ProfessorBainbridge.com

Yours truly cited by Virginia Federal District Court re Whether Disgorgement is a Penalty

U.S. v. Bank, 2:17CR126, 2019 WL 2023734, at *4 (E.D. Va. May 8, 2019)

Kokesh has sparked a debate about whether district courts have the authority at all to impose disgorgement because the Supreme Court appeared to question such authority. See Kokesh, 137 S. Ct. at 1642 n.3 (stating that the court offered “[n]o opinion on whether courts possess authority to order disgorgement in SEC proceedings”); Donna M. Nagy, The Statutory Authority for Court-Ordered Disgorgement in SEC Enforcement Actions, 71 S.M.U. L. Rev. 896, 898 (2018) (explaining how, at oral argument for Kokesh, the Justices questioned the authority to order disgorgement and invited challenges to it by disclaiming, in a footnote of the opinion, that it was not deciding the issue). Those arguing there is no authority for disgorgement suggest that, now that disgorgement has been declared a penalty, it can no longer be within a district court's equitable authority because a court cannot impose penalties when acting in equity. See, e.g., Stephen M. Bainbridge, INSIDER TRADING: Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J.L. & Pol'y 17, 21-22 (2018). Those arguing that there is authority posit that just because disgorgement is a penalty for one purpose does not mean it is a penalty for all purposes, and that Congress has expressly recognized a court's power to order disgorgement. See, e.g., Nagy, supra, at 901-903. In March of 2019, a bill was introduced in the Senate that would resolve this debate by amending 15 U.S.C. § 78u(d) to expressly grant district courts the authority to order disgorgement. Securities Fraud Enforcement and Investor Compensation Act of 2019, S.799, 116th Cong. (2019).

That said, a district court's authority to order disgorgement is not at issue here. Accordingly, the Court assumes, for the purposes of this motion only, that district courts necessarily have the authority to order disgorgement under the equitable authority granted to them by one of the statutes discussed above. See 15 U.S.C. §§ 77t(b), 77v(a), 78aa, 78u(d) (1).

The cited article is: Bainbridge, Stephen Mark, Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases. 56 Washington University Journal of Law & Policy 17 (2018); UCLA School of Law, Law-Econ Research Paper No. 17-12. Available at SSRN: https://ssrn.com/abstract=2992719

Yours truly cited by Wisconsin Federal District Court re Rights of First Refusal

Dewey v. Bechthold, 18-CV-1739-JPS, 2019 WL 2193865, at *4 (E.D. Wis. May 21, 2019):

Although Wisconsin courts routinely uphold these types of provisions, some courts have held that rights-of-refusal should be narrowly construed. Frandsen v. Jensen-Sunquist Agency, Inc., 802 F.2d 941, 945–46 (7th Cir. 1986) (applying Wisconsin law and holding that a right-of-refusal is not triggered by a merger). Finally, it is worth noting that there is no legally mandated option price. Rather, the option price is set at the discretion of the corporation. See Nichols Constr. Corp. v. St. Clair, 708 F. Supp. 768, 771 (M.D. La. 1989), aff’d mem., 898 F.2d 150 (5th Cir. 1990) (holding that “the mere failure to pay ‘fair value’ for stock under a stock redemption agreement” is not “fraud or breach of fiduciary duty.”); F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440, 448 (Ind. 2003) (“to the extent that restriction devalues the shares in the hands of any individual shareholder by reason of lack of transferability, it is the result of the bargain they struck”); see also Stephen M. Bainbridge, Corporate Law, § 14.2 (3d ed. 2015) (explaining the aforesaid and noting that, where a right-of-refusal provision is in place, even option prices set at fair market value will be dramatically discounted by potential third party purchasers to account for the bargain’s low likelihood of success).

Macey and Strine on "Citizens United as Bad Corporate Law": Post 2-What about the shell game?

In closing my prior post on Macey & Strine's new article on Citizens United, I asked "do Strine and Macey really want to deny [individuals] the opportunity to assert their religious liberty simply because they incorporated their business?"

I raise this concern because, if accepted, Macey and Strine's approach would allow the government to restart what Douglas Laycock called the shell game:

The threshold issue in Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties Corp. v. Sebelius is whether any plaintiff’s free exercise of religion is substantially burdened within the meaning of the Religious Freedom Restoration Act.

On that issue, the government’s argument is a shell game. Only the individuals have religious-liberty rights; only the corporations are regulated. And more: Even the individuals have no rights when they act or refuse to act as directors, officers, or managers of the corporation. Not only are the individuals separate persons from the corporation, but the individuals are divided into additional separate persons, depending on the capacity in which they act. This is formalism in the extreme.

Douglas Laycock, Symposium: Congress answered this question: Corporations are covered, SCOTUSblog (Feb. 19, 2014), http://www.scotusblog.com/2014/02/symposium-congress-answered-this-question-corporations-are-covered/.

The shell game thus eviscerates essential rights, as I noted in in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers (March 6, 2013). The Green Bag, Vol. 16, No. 3, Spring 2013, available at SSRN: https://ssrn.com/abstract=2229414,

Conduct that is motivated by religious belief is accepted as one of the ways in which people exercise their religious freedom, however, even when the conduct occurs in a commercial setting. ... The values protected by the religious freedom clauses of the First Amendment “have been zealously protected, sometimes even at the expense of other interests of admittedly high social importance.” Accordingly, “no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opin- ion or force citizens to confess by word or act their faith therein.”

I would feel better about Macey & Strine's project if they explained just how their approach would ensure that people conducting their business as a corporation would still find those rights protected. Or perhaps explain why the shell game isn't a concern.

Macey and Strine on "Citizens United as Bad Corporate Law": Post 1-What about Close Corporations

I am reading with great interest Jonathan R. Macey and Leo E. Strine, Citizens United As Bad Corporate Law (August 16, 2018), https://ssrn.com/abstract=3233118. Herewith the absurdly long abstract:

In this Article we show that Citizens United v. FEC, arguably the most important First Amendment case of the new millennium, is predicated on a fundamental misconception about the nature of the corporation. Specifically, Citizens United v. FEC, which prohibited the government from restricting independent expenditures for corporate communications, and held that corporations enjoy the same free speech rights to engage in political spending as human citizens, is grounded on the erroneous theory that corporations are “associations of citizens” rather than what they actually are: independent legal entities distinct from those who own their stock. Our contribution to the literature on Citizens United is that the case is as much a case about corporate law, as it is about the First Amendment. The major disagreement among the justices in Citizens United is about the applicability of settled First Amendment protections to a particular juridical entity, the corporation. In Citizens United, Justice Kennedy, writing for the majority opines that Congress may not take into account the distinctions between corporations and human beings in regulating political speech, and that corporations must be permitted the same freedom to speak as human beings. In dissent, Justice Stevens fails directly to challenge Justice Kennedy’s existential conception of the corporation notwithstanding the fact that that it constitutes the core of the majority opinion. This Article fills that void. We reject the Citizens United majority’s conception of the corporation as an “associations of citizens” and reaffirm its status as an artificial, metaphysical, and legal construct that exists separate and apart from its investors. The Citizens United view of the corporation as an association of individuals is inconsistent with the established conception of the corporation as a juridical entity with limited liability.

This conception confuses the corporation with the general partnership form of business organization. In fact, the entire point of the incorporation process is to permit the creation of a legal entity that is not an association of individuals, but rather a discrete legal entity whose rights and obligations are distinct from those of it its creators, investors, managers, and other constituents. We base our argument that corporations are separate and distinct legal entities and that they are not “associations of citizens” as Citizens United asserts on three facts about the corporate form:

(1) the treatment of corporations as separate legal entities is what distinguishes corporations from general partnerships and sole proprietorships and what justifies the legal notion of “limited liability” and other central characteristics of the corporate form, such as the ability to contract and to sue and be sued;

(2) corporations do not have owners, they have investors who have contract-based, financial interests in the firms and limited management rights; and

(3) corporations are not fiction, but fact only because the law makes them real and distinct entities with a legal identity.

In Part I of this Article, we discuss the nature of the corporate form by describing its core attributes and explain that one must infer from the nature of the corporate form itself that the corporation is an entity, not an association of individuals. In Part II, we expand upon the analysis in Part I by examining certain settled legal characteristics that the Supreme Court has itself recognized to distinguish the corporation from other forms of business organization that can more plausibly be viewed as associations of individuals. We conclude Part II by noting a simple, empirical reality that cuts against Citizens United’s conception of the corporation as an “association of citizens”: stockholders are not owners of the corporation, but rather contract claimants. In Part III, we discuss the reality that in most other areas of its jurisprudence the Supreme Court embraces the traditional entity view of the corporation, and does not treat corporations as associations of citizens. Thus, Citizens United and its progeny are outliers, in tension with the Supreme Court’s decisional law in key areas like standing, tax law, criminal law, and other areas of constitutional law.

Our analysis shows that in the great bulk of its jurisprudence, the Supreme Court adheres to our view of the business corporation, which is that it is a distinct legal entity whose rights and obligations are subject to statutory constraint. In fact, by long tradition, starting under Chief Justice Marshall, corporations are the opposite of Lockean–Jeffersonian human beings endowed with inalienable rights that cannot be taken away by the government. By contrast, corporations have only those rights society gives them by statutory law, and any statutory law may take into account the unique nature of corporations in limiting their ability to act. We then point out in Part IV profound problems with Citizen United’s assertion that corporations are “associations of citizens.” Namely, that assertion comes without supporting legal authority and for good reason. Neither the law nor empirical fact supports the idea that stockholders are associated citizens, much less with any common political or social viewpoint. Part V then notes the stark difference in the Supreme Court’s approach when dealing with the free speech of labor unions. In the union context, the Supreme Court’s principal concern has been ensuring that no union member has his dues used for political speech without his express authorization, and has held that it is a First Amendment violation to use union dues for political speech.

Just this year, in Janus v. American Federation of State, County, and Municipal Employees, Council 31 the Court went further and held that unions could not even collect fees for the costs due to the core costs of bargaining for higher wages from a workforce member who did not join the union. In McCain-Feingold, Congress embraced concerns like this and gave corporations the ability to engage in political speech by raising funds voluntarily from stockholders for this purpose. This means took into account the corporate law consensus that stockholders’ decision to invest in business corporations does not rationally involve any authorization for the corporation to use treasury funds for political speech, and that stockholders are of diverse political viewpoints and only have a shared interest in one thing, getting a good return on their investment. But, applying a starkly different viewpoint than it takes in cases like Abood and Janus, the Supreme Court struck down McCain-Feingold and trivialized the substantial leeway McCain-Feingold had given for corporations to speak. In analyzing this contradiction, we identify the market realities that make it even less plausible that 21st century American business corporations can be deemed “associations of citizens,” especially when most of their stock is owned by institutional investors, to whom American investors are in essence compelled to turn over their capital to save for college for their kids and retirement for themselves. And we conclude Part II by noting a simple, empirical realty that cuts against Citizens United’s conception of the corporation as an “association of citizens”: stockholders are not owners of the corporation, but rather contract claimants.

Finally, in Part VI we comment on the lack of any source for the Citizens United majority’s view that the corporation is an association of individuals. In particular, we observe that corporations are creatures of state law, not federal law. As the Court observed in CTS Corp. v. Dynamics Corp., “[s]tate regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law.” Therefore, determinations about the nature of the corporation, such as whether the corporation is a distinct juridical entity or an association of individuals, should be made by reference to state law, not federal law. To further this point, we survey those forms of entities that might be more plausibly considered associational in form than corporations, and note that in the main, most of them are trending strongly toward the entity conception. After doing so, we address those corporations most rationally considered to be vehicles for the shared viewed points of those who form them: non-profit corporations. As to them, we highlight two features that buttress our core point. To wit, most non-profit corporations are member corporations and do not even have stockholders. And as important, these corporations do not fund their speech using the entrusted capital of their members or stockholders. Rather, they speak using funds they raise specifically for that purpose from donors—exactly the method that Congress left open to corporations in McCain-Feingold and that the Citizens United majority said constituted a total ban on corporate speech. We conclude by noticing an irony. It was the legislative branch, not the judicial branch that is supposedly more learned in the law, that was the one that understood corporate law when addressing political speech. Congress considered the nature of corporations when enacting McCain-Feingold and took into account that corporations are not associations of citizens, but separate, state-created entities formed for reasons that cannot be rationally attributed to the shared political or philosophical views of their investors. As such, Congress allowed corporations broad freedom to engage in political speech, but only by using funds voluntarily contributed for this purpose by stockholders to a corporate-controlled political action committee (PAC). By this means, Congress left ample room for the corporation to act as a collective vehicle for stockholders who wished to affiliate for that purpose, but protected other stockholders from being forced to subsidize speech that the mere decision to invest cannot plausibly be thought to endorse. By contrast, the Supreme Court ignored, or misunderstood, the traditional corporate law concept of the corporation and thereby subjected millions of American investors to suffer the involuntary use of their entrusted capital for speech that has no rational connection to their decision to buy stock. That is bad corporate law making bad constitutional law.

When a deservedly distinguished Yale law professor and the Chief Justice of the Delaware Supreme Court speaks, we lesser mortals do well to tread lightly. Yet, I am moved to offer a few thoughts.

First, a quibble. Macey and Strine spend a great deal of time arguing that shareholders are heterogenous, that corporations are board-centric, that shareholders do not own the corporation, and so on and on. Their point, of course, is that "a corporation is a separate entity distinct from its shareholders." Virtually all of their arguments, however, apply almost exclusively to publicly held corporations. 

But what about the millions of close corporations? They are relegated to essentially a single footnote (151):

In some of its jurisprudence dealing with entities, the Supreme Court seems tempted to give greater credence to arguments by closely held business corporations arguing that they should be able to make claims to constitutional protection, such as in arguing that a corporation’s religious freedom has been impinged, than it would indulge from a public corporation. See Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014) (holding that the Affordable Care Act contraception mandate, as applied to a closely held for-profit corporation, violated the Religious Freedom Restoration Act). Even corporate law scholars sympathetic to the notion that all corporations should be able to advance such claims view it as bad corporate law to use the number of stockholders as a dividing line for the exercise of rights. Brief for Corporate and Criminal Law Professors as Amici Curiae Supporting Petitioners, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014) (Nos. 13-354, 13-356), 2014 WL 333889. The reason for that is inarguable: corporate law itself makes no distinction on this ground and there is little basis to believe that the stockholders of more closely held businesses tend to be more united around a religious or other non-monetary purpose than those of public corporations. Their argument for the corporate exercise of rights is simple and different: they contend that corporate boards are elected and have broad discretion while in office to advance any lawful purpose, unless constrained by the charter from doing so. Lyman P.Q. Johnson and David K. Millon, Corporate Law After Hobby Lobby, 70 BUS. LAW. 1, 10 (2015) (“State corporate law does not require corporations to prioritize profits over competing considerations. This fact has ramifications that extend far beyond the particular activities—religious observance—at issue in the Hobby Lobby cases. All business corporations (and non-profits too, for that matter) must generate profit in order to survive. That is simply a fact of life. But corporate law confers on [boards] broad discretion to determine the extent to which they choose to temper the pursuit of profit by regard for other values.”). But see Stephen M. Bainbridge, A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby andConestoga Wood, 100 VA. L. REV. ONLINE 1, 4–5 (2014) (“The law thus has long recognized William Klein’s point that, despite the utility of the fiction of corporate legal personhood, it is critical to remember that treating the corporation as an entity separate from the people making it up bears no relation to economic reality.”). They do not conflate the corporation with its stockholders or view it as an association of them. Rather, these scholars just believe corporations, although distinct from their human constituents, should have all the rights of human beings, while recognizing that they do not have all of the obligations that come from being a human citizen.

I genuinely struggle with this paragraph, but I take it that their core point is captured by the statement that "there is little basis to believe that the stockholders of more closely held businesses tend to be more united around a religious or other non-monetary purpose than those of public corporations."

Says who?

Other courts have disagreed. Consider, for example, Tyndale House Publishers, Inc. v . Sebelius, 2012 WL 5817323 at *2 (D .D .C. 2012), in which the Court wrote that:

Tyndale is a closely-held corporation owned by four entities united by their Christian faith, each of which plays a distinct role in achieving shared, religious objectives. Christian principles, prayer, and activities are pervasive at Tyndale, and the company’s ownership structure is designed to en- sure that it never strays from its faith-oriented mission. . . . Tyndale’s religious objection to providing insurance cover age for certain contraceptives reflects the beliefs of Tyn- dale’s owners. Nor is there any dispute that Tyndale’s primary owner, the Foundation, can “exercise religion” in its own right, given that it is a non-profit religious organization . . . . Accordingly, because Tyndale does “not present any free exercise rights of its own different from or greater than its owners’ rights,” it has “standing to assert the free exercise rights of its owners.”

I also take issue with the empirical claim. See, e.g., Frederick H. Alexander, Lawrence A. Hamermesh, Frank R. Martin, Norman M. & Monhait, M&A Under Delaware's Public Benefit Corporation Statute: A Hypothetical Tour, 4 Harv. Bus. L. Rev. 255, 279 (2014) (pointing out that benefit corporations are often "closely held by a cohesive group of like-minded stockholders with similar preferences").

Finally, in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers (March 6, 2013). The Green Bag, Vol. 16, No. 3, Spring 2013, available at SSRN: https://ssrn.com/abstract=2229414, I offer a test designed to find out precisely whether the stockholders of a closely held businesses are "united around a religious or other non-monetary purpose." If they are, do Strine and Macey really want to deny them the opportunity to assert their religious liberty simply because they incorporated their business?

What is the difference between a chief executive officer and a chairman?

My answer to a Quora question:

The chief executive officer is “A corporation's highest-ranking administrator or manager, who reports to the board of directors.” CHIEF EXECUTIVE OFFICER, Black's Law Dictionary (10th ed. 2014).

The chairman is “The preeminent member of a board of directors, responsible for leading the firm's other officers and executives, presiding over board meetings, and ensuring that the firm's duties to shareholders are being fulfilled by acting as a link between the board and the upper management.” CHAIR OF THE BOARD, Black's Law Dictionary (10th ed. 2014).

“Chairman Williams stressed the different roles that the chair and CEO have to perform: ‘[I]n the board environment, the role of the chairman . . . is to create the kind of open, contributing and questioning environment . . . The CEO's role is to speak for management.’” Joel Seligman, A Modest Revolution in Corporate Governance, 80 Notre Dame L. Rev. 1159, 1176 (2005).

“The roles of the chairman and CEO can be seen as encompassing different domains that may not be complementary, particularly if one of the roles of the chair is as a mentor and reality check for the CEO, and as a focal point for providing information to the board as a whole.” Mark A. Fox et. al., Corporate Governance Research on New Zealand Listed Companies, 29 Ariz. J. Intl. & Comp. L. 1, 31 (2012)

Bernie Sanders decides to campaign for president by being a shareholder gadfly, crashing Walmart's annual shareholder meeting

In a blatant publicity stunt, Socialist Senator Bernie Sanders plans to crash Walmart's annual shareholder meeting:

Bernie Sanders plans to crash Walmart Inc.’s annual shareholder meeting next month, but he won’t get the VIP treatment that the retailer usually extends to famous guests.

Sanders, a longtime critic of labor practices at the nation’s biggest private employer, will introduce a shareholder proposal at the June 5 meeting in Rogers, Arkansas, a spokeswoman for his campaign said. The proposal, which has no chance of passing, calls for Walmart to give its hourly workers a board seat.

According to a press report:

“We should have the power to decide what happens at the company many of us have given our working lives to,” Davis said in a statement.

Wrong. As I discussed in my article, Privately Ordered Participatory Management: An Organizational Failures Analysis (September 1997), available at SSRN: https://ssrn.com/abstract=38600, there are significant costs to employee voice/representation while the benefits are most uncertain:

Michael Dooley opines that workers will be indifferent to most corporate decisions that do not bear directly on working conditions and benefits: “As to the majority of managerial policies concerning, for example, dividend and investment policies, product development, and the like, the typical employee has a much interest and as much to offer as the typical purchaser of light bulbs.” Dooley’s argument is supported by a number of empirical studies. John Witte’s case study, for example, found that workers who did not desire participation often cited a lack of managerial expertise as the reason. John Cotton’s review of the literature concluded that participatory management is most effective when it is directed at “one’s everyday work, not [at] deciding policy issues of the entire organization.” Sagie and Koslowsky found that “subordinate participation in tactical decisions (those dealing with working methods), as opposed to strategic decisions (those dealing with the initiation of a new product or service), was a better predictor of an increase in change acceptance, work satisfaction, effectiveness, and time allotted to work.” All of which tends to suggest that employee representatives add little except increased labor advocacy to the board.

I'm no Google fan, but this lawsuit alleging breach of fiduciary duty by its directors strikes even mean weak

Bloomberg reports:

Google’s top brass face claims they shirked their duties to shareholders by fostering a “culture of misconduct” that exposed the company to a wave of scandals and lawsuits.

The “uninformed and uninvolved” directors of Google parent Alphabet Inc. deferred to its star-studded leadership team, giving the company’s co-founders and their lieutenants leeway to run their divisions with little board oversight, according to a complaint unsealed May 20 in Delaware Chancery Court.

“This culture that fostered autonomy, however, also led to systematic sex and age discrimination, sexual misconduct perpetrated by high-ranking executives, and a disregard for protecting user privacy,” the partly redacted suit says.

The “dark underside of Google’s culture” is responsible for multiple class actions over its privacy practices, unequal pay for women, age discrimination, and sexual harassment, according to the 70-page complaint, which was filed under seal May 14.

Here's the complaint.

At it's core, it's a Caremark claim. For an overview of Caremark, see this post. 

In Stone v. Ritter, the Delaware supreme court confirmed that “Caremark articulates the necessary conditions for assessing director oversight liability.” In doing so, however, the court described Caremark as a case in which the operative standards are good faith and loyalty rather than care, stating that:

[T]he Caremark standard for so-called “oversight” liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence). In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: . . . where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.

Stone further held that “In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions to assure a reasonable information and reporting system exists and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.” Liability will arise only where there are alleged “red flags” that are “either waved in one’s face or displayed so that they are visible to the careful observer.” Rattner v. Bidzos, 2003 WL 22284323 at 13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. 2003). Stringing together a bunch of negative news reports does not amount to the necessary red flags.

Caremark claims are notoriously the most difficult corporate law claim fora plaintiff to establish (see here). So good luck.

My Quora answer to What is a person on a board of directors paid? by Stephen Bainbridge

Answer to What is a person on a board of directors paid? by Stephen Bainbridge https://t.co/nG1jy2gl99

— Professor Bainbridge (@ProfBainbridge) May 20, 2019

My answer to a Quora post asking Should there be a legislation to make it mandatory for the businesses to bring women on their board of directors?

Answer to Should there be a legislation to make it mandatory for the businesses to bring women on their board of directors? What positive things will women introduce in the corporate governance process of a business organization? by Stephen Bainbridge https://t.co/5stWyDBGY5

— Professor Bainbridge (@ProfBainbridge) May 20, 2019

Kudos to the Trump administration for correctly stating the corporate purpose and slapping at ESG in passing

Ann Lipton spotted something really interesting:

this April Executive Order in which Trump declares:

The majority of financing in the United States is conducted through its capital markets.  The United States capital markets are the deepest and most liquid in the world.  They benefit from decades of sound regulation grounded in disclosure of information that, under an objective standard, is material to investors and owners seeking to make sound investment decisions or to understand current and projected business.  As the Supreme Court held in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), information is “material” if “there is a substantial likelihood that a reasonable shareholder would consider it important.”  Furthermore, the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.

(emphasis added),

As readers of this blog are likely aware, academics love to argue over whether existing law requires that corporations be run solely to maximize stockholder wealth, and of course over whether such law – if it exists – is a good idea or a bad idea.  See generally Joan MacLeod Heminway, Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939 (2017).  Usually, however, these battles occur in the context of state law.  And while federal law – securities regulation, and so forth – often implies a corporate purpose of wealth maximization, I have to admit, I don’t recall seeing so blatant a statement about it before.

In any event, this section of the Executive Order directs the Department of Labor to review its existing guidance re: ERISA plans’ involvement in ESG matters.  It’s a follow-up to last year’s Labor Department release – which I blogged about here – warning that ERISA plans may violate their duties to plan beneficiaries if they engage on ESG matters,  or vote for ESG-related proxy proposals, for reasons other than plan wealth maximization.

She goes on to note that this might impact the SEC's proxy process review:

As I’ve previously discussed, the SEC is currently reviewing rules governing the proxy process – including the role of proxy advisory services – to determine if additional regulation is needed.  Much of this fight is, of course, about shareholder involvement in ESG matters and corporate governance more generally.  I assume from this latest Executive Order that we’re about to see something of a two-pronged effort to limit shareholder power, with new guidance and/or regulations issuing from the SEC on one side and the Labor Department on the other. 

I hope somebody at the SEC is reading my paper, Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013). Research Handbook on Shareholder Power and Activism, p.231 (edited by Jennifer G. Hill & Randall S. Thomas, Edward Elgar Publishing, 2015), available at SSRN: https://ssrn.com/abstract=2298415, in which I argue that:

Even though the primacy of the board of directors is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.

There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.

This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.

Centros, California’s Women on Boards Statute and the Scope of Regulatory Competition

There's a really interesting new article by Jill Fisch and Steven Davidoff Solomon:

We examine the Centros decision through the lens of SB 826 – the California statute mandating a minimum number of women on boards. SB 826, like the Centros decision, raises questions about the scope of the internal affairs doctrine and its role in encouraging regulatory competition. Despite the claim that US corporate law is characterized by regulatory competition, in the US, the internal affairs doctrine has led to less variation in corporate law than in Europe. We theorize that this is due to the shareholder primacy norm in US corporate law which results in the internal affairs doctrine focusing on matters of shareholder interest and, primarily, shareholder economic interest. We argue that the internal affairs doctrine should be understood within the context of the shareholder primacy norm and therefore directed to rules oriented to enhancing firm economic value. In contrast, EU corporate law has traditionally had broader stakeholder orientation. We posit that the limited impact of the Centros decision, an impact which differed significantly from its predicted revolutionary effect, can be attributed to the greater focus of EU corporate law on social ordering and extra-shareholder interests. This difference leads to a new understanding of SB 826 as reflecting a move toward more EU-style governance focused on social ordering. Ironically, California’s adoption of SB 826 may portend a movement of the United States towards Centros-style governance. Under this analysis, we argue that SB 826 should not be viewed as inconsistent with the internal affairs doctrine since it involves social ordering rather than purely shareholder interests.

Fisch, Jill E. and Davidoff Solomon, Steven, Centros, California’s 'Women on Boards' Statute and the Scope of Regulatory Competition (May 7, 2019). European Business Organization Law Review (Forthcoming).; U of Penn, Inst for Law & Econ Research Paper No. 19-23. Available at SSRN: https://ssrn.com/abstract=3384768

What, you may be asking, is this Centros decision of which they speak? From the Columbia Journal of European Law:

In 1999 the European Court of Justice (the “ECJ”) handed down its decision in the now famous case of Centros Ltd v. Erhvervs- og Selskabsstyrelsen. The case concerned the ability of two Danish nationals to incorporate their company in the UK without carrying out any business there for the purpose of operating their company in Denmark through a “branch,” all the while skirting Danish rules on minimum capitalization. Despite the Danish government’s protestations that this constituted blatant fraud and endangered creditors, the ECJ held that the Danish nationals’ scheme was permissible under the right to freedom of establishment as guaranteed by the EC Treaty.

Centros, in the words of one commentator, immediately provoked “great waves of unrest on the continent.” To understand why this is so, it is necessary to understand the system of conflict-of-laws approaches within Europe – a system which at this point rises to the level of deeply held convictions. Although the ECJ did not explicitly address conflict-of-laws in Centros, many commentators have argued that the case has serious implications for this issue.

The Netherlands, the UK, Ireland and Denmark subscribe to incorporation theory in their conflict-of-laws legislation, while the rest of Europe subscribes to the system of siège réel, or seat theory. As far as the Netherlands, the UK, Ireland and Denmark are concerned, they are willing to recognize any corporation as a legal entity so long as it has been duly incorporated under the laws of a particular jurisdiction. The rest of Europe, however, insists that a company’s legal personality be bound to the place of its “real seat,” or central administration. Therefore, a duly incorporated company seeking to locate its central administration in a seat theory state will not be recognized legally until it reincorporates itself under that state’s laws.

For years, seat theory has guaranteed those countries that adhere to it effective control over the businesses whose activities concentrate within their borders. Indeed, seat theory is designed as a first line of defense against corporations governed by (presumably less stringent) foreign laws. It has also effectively prevented the prospect of regulatory competition within the European Union (the “EU”) in the area of company law.

Exxon Subjected to a Shareholder Proposal to Split CEO and Chairman Roles-It's a Bad idea

Bloomberg reports:

Exxon Mobil Corp. investors should vote in favor of a proposal to separate the roles of chief executive officer and chairman, according to the two leading shareholder advisory firms. ...

“Shareholders would benefit from having a policy to institute an independent chair position in the future,” ISS said. “The Presiding Director is not considered to be a sufficient counter-balance to a combined chairman/CEO.”

As I have observed before, however, the evidence does not support mandating that the two jobs be separated. 

My most recent piece on the Catholic Church's responses to the sex abuse scandal-This time it's the Bishops' turn

Understanding the Vatican’s New Rules on Sex Abuse @ProfBainbridge https://t.co/Yy0H4Hrngo via @PublicDiscourse

— Ryan T. Anderson (@RyanTAnd) May 15, 2019

Why Vanguard Outsourced Proxy Policy

@AnnMLipton has a very plausible explanation for Vanguard's decision to outsource proxy voting policy decisions for its externally managed funds to the managers. https://t.co/ZHNX5GXoY8

— Professor Bainbridge (@ProfBainbridge) May 13, 2019

I answer another question at Quora

Answer to Why do companies need a board of directors? by Stephen Bainbridge https://t.co/LPo9wxaFfS

— Professor Bainbridge (@ProfBainbridge) May 8, 2019