ProfessorBainbridge.com

Changes in the Delaware Judiciary

From Bloomberg: Two new chancery court appointees bringing the total to eight. Collin J. Seitz, Jr., replaces our friend Leo Strine as Chief Justice. 

The Business Roundtable and Corporate Purpose

My remarks at the AALS panel:

We are convened to discuss “Rising Tensions Among Corporate Stakeholders.” Really?

The call that brings us together informs us that “Tensions among corporate stakeholders are rising. Managers and shareholders continue to battle for primacy as power tilts toward shareholders with the ongoing rise of institutional investors. … Amazon's dust-up in New York City shows the influence of communities and the resurgence of popular movements. Exxon's recent experience over climate change illustrates the power of environmental concerns even for investors in traditional energy companies” Really?

I see something very different happening. The corporate social responsibility debate continues, but some key players have switched sides.

Investors—including the big three of Blackrock, Vanguard, and State Street—increasingly at least purport to care about ESG issues.

And this fall, The Business Roundtable—a center of corporate C-suite elitism—purportedly switched sides, as well.

What’s going on?

As we all know, a couple of months ago, the BRT released a statement on the purpose of the corporation in which it made a major break from its longstanding position. Starting in 1997, the BRT had issued a series of statements positing that corporations exist principally to serve their shareholders. In its recent statement, however, the BRT announced that going forward its members would recognize that “we share a fundamental commitment to all of our stakeholders.” The 181 signing CEOs committed themselves to leading “their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”

The BRT statement was met with enthusiastic praise in some quarters, condemnation in others, and skepticism in still others. Much of the commentary, however, failed to correctly assess either the effect of the statement or the reasons the BRT felt moved to issue it.

In most cases, the BRT statement likely will prove no more than an irrelevant and innocuous platitude, which may make some people feel a bit better about the role big corporations play in our lives, but which will not affect corporate decision making. Most business decisions, after all, do not directly oppose the interests of stakeholders and shareholders. To the contrary, most business decisions are potentially win-win scenarios. The proverbial rising tide usually does lift all boats.

This is true even of decisions that in the short-run seem to favor stakeholders at the expense of shareholders. Providing health benefits for employees may increase expenses and reduce profits in the short term, for example, but often leads to greater productivity in the long term. Focusing on environmental sustainability can be a useful means of engaging with customers and thereby building brand reputation. Indeed, companies such as Walmart and Coca-Cola have used sustainability in their messaging with success.

Occasionally, however, a business faces a true zero-sum decision. It cannot make both stakeholders and shareholders better off either in the short- or in the long-run. In such a case, would we really expect the signers of the BRT statement to put stakeholders interests ahead of shareholders?

Obviously, the BRT has no power to change the law and the law remains clearly contrary to the BRT’s new commitments. One hundred years ago, in Dodge v. Ford Motors, the Michigan Supreme Court held that: “A business corporation is organized and carried on primarily for the profit of the stockholders.”[1] Much more recently, in eBay v. Newmark, the Delaware Chancery Court likewise held that directors of a company incorporated in Delaware—as are most BRT companies—are obliged to “promote the value of the corporation for the benefit of its stockholders.”[2] The court therefore held that “a business strategy that openly eschews stockholder wealth maximization” was inconsistent with the directors’ fiduciary duties to the company’s shareholders.

In a 2015 Wake Forest Law Review article, former Chief Justice of the Delaware Supreme Court Leo Strine—arguably the leading corporate law jurist of our era—took what he called a “clear-eyed look at the law of corporations in Delaware,” on the basis of which he concluded “that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.”

He therefore rejected arguments by various academics that Delaware law allowed executives and directors to make tradeoffs between shareholder and stakeholder interests, stating that “Dodge v. Ford and eBay are hornbook law.” Anyone who argues to the contrary, he said, was pretending. Let’s pause to savor that word: “pretending.”

To be sure, the business judgment rule usually insulates directors from liability for decisions that depart from a short-term focus on maximizing shareholder wealth. But the prudential judgment that courts generally should defer to board of director business decisions does not change the legal obligation of the board and in appropriate cases officers and directors can be held liable for putting stakeholder interests ahead of those of shareholders.

Whether the BRT likes it or not, its statement doesn’t change that rule.

Just as the BRT statement does not change the signers’ legal duties, it does not change the governance structures that constrain their freedom to act as they see fit.

CEOs are appointed by the board of directors. Boards of directors are elected by the shareholders. Until recent decades, of course, none of that mattered very much. Boards of directors passively rubberstamped the wishes of imperial CEOs. As a result, the predecessors of the CEOs who signed the BRT statement had broad discretion to make decisions that put the interests of stakeholders ahead of those of shareholders.

That world no longer exists. In response to new obligations imposed by state and federal laws, boards of directors have become more independent and less willing to acquiesce in a CEO’s wishes. At the same time, share ownership has shifted from individual retail investors to institutions. Some of those institutions—especially activist hedge funds and some pension funds—have made corporate governance activism a central part of their business model. Such investors are constantly on the lookout for managers who are failing to maximize shareholder value and are willing to pressure their boards for change.

Granted, governance activism by shareholders is somewhat offset by social justice activism by ESG-oriented investors. Even so, managers and boards that put stakeholder interests ahead of (or even on a par with) shareholder interests are likely to face proxy contests and other forms of activism from activist hedge funds and their allies. Managers and directors who too often shortchange shareholder value in the name of social responsibility may well find themselves on the losing end of such contests.

Given that nether the legal rules nor the governance environment in which the BRT’s members must operate were changed by the new statement, what purpose was served by issuing the statement? What are the signers up to?

1. 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.”
2. 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. Accordingly, there is an increasingly widely held view in the business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon, but even such heartland companies as Walmart are embracing socially progressive stances, despite the risk of alienating their Red State customer base.
3. The BRT may be trying to head off regulation by progressive politicians. As Wall Street Journal columnist David Benoit has observed, “Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers.” With the mainstream of the Democratic Party seemingly moving in Warren’s direction on business and finance issues, the BRT’s members may have hoped that a voluntary—and perhaps intentionally ambiguous—embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation in the event of a Democratic presidential victory in 2020.
4. 4. The BRT may be responding to pressure from a few very powerful 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. As I noted at the outset, however, 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. 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.
5. Some BRT members may crave a return to the days of imperial CEOS. This is the flip side of #3. 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.

Indeed, to my mind this is the basic problem with CSR. 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, managers and directors will be tempted to allow their personal self-interest to dominate their decision making. If the CEO’s interests favor keeping the plant open, 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 CEO’s 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.

In sum, the BRT statement changes nothing. Neither the law nor the governance system in which the BRT’s members must function has changed. Shareholder wealth maximization remains the law. And anyone who says otherwise is, to again quote Leo Strine, pretending.

I submit herewith my "Diversity, Equity, and Inclusion" statement for my merit raise at UCLAW

As regular readers know, I'm up for a merit raise at UCLAW this year and am now required to submit a statement of how I contribute to the University's goals in Diversity, Equity, and Inclusion. I have just emailed the statement to the administration. It reads as follows:

Although I am aware and respectful of the many dimensions within which a university properly seeks a diverse faculty and student body, I have long been particularly concerned with the lack of intellectual diversity at the law school. A survey of U.S. law professors in general found that white Democratic professors (both male and female), Jewish professors, and nonreligious professors “account for most (or all) of the overrepresentation among racial, gender, religious, and ideological groups in law teaching.”[1] The groups that “account for most of the underrepresentation among racial, gender, religious, and ideological groups in law teaching” are Republicans (both male and female), Protestants, and Catholics.[2] This disparity persists even though “religious and political diversity are probably more important for viewpoint diversity than gender diversity and roughly as important as racial diversity.”[3]

At UCLA, we know that the campus as a whole leans substantially to the left. “A study of various university faculties showed that at Cornell the ratio of liberal to conservative faculty members was 166 to 6, at Stanford it was 151 to 17, at UCLA it was 141 to 9, and at the University of Colorado it was 116 to 5.”[4] Conservative students at UCLA have been “harassed, stalked, and threatened.”[5] I recently searched the opensecrets.org donor database for political contributions made by persons who claimed UCLA School of Law as their employer. Thirty-eight of those persons contributed solely to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs. One person contributed to both Republicans and Democrats. Three persons contributed exclusively to Republican candidates, the Republican Party, and various NRC affiliates. Of the faculty members who contributed exclusively to Republican candidates, the most recently hired of the two was hired in 1997. As a monetary matter, 92.67% of all contributions went to Democrats and affiliated groups.[6]

Because conservative students and students of faith often feel alienated and estranged in an environment that is so relentlessly liberal and secular, I have made particular efforts to reach out to and support such students. I have served as a mentor for leaders of The Federalist Society and Christian Law Students Association. I have given talks to both organizations. I taught a Perspectives on law and Lawyering seminar devoted to Catholic Social Thought and the Law, which gave students—whether Catholic or not—an opportunity to consider how their faith (or lack thereof) related to the law and an opportunity to learn about a coherent body of Christian scholarship that might inform their lives as lawyers. I have also tried to lead by example, such as by serving as a volunteer with the Good Shepherd Catholic Church’s St. Vincent de Paul chapter, which raises funds for distribution to poor persons who are in danger of losing their home due to inability to make rent or mortgage payments.

I'll let you know if I get the raise.

As regular readers know, I'm up for a merit raise at UCLAW this year and am now required to submit a statement of how I contribute to the University's goals in Diversity, Equity, and Inclusion. I have just emailed the statement to the administration. It reads as follows:

Although I am aware and respectful of the many dimensions within which a university properly seeks a diverse faculty and student body, I have long been particularly concerned with the lack of intellectual diversity at the law school. A survey of U.S. law professors in general found that white Democratic professors (both male and female), Jewish professors, and nonreligious professors “account for most (or all) of the overrepresentation among racial, gender, religious, and ideological groups in law teaching.”[1] The groups that “account for most of the underrepresentation among racial, gender, religious, and ideological groups in law teaching” are Republicans (both male and female), Protestants, and Catholics.[2] This disparity persists even though “religious and political diversity are probably more important for viewpoint diversity than gender diversity and roughly as important as racial diversity.”[3]

At UCLA, we know that the campus as a whole leans substantially to the left. “A study of various university faculties showed that at Cornell the ratio of liberal to conservative faculty members was 166 to 6, at Stanford it was 151 to 17, at UCLA it was 141 to 9, and at the University of Colorado it was 116 to 5.”[4] Conservative students at UCLA have been “harassed, stalked, and threatened.”[5] I recently searched the opensecrets.org donor database for political contributions made by persons who claimed UCLA School of Law as their employer. Thirty-eight of those persons contributed solely to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs. One person contributed to both Republicans and Democrats. Three persons contributed exclusively to Republican candidates, the Republican Party, and various NRC affiliates. Of the faculty members who contributed exclusively to Republican candidates, the most recently hired of the two was hired in 1997. As a monetary matter, 92.67% of all contributions went to Democrats and affiliated groups.[6]

Because conservative students and students of faith often feel alienated and estranged in an environment that is so relentlessly liberal and secular, I have made particular efforts to reach out to and support such students. I have served as a mentor for leaders of The Federalist Society and Christian Law Students Association. I have given talks to both organizations. I taught a Perspectives on law and Lawyering seminar devoted to Catholic Social Thought and the Law, which gave students—whether Catholic or not—an opportunity to consider how their faith (or lack thereof) related to the law and an opportunity to learn about a coherent body of Christian scholarship that might inform their lives as lawyers. I have also tried to lead by example, such as by serving as a volunteer with the Good Shepherd Catholic Church’s St. Vincent de Paul chapter, which raises funds for distribution to poor persons who are in danger of losing their home due to inability to make rent or mortgage payments.

I'll let you know if I get the raise.

Is hedge fund activism socially irresponsible; is management resistance socially responsible?

Interesting study:

... we find that employees of target firms that sponsor DB pension plans suffer from greater plan underfunding after HF activism. This finding is consistent with the view that HF activists expropriate wealth from employees. Underfunding implies that a plan’s liabilities exceed its assets, potentially hurting employees after they retire. We then examine the mechanisms that lead to the underfunding of pension plans. We find that targeted firms reduce employer contributions by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Firms also tilt plan investments toward riskier assets, in a failed effort to boost plan returns. Activists typically exit the firm after 1.5 to 2 years (see Brav, Jiang and Kim (2009)), but the effect on employee pensions is long-term and persists over at least the next five years. While most of our paper deals with defined benefit pension plans, about which there are more data, we also find that target firms reduce employer contributions in defined contribution plans.

There are two potential interpretations of our findings. First, HF activists put pressure on managers to increase shareholder wealth, and managers respond by raiding employee pension funds. Second, observable and unobservable characteristics of these firms that lead activist HFs to target them also lead the firms to underfund employee pensions. We provide three types of evidence that favors the first interpretation over the second.

Maybe Elizabeth Warren should lay off corporations and focus on hedge fund activists.

Josh Fershee responds to my post about the implied covenant of good faith

Here:

Prof. Bainbridge recently posted, Here's the thing I don't understand about the implied covenant of good faith and fair dealing. ...

... I think this concept of the implied covenant matters more than ever, now that Delaware allows the elimination of the duty of loyalty in LLCs (my thoughts on that here). Even in allowing parties to eliminate the duty of loyalty in an LLC, such agreements always retain the duty of good faith and fair dealing. ...

...

I am of the mind that the implied covenant of good faith and fair dealing means that: (1) you get the express terms of the agreement, and (2) the agreement cannot take away all possible reasons for the deal in the first place.  As to the latter point, it means, quite simply, even without a duty of loyalty, there must be some reason for the contract to exist at all.  So, you may not be entitled to a fair share of proceeds from the agreement, or even a significant share.  But there must always be some value (or potential value) to have been gained by entering the agreement. At a minimum, it can't be an agreement to get nothing, no matter what. 

As one example, a Delaware court explained that a plaintiff's claim was lacking when the 

the incentive [gained by the defendant] complained of is obvious on the face of the OA [operating agreement]. The members, despite creating this incentive, eschewed fiduciary duties, and gave the Board sole discretion to approve the manner of the sale, subject to a single protection for the minority, that the sale be to an unaffiliated third party. . . . [T]he parties to the OA [thus considered] the conditions under which a contractually permissible sale could take place. They avoided the possibility of a self-dealing transaction but otherwise left to the [defendant] the ability to structure a deal favorable to their interests. Viewed in this way, there is no gap in the parties’ agreement to which the implied covenant may apply. The implied covenant, like the rest of our contracts jurisprudence, is meant to enforce the intent of the parties, and not to modify that expressed intent where remorse has set in.

Miller v HCP & Co., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018). (More commentary on this case here.)

Furthermore, the implied covenant

does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand. Even where the contract is silent, an interpreting court cannot use an implied covenant to re-write the agreement between the parties, and should be most chary about implying a contractual protection when the contract could easily have been drafted to expressly provide for it.

Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 507 (Del. 2019) (footnotes omitted). For more on this case see the Delaware Corporate &Commercial Litigation Blog. 

 

Parties have a lot of latitude, but I think the covenant of good faith and fair dealing means that there must be a reasonable effort to honor the express terms of the agreement and there must have been some reason to enter the contract. That's it.  It's not a lot, but it still has teeth where someone takes all of the things.  

That makes sense.

Carney v. Adams and the Future of Delaware Corporate Law

@ProfBainbridge on "Delaware's Judiciary in the U.S. Supreme Court" https://t.co/BUAhPlqSiR via @wlf

— Professor Bainbridge (@ProfBainbridge) December 13, 2019

We got a lovely compliment from Father Bill Dailey

questions together in a very humble and gracious way. I recommend the chapter which is both readable and insightful.https://t.co/jaMvDrsFTO

— Fr. Bill Dailey, CSC (@wrdcsc) December 10, 2019

Political Contributions by UCLA School of Law Faculty and Staff go 92.67% to Democrats/Liberal Groups

There's an article in the WSJ claiming that political diversity at Yale is 0%. Inspired by that headline, I went to opensecrets.org. I typed UCLA SCHOOL OF LAW in to the Occupation/Employer field of the advanced search engine and searched for all cycles covered by the search engine.

38 persons who claimed the UCLAW is their employer contributed solely to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs.

1 person contributed to both Republicans and Democrats. 

3 persons contributed exclusively to Republican candidates, the Republican Party, and various NRC affiliates.

As a result, 90.48% of UCLAW faculty and staff gave exclusively to Democrats.

The total amount contributed to Democratic candidates, the Democratic Party and various affiliates, and liberal PACs was $97,959

The total amount contributed to Republican candidates, the Republican Party, and various NRC affiliates was $7750.

As a result, 92.67% of all contributions went to Democrats and affiliated groups.

(Note that some of my own contributions were attributed to UCLA as my employer, which probably was true for some of my colleagues. So the exact numbers may be off a bit.)

Lawyer run amok

This has to be seen to be believed.

Here's the thing I don't understand about the implied covenant of good faith and fair dealing

In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the court reviews the Delaware law of the implied covenant:

“In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). In describing the implied contractual obligation, the plaintiffs must allege facts suggesting “from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). That is because “[t]he implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” El Paso, 113 A.3d at 184. Accordingly, “[t]he implied covenant is well-suited to imply contractual terms that are so obvious . . . that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman, 155 A.3d at 361.

My question is simple: How do you know that the provision was left out because it was obvious? After all, if it was obvious, shouldn't the parties have put it in the contract? Put another way, how do you know the parties did think about it and decide to leave it out?

New Delaware guidance reaffirming the shareholder wealth maximization norm

Via our friend, prominent Delaware practitioner and blogger Francis Pileggi, we learned of Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), which he aptly describes as "notable for its application of the implied covenant of good faith and fair dealing in a partnership agreement that waives all conventional fiduciary duties, and replaces them with a contract-based standard of conduct. The decision ... is an exemplary exegesis of standards and nuances and subtleties that must be addressed before finding a breach of the implied covenant of good faith and fair dealing–especially when conventional default fiduciary duties in the alternative entity context are waived."

This decision is also worthy of attention because it finds a breach of the difficult-to-prove breach of the implied covenant of good faith and fair dealing. The court explains why, based on the facts presented, it is “reasonably conceivable” that the implied covenant was breached. See Slip op. at 48-49.  The court also reasoned that it was not surprising that there was no express term that barred manipulation of a “call price.”

If and when I ever get around to writing a long planned article on the implied covenant of good faith, this case will figure prominently. Having said that, however, here at PB.com we have been talking a lot about corporate purpose lately and so our attention was drawn to this passage from the opinion:

When exercising their authority, directors must seek “to promote the value of the corporation for the benefit of its stockholders.” “It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term.” Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135, 147 n.34 (2012). Decisions of this nature benefit the corporation as a whole and, by increasing the value of the corporation, increase the share of value available for the residual claimants. Nevertheless, “Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.”

Here we have more proof that those commentators who claim Delaware law does not mandate shareholder wealth maximization are either misinformed or disingenuous.

Nuns against director primacy

There are a handful of orders of Catholic nuns that have been active users of the SEC's shareholder proposal rule (Exchange Act Rule 14a-8). They're not happy with the SEC's plans to reform the rule to make it harder for shareholder gadflies to micromanage corporations, as Crux reports:

Sister Nora Nash, a longtime participant in the shareholder advocacy field, is part of a broad coalition of faith-based and other investors who are lining up to push the SEC to modify if not rollback the proposed steps they say would restrict their voice in seeking corporate accountability.

“I don’t think it will be a possibility for many institutions to be able to participate” at the same level of shareholder advocacy if the amendments to existing rules are implemented, said Nash, director of corporate social responsibility for her order, the Sisters of St. Francis of Philadelphia.

As I have argued:

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 traditional 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.

This allocation of decision-making power follows from the basic principle that public corporations are not shareholder democracies. Although shareholders nominally own the corporation, they possess very few control rights normally associated with ownership. Instead, corporate law assigns virtually plenary decision-making authority to the board of directors and the subordinate managers to whom the board properly delegates authority.

This allocation of authority is essential if the corporation is to be run efficiently. Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”…

In principle, Rule 14a-8 contains protections designed to prevent it from being used as a tool for effectuating a shift in the locus of corporate decision making from the board to the shareholders. As the D.C. Circuit explained, the Rule's drafters recognized that “management cannot exercise its specialized talents effectively if corporate investors assert the power to dictate the minutiae of daily business decisions.”

Stephen M. Bainbridge, Revitalizing Sec Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016).

The problem is that the Rule has been interpreted in ways that allow the nuns and other shareholders to make proposals on a wide range of governance, social, strategic, and operational decisions that ought to be made by the board. 

Worse yet, many of the nuns' proposals are actually counter to the interests of the companies and the other investors in those companies. 

The SEC proposals put a band-aid on the problem. It's a highly imperfect solution, but at least it's start.

Christianity and Corporate Purpose

I've posted a new article to SSRN: Christianity and Corporate Purpose (December 1, 2019): https://ssrn.com/abstract=3496850

This essay is a chapter in a forthcoming book on law and Christianity. It compares and contrasts the law governing corporate purpose with the pertinent Christian teachings from Scripture and Tradition, with a special focus on catholic social thought.

Keywords: Corporate law, corporate purpose, corporate social responsibility, religion, Catholicism, Christianity, Catholic social thought

"Is There Real Virtue Behind the Business Roundtable’s Signaling?"

Economists Aneesh Raghunandan and Shiva Rajgopal have a great op-ed in today's WSJ:

The Business Roundtable made a big splash in August by “modernizing its principles on the role of a corporation.” No longer stressing the unique importance of maximizing shareholder value, the organization got 181 CEOs to sign a statement outlining a corporate commitment to various “stakeholders,” of which shareholders are only one, listed alongside customers, employees, suppliers and communities.

Why did they sign? We see two possibilities. Either they are genuinely committed to lead in socially conscious business practices, or they are trying to pre-empt criticism. One way to determine which explanation fits better is to compare the behavior of publicly listed signatory firms to that of public nonsignatory firms in the same industries, matched by firm size and financial performance.

They find four reasons to think that signatory firms are less socially responsible than non-signatories:

1. More violations of federal compliance.
2. Increase in share buybacks.
3. Larger market shares.
4. Weaker association between CEO compensation and stock-return performance.

They conclude:

These findings suggest that Business Roundtable signatories aren’t leaders in socially conscious environmental, social or governance practices or stakeholder orientation.

States extending or suspending statutes of limitation for priest abuse scandals again

Crux reports:

At the end of another long day trying to sign up new clients accusing the Roman Catholic Church of sexual abuse, lawyer Adam Slater gazes out the window of his high-rise Manhattan office at one of the great symbols of the Church, St. Patrick’s Cathedral.

“I wonder how much that’s worth?” he muses.

Across the country, attorneys like Slater are scrambling to file a new wave of lawsuits alleging sexual abuse by clergy, thanks to rules enacted in 15 states that extend or suspend the statute of limitations to allow claims stretching back decades. Associated Press reporting found the deluge of suits could surpass anything the nation’s clergy sexual abuse crisis has seen before, with potentially more than 5,000 new cases and payouts topping $4 billion.

I have been a consistent advocate of Church reforms intended to prevent sexual abuse by priests and other church officials. See my article Enhanced Accountability: The Catholic Church’s Unfinished Business, 53 University of San Francisco Law Review 165 (2019); available at SSRN: https://ssrn.com/abstract=3421795.

But I am also a strong advocate of statutes of limitation. It's important to remember that the Church has gotten its act together. Ninety-nine percent of newly reported cases occurred before 2000. So we're talking about decades-old cases. And there's a lot of good reasons why we generally don't allow cases to be brought decades after they allegedly occurred. See my memorandum against SB 131, which I wrote the last time California decided to throw the whole concept of fundamental fairness under the bus:

By extending the period within which suits may be brought indefinitely, and thus raising the specter of litigation based on decades-old events, SB 131 is completely antithetical to the proposition that litigation should be based on “reasonably fresh evidence.”  ...

SB 131 breaks faith with assurances given by the Legislature 10 years ago when it enacted SB 1779 (Burton), a one-time, one-year lifting of the statute of limitations for all of 2003 that allowed any victim of sexual abuse — regardless of how long ago it occurred — a second chance to file a lawsuit. SB 131 thus would revive claims for an unprecedented third time. ...

SB 131 is further flawed by its fundamental unfairness. SB 131 covers incidents of abuse that may have taken place in private schools, not public schools, so the 92 percent of California children who attend public schools aren’t covered. This discriminates against both public school children and operators of private schools. Why do public schools and teachers get a free ride, while their students get no relief and their private school counterparts face potentially staggering liability?

The financial impact cannot be ignored. As I pointed out in my law review article, The Bishop's Alter Ego: Enterprise Liability and the Catholic Priest Sex Abuse Scandal,(9) unlimited liability exposure for the Catholic Church will "impede, if not destroy, the ability of these ministries to serve the needs of their congregants. Indeed, the mere threat of liability might do so: 'Both church and society will suffer if the continuation of ministries prompted by compassion — ministries often involving risks — is stopped short by the nervous calculation of legal liabilities.'” (10)

As such, SB 131’s elimination of statutes of limitation raises serious concerns about the ability of religious organizations to freely exercise their religion, and thus has very serious implications for the free exercise rights that are supposed to be protected by the First Amendment.

The usual suspects--the trial lawyers, their front groups masquerading as victim representation advocates, and their anti-Church academic enablers will scream that I am being insensitive. While victims of decades-old cases deserve our sympathy, I am not sure we should bankrupt the Church to enrich trial lawyers bringing cases that are often suspect:

The problem is particularly acute in the area of childhood sex abuse litigation, where so-called “recovered memories” are often at issue. As courts have recognized, the length of time between the alleged event and the recovery of the purported memory is highly relevant to the credibility of that memory, with longer time periods being associated with reduced credibility. In addition, courts have recognized that “the presence or absence of objective, verifiable corroborative evidence of the event” is critical in assessing the credibility of a recovered memory. All too many of the cases authorized by SB 131 [and these new bills] likely will be so old that the defense may be unable to obtain evidence to challenge the credibility of purported recovered memories.