ProfessorBainbridge.com

Unions and strikes

In re the strikes at #Instacart and #Amazon: my take on unions and strikes. It may surprise you. #InstacartStrike #AmazonStrike https://t.co/icjCMnDVCx

— Professor Bainbridge (@ProfBainbridge) March 30, 2020

Dodd-Frank's requirement that companies disclose the ratio of CEO to median employee pay hasn't worked

Knust, Lucas and Oesch, David, On the Consequences of Mandatory CEO Pay Ratio Disclosure (February 17, 2020). Available at SSRN: https://ssrn.com/abstract=3540009 or http://dx.doi.org/10.2139/ssrn.3540009

We examine the consequences of the highly anticipated and controversial Section 953(b) of the Dodd-Frank Act, which mandates companies to disclose the CEO-to-median employee pay ratio starting from 2018. We address endogeneity concerns by using a regression discontinuity design around the public float of companies. Contrary to one of the main arguments of the supporters of the rule, the disclosure requirement does not reduce CEO compensation. We also find no evidence that investors are substantially influenced by the disclosure since firms that disclose the ratio experience no change in investor attention and no change in say-on-pay voting outcomes.

High cost. Low benefit. Repeal it.

A purported list of changes in grading policies law schools are making in response to COVID19

You can find one here. There's a second list sorted by US News ranks here.

My WLF Legal Pulse column on federal forum selection clauses and Salzberg v. Sciabacucchi is now up

You can download it here.

Deal making in the COVID19 era

M&A: "Auctions are accelerating in case conditions worsen. Sellers are choosing cash upfront over higher offers; and they’re doing it all over video chat while pets and children roam in the background." #MnA https://t.co/LGj8mGHAqw

— Grace Maral Burnett (@BurnettGraceM) March 24, 2020

The Delaware Supreme Court's federal forum selection clause decision in Salzberg v. Sciabacucchi

I've just finished a short piece on Salzberg v. Sciabacucchi, (Del. Mar. 18, 2020), for the Washington Legal Foundation. Ann Lipton has written a lot on the issues involved and her initial blog post on the case is well worth reading. As somebody who is generally regarded as a nexus of contracts fellow, I was particularly struck by her discussion of the prominent ways in which corporate theory has featured in the litigation:

I think the contrast between the Supreme Court and Chancery decisions as a matter of corporate theory are quite striking.  The Chancery decision is a fairly stark example of the concession theory of the corporation: Laster makes very clear that Delaware, as sovereign, is intimately involved in establishing corporations, designing their operations, and articulating their limits.  The Supreme Court, by contrast, is a model of contracts theory; it treats the corporation as simply a private arrangement among its constituents, with few prohibitions on what that arrangement may entail.  I have been thinking about designing a corporate theory seminar; if it comes to fruition, I’ll likely include excerpts of both opinions.

Refuting the #BailOutPeopleNotCorporations hashtag

From Twitter:

The trending hashtag #BailOutPeopleNotCorporations is founded on a basic error; namely, reification. While it may be necessary to reify the corporation for semantic convenience, it can mislead.

Conceptually, the corporation is not a thing, but rather simply a set of contracts between various persons pursuant to which services are provided and rights with respect to a set of assets are allocated.

When we "bail out" a corporation, what we're really doing is redirected wealth from taxpayers as a whole to the subset of individuals who collectively make up the corporation. We thus have to make a decision: In a period of economic triage, is this group of people worth saving? Are the jobs of these employees worth preserving. Are the savings of these shareholders worth preserving?

Concomitantly, we need to consider the problem of agency costs. Corporations are not democracies. They are run by managers and executives. Hence, once we decide that a particular group of people is worth saving (in an economic sense), we need to ensure that managers and directors cannot divert the "bail out" funds from the desired goals. This is a non-trivial design problem. The TARP bail out in the financial crisis was not well designed. We need to do better this time.

Is the COVID-19 event a material adverse change for purposes of merger agreements?

In my Mergers and Acquisitions class, we discuss a material adverse effect clause that reads as follows:

"Company Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or would reasonably be expected to become, individually or in the aggregate, materially adverse to (i) the business, results of operations, prospects, condition (financial or otherwise), or assets of the Company and its Subsidiaries, taken as a whole, or (ii) the ability of the Company to consummate the transactions contemplated hereby on a timely basis; provided, however, that, for the purposes of clause (i), a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from: (a) changes generally affecting the economy, financial or securities markets; (b) the announcement of the transactions contemplated by this Agreement; (c) any outbreak or escalation of war or any act of terrorism; or (d) general conditions in the industry in which the Company and its Subsidiaries operate; provided further, however, that any event, change and effect referred to in clauses (a), (c) or (d) immediately above shall be taken into account in determining whether a Company Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such event, change or effect has a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses.

The absence of such an event is a closing condition, so that if such an event occurs one or both parties could invoke it to justify terminating the deal.

It occurs to me that the COVID-19 crisis raises a great hypothetical as to the application of the MAE clause,

It seems obvious that the economic devastation being wrought by the coronavirus pandemic is "an event ... that is ... materially adverse to the business, results of operations, prospects, condition (financial or otherwise), [and] assets of the Company." 

As I explain in my book Mergers and Acquisitions, however, courts put the burden on the party seeking to invoke the clause to show that the allegedly material adverse effect will be significant and lasting. Accordingly, such a clause is treated as “a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.” IBP, Inc. v. Tyson Foods, Inc. (In re IBP, Inc. S'holders Litig.)., 789 A.2d 14, 68 (Del. Ch. 2001). See also  Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch. 2008) (“The important consideration therefore is whether there has been an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.”).

At this point, most commentators seem to be assuming that the impact of the pandemic will be felt over months or even years rather than just a short period.

So the question is whether any of the provisos are pertinent. Provisos (b) and (c) are inapplicable on their face. But what about (a)? Recall that it provides that "a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from ... changes generally affecting the economy, financial or securities markets." A global pandemic like just such an event. But, as Gibson Dunn notes:

A pre-crisis MAE/MAC definition that makes no reference to COVID-19 (or even to pandemics or epidemics generally) may or may not be found to include the effects of COVID-19 in determining whether an MAE/MAC has occurred. In such cases, disputes may focus on whether definitional language that typically excludes general economic or market conditions and other broad based factors impacting the business climate or the target’s industry generally is sufficient to exclude the impact of COVID-19. Parties also may debate whether the potential impact of the virus was reasonably foreseeable at the time the agreement was signed or whether the impact is sufficiently long-lasting to be considered an MAE/MAC under applicable state law.

So if one of our parties wishes to invoke the MAE clause, they are going to have to prove that the event has had "a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses." I'm having trouble thinking of a company that would be disproportionately affected by the pandemic compared to other companies in the same industry. Suggestions?

One wonders whether transaction planners will start adding pandemics to the war/terrorism clause of the standard MAE clause. Paul Weiss predicts that "it is likely that sellers will negotiate for more specific references to pandemics and epidemics in the exceptions to the definition of an MAE, just as terrorism exceptions became more commonplace following the events of September 11, 2001." Gibson Dunn agrees:

... both buyers and sellers would be well-advised to negotiate explicit language to address COVID-19 risk-allocation in the context of an MAE/MAC provision. We have seen this practice followed in response to past crises. We have already seen a fair number of more recent agreements that specifically exclude the impact of COVID-19 (most often building on an exclusion for any “pandemic” or “epidemic,” and sometimes only if it does not disproportionately affect a party) from the scope of an MAE/MAC definition. Whether excluding it completely or specifying a quantitative or qualitative level of financial or operational impact from COVID-19 that, if reached, would give rise to an MAE/MAC, specificity will guard against unexpected results.

Senators dumping stock and the STOCK Act

JW Verret's article on the STOCK Act got noticed by Trader's Magazine. Kudos.

A sample of yours truly teaching SOX Legal Ethics from home during the coronavirus crisis using Zoom

Contrary to the proponents of stakeholderism, businesses are still putting shareholders first

The Business Roundtable's August 2019 statement on corporate purpose was hailed a signal that corporate CEOs had embraced a kinder, gentler capitalism in which the executives and the company's stakeholders would sit around singing Kum Bay Yah. According to an article in this week's The Economist, however:

The latest data on incentives suggest shareholders come first. The 20 [BRT-member] firms’ [studied in a paper by Lucian Bebchuk and Roberto Tallarita] non-executive directors earn an average 56% of their compensation in the form of equity stakes, which are by definition driven by shareholder value; 87-95% of their bosses’ pay is tied to performance. Only Duke Energy, Eastman and Marriott tie bonuses to a quantified stakeholder metric—and only in a limited way. Eastman includes three measures of employee safety, but it is up to the compensation committee to decide what weight to assign to each.

The firms’ hands may have been tied. Fully 70% of the brtstatement’s signatories are incorporated in Delaware, whose corporate law is shareholder-friendly. The state’s former chief justice goes so far as to argue in a recent article that “within the limits of their discretion, directors must make stockholder welfare their sole end”.

This need not be a problem .... Farsighted bosses have always known that promoting long-term shareholder value requires delivering for customers and treating workers and suppliers reasonably. It is unclear if the same can be said of championing fuzzy stakeholderism.

What do companies need to disclose (if anything) if their CEOs catch coronavirus?

Bloomberg:

Chief executives of big public companies, like most everyone else in the U.S., are at risk of exposure to the Covid-19 virus—but if a CEO tests positive, experts say that’s probably a “material risk” to shareholders. The big question is: What must executives and directors reveal, and when?

The report quotes securities law professor Tom Lin who thinks “it would be prudent for any CEO who’s been diagnosed with Covid to disclose it to their board, at minimum, and probably to their shareholders.”

I concur. Setting aside the question of prudence, what must a company disclose--if anything--if its CEO comes down with the coronavirus?

In Hines v. Data Line Sys., Inc., 787 P.2d 8 (Wash. 1990), the Washington Supreme Court dealt with a case in which a company's private placement memorandum risk factor analysis had stated that:

Dependance Upon Key Personnel. The performance of the Company depends upon the active participation of its officers, including Dale L. Peterson ... The loss of any of these qualified personnel could have a material adverse effect upon the Company....

Investors sued, claiming that defendants had violated the Washington State Securities Act’s antifraud provision by failing to disclose CEO Peterson's health problems. The defendants did not deny that the health was a material fact. Instead, the defendants argued that plaintiff should have to prove loss causation. The court rejected that argument, holding that proof of transaction causation sufficed.

Perhaps defendants felt they had to concede the materiality of the CEO's health in light of the risk factor disclosure. Absent such a trigger, however, would a CEO's health be a material fact that the company has an affirmative duty to disclose?

A 2018 corporate governance advisory (Corp. Gov. Adv. 777862 (C.C.H.), 2020 WL 777862) observes (in my view, correctly):

U.S. securities laws do not specifically mandate disclosure of a CEO's illness or other health-related information. Public disclosure of a CEO's health condition becomes necessary only when there is “a present duty to disclose” and the information is considered “material”—the framework applicable to non-public information generally. ...

... the determination of whether an executive's health issue is material is generally left to the board's judgment. Even then, there appears to be a gloss on the materiality test that weighs against disclosure when it comes to health information. Academics and commentators disagree about when a CEO's illness becomes material to investors and whether the U.S. Securities and Exchange Commission should mandate its disclosure.

There is a dearth of case law on point; neither courts nor the SEC have concluded that adverse information about a CEO's health was so material that (in hindsight) it should have been disclosed.

... Existing case law indicates that just because investors might like to know about the CEO's health, that does not mean the information is material.

Even if the CEO's health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, "[s]ilence, absent a duty to disclose, is not misleading ...." Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO's health, it would have a duty to correct that statement. But simply remaining silent about the CEO's health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.

Having said all that, there are some academic who think there should be such a duty, although they recognize that the law has not yet imposed such a duty. See, e.g., Jayne W. Barnard, Sovereign Prerogatives, 21 J. Corp. L. 307, 321-28 (1996) (discussing Time-Warner's failure to disclose Steve Ross's heart attack and prostate cancer); Tom C. W. Lin, Undressing the CEO: Disclosing Private, Material Matters of Public Company Executives, 11 U. Pa. J. Bus. L. 383, 387 (2009) (favoring "more meaningful, material disclosure and less privacy for executives").

I see arguments on both sides and am not convinced that there is a clear right answer. FWIW, my gut reaction favors privacy, but that's certainly not a compelling argument. 

Thoughts?

James Lindgren surveys the religious beliefs and practices of law professors and the results are depressing

Lindgren, James T., The Religious Beliefs, Practices, and Experiences of Law Professors (June 1, 2019). 15 University of St. Thomas Law Journal 342 (2019); Northwestern Public Law Research Paper No. 19-27. Available at SSRN: https://ssrn.com/abstract=3527017 or http://dx.doi.org/10.2139/ssrn.3527017

In the 1990s I surveyed law faculties at the top one hundred law schools, collecting data on professors’ religious affiliations. [Measuring Diversity: Law Faculties in 1997 and 2013, 39 Harv. J.L. & Pub. Pol’y 89 (2016), https://ssrn.com/abstract=2581675]

I found that Christians were represented at only about half their percentages in the larger population, while Jewish and nonreligious law professors were substantially overrepresented. Yet knowing whether a professor is, for example, Christian or Jewish only scratches the surface. For the general public, the General Social Survey and the American National Election Studies have long asked about belief in God and church attendance, but these questions had never before been asked of law professors.

This article reports the results of a 2017 survey of about 500 law professors. The study first updates the 1997 study on religious preference and then moves on to explore the issues of belief in God, church attendance, and religiously motivated discrimination. Law faculties are substantially less devout than mere reports of religious preferences would indicate. Though religious belief in the general population tends to fall with increased education, that phenomenon does not explain or account for the observed magnitude of the differences. For example, while 24 percent of law professors say that they “don’t believe in God” and another 18 percent “don’t know whether God exists,” among those in the general population who have graduate and professional degrees, only 5.4 percent do not believe in God and 10.4 percent do not know whether God exists.

While in this study higher percentages of Christians report religious discrimination than the non-religious, so do higher percentages of Jews and those who embrace “other religions.” As for their schools preferring non-Christians over Christians, Christians are much more likely to report this behavior than Jews or the non-religious, but the percentages reporting having witnessed this discriminatory preference are still relatively small.

The disparity between legal academics and the general populace with similar credentials is really quite striking:

"The harvest is abundant but the laborers are few"

 

Refining the debate over mandatory disclosure by separating the cases of primary and secondary markets

Andrew Abraham Schwartz has posted a very interesting new paper, which I think advances the ball significantly in the seeming dormant debate over mandatory disclosure. The gist of his argument is that we need to draw a "distinction between primary markets (where companies offer securities directly to investors) and secondary markets (where investors trade securities with one another)."

The two key economic concepts that undergird the modern theory of mandatory disclosure – agency costs and information underproduction – make good sense in the context of secondary markets.  But if we shift our gaze to the primary context, these two ideas become largely irrelevant.

First, agency costs arise only after the securities have been sold and the investors worry that management will run the company in its own interest, rather than for the benefit of shareholders.  The concept is irrelevant to the primary market, where promoters are trying to get investors to buy the securities at the outset.  In the primary market, there are no agents and hence no agency costs; they are a feature of the secondary market alone.

Second, information underproduction is largely a function of the secondary market only.  The idea here is that one company may have relatively easy access to information that would help participants in the secondary market more accurately assess the value of some other company or companies whose securities they trade.  Information underproduction has almost nothing to do with primary offerings, because new issuers rarely have the same quantity or quality of relevant market information as existing public companies, and because a primary offering is a one-time event.  Furthermore, promoters have powerful economic interests to divulge all the information that investors want, and thus there is likely little relevant company information missing from public view.

Highly recommended.

First legal test for California board of directors gender quota law today

Keith Paul Bishop reports:

Last August, I reported on the filing of a taxpayer challenge to California's Board Gender Quota Law.  Crest v. Padilla, Cal. Super. Ct. Case No. 19STCV27561. ...

The Secretary of State's demurrer will be heard on Monday by Superior Court Maureen Duffy-Lewis.  Secretary Padilla faults the plaintiffs with failing to plead specific facts alleging illegal expenditures sufficient to establish taxpayer standing under Section 526a of the California Code of Civil Procedure.  ...