ProfessorBainbridge.com

Where Is Your Corporation's Principal Executive Office (Or Offices)?

Keith Paul Bishop offers some guidance to this question that became even more fraught with the passage of the California gender quota bill.

My UCLAW colleague Jason Oh injects a note of practicality in a WSJ article taxing wealth

In a lengthy WSJ article on Democrat proposals to tax wealth, my friend and UCLAW colleague Jason Oh is quoted as offering a practical cautionary note:

For the richest Americans, Democrats want to shift toward taxing their wealth, instead of just their salaries and the income their assets generate. The personal income tax indirectly touches wealth, but only when assets are sold and become income. ... 

In the real world, a wealth tax would emerge from Congress riddled with gaps that the tax-planning industry would exploit, said Jason Oh, a law professor at the University of California, Los Angeles. For example, if private foundations were exempted, the wealthy might shift assets into them.

“We’ve never seen in the history of taxation a pristine tax of any form,” Mr. Oh said. “People who want to pursue a wealth tax for the revenue may be a little disappointed when we see the estimates roll in.”

Bismarck's famous aphorism--"Laws, like sausages, cease to inspire respect in proportion as we know how they are made"--applies in spades to tax laws. You just know any bill will come out encumbered with exclusions and exemptions.

It's also worth remembering the history of the Alternative Minimum Tax. When introduced in 1966, Congress told us that the predecessor to today's AMT would impact only 155 high income taxpayers. At its peak, prior to the 2017 tax reform law, 10 million taxpayers per year were potentially subject to the AMT and therefore were required to calculate whether they owed the AMT. About 5% of all taxpayers ended up owing AMT. 

A wealth tax is almost sure to expand equally until it covers millions of middle and upper middle class taxpayers.

Sam Bray on restitution and disgorgement with applications to Kokesh

My friend and former colleague Sam Bray writes in Reason that:

There was a very significant decision yesterday from the Seventh Circuit on whether the Federal Trade Commission can seek restitution under Section 13(b) of the Federal Trade Commission Act. The case is FTC v. Credit Bureau Center, and the question is about whether Section 13(b) of the Act, which authorizes injunctions, thereby impliedly authorizes restitutionary relief (so-called "disgorgement"). Another section of the Act authorizes restitution, but it has additional requirements. So the FTC naturally wants to use the injunction provision to get restitution, and it has been allowed to do that by the federal courts for decades. But not any more. The Seventh Circuit panel, in an opinion written by Judge Sykes, concludes: "nothing in the text or structure of the FTCA supports an implied right to restitution in section 13(b), which by its terms authorizes only injunctions" (p. 21). Not just that, but the panel (using the Seventh Circuit practice of circulating to active judges for consideration whether to rehear en banc) overruled a previous Seventh Circuit decision that allowed restitution through Section 13(b). It did so on the basis of Supreme Court decisions like Meghrig and Kokesh (especially the former).

(Kokesh, and specifically its third footnote, raises a similar issue for the SEC. For background, see Steve Bainbridge's Kokesh Footnote 3 Notwithstanding.)

I appreciate the shoutout! Those of you who labor in these vineyards will want to go read the whole thing.

Hoison duck legs sous vide recipe

• 2 x duck legs
• 4 tablespoons hoisin sauce
• 1 tablespoon soy sauce
• 1 tablespoon rice wine
• 1 teaspoon minced garlic
• 1 teaspoon crushed ginger
• 1 teaspoon 5-spice powder
• Salt and pepper

Combine all ingredients other than the duck legs in a small bowl and whisk to combine. Put the duck legs in a heavy duty zip-top plastic bag and add the marinade. Rub thoroughly and put in refrigerator overnight. 

Put your ChefSteps Joule Sous Vide in your spaghetti pot and fill with warm water to within an inch of the top. Set the Joule temperature to 167° and the time to 8 hours. Remove duck from marinade and pat dry with paper towels. Reserve marinade.

Put each leg into its own Weston vacuum seal bag and remove the air and seal the bag using your trusty Weston Vacuum Sealer. Add bags to water bath (preventing them from touching as much as possible.)

When the 8-hour cooking time is up, remove bags from water bath and allow them to cool slightly. Preheat your broiler and broiler pan.

Add reserved marinade to a small pan (I like to use my All-Clad 8-Inch non-stick skillet) and bring to a simmer. Allow to simmer for a couple of minutes. If the sauce is too thick, add a little more hoisin and soy sauce.

Open the bags with scissors being VERY careful. The legs will have rendered a lot of fat and some juice, which will be very hot. Blot legs dry with paper towels and allow to rest for 10 minutes or so at room temperature. Place legs on broiler pan, skin side up. Broil legs for five minutes. 

Allow legs to rest at room temperature for 5 minutes. Then shred the meat using two forks, being sure to get as much of the crispy skin as possible. 

Serve with soft flour tortillas (taco size), the reserved marinade/sauce, and the Asian pear slaw. We drank a four year old Central Coast Rhône Ranger red wine. 

Skirt steak with hoisin sauce recipe

• ¼ cup soy sauce
• 2 tablespoons hoisin sauce
• 1 tablespoon honey
• 1 teaspoon Siracha sauce
• 1 teaspoon minced garlic
• 1 teaspoon minced ginger
• 1 tablespoon sesame oil
• ½ teaspoon 5 spice powder
• Salt and pepper
• 2 scallions sliced thinly
• 12 ounces skirt steak cut into two pieces and trimmed of any connective tissue

Combine all ingredients other than the skirt steak in a large bowl and whisk to combine. Add skirt steak and toss to coat. Allow to marinate for 30 minutes at room temperature.

Set broiler pan under broiler on top rack. Preheat broiler and pan for 10 minutes.

Remove steaks from marinade, scraping the marinade off into the bowl, and reserving the marinade. Transfer marinade to a small pan and bring to a simmer. Allow to simmer for a couple of minutes. Allow to cool.

Pat steaks dry with paper towels. Broil for about 3-4 minutes per side.

Allow steak to rest 5 minutes. Slice against the grain into small pieces. Toss steak with marinade.

Serve with a mature Russian River Valley Zinfandel and Asian slaw.

Asian slaw (without pears) recipe

• ¼ cup extra virgin olive oil
• 1 ½ tablespoons rice vinegar
• 2 tablespoons lime juice
• 1 tablespoon honey
• ¾ tablespoon Red Boat fish sauce
• Pinch salt
• Grind of black pepper
• 1 red jalapeno chile (remove seeds and ribs then diced fine)
• 4 ounces grated carrots
• 4 ounces packaged cole slaw mix
• 4 scallions, green parts only, sliced thinly

Combine olive oil, vinegar, lime juice, honey, fish sauce, salt, and pepper in a large bowl. Whisk to combine. Add vegetables and toss to coat.

Asian Pear Slaw Recipe

• ¼ cup extra virgin olive oil
•  1 ½ tablespoons rice vinegar
• ½ tablespoon sesame oil
• Pinch salt
• Grind of black pepper
• 1 ripe Asian pear, peeled, cored, julienned
• 5 ounces grated carrots
• 7 ounces packaged cole slaw mix
• 4 scallions, green parts only, sliced thinly

 

Combine olive oil, vinegar, sesame oil, salt, and pepper in a large bowl. Whisk to combine. Add vegetables and toss to coat.

Served with duck breasts in hoisin sauce.

Duck Breasts with Hoisin Sauce Recipe

• 2 x duck breasts
• 4 tablespoons hoisin sauce
• 2 tablespoon soy sauce
• 2 tablespoon rice wine
• 1-1/2 teaspoons minced garlic
• 1-1/2 teaspoon crushed ginger
• 1 teaspoon 5-spice powder
• Salt and pepper

In a medium bowl, combine hoisin sauce, soy sauce, rice wine, garlic, ginger, 5-spice powder.

Season duck breasts with salt and pepper. Put in bowl with sauce to marinate for at least 30 minutes at room temperature.

Heat a medium nonstick pan over medium-high heat for a couple of minutes.

Remove breasts from bowl, scraping off and reserving the marinade, pat dry with paper towels.

Add duck breasts to pan skin down. Reduce heat to medium. Cook 15 minutes (20 for large breasts), removing fat as it renders. Flip to meat side and cook another 5 minutes. Remove breasts to a plate.

Add reserved marinade to pan and bring to a simmer. Let it cook for a minute or two. Return duck to pan and turn it over several times to glaze the breasts.

Allow to rest 5 minutes before serving.

Serve with a good Central Coast Pinot Noir and Asian Pear slaw.

Jeff Gordon on Why Social Insurance Is Better Than Corporate Governance Reform

Jeffrey Gordon offers a typically insightful and provocative essay on the titular subject, which begins:

The question that emerges from proposals to elevate a corporation’s “purpose,”[1] the call for co-determination in Senator Warren’s Accountable Capitalism Act and now the Business Roundtable’s purported elevation of stakeholder interests, is whether corporate governance is capable of playing the important role in addressing social problems that some have posited.  Such an approach seems to suggest that the social challenges we face can be dealt with at the level of the firm – that is, by specific corporations and their boards.  This assumption seems to animate the argument for firm-specific tailoring of corporate governance in light of distinct corporate missions.

The alternative perspective is that the fundamental issues are more clearly viewed as the economic and social effects of a dynamic and global market economy in which companies operate and are forced to compete.  And so rather than focusing on the firm as the unit of greatest concern, and assuming that companies themselves are responsible for, say, retraining workers whose skills have become obsolete, whose human capital has depreciated, I think the real issue is one of social insurance, of ensuring that we have the right form of government match to ensure the preservation and, where possible, the reinvigoration, of human potential over the lifetime of employees.  Designing and implementing this kind of insurance is critically important in a dynamic economy like ours – an economy in which no single firm is able to offer thick enough insurance, including income preservation insurance, to compensate workers, especially aging workers, for the shrinking job security associated with technological change and obsolescence.

Kindly go read the whole thing.

Finding God in Game of Thrones

I've been reading The Imitation of Christ as my daily devotional. In today's reading, Thomas poses this question to God:

What can I do concerning my sins, except humbly confess them, regret them, and unceasingly plead for your pardon?

Which called to mind the scene from The Winds of Winter (Game of Thrones S06E10) in which Jon Snow is proclaimed King in the North:

LORD GLOVER: I did not fight beside you on the field and I will regret that until my dying day. A man can only admit when he was wrong and ask forgiveness.

JON SNOW: There’s nothing to forgive, my lord.

Glover has thus captured the same insight as Thomas; namely, that we are unable to do anything other than to admit our errors.

Of course, there is something to forgive. But Christ promises that he will forgive.

Slate's Jordan Weissman takes some shots at the Business Roundtable's statement on corporate purpose and I gave him some ammo

From Slate:

On Monday, the Business Roundtable, a major corporate lobbying group, released its latest “Statement on the Purpose of a Corporation,” a lofty mission statement of sorts for the country’s C-suites that the group updates every so often. For more than 20 years, every version of the document has claimed that companies exist primarily to serve the interests of their investors—which typically means making money by any means necessary, and preferably lots of it. This time, however, the roundtable dropped that language, claiming it “does not accurately describe” how corporations view their role today. The new version states that businesses are responsible to all of their various “stakeholders,” including their workers, suppliers, and local communities. ...

Practically speaking, the roundtable statement doesn’t do much. Tim Cook can tell anyone he wants that Apple has lots of different stakeholders and doesn’t just answer to the whims of its shareholders. But the next time investors decide they want the company to start dropping cash on stock buybacks, they can still pressure him to do it. Likewise, just because a lobbying group got together and decided that the purpose of a corporation is to help humanity, that doesn’t make it so. “They don’t get to do that,” Stephen Bainbridge, a law professor at UCLA, told me. “The law gets to do that. And in corporate law, Delaware is the only law that matters.”

My friend Todd Henderson is quoted too. Go read the whole thing. It's quite good, even if I disagree with the policy recommendation.

Do institutional investors solve the principal-agent problem at the heart of corporate governance?

Thank you! This is a point that I have been making for years. Institutional shareholders do not solve the agency cost problem they just move it back one level of ownership. https://t.co/tWeFSLxevw https://t.co/sYAHiT041M

— Professor Bainbridge (@ProfBainbridge) August 20, 2019

The WSJ on the Business Roundtable Statement on Corporate Purpose

From behind the paywall:

There is also more than a whiff of pre-emptive politics here. The executives—the Business Roundtable is led by JPMorgan CEO Jamie Dimon —know they are political targets.

They see socialism on the rise, with Senator Elizabeth Warren proposing to redefine corporate governance in law with explicit direction to serve “stakeholders.” Her goal is to redirect corporate capital to serve political goals favored by unions, environmentalists and trial lawyers. The CEOs no doubt want to get out in front of this by showing what splendid corporate citizens they are.

Yet these CEOS are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders is somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them.

Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results.

An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response.

A tweet to the Business Roundtable re the law of corporate purpose

Memo to the @BizRoundtable: You don't get to "redefine" anything. Only the Delaware courts can change the law of corporate purpose. And, as you ought to know, Delaware comes down square on the side of shareholder wealth maximization. https://t.co/brym193M3U #BizRoundtable https://t.co/QHVpkG8rE6

— Professor Bainbridge (@ProfBainbridge) August 19, 2019

Four Answers to "Why did the Business Roundtable Release its Statement on Corporate Purpose?"

A friend sent along this email in response to the Business Roundtable Statement on Corporate Purpose:

Several possibilities occur to me, but only two seem truly persuasive:

1. The BRT leaders are responding to perceived consumer and labor demand. In particular, millennials apparently prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. “To attract promising young employees in many parts of America and to woo today’s customers, the argument goes, companies must project a corporate ethos that goes beyond profit.” Even Walmart is embracing socially progressive stances, despite the risk of “alienating its core customers, who often live in more conservative-leaning rural and suburban communities.” Social media clearly has been in a factor in this development, as it has given tech-savvy activists unprecedented ability to mobilize pressure on recalcitrant corporations.

But this raises new questions. First, why have so many millennials embraced corporate social activism? Second, why are corporations catering to their preferences as opposed to those of the Yeomanry?

Finally, thought leadership on this issue has been provided by the Clerisy, which has embraced using corporate social activism to drive progressive causes. Progressive corporate law professors, to cite an obvious example, have long advocated corporate social responsibility. More generally, progressive lawyers and activists have joined forces to advance social goals through corporate law reform and internal corporate governance battles. Again, however, the question of why the Clerisy has done so remains unanswered.

2.Some may be responding to pressure from investors, especially the big three institutional investors. Institutional investors long have offered funds that focus on corporations perceived as socially responsible, which generally has been understood to mean companies pursuing progressive goals. A growing number of major institutional investors, however, have embraced social activism in support of progressive goals with respect to all of the funds they manage. BlackRock, for example, encourages companies to pursue excellence in environmental and social, as well as governance, areas. BlackRock CEO Laurence Fink sent a letter in 2018 to CEOs of the firm’s portfolio companies, in which he posited that companies need to be responsive to stakeholders, including consumers and communities, as well as investors, and pursue environmental, social, and governance goals to achieve “sustainable growth.” But this simply pushes the question further up the corporate finance food chain, since it fails to explain why investment fund managers like Fink are pursuing that agenda.

3. Some may crave a return to the days of imperial CEOS. This is sort of the flip side of #2. Aside from a brief period in the 1980s, when the hostile takeover was viable, CEOs were virtual emperors for most of the last 100+ years. Over the last decade or two, however, shareholder activists have grown in number and power. Unlike the gadflies of old, the new activists--mainly hedge funds--have been all about shareholder return. We have seen repeated cases where hedge fund activism has forced out CEOs (and entire boards), resulted in massive changes in corporate strategy, and even led to companies being broken up.

By embracing stakeholderism, the BRT leaders may hope to restore a measure of freedom. Recall the Bainbridge Hypothetical:

Suppose Acme's board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?

Shareholder wealth maximization provides a clear answer -- close the plant. Once the directors are allowed to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate balancing standards. Such standards deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, raising the transaction costs of corporate governance.

Worse yet, absent the clear standard provided by the shareholder wealth maximization norm, the board of directors will be tempted to allow their personal self-interest to dominate their decision making. Put another way, directors who are allowed to consider everybody's interests end up being accountable to no one.

In the plant closing example, if the board's interests favor keeping the plant open, we can expect the board to at least lean in that direction. The plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant's workers and the local community. In contrast, if the board of directors' interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm's shareholders, creditors, and other benefited constituencies.

Some BRT leaders probably would be quite content to see that kind of freedom restored to the C-suite.

4. Some of the signatories are themselves social justice warriors. Oligarchs like Salesforce.com CEO Marc Benioff, for example, promote “social activism among American chief executives.” As the Wall Street Journal reported:

Mr. Benioff is among CEOs of companies, including Apple Inc., Bank of America Corp., Walt Disney Co. , Intel Corp. and International Business Machines Corp. , that have begun pressuring lawmakers on social issues, often with a warning: Change laws or risk losing business. … What sets apart the new activist CEOs is how they use their names and corporate muscle to campaign directly against specific laws governing social issues, often on short notice, sometimes by threatening to withhold business.

This is a point made in my article Corporate Purpose in a Populist Era, which is available at SSRN: https://ssrn.com/abstract=3237107.

The values of the elites (the Oligarchs and Clerisy, as Kotkin calls them), on the one hand, and those of non-elites, on the other, have been diverging for several decades. In his 1995 classic The Revolt of the Elites, Christopher Lasch identified the emergent split between what he called the New Elites and the rest of society. Lasch identified several trends that have accelerated in subsequent years. First, he argued, American elites had become increasingly global, rejecting nationalism and patriotism, and refusing to be tied to places or people. Today we refer to those elites, as well as their global counterparts and those who aspire to join them, as Davos Man:

January is when the World Economic Forum (WEF) holds its annual conference at a Swiss mountain resort to “improve the state of the world.” More than a business meeting for 2,500-plus globetrotting academics, executives, politicians, and lobbyists, it is a tribal celebration for leaders who worship a holy trinity of ideas: capitalism, globalization, and innovation. In a 2004 essay, Samuel Huntington, who popularized the term “Davos Man,” described this breed of humans as “view[ing] national boundaries as obstacles that thankfully are vanishing.” (And, yes, more than 80 percent of attendees at the WEF conference are male.)

As The Economist’s Schumpeter columnist observed in 2013, “[o]rdinary folk trust Davos Man no more than they would a lobbyist for the Worldwide Federation of Weasels.” This distrust took on considerable political weight in the 2016 Presidential campaign, as the populists who voted for Trump recognized that a minority comprised of “people from ‘anywhere’” ruled the majority of people who came from “somewhere.”

The first group … holds “achieved” identities based on educational and professional success. Anywheres value social and geographical mobility. The second group is characterised [sic] by identities rooted in a place, and its members value family, authority and nationality.

Whereas Anywheres, whose portable identities are well-suited to the global economy, have largely benefited from cultural and economic openness in the West, he argues, the Somewheres have been left behind—economically, but mainly in terms of respect for the things they hold dear. The Anywheres look down on them, provoking a backlash.

The disdain in which elites now hold non-elites was another critical emergent trend Lasch identified. As Christopher Lasch explained, “the new elites, the professional classes in particular, regard the masses with mingled scorn and apprehension.” Many of Lasch’s new elites dismissed the masses’ values as “mindless patriotism, religious fundamentalism, racism, homophobia, and retrograde views of women.”

Middle Americans, as they appear to the makers of educated opinion, are hopelessly shabby, unfashionable, and provincial, ill informed about changes in taste or intellectual trends, addicted to trashy novels of romance and adventure, and stupefied by prolonged exposure to television. They are at once absurd and vaguely menacing—not because they wish to overthrow the old order but precisely because their defense of it seems so deeply irrational [to the new elites] ….

This tension was perhaps nowhere more pronounced than with respect to religion. When Lasch wrote over two decades ago, he opined that “[a] skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. ... The elites’ attitude to religion ranges from indifference to active hostility.”

If anything, today’s elites have become even more hostile to religious values. As Samuel Gregg observes, the Davos Man’s moral creed is “a mélange of social liberalism, environmentalism, and a new order of a borderless world. Religion is … considered the refuge of fanatics and anyone stupid enough to be skeptical of gender ideology and techno-utopianism.”

In contrast, modern right-wing populists are highly religious. According to a 2011 Pew Research Center analysis, for example, Tea Party members were “much more likely than registered voters as a whole to say that their religion is the most important factor in determining their opinions on … social issues.” Likewise, a subsequent Pew analysis found that “white born-again or evangelical Christians and white Catholics … strongly supported Donald Trump ….”

Today’s elites thus hold non-elites in at least as much disdain as did the elites of Lasch’s period. The Clerisy, in particular, scarcely bothers to conceal its disdain for the traditional middle and working classes. This disdain manifests itself in a variety of ways, perhaps most notably through the increasing separation between the working class and the elites.