ProfessorBainbridge.com

A case comment by yours truly on Tornetta v. Musk

New WLF Legal Pulse Featured Guest Expert column by @ProfBainbridge https://t.co/3Lz17mLWwz via @wlf

— Washington Legal Fdn (@WLF) October 30, 2019

If US News is going to measure scholarly impact, how should it do so?

Apparently, US News plans to expand its rankings of law schools to reflect scholarly impact. The proposal, I gather, is to use Hein on Line's citation counts and rankings. The Society for Empirical Legal Studies is appalled. They've sent a letter to US News outlining their complaints (apparently they didn't write the letter on a spreadsheet, which seems mildly surprising, but good for them):

HeinOnline’s present citation-measurement system has three principal problems: (1) it is biased against interdisciplinary legal scholarship; (2) it omits all book manuscripts and chapters; and (3) it systematically undervalues the academic contributions of junior scholars, which would inhibit law schools from recruiting diverse faculties.

And the problem is?

Seriously, the omission of books and chapters is a problem. As for interdisciplinary work, is the claim that non-law journals "are routinely read by lawyers and judges" even remotely plausible? If the US News system in fact changes what type of scholarship people produce and where they publish it, shifting it back towards traditional legal scholarship and law journals, I will not lose much sleep. We are supposed to be the academic arm of the legal profession, not a humanities department. As Brian Leiter observes:

Of course, it might reasonably be said that "scholarly impact" for a law school should be reflected in law publications, not, e.g., in impact in philosophy or economics journals.  (The two examples given--a highly-cited article co-authored by Lucian Bebchuk [Harvard] in a non-law journal and the highly cited historian Samuel Moyn [Yale] whose citations derive primarily from books--are apt, but probably not typical.  Bebchuk will surely do extremely well by a Hein-only measure even if that one article is excluded, while Moyn won't; but does anyone think that would have factored into Yale's hiring decision?)

As for the argument that using Hein's system will reduce law school faculty diversity, that argument is blatantly specious. 

Under a HeinOnline-driven ranking system, law schools would go to great lengths to retain faculty members with long tenures and publication records, even those who have more recently become less productive. This in turn would reduce schools’ ability to hire and tenure junior faculty members, who increasingly hail from more diverse demographic backgrounds.

Says who? Given the pressure felt by law schools to diversify their faculties, this strikes me as a mere scare tactic. Run up the diversity flag and watch your opponents run away.

Anyway, although Leiter is more sympathetic to the Society's arguments than I am, he concludes:

... the fact that the Hein results are not that different from the Sisk-Leiter impact measure (the latter picking up, e.g., citations to books and to non-law articles) suggests that the effect on personnel decisions, and especially interdisciplinary scholars, may be less dramatic than feared.   I'll just add my anecdote to the mix of evidence here:   because Hein's database includes many more law journals internationally than Westlaw, while citations to my books and non-law review articles are lost, my total citation count appears to be roughly comparable because legal philosophy is an international scholarly community and I pick up lots of citations I never realized I had in law journals abroad.   Make of that anecdote what you will, but I expect there may be similar effects in legal history, empirical legal studies, and so forth.  Perhaps someone will examine this systematically.

 

I guess they make them offers they can't refuse

I am a great fan of Mario Puzo's The Godfather and, of course, of Scorcese's movies. So I was fascinated y this new paper:

We use a unique and unexplored dataset to investigate the determinants and effects of mafia firms in Italy. Mafia may use several tools to expand its firms. However, in this paper, we show that they prefer political corruption to violence to expand mafia firms. In particular, they use the latter more to build up their reputation in new established regions. Mafia firms hamper entrepreneurial activity but they can have beneficial effects on unemployment if mafia firms add to not substitute current economic activities. Policy makers should take account of this twofold effects of mafia firms.

Alfano, Maria Rosaria and Cantabene, Claudia and Silipo, Damiano Bruno, Mafia Firms and Aftermaths (October 25, 2019). FEEM Working Paper No. 21.2019. Available at SSRN: https://ssrn.com/abstract=3475376 or http://dx.doi.org/10.2139/ssrn.3475376

One os reminded of Don Corleone's preference for making someone an offer they can't refuse rather than using violence.

Do female insiders trade differently than male insiders?

Eckbo, B. Espen and Ødegaard, Bernt Arne, Insider Trading and Gender (October 24, 2019). Tuck School of Business Working Paper No. 3475061. Available at SSRN: https://ssrn.com/abstract=3475061 or http://dx.doi.org/10.2139/ssrn.3475061

We provide comprehensive, gender-based estimates of the performance of primary insiders' non-routine trades on the Oslo Stock Exchange. Regardless of gender, the time-series of insider holdings fail to indicate that insiders "buy low and sell high". However, there is evidence that the dramatic increase in the network of female directors following Norway's 2005 board gender-balancing law has increased the market reaction to female insider purchases. Moreover, female insider purchases spike following the market crash in 2008, both absolutely and relative to male insiders, which contradicts the conventional view that females are more risk averse than males.

Huh.

ProfessorBainbridge.com posts by yours truly on reforming the SEC shareholder proposal rule (Rule 14a-8)

The case for changing the shareholder proposal rule

Made by Edward Knight in today's WSJ: ... shareholders and companies are spending significant amounts of money to manage the legal process involving proxy proposals. This cost is one that even shareholders would agree often will not a...

Posted at 11:52 AM in Securities Regulation, Shareholder Activism| Permalink | Comments (0)

Attn: SEC Division of Corporation Finance-How to Fix SEC Rule 14a-8(i)(7) (the ordinary business exclusion)

The SEC Division of Corporation Finance has announced guidance for companies on the application of the ordinary business exception to the shareholder proposal rule (14a-8(i)(7)): At issue in many Rule 14a-8(i)(7) no-action requests is...

Posted at 06:08 PM in Securities Regulation, Shareholder Activism| Permalink

Unions in fact use the shareholder proposal process to seek private benefits

In my book The New Corporate Governance in Theory and Practice, I argued that: The interests of large and small investors often differ. For example, large holders with substantial decision-making influence will be tempted to use their...

Continue reading "Unions in fact use the shareholder proposal process to seek private benefits" »

Posted at 12:21 PM in Shareholder Activism | Permalink | Comments (0)

Business groups ask SEC for minor shareholderproposal rule tweak

A coalition of business groups--including the U.S. Chamber of Commerce, National Association of Corporate Directors, National Black Chamber of Commerce, American Petroleum Institute, American Insurance Association, The Latino Coalition, ...

Posted at 04:01 AM in Securities Regulation, Shareholder Activism | Permalink | Comments (0)

 

 

 

 

Made by Edward Knight in today's WSJ: ... shareholders and companies are spending significant amounts of money to manage the legal process involving proxy proposals. This cost is one that even shareholders would agree often will not a...

The SEC Division of Corporation Finance has announced guidance for companies on the application of the ordinary business exception to the shareholder proposal rule (14a-8(i)(7)): At issue in many Rule 14a-8(i)(7) no-action requests is...

In my book The New Corporate Governance in Theory and Practice, I argued that: The interests of large and small investors often differ. For example, large holders with substantial decision-making influence will be tempted to use their...

A coalition of business groups--including the U.S. Chamber of Commerce, National Association of Corporate Directors, National Black Chamber of Commerce, American Petroleum Institute, American Insurance Association, The Latino Coalition, ...

Articles and presentations by yours truly on reforming the SEC shareholder proposal rule (Rule 14a-8)

SEC expected to propose new rules around proxy advisers and shareholder proposals #CorpGov #ProxyVoting https://t.co/UgAA6VEKJG

— Proxy Insight (@ProxyInsight) October 28, 2019

Revitalizing Rule 14a-8's ordinary business exclusion for shareholder proposals from Stephen Bainbridge

Bainbridge, Stephen Mark, A Comment on the Sec Shareholder Access Proposal (November 14, 2003). UCLA School of Law, Law & Econ. Research Paper No. 03-22. Available at SSRN: https://ssrn.com/abstract=470121:

The Securities and Exchange Commission (SEC) recently proposed a set of amendments to its proxy rules intended to provide shareholders of public corporations with a limited ability to nominate candidates for a corporation's board of directors and to have their nominee placed on the corporation's own proxy statement and card. This essay reviews the principal features of the proposal and identifies several issues remaining for resolution. The essay concludes that the SEC likely has authority to adopt the proposal, but argues that the costs the rule will impose on corporations outweigh any likely benefits from greater shareholder democracy.

Bainbridge, Stephen Mark, Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-06. Available at SSRN: https://ssrn.com/abstract=2750153

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.

The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion in Rule 14a-8(i)(7) of proposals relating to ordinary business operations is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements.

This article proposes an alternative standard that is grounded in relevant state corporate law principles, while also being easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.

Bainbridge, Stephen Mark, The Scope of the SEC's Authority Over Shareholder Voting Rights (May 2007). UCLA School of Law Research Paper No. 07-16. Available at SSRN: https://ssrn.com/abstract=985707 or http://dx.doi.org/10.2139/ssrn.985707

At a May 2007 Roundtable on The Federal Proxy Rules and State Corporation Law, the Securities and Exchange Commission posed the following question for discussion: What should be the relationship of federal and state law with respect to shareholders' voting rights and ability to govern the corporation? To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law.

The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.

 

Wachtell, Lipton's False Gospel of the Law of Corporate Social Responsibility and the Reasoning Behind It

A new Harvard post by famed lawyer Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz, and fellow WLRK partner William Savitt contains an astonishing number of erroneous statements about the purpose of the corporation.To wit:

Nor does any rule of law mandate director obeisance to the ideology of share-price maximization. No statute anywhere enshrines or even endorses the objective of share-price maximization. Nor does case law require directors to manage the ongoing business and affairs of the corporation with the paramount goal of maximizing share price. Directors may be obligated to seek the highest price in the context of a corporate auction, and the market’s perception of a corporation’s future prospects, as reflected in the stock price, is no doubt a relevant factor in deciding how to manage the company to maximize its potential. But not even the most aggressive reading of precedent identifies share-price maximization as the polestar of director decision-making.

What part of Dodge v. Ford Motor Co. do Lipton and Savitt fail to understand:

There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes. [Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).]

Or eBay?

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. [eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010).]

To be sure, those cases do not require short-term profit maximization at the expense of the long-term health of the business, but neither do they contemplate what Lipton and Savitt call "a cooperative exercise among a corporation’s shareholders, directors, managers, employees, business partners, and the communities in which the corporation operates."

Lipton and Savitt might try to explain these cases and their ilk away. Many lawyers and scholars have tried to do that before. And they were all wrong. That's not just my opinion, it's also the opinion Delaware Chief Justice Leo Strine:

... advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion, under the law of the most important American jurisdiction--Delaware. [Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761 (2015).]

Let's just pause a moment to savor that word: "pretend," How wonderfully well put.

And, as Strine pointed out, he is not alone in so reading the case law:

[T]he finest corporate law judge of his era--and arguably the finest overall trial judge of his era--Chancellor William T. Allen ... dilated on the two major traditions in American corporate law. In that essay, Chancellor Allen gave his own reading of Dodge v. Ford Motor Co., where the Michigan Supreme Court observed that “[a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.” He explained:

Dodge v. Ford . . . reflects as pure an example as exists of the property conception of the corporation. In this conception, the corporation is seen as it is in its nineteenth century roots, as essentially a sort of limited liability partnership. The rights of creditors, employees and others are strictly limited to statutory, contractual, and common law rights. Once the directors have satisfied those legal obligations, they have fully satisfied all claims of these “constituencies.” This property view of the nature of corporations, and of the duties owed by directors, equates the duty of directors with the duty to maximize profits of the firm for the benefit of shareholders.

In another article reflecting on his judicial career, Chancellor Allen indicated that he understood Delaware law as requiring directors, when they are not subject to the duty to maximize current stock value as in Revlon, to maximize the value for (hypothetical) stockholders who have entrusted their capital to the firm indefinitely.

In order for their argument to work, Lipton and Savitt therefore must join hands with what Strine called "forms of legal thought tied to deconstructionist linguistics and philosophy, such as critical legal studies," which "are premised on the idea that authors themselves can never understand what they intend to say or are in fact saying."

Basically, to paraphrase Strine, Lipton and Savitt are accusing Strine and other "accomplished jurists such as Chancellor Chandler, Chancellor Allen, and Justice Moore" with not understanding what they wrote, even though they wrote those opinions in high-profiles context and even though those jurists underscored their understanding of the importance of the subject matter they were addressing.

I think I understand why Lipton and Savitt are spewing the nonsense. First, I'm guessing they're assuming Elizabeth Warren will be the next President and they're trying to give their clients an argument against government-mandated corporate social responsibility. Why do I say that? How else would you explain this comment in their post?

We are deeply skeptical that mandatory corporate governance regulation is the solution.

Second, just as Lipton spent the 1980s defending corporate managers from corporate raiders during the heyday of the hostile takeover, he has spent much of recent years defending today's managers against activist hedge funds. Hence, he and Savitt justify their approach as being necessary to "curtail, if not eliminate, short-termism and to combat activist pressure for financial engineering focused on short-term gain."

I am not unsympathetic to both concerns. But that doesn't justify pretending that the law is other than what it actually is.

Yours truly cited re validity of disgorgement as relief in cases brought by the SEC

In SEC v. Westport Capital Markets LLC., 2019 WL 4857337 (D. Conn. Sept. 30, 2019), THE SEC "accused Westport Capital Markets, LLC, and its owner Christopher E. McClure of violating the Investment Advisers Act of 1940. Westport and McClure have moved to dismiss the SEC complaint to the extent that it seeks a disgorgement remedy."

The Court declined to decide the motion at present, explaining that:

Deferring decision on whether the Court may enter a disgorgement remedy is appropriate in view of uncertainty about the ... extent the SEC may seek disgorgement for strictly victim restitutionary purposes and whether disgorgement for victim restitutionary purposes may retain an equitable character that distinguishes it from disgorgement for deterrent penalty purposes. 

A further reason to forbear ruling for now on the defendants' motion is the likelihood that precedent on whether the SEC may continue to seek a disgorgement remedy may change or be clarified in the coming months. ...

Now pending before the U.S Supreme Court is a certiorari petition on the issue of “[w]hether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation even though this Court has determined that such disgorgement is a penalty.” Liu v. SEC, No. 18-1501 (petition for writ of certiorari filed on May 31, 2019); see also Stephen Bainbridge, Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 WASH. U. J. L. & POL'Y 17 (2018); Daniel B. Listwa & Charles Seidell, Note, Penalties in Equity: Disgorgement After Kokesh v. SEC, 35 Yale J. Reg. 667 (2018).

Granted, it's not much of a cite. But it counts. Now I need to get the Supreme Court to cite the article.

On that score, I was pleased to see that counsel for petitioners in the Liu case cited my article in their brief:

The SEC first successfully obtained disgorgement in SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77 (S.D.N.Y. 1970), aff’d in part, rev’d and remanded in part on other grounds, 446 F.2d 1301 (2d Cir. 1971). See Stephen M. Bainbridge, Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J.L. & Pol’y 17, 20- 21 (2018). The Second Circuit affirmed the award, adding that “the SEC may seek other than injunctive relief in order to effectuate the purposes of the Act.” SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971). Even there, however, the court noted that such equitable relief must be “remedial” and thus cannot be “a penalty assessment.” Id.

It'd have been nice if they had cited the arguments I made on the merits, but so be it.

Chancellor William Allen, RIP

The Delaware Judiciary has announced "the passing on Sunday of retired Chancellor William T. Allen, a giant of the corporate bar, academia, and the Delaware Bench." 

“Our nation lost one of the finest jurists of the last fifty years yesterday,” said Delaware Supreme Court Chief Justice Leo E. Strine, Jr. “Chancellor Allen set a standard of excellence that made Delaware stand out in the eyes of all sophisticated observers. Bill Allen, the person, set a standard as a husband, father, friend, and caring professor to which we should all aspire. For me personally, he was a mentor, source of wisdom, and an inspiration. Everyone in Delaware owes him a debt of gratitude for what he did for our state, and our Judiciary’s hearts are with his wife and children, as they endure the loss of this special man.” ...

Chancellor Allen’s decisions, often produced under extreme time pressure, were known for their lucid and lively writing style and incisive analysis. His rulings also showed a deep concern for the integrity of the law, the need for those with power to use it with fidelity to those they represented, and for their understanding of scholarship relevant to the matters before the Court. For that reason, Chancellor Allen was considered to be one of the finest corporate law judges of the era and, even more broadly, as one of the finest judges of his generation on any court. ...

Chancellor Allen wrote hundreds of opinions related to corporate law during his time on the bench. Among the most notable were his iconic rulings in two corporate law cases. In Caremark, the Chancellor addressed the duty of corporate directors to monitor corporate legal compliance and called on corporate boards to recognize the duty of Delaware corporations to obey the law and act ethically toward society and the corporation’s stakeholders. And in the Blasius case, Chancellor Allen articulated a stringent standard of judicial review to make sure that corporate elections are conducted with scrupulous fairness and integrity.

As I have observed: "To paraphrase a television commercial of my youth, when Chancellor Allen speaks, people listen." Stephen M. Bainbridge, The Board of Directors As Nexus of Contracts, 88 Iowa L. Rev. 1, 33 (2002).

I only had the privilege of meeting him on one occasion. But I admired his skill and wisdom greatly, even on those rare times I disagreed with him.

 

Holmesian "bad man theory" and law & economics

Over on Twitter, Rob Anderson posts the following:

Is Holmesian "bad man theory" the foundation for law & economics?

— Rᴏʙᴇʀᴛ Aɴᴅᴇʀsᴏɴ (@ProfRobAnderson) October 12, 2019

Although it's not directly on point, Rob's question called to mind my essay Law and Economics: An Apologia, in Christian Perspectives on Legal Thought, in which I posited that:

[Some might argue that] theological insights on human nature lead to different behavioral predictions than those premised on Economic Man. But is that necessarily true? Consider a restaurant located on one side of a busy street. Although crossing the street is dangerous, some people will nonetheless do so in order to eat at the restaurant. Basic economic theory, however, tells us some things about the likelihood that people will do so. The more dangerous the crossing becomes, the less likely people are to venture across. Conversely, the more attractive the restaurant becomes, the more risk people are willing to bear. And so forth. All of which seems quite obvious, but these predictions about human behavior, when extrapolated and generalized, become the foundation for price theory. Here’s the kicker: price theory tells us how people will choose, but “it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from [economists] even though we know that, if the risk is increased sufficiently, he will forego seeking that pleasure.”[1] In other words, economics has no good account of the character or origins of human preferences.

As a Christian practicing law and economics, however, my faith brings something to the table in grappling with the question of preference formation. Christianity is not a utopian faith, but rather is quite realistic about human beings. In particular, our central doctrine of the Fall of Man tells a coherent story about the nature and origins of human preferences in an unredeemed world. In my view, the assumptions about human behavior made by economists are largely congruent with the fallen state of man. If Economic Man is a fair description of Adam after the Fall, the rational choice model used in economics is not a bad model for predicting the behavior of fallen men. At the same time, however, because Christianity’s account of how man fell and the consequences of that Fall provide an answer to Coase’s question, our faith gives Christian practitioners of economic analysis a more fully realized account of human behavior.

To be sure, Christians are called to a higher standard of behavior than that of fallen man. If the purpose of economic analysis is to predict how people will respond to changes in legal rules, however, can we assume Christian behavior by the masses of a secular and God-less society? No realistic social order can assume “heroic or even consistently virtuous behavior” by its citizens.[2] A realistic social order therefore must be designed around principles that fall short of Christian ideals. In particular, the rules must not be defined in ways that effectively require every citizen to be a practicing Christian. Christian visions of Justice therefore cannot determine the rules of economic order. Instead, legal rules and predictions about human behavior must assume the fallen state of Man, which is precisely what I have tried to suggest Economic Man permits us to do.