporation Act feel it necessary to lay out both standards of conduct and standards of liability for officer? The MBCA had to do so for directors, who are fiduciaries but not agents, so as to define the directors' duties because agency law was not applicable. The decision to do so for officers therefore implies that even if officers are agents, they are a special sort of agent.

Second, even assuming that officers are mere agents--nothing more and nothing less--the Restatement tell us us that the law of the state of incorporation generally controls:

The local law of the state of incorporation will be applied to determine the existence and extent of a director's or officer's liability to the corporation, its creditors and shareholders, except where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the parties and the transaction, in which event the local law of the other state will be applied.

Restatement (Second) of Conflict of Laws § 309 (1971). The commentary focuses on breaches of fiduciary duty:

Issues relating to the liability of the directors and officers for acts such as these can practicably be decided differently in different states. It would be practicable, for example, for a director to be held liable for a given act in one state and to be held not liable for an identical act in another state. Nevertheless, in the absence of an applicable local statute, the local law of the state of incorporation has usually been applied to determine the liability of the directors or officers for acts such as these to the corporation, its creditors and shareholders. This law has usually been applied even in a situation where it might be thought that some other state had a greater interest than the state of incorporation in the issue to be determined. The local law rule of a state other than the state of incorporation is most likely to be applied in a situation where this rule embodies an important policy of the other state and where the corporation has little contact with the state of its incorporation.

Restatement (Second) of Conflict of Laws § 309 cmt c. (1971).

The Restatement thus tees up a case in which the forum state is not the state of incorporation. In that instance, we are told, the forum state should apply the law of the state of incorporation except in rare instances in which the forum state has an applicable rule reflecting an important local policy and the corporation has weak contacts with the state of incorporation. 

In Gantler, however, Delaware was both the forum state and the state of incorporation. If someone had raised the choice of law issue, the Delaware courts presumably would have applied Delaware choice of law rules. In turn, that would have sent the court to the substantive law of Delaware, as it has a particularly strong version of the internal affairs doctrine (perhaps not surprisingly):

The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders.¹² The Restatement (Second) of Conflict of Laws § 301 provides: “application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the need of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied.”¹³ Accordingly, the conflicts practice of both state and federal courts has consistently been to apply the law of the state of incorporation to “the entire gamut of internal corporate affairs.”¹⁴

67 The internal affairs doctrine is not, however, only a conflicts of law principle. Pursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations “have a significant right ... to know what law will be applied to their actions”¹⁵ and “[s]tockholders ... have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs.”¹⁶ Under the Commerce Clause, a state “has no interest in regulating the internal affairs of foreign corporations.”¹⁷ Therefore, this Court has held that an “application of the internal affairs doctrine is mandated by constitutional principles, except in the ‘rarest situations,’ ”¹⁸ e.g., when “the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.”¹⁹

VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005) (footnotes omitted). In other words, Delaware takes the position (again, not surprisingly) that the internal affairs doctrine amounts to a constitutional principle. As such, why would we expect a Delaware court to spend time dithering (in an opinion as opposed to perhaps a bench ruling) over choice of law in such a case?

 

Did you notice my qualifying remark "If someone had raised the choice of law issue"? It is a general rule that a "court is not obligated to analyze a choice of law issue sua sponte. Kearl v. Rausser, 293 F. App'x 592, 599 n. 2 (10th Cir.2008) (“ ‘[U]nlike jurisdictional issues, courts need not address choice of law issues sua sponte.’ ”) (quoting Flying J Inc. v. Comdata Network, Inc., 405 F.3d 821, 831 n. 4 (10th Cir.2005))." Patterson v. Williams, No. 10-CV-4094-CM, 2012 WL 138606, at *2 (D. Kan. Jan. 18, 2012). The court may. But it doesn't have to.

 

So if I understand Keith's complaint about Gantler, it is that he is annoyed that the court equated the fiduciary duties of directors and officers. Yet, corporate law generally does treat officers as having fiduciary duties at least comparable to those of directors. The MBCA does it by statute, while Delaware does it by caselaw. Moreover, many other cases so hold. Diederich v. Yarnevich, 40 Kan. App. 2d 801, 808, 196 P.3d 411, 417 (2008) ("Officers and directors of a corporation have a strict fiduciary duty to act in the best interests of the corporation and its stockholders. This duty requires officers and directors to work for the general interests of the corporation and the stockholders."); Adelman v. Conotti Corp., 215 Va. 782, 790, 213 S.E.2d 774, 779 (1975) ("We hold this same fiduciary duty applies to the conduct of the officers and directors of a corporation in their dealings with the corporation's stockholders."). None of the 55 cases that have cited the relevant Westlaw headnote have disagreed with Gantler, including many federal cases. (Granted, many of them likely involved Delaware law.)

Second, Keith is perturbed by the court's failure to deal with the choice of law issue. But (1) maybe nobody brought it up, in which case the court had no duty to do so sua sponte and (2) the result would have been a foregone conclusion in favor of applying Delaware law.

Personally, I'm okay with it.

Joan Heminway on Henderson & Haeberle's "Making a Market for Corporate Disclosure"

Joan writes:

Last summer, at the National Business Law Scholars Conference at The University of Chicago Law School, I listened with some fascination to the presentation of an early-stage project by Todd Henderson (whose work always makes me think--and this was no exception).  His thesis was a deceptively simple one: that the age-old disclosure debate could best be solved by creating a contextual market for disclosure (rather than by, e.g., continuing its the current system of "federal government mandates and issuer pays" or leaving market participants to their own devices as to what to disclose and punishing malfeasance merely through fraud and misstatement liability or state sanctions).  The paper resulting from that presentation, coauthored by Todd and Kevin Haeberle from the University of South Carolina School of Law (but moving to William & Mary Law School in July), has recently been released on SSRN.  The title of the piece is Making a Market for Corporate Disclosure, and here's the abstract:

One of the core problems that law seeks to address relates to the sub-optimal production and sharing of information. The problem manifests itself throughout the law — from the basic contracts, torts, and constitutional law settings through that of food and drug, national security, and intellectual property law. Debates as to how to best ameliorate these problems are often contentious, with those on one end of the political spectrum preferring strong government intervention and those on the other calling for market forces to be left alone to work.

When it comes to the generation and release of the information with the most value for the economy (public-company information), those in favor of the command-and-control approach have long had their way. Exhibit A comes in the form of the mandatory-disclosure regime around which so much of corporate and securities law centers. But this approach merely leaves those who value corporate information with the government’s best guess as to what they want. A number of fixes have been offered, ranging from more of the same (adding to the 100-plus-page list of what firms must disclose based on the latest Washington fad), to the radical (dump the federal regime and its fraud and insider-trading overlays altogether in favor of state-level regulation). This Article, however, offers an innovative approach that falls in middle of the traditional spectrum: Make relatively small changes to the law to allow a market for tiered access to disclosures, thereby allowing firm supply and information-consumer demand to interact in a way that would motivate better disclosure. Thus, we propose a market for corporate disclosure — and explains its appeal.

I have skimmed the article and am looking forward to reading it in full over my spring break in a week's time.  I write here to encourage you to make time in your day/week/month to read it too--and to consider both the critiques of federally mandated disclosure and the article's response to those critiques.  I am confident that the thinking it will make me do (again) will sharpen my teaching and scholarship; it might just do the same for you . . . .

I think it's one of the most innovative articles I've seen in a very long time.

Haeberle, Kevin S. and Henderson, M. Todd, Making a Market for Corporate Disclosure (February 23, 2017). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 769. Available at SSRN: https://ssrn.com/abstract=2814125 or http://dx.doi.org/10.2139/ssrn.2814125

Should Uber's board face liability to shareholders over the greyball tool?

The NY Times reports that:

Uber has for years engaged in a worldwide program to deceive the authorities in markets where its low-cost ride-hailing service was being resisted by law enforcement or, in some instances, had been outright banned.

The program, involving a tool called Greyball, uses data collected from the Uber app and other techniques to identify and circumvent officials. Uber used these methods to evade the authorities in cities such as Boston, Paris and Las Vegas, and in countries like Australia, China, Italy and South Korea. ...

Uber has long flouted laws and regulations to gain an edge against entrenched transportation providers, a modus operandi that has helped propel it into more than 70 countries and to a valuation close to $70 billion.

I discussed the corporate law issues raised when boards of directors allow the corporation to act illegally (or fail to detect that managers are allowing the company to do so), in two earlier posts:

Can directors of corporations be held liable to shareholders when the corporation breaks the law

Does an Intentional Violation of Law = Bad Faith?

Personally, I still think the business judgment rule ought to apply to these cases. 

Disgorgement: Statute of Limitations and Nature of the Action

The Washington Legal Foundation announced:

On March 3, 2017, WLF asked the U.S. Supreme Court to overturn a Tenth Circuit decision that permitted the SEC to seek monetary penalties for securities law violations that occurred decades ago. In an amicus brief filed in the case, WLF argued that a strict five-year statute of limitations (28 U.S.C. § 2462) precludes such SEC enforcement actions. WLF reminded the appeals court that statutes of limitations serve important goals; they permit citizens to arrange their affairs secure in the knowledge that they won’t suddenly face sanctions based on long-ago events. WLF’s brief further contended that the “disgorgement” remedy SEC sought in the case has never been recognized as an equitable remedy throughout American legal history. Because the SEC never attempted to use disgorged funds to provide restitution to fraud victims, those funds served a punitive rather than a remedial purpose.

The discussion of the nature of the disgorgement remedy is particularly interesting. If the Court decides to take up that issue, it's ruling will have potentially important results beyond just the statute of limitations issue. In particular, it will force courts to deal with the issue of whether there is a right to jury trial in disgorgement cases. My sense of the law is that most courts assume there is no jury trial right, but the cases rarely dig into the issue in any depth.

Does the AALS really care about viewpoint diversity?

Randy Barnett wrote on February 25 that:

... for several years, a group of conservative and libertarian law professors from a variety of law schools has quietly been urging the Association of American Law Schools, which has taken a leadership role in addressing racial and gender diversity–including by establishing a Racial Diversity Task Force in 1999–to do the same with viewpoint or political diversity. Our complaint was not limited to the gross political one-sidedness of the Annual Meeting of the AALS, but primarily concerned the gross political imbalance of law faculties–especially in such subjects as public law where viewpoint most affects a professor’s legal scholarship and teaching.

Although we were treated respectfully–and some marginal, though welcome, steps were taken this year to diversify the annual AALS program–as the following letter to the AALS explains, our requests for concrete preliminary steps to address the existing pervasive imbalance of law faculties have apparently been denied. ...

Having worked patiently behind the scenes for several years, we believe it is time to make our complaint more public. 

He then posted an open letter to the AALS leadership that powerfully makes the case for viewpoint diversity.

The AALS has now responded and Barnett has posted the response, of which he observes that:

... we are grateful to Dean Areen for her courteous reception and to the Executive Committee for meeting with us in January of 2016. We wrote our letter because we had received no formal response to our requests in over a year, and appreciate the response we have now received. But, with all due respect, this response fails to address, or even mention, the thrust of our proposals to address the current imbalance on law school faculties–proposals which we reiterated in our letter of last week.

Indeed, this letter can fairly be read as a silent rejection of these suggestions. Oddly, it discusses an idea we do not mention in the letter to which it is responding, while failing to respond to the ones we do.

Indeed, if you asked me (not that anyone did), I'd say the AALS letter is the usual bullshit. And its time for a change.

Can a board remove a director?

No.

Keith Paul Bishop evaluates California law on the question:

In the case of a California corporation, the answer is no.  The power to remove directors is vested in the shareholders and the superior court pursuant to Corporations Code Section 303 and 304.  While technically not a removal, one option may be available to a board.  Section 302 provides that the board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony.

Under Delaware law, the board may remove its chairman from that office. But there is no provision under Delaware law for the board of directors to remove one of its members. Indeed, there is case law specifically holding that the board lacks power to remove one of its own members. See, e.g., Dillon v. Berg, 326 F. Supp. 1214 (D. Del. 1971). Under Delaware General Corporation Law § 141(k) only shareholders are authorized to remove a board member.

PS: I blogged about this issue back in 2003 in connection with Conrad Black's fight with the Hollinger board.

Change Coming for SEC’s Controversial Conflict Minerals Rule

Is the title of my latest post for the Washington Legal Foundation's Legal Pulse blog.

In sum, it looks like change is coming to the conflict-minerals disclosure regime. Whether it will happen through Congress repealing § 1502 as part of sweeping Dodd-Frank review, significantly revised by SEC, or put on a two-year hold by the White House is not certain. The odds of at least one of those events happening soon, however, seems high.