ProfessorBainbridge.com

Answering more Quora questions: What's the difference between a CEO and COO? Can I just transfer a corporation to someone else?

Answer to What is the difference between CEO & COO? by Stephen Bainbridge https://t.co/4wcpSH1OtV

— Professor Bainbridge (@ProfBainbridge) July 22, 2019

Answer to How can you sign your corporation over to another corporation? by Stephen Bainbridge https://t.co/kiyXcVgtUy

— Professor Bainbridge (@ProfBainbridge) July 22, 2019

It was not shareholder passivity that caused the financial crisis, it was shareholder activism

I cannot believe that a decade after the financial crisis people are still spreading these stories:

In policy circles, the currently prevailing narrative views shareholder engagement as a desirable corporate governance attribute, which is able not only to improve corporate governance and performance, but also to ensure long-term stability and social responsibility. This narrative—also associated with lingering post-global-financial-crisis views that attribute managerial excessive risk-taking and corporate failures to the lack of shareholder engagement and excessive short-termism—found expression in the enactment of the 2010 UK Stewardship Code (revised in 2012 and currently under revision), which aims at making institutional investors serve the whole economy under a long-termism wrapper.

In my book, Corporate Governance after the Financial Crisis, I explain that it was much more likely that shareholder activism that contributed to the financial crisis:

As we have seen, regulators and some commentators identified executive compensation schemes that focused bank managers on short-term returns to shareholders as a causal factor in the financial crisis of 2007-2008. As we have also seen, shareholder activists long have complained that these schemes provide pay without performance. This was one of the corporate governance flaws Dodd-Frank was intended to address, most notably via say on pay.

The trouble, of course, is that shareholders and society do not have the same goals when it comes to executive pay. Society wants managers to be more risk averse. Shareholders want them to be less risk averse. If say on pay and other shareholder empowerment provisions of Dodd-Frank succeed, manager and shareholder interests will be further aligned, which will encourage the former to undertake higher risks in the search for higher returns to shareholders. Accordingly, as Christopher Bruner aptly observed, “the shareholder-empowerment position appears self-contradictory, essentially amounting to the claim that we must give shareholders more power because managers left to the themselves have excessively focused on the shareholders’ interests.”

Senator Warren has a plan for private equity and it stinks

In his latest encomium for Senator Elizabeth Warren, The Economist's Lexington columnist tells us that has a pan for everything. Whether that's a good thing, of course, depends on the merits of the plans.

Senator Warren's most recently announced plan is, as Bloomberg reports, intended "to transform private equity firms, which she said often act like 'vampires' when they buy companies by 'bleeding the company dry and walking away enriched even as the company succumbs.'” [Insert rolling eye emoji here.]

Like everything devised by the mind of Man, private equity is hardly perfect. But it is generally accepted that private equity has a number of advantages that redound to the benefit of investors and the economy as a whole:

Among the advantages of private equity cited by commentators are: (1) better governance and a greater willingness to take risks, (2) the ability to focus on long-term issues and a more stable shareholder base, (3) the ability to attract better management talent, (4) creating a sense of urgency, (5) the ability to use leverage more effectively, (6) avoiding the costs imposed by the Sarbanes-Oxley Act, and (7) freedom from shareholder suits.

Scott J. Davis, Would Changes in the Rules for Director Selection and Liability Help Public Companies Gain Some of Private Equity's Advantages?, 76 U. Chi. L. Rev. 83 (2009).

With some exceptions, moreover, this vampire business is just stuff and nonsense:

Despite the common media characterization and focus on leveraged buy-outs (LBOs) or “rip, strip, and flip” funds,295 private equity provides an investment vehicle that has the ability to inject capital and create value in companies that are otherwise capital-starved in the United States.As an investment vehicle, these funds are entrusted to create stable returns for charitable organizations, universities, and pension funds.

Sarah Sutton Osborne, Carried Away: Sun Capital, Politics, and the Potential for A New Spin on "Trade or Business" in Private Equity, 45 Cumb. L. Rev. 595, 633 (2015).

How does private equity create new wealth?

Private-equity involvement strengthens board monitoring of derivative exposures by reducing board size, improving information flows to the board, increasing board control over managers, sharpening director financial incentives to monitor derivative exposure carefully, and attracting highly qualified, more financially sophisticated directors who are better able to understand the associated risks. It also creates incentives for managers to carefully evaluate risk-return tradeoffs. These strengths could be particularly important for financial firms that have experienced tremendous write-downs of their loan portfolios ....

Large increases in debt also create strong managerial incentives to improve firm efficiency because they: (1) make stock prices much more sensitive to improvements in firm value; and (2) motivate managers to use firm cash conservatively and to eliminate underutilized assets so as to minimize the risk of bankruptcy, financial distress, and the accompanying forced management turnover. Moreover, debtholders and institutional investors can further improve firm risk monitoring since they are large investors who frequently hold both debt and equity positions in private-equity-controlled firms. This gives them good access to and strong incentives to monitor proprietary firm information flows to accomplish this goal. Thus, the shift toward greater private-equity ownership in the economy can be viewed as a value-creating response to increased derivative activity and contract exposure levels, especially in less competitive industries where product market competition is a weaker alternative mechanism for motivating managers to improve firm efficiency and profitability.

Ronald W. Masulis & Randall S. Thomas, Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance, 76 U. Chi. L. Rev. 219, 220–21 (2009)

 

My article, Enhanced Accountability: The Catholic Church’s Unfinished Business, has been posted to SSRN

Enhanced Accountability: The Catholic Church’s Unfinished Business (July 17, 2019). 53 University of San Francisco Law Review 165 (2019); UCLA School of Law, Public Law Research Paper No. 19-22. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3421795

Abstract: Events of the Summer 2018 brought the long running sexual abuse crisis in the Roman Catholic Church back onto the front pages, highlighting the role of diocesan bishops in covering up the scandal and enabling abusers. In response to these developments, the Church is again considering reforms to protect victims and punish abusers and enablers. This article proposes that the Church create a system for laity to anonymously report allegations, enact strong protections for whistleblowers, and impose a mandatory whistleblowing requirement on priests. As a 2018 Pennsylvania grand jury report demonstrates, however, the laity was reporting the abuse to the Church but the hierarchy buried those reports in secret files. The ultimate problem thus is not so much the lack of reporting, as it was the lack of action after the report. Accordingly, the article’s principal proposal is the creation of both diocesan and national disciplinary bodies led by expert lay members as the ultimate authorities in sex abuse cases. The proposal draws an analogy between these bodies and corporate audit committees and argues that a number of aspects of how audit committees function can be usefully adapted to the proposed review bodies.

Keywords: Roman Catholic Church, corporate governance, compliance, law and economics, credence good

Sadly, the article was finalized before the USCCB's June meeting. In anticipation of the proposals likely to be considered at the June meeting, the article was revised at the last minute to critique such ideas as the metropolitan model. I was able to get that critique into the public domain by posting a revised working draft of this paper to SSRN and by writing several short essays for Public Discourse. Although the article's criticisms did not prevail, the USCCB's June 2019 reforms have a three-year sunset provision. I hope my article will provide guidance for that review.

New SSRN Posting--"Bob Cochran on Law and Lawyering--A Catholic Perspective"

Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3421790

Abstract

This essay is a contribution to a festschrift honoring Pepperdine law professor Robert Cochran. In addition to his many other professional accomplishments, Professor Cochran is a leading figure in the study of Law and Christianity.

One strain of Law and Christianity scholarship focuses on normative critiques of substantive legal issues based on Christian theology. In other words, it seeks to make the civil law more moral; i.e., to conform Man’s Law to God’s Law. A second strain seeks to help lawyers deal with the difficulties inherent in being a Christian and a lawyer. As Cochran has put it, one might ask “whether there is a connection between religious faith and what ordinary lawyers do in ordinary law offices on ordinary Wednesday afternoons.”

Cochran’s work has intersected both possibilities. In Part I of this Article, I tackle his analysis of the extent to which we should strive to harmonize God’s and Man’s Law. In Part II, I turn to Cochran’s analysis of the Christian lawyer’s vocation. In both parts, I come at his work from the perspective of a Roman Catholic called upon to give religious assent to both Christian scripture and, where I differ from Cochran, the Church’s Magisterium.

Keywords: law, jurisprudence, law and religion

Apparently, I'm the Avis of corporate law professors

Readers of a certain age will recall Avis Rent-a-Car's slogan "We're #2. We try harder." Apropos of which I refer you to Robert Anderson's post: Citation Engagement Counts - The Case of Corporate Law Scholars:

Citation counts (and other types of citation-based metrics) are increasing in importance in the legal academy. Some people like the objectivity of these measures and others lament their failure to capture important non-quantifiable aspects of scholarly influence.

One of the most influential citation count rankings in the legal academy is the Sisk-Leiter approach that Greg Sisk updates every three years. Last fall when the new Sisk et al. citation count study came out I proposed a small change to the Sisk-Leiter method that would attempt to measure engagement, defined as citing a particular article more than once. This was designed to address the "throwaway" citation problem that critics of citation counts have raised--that some papers may receive a large number of perfunctory "one off" citations that are less meaningful as a measure of scholarly influence.

I decided to experiment with this using the most highly cited scholars in my field, corporate law and securities regulation, using the citation count rankings as compiled by Brian Leiter. ...

Although the two measures do produce slightly different ordinal rankings, the differences are not significant at least for this small group of 20 scholars. Professor Stephen Bainbridge moves up from third place to second place and Professor Donald Langevoort moves up from 7th place to 5th place.

Will the SEC stop policing shareholder proposals? If so, how will that work?

Bloomberg reports:

Companies that receive shareholder proposals and want to prevent them from going to a vote can ask the SEC to weigh in, a process that was delayed this year by the federal government’s longest shutdown. The commission currently reviews all such proposals, but it’s considering how to “still actively monitor” them without issuing a response every time, Bill Hinman, who directs the SEC’s Division of Corporation Finance, said in a July 16 speech. ...

... the SEC’s potential pullback could lead to more litigation over shareholder proposals and limit the paper trail used for company requests, shareholder reaction, and SEC staff responses.

Indeed. Unless the SEC simultaneously imposes sharp limits on shareholder proposals, it is very hard to see how this would work. My best guess:

• Proponent submits proposal
• Issuer decides to exclude
• Issuer asks SEC to issue no-action latter
• SEC ignores request
• Company goes ahead and excludes proposal
• Proponent files lawsuit
• Company tries to run up proponent's legal expenses

That doesn't look like much of an improvement.

Commissioner Hester Peirce Has Concerns About California's Gender Quota Mandate

Keith Paul Bishop reports on Commissioner Pierce's comments to the Society for Corporate Governance:

The text of the bill explicitly makes a business case to justify the law’s existence; it points to the financial benefits to firms of having women on their boards.  As I noted earlier, the mixed findings of research in this area may not support this business case.

These state efforts concern me because they micromanage an aspect of corporate governance that corporations, boards, and shareholders seem perfectly capable of handling on their own.

The full text of Commissioner Pierce's speech is here. Oddly, the Commissioner failed to cite my work on the subject.

The difference between "publicly held" and "publicly traded"

Keith Paul Bishop explains

Bainbridge throws hat into Delaware ring

Being far too modest to put my name forward, I trust that some of my friends in the corporate law academy (and perhaps even some of my foes) will step up to the plate and encourage Delaware to consider, well, yours truly. https://t.co/uw2dlVsqW8

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

Twitter bids farewell to Delaware Chief Justice Leo Strine and ponders Strine's next move

Breaking News: Chief Justice Leo Strine Stepping Down https://t.co/EhegYlpuaR

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

She links Strine's resignation letter. https://t.co/vBrAtlIiou

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

So the rumors were true. What's next? #Wachtell? Working with @JoeBiden campaign? Both? https://t.co/5yIJLvgc0V

— Jesse Fried (@jessefried) July 8, 2019

Sam Waltz of Delaware Business Times speculates CJ Leo Strine will spend a few years with a Wall Street firm (Del office?), sock away money to put sons through college, run for Governor in 2024. https://t.co/ZfC5VbqzQT

— Professor Bainbridge (@ProfBainbridge) July 8, 2019

Leo Strine, Delaware Supreme Court's Chief Justice, to step down https://t.co/RDOoUBfxpO via @delawareonline

— Ann Lipton (@AnnMLipton) July 8, 2019

🤐 https://t.co/NVTfktW06p

— Strine Says (@StrineSays) July 8, 2019

It’s hard to imagine the nation’s most important court for businesses without Strine’s extremely distinctive voice.

— Alison Frankel (@AlisonFrankel) July 8, 2019

SP500 ticking up after Strine announcement. Must be causal. pic.twitter.com/VeZOVpJtCb

— Andrew Baker (@Andrew___Baker) July 8, 2019

Breaking News: Chief Justice Leo Strine Stepping Down

Bloomberg Law reports:

Leo Strine, head of the Delaware Supreme Court, is stepping down after five years of leading the state’s sole appellate court that decides most of the highest-profile business disputes in the U.S.

Strine, 55, said in a statement he doesn’t have any immediate plans for after he retires. In the past, he’s taught about Delaware corporate law at institutions such as Harvard University, the University of California at Los Angeles and Yale University and churned out law-review articles on topics ranging from defining good-faith in corporate law and investor suits that generate more compensation for lawyers than shareholders.

I suspect Chief Justice Strine will follow so many of his recent predecessors into highly remunerative legal practice with some big Wall Street firm (he's got two sons to put through college) or, maybe more likely based on various hints he's dropped over the years, he may be planning a political career. But I would give just about anything to have him join the UCLA corporate law faculty. What a tremendous coup that would be!

Delaware Business Times Publisher Sam Waltz speculates:

First, people with his background and accomplishments make a huge personal financial sacrifice in serving on the bench, although it does advance their billing rates when they re-enter private practice.

It’s not out of the realm of the expected to anticipate that Chief Justice Strine could and would pull in $1 million a year, perhaps even more, in private practice. And part of the speculative reason is that he’s at the stage with young adults heading off to college, so his family would benefit from the change.

Beyond that, though, one or two speculated that he really wants to be governor one day, and a lucrative legal career would secure his family’s future for a return to public service in an elected role.

 

 

 

California Secretary Of State Issues First Board Gender Quota Report

Keith Paul Bishop reports a couple of oddities in the first report per SB 826:

Oddly missing from the list was any indication of the number of female directors (if any) even though the law clearly requires that information.  It is also unclear why the Secretary of State chose to publish address and telephone information when that information was not required to be in the report.

He also observes that:

First, the report does not disclose the number of subject corporations that have at least one female director for the reasons explained above.  Second, it does not identify any corporation that is in violation of the law.  The reason is that the law requires that subject corporations have a minimum of one female director no later than December 31, 2019.  Cal. Corp. Code § 301.3(a).  The statute further provides that a female director having a seat for at least a portion of the year will not be a violation.  Cal. Corp. Code § 301.3(e)(3).  

Chief Justice Leo Strine rehabilitates his Oracle decision

Ann Lipton analyzes the recent Delaware Supreme Court decision in Marchand v. Barnhill, "which is notable for two reasons.  First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations."

As to the former, she observes that:

Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution.  Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.

Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him.  Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.

This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative. 

 

Courts should not automatically pierce the veil of single shareholder corporations

Joshua Fershee analyzes a Hawaii case seeming to suggest that "sole ownership and control" was enough to justify veil piercing.