ProfessorBainbridge.com

The Vatican's "lingering ambivalence on 'zero tolerance'"

John L. Allen Jr. has a really interesting article on Crux about the Vatican's "lingering ambivalence on 'zero tolerance'"

 

As some of you know, I've written a lot about legal aspects of the abuse crisis. See, e.g., Enhanced Accountability: The Catholic Church's Unfinished Business, 53 U.S.F. L. Rev. 165 (2019); The Bishop's Alter Ego: Enterprise Liability and the Catholic Priest Sex Abuse Scandal, 46 J. Cath. Leg. Stud. 65 (2007). But my work hasn't focused on zero tolerance policies, so that article triggered some new ideas that I'll be working on.

 

At first blush, it strikes me that the only persuasive argument against zero tolerance in this context is Sister Anna Deodato's argument that the work towards justice and peace in the context of the abuse scandal includes ensuring that the abusers are "accompanied in the journey of becoming more responsible, their request for forgiveness and reconciliation, and their psychological care and spiritual support.”

 

But it also seems to me that there is a version of zero tolerance that balances that concern with the overriding need to ensure that victims are protected and that abusers be removed from positions in which they could continue to commit abusive acts.

 

One might, for example, provide that, at the end of whatever secular punishment is imposed on the abuser, the abuser be sent to a remote monastery where they could receive psychological and spiritual counseling but be isolated from opportunities to abuse anyone ever again.

A Global Perspective on Say on Pay

An interesting comparison of the US and UK, which have say on pay, and Hong Kong and Singapore, which do not.

Todd Henderson inveighs against fossil fuel divestment

As longtime readers know, I am not a big fan of divestment campaigns. Neither is my friend and sometime coauthor Todd Henderson:

No matter what your views are on the climate change debate, no rational person should support divestment. There is no evidence to demonstrate it will do anything to help the climate, and it will ultimately cost the University hundreds of millions of dollars—Swarthmore estimates it would cost their endowment $200 million over 10 years to divest. This is money that could be spent on research, scholarships, or perhaps best of all for the cause, reducing the University’s carbon footprint.

Here is why divestment won’t work: A central tenet of corporate finance is that demand curves for individual stocks are approximately horizontal. For most things we buy, demand curves slope downward. This means if we demand less, less will be supplied and at lower prices, but stocks are not like other products. The stock price is merely an estimate of the cash flows that ownership of the stock will produce in the future, and therefore is not determined by a “demand” for the stock. Unless the sale of stock conveys information to the market about the future cash flows, no individual sale can move the price.

If the Office of Investments, which manages the University’s nearly $9 billion endowment, sells all of the shares it owns in ExxonMobil, the stock price of ExxonMobil should not change. Others will stand ready to buy the shares at the current market price, meaning supply and demand aren’t helpful ways to think about stock prices. Unless the money that ExxonMobil is expected to earn in the future goes down, the stock price will stay the same. And nothing about the decision of a few university endowments to sell the shares provides the market information about how much oil or coal will be sold at what prices tomorrow. Undervalued shares in the near term will be bought up until their price more or less reflects the expected gain from holding those shares. In an extreme case, ExxonMobil could simply go private, removing any need to rely on public markets for funding or valuation.

The fact that the stock price of divested companies will not fall means that these firms will not experience a higher cost of capital, and therefore nothing about their capital raising activities, project choice, or other decisions will be affected by divestment. Managers with stock-based compensation won’t be affected either nor will other shareholders of these firms. In short, the economic impact of the SJSF demands on the targets of their ire would be nearly zero.

Go read the whole thing.

A True Confession

I was eating some ramen soup today for lunch. Not the kind you get at a trendy noodle restaurant. Not the vegetarian, low sodium, non-GMO, probiotic, prebiotic, hippie brand kind my wife eats. I mean good old fashioned ramen soup of the kind I used to eat in grad school at the end of the month when my money had run out. You know the ones. They come in those little plastic wrappers and have a "seasoning packet" that's basically just a salt lick.

 

All of which leads to a true confession: I like that kind of ramen soup. (There goes my reputation as a foodie.) Worse yet, it's not the only kind of ersatz food I like better than the real stuff. Take, for example, American "cheese." In particular, Velveeta. It's not really cheese. But for some applications (see, e.g., cheeseburgers, grilled cheese sandwiches, eggs sandwiches), I prefer it to real cheese.

 

So any other foodie friends willing o step up to the plate and admit to their own ersatz preferences?

NOL Poison Pills to make a comeback?

Interesting post from some Cleary lawyers.

Is there a place in legal scholarship for lighthearted banter?

I'm working on a rebuttal to a reply to something I wrote about corporate purpose and I'm having a really hard time getting the tone right.

Donald Dripps once told me (back when we were both at Illinois) that in these situations one must go for the jugular. One must win. I wonder if he still feels that way (tag, you're up).

That seems both unpleasant and exhausting. I'm at a point in my career where if it's not fun, I'm not doing it.

So I just want to amuse myself and perhaps the reader, while still taking the subject seriously.

I want to be respectful of the opponent (who is a friend and has made some very good points), but I also want to be somewhat lighthearted and witty. Sort of like Bertie Wooster in his narrator voice (not his character voice) discussing corporate purpose at the Drones Cub.

It's turning out to be damned hard work and I may end up punting. But it'd be nice if there turns out to be a space for witty banter in serious scholarship.

About half of big businesses aren't ready for a possible second wave of COVID-19 cases

John Jenkins reports:

As the U.S. slowly reopens for business, we’re already hearing warnings that a second wave of the pandemic is likely heading our way in the fall. Since that’s the case, a recent Gartner survey finding that 42% of CFOs have not addressed a potential second wave in their planning for the remainder of the year is a little disconcerting. Here’s an excerpt:

A Gartner, Inc. survey of 99 CFOs and finance leaders taken April 14-19, 2020 revealed that 42% of CFOs are not incorporating a second wave outbreak of COVID-19 in the financial scenarios they are building for the remainder of 2020. Additional survey data showed that only 8% of CFOs have a second wave factored into all their planning scenarios, and only 22% have a second wave factored into their “most likely” scenario. The lack of planning comes even as CFOs express a cautious approach as to when they will fully reopen their operations and bring employees back to their normal office routines.

“As CFOs are attempting to project revenue and profits for 2020, it’s surprising that 42% are not baking a second wave of COVID-19 into any of their scenarios” said Alexander Bant, practice vice president, research, for the Gartner Finance practice. “Our latest CFO data also reveals that most executive teams are still trying to decide what factors they should use to determine how and when to reopen their offices and facilities.”

In fairness, this survey was taken a full month ago, and a lot has changed since then. But with the Covid-19 pandemic already spawning securities litigation, the potential lack of preparedness for a second wave presents governance and disclosure issues that may make attractive targets for plaintiffs.

The State of Shareholder Inspection Rights under Delaware Law

Friend of the blog (and of yours truly) Francis Pileggi has a great post on the state of the law under section 220.

Can a corporation opt out of Rule 14a-8?

Keith Paul Bishop notes that:

Phillip Goldstein, the co-founder of Bulldog Investors, has recently begun a campaign against a 2017 staff no-action position that has allowed trusts to exclude shareholder proposals when the trust documents forbid shareholders from voting on a matter “unless the matters covered by the proposal are among the enumerated matters specifically described in the Declaration of Trust or the Board was to declare a proposed action as being advisable and, in its sole discretion, direct that the matter be submitted to the shareholders for approval or ratification".  RAIT Financial Trust (March 10, 2017).  See Harvard Law School Forum on Corporate Governance, "Can a Public Company Effectively Opt Out of Rule 14a-8?", March 30, 2020.

While acknowledging that all of the no-action letters to date have involved trusts rather than corporations, Mr. Goldstein argues "there is no reason a corporation could not use it, e.g., by adopting a bylaw to limit proposals that shareholders may vote upon to those submitted by the board or mandated by statute". 

Keith goes on to note that there would be some question under California law as to the validity of such a bylaw.

But. assuming a state corporation law was deemed to allow such a bylaw, would federal law preempt it? The case that springs to mind is Securities and Exch. Commn. v. Transamerica Corp., 163 F.2d 511, 518 (3d Cir. 1947), in which the court was considering the implications of the company's Bylaw 47:

These by-laws may be altered or amended by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote threat, at any regular or special meeting of the stockholders if notice of the proposed alteration or amendment be contained in the notice of the meeting, or by a resolution adopted by the affirmative vote of a majority of the whole Board at a regular or special meeting, provided that the amendments so adopted shall first have been proposed by a resolution passed by the vote of a majority of the whole Board at its last preceding meeting and that the notice calling the meeting at which said amendments are to be and are adopted shall specify by designated number, the section or sections of the by-laws involved, and embody a copy of the section or sections proposed to be added or deleted, or in case it is proposed to amend any section or sections, ahll embody a copy of such section or sections in proposed amended form.

Transamerica took the position that Rule X-14A-7 (which is now Rule 14a-8) precluded shareholders from using the proposal rule to amend the bylaws. The court rejected that argument:

If this minor provision may be employed as Transamerica seeks to employ it, it will serve to circumvent the intent of Congress in enacting the Securities Exchange Act of 1934. It was the intent of Congress to require fair opportunity for the operation of corporate suffrage. The control of great corporations by a very few persons was he abuse at which Congress struck in enacting Section 14(a). We entertain no doubt that Proxy Rule X-14A-7 represents a proper exercise of the authority conferred by Congress on the Commission under Section 14(a). This seems to us to end the matter. The power conferred upon the Commission by Congress cannot be frustrated by a corporate by-law.

A 1971 Harvard Law Review Note observes that:

To be sure, some commentators have read SEC v. Transamerica Corporation for the broad proposition that the SEC can override state law by means of the shareholder proposal rule.²⁰ In that case a corporate bylaw arguably conferred on management virtually untrammelled discretion to decide which proposed bylaw amendments could be presented at shareholder meetings. The Third Circuit held that the bylaw granting discretionary power to the directors was, at least when applied “in all its strictness,”invalid under state law. But the court also indicated that even if the bylaw provisions had been proper under state law, it would nevertheless be invalidated by federal proxy rule 14a-8. Thus, the court seemed to conclude that where a corporate bylaw gave management power to exclude any proposed bylaw amendment from the shareholder meeting, rule 14a-8 would require inclusion of at least some proposed amendments even if management's power had been sanctioned by state law. The operation of rule 14a-8 could not be vitiated by management action even where that action had received the imprimatur of state law.

²⁰ See Bayne, Caplin, Emerson & Latcham, Proxy Regulation and the RuleMaking Process: The 1954 Amendments, 40 VA.L.REV. 387, 407-08 (1954); Gilbert, The Proxy Proposal Rule of the Securities and Exchange Commission, 33 U. DET. L.J. 191, 195 (1956).

Proxy Rule 14a-8: Omission of Shareholder Proposals, 84 Harv. L. Rev. 700, 704 (1971).

On the other hand, Jill Fisch much more recently has argued that Transamerica should be narrowly interpreted:

The court ... did not expressly find that Congress had authorized the SEC to override a charter provision or bylaw that had been adopted in compliance with state law.⁷³ In addition, the court did not explain whether its conclusion that Transamerica's position was “overnice” and “untenable”was based on its interpretation of Delaware law and, if so, what the basis was for that interpretation.

⁷³ Nor did it explain how this finding, which appears implicit in the court's conclusion, could be squared with the view that federal law deferred to the states to determine what issues were proper subjects for a shareholder vote.

Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129, 1146 (1993).

Susan W. Liebler goes even further, advancing an argument that would explicitly support the proposed bylaw:

I suggest that corporations adopt bylaw provisions placing reasonable restrictions on the ability of security holders to bring matters before a shareholders meeting. Transamerica does not preclude corporations from adopting bylaw provisions, which are valid under state law, to restrict the rights of shareholders to bring matters before the stockholders' meeting. First, the statement that bylaw provisions could not be used to thwart the shareholder proposal rule was dictum. Transamerica should be limited to its holding: rule 14a-8 requires inclusion of those shareholder resolutions which are proper subjects under state law, without regard to bylaw notice provisions. Second, since state law arguably would have prevented Transmerica's management from ruling Gilbert's motions out of order on the basis of a procedural technicality within management's control, Transamerica may stand for the proposition that no action which violates state law can be used to circumvent the rule. Finally, it is clear that the Commission's authority under the rule would not be frustrated by all state restrictions on the right of a shareholder to present resolutions at a shareholders meeting.

Congress did not preempt state corporation law when it enacted the Securities Exchange Act of Rather, the fundamental purpose of the securities laws is disclosure.The Commission cannot exceed the power granted it under section 14(a) of the Act by using its disclosure authority to legislate shareholder voting requirements. Of course, just as the Commission could not lawfully promulgate a rule requiring fifteen percent share ownership in order to call a special shareholders meeting, a state legislature could not enact a law that a corporation need not disclose in its proxy statement the nature of shareholder resolutions which it expects to be presented at the meeting. The latter would conflict with the Commission's lawful authority under section 14(a). Presumably, however, state law could preclude corporations from paying to insurgent groups any of their expenses, thereby requiring the corporation to charge for including shareholder resolutions in the proxy statement. Likewise, state law could impose or authorize minimum ownership requirements in order to bring a matter before the shareholders.

Susan W. Liebeler, A Proposal to Rescind the Shareholder Proposal Rule, 18 Ga. L. Rev. 425, 461–62 (1984).

To the extent that Liebler's argument depends on the SEC lacking authority to adopt Rule 14a-8, I must (regretfully) disagree:

The Commission's authority to adopt both its existing rules, especially the shareholder proposal rule, and the recently proposed reforms has been questioned. The Business Roundtable decision provides potent support for these challenges. It requires courts to determine whether a challenged rule is substantive or procedural. The court recognized the existence of a “murky area between substance and procedure,” which may resist classification. Nonetheless, the opinion offers a few signposts by which to resolve future cases. In particular, consider the distinction the court drew between rule 19c-4 and rule 14a-4(b)(2)'s requirement that proxies give shareholders an opportunity to withhold authority to vote for individual director nominees. In the court's view, the latter “bars a kind of electoral tying arrangement, and thus may be supportable as a control over management's power to set the voting agenda, or, slightly more broadly, voting procedures,” while “Rule 19c-4 much more directly interferes with the substance of what shareholders may enact.”

Rules addressing unfair solicitation procedures thus should pass muster. The rules on the form of a proxy card, discretionary authority, and mailing of insurgent materials, for example, plausibly relate to the Congressional goal of assuring procedural fairness in proxy contests. Each prevents management from using its control of the proxy solicitation process to manipulate the result of shareholder elections. As a means of preventing management coercion of voters, a confidential voting rule might pass muster as relating to the same sort of procedural unfairness.

The shareholder proposal rule presents a somewhat less compelling case. Even though full disclosure of all matters to come before a shareholders meeting was its original justification, at first blush the rule does not seem to advance either purpose of section 14(a). However, absent the rule, shareholders have no practical means of holding management accountable through the voting process or even affecting the agenda. As such, it too may be supportable “as a control over management's power to set the voting agenda.”

Stephen M. Bainbridge, The Short Life and Resurrection of SEC Rule 19c-4, 69 Wash. U.L.Q. 565, 621–22 (1991).

If I rewrote the article today, I'd put the case for Rule 14a-8 somewhat more strongly. For example, with respect to Dodd-Frank section 971's grant of authority to the SEC to mandate proxy access, I wrote that:

Section 971 probably was unnecessary. An SEC rulemaking proceeding on proxy access was well advanced long before Dodd-Frank was adopted, so a shove from Congress was superfluous. Although the SEC lacks authority to regulate the substance of shareholder voting rights, proxy access almost certainly fell within the disclosure and process sphere over which the SEC has unquestioned authority.

Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1802 (2011).

Is it really going to cost $24 million a week to reopen the UC system?

According to the UCLA Faculty Association blog, the answer is yes:

The Regents were told last week that testing for some kind of reopening during the coronavirus crisis would cost $24 million a week. Just the 10-week quarter for courses would be $240 million, and presumably you would have to have more than 10 weeks for exams and other functions. ...

From Calmatters: ...Dr. Carrie L. Byington, a top UC medical expert, pulled the curtain back on what campus re-openings would look like; the expenses are significant and the logistics complex. She said that she predicts that both COVID-19 cases and circulation of the flu will increase in the fall. Universal testing is unfeasible, said Byington, the executive vice president of UC Health, which includes five academic medical centers, a community-based health system and 18 health professional schools. With roughly 600,000 students, faculty and staff at the UC, weekly testing would cost the system $24 million a week because each test is $40. 

Absent a vaccine, I'm guessing my UC colleagues and I will be teaching online again in the Fall. Of course, if that results in declining student enrollment (especially international students), there'll be a major revenue hit. So we're screwed (if you'll pardon the vulgarity) either way.

Apropos of the vaccine qualifier, the UCLA FA also reports that:

Byington also shed light on a possible vaccine for COVID-19 in the form of a patch developed in conjunction with UC Davis. The hope is that the vaccine patch will go into clinical trials in the summer.  “Not only does it give us hope for having a vaccine, but also a mechanism to deliver that vaccine that would allow millions of people to receive the vaccine in their own homes, as the vaccine could be mailed, and they could place it on themselves in their own homes,” she explained.

Overlawyered closing its doors

Walter Olson has decided to bring his 21 years of blogging at Overlawyered to a conclusion:

I’ve been considering ceasing publication of Overlawyered over the past couple of years, and the time has finally arrived. I plan to publish its final post on May 31, ten days from now.

Walter's blog was one of those that inspired me to start my own blog. His site has been a must read since day one. It will be missed, even though he'll still be writing in plenty of other places:

I look forward to continuing my writing as a Cato senior fellow both at the excellent multi-contributor blog Cato at Liberty and at many other outlets.

I'm not the only one saddened at this development. Walter collected a slew of Twitter posts expressing how much people will miss his blog.

Are trial lawyers the reason we can't have anything nice?

My friend Jim Copland has a great op-ed in today's WSJ on how the trial lawyers killed off Johnson & Johnson baby powder using a combination of junk science and litigation hotspots with gullible anti-business jurors.

In other developed countries, regulators would apply the best science and essentially end the matter. But not in the U.S., where claims that a product causes an injury are typically matters of state law. An FDA determination that a product is safe doesn’t usually preclude litigation alleging otherwise. ...

Asbestos lawyers have Johnson & Johnson as their latest deep-pocketed corporate defendant. And a necessary one too, as other lawsuits bankrupted all the actual asbestos manufacturers long ago.

Mixed Motive Insider Trading

My friend and forthcoming UCLAW colleague Andrew Verstein has posted a really interesting new paper to SSRN:

If you trade securities on the basis of careful research, then you are a brilliant and shrewd investor. If you trade on the basis of a hot tip from your brother-in-law, an investment banker, then you are a criminal. What if you trade for both reasons?

There is no single answer, thanks to a three-way circuit split. Some courts would forgive you according to your lawful trading motives, some would convict you in keeping with your bad motives, and some would hand the issue to the jury. Sometimes called the “awareness/use” debate or the “possession/use” debate, the proper treatment of mixed motive traders has occupied dozens of law review articles over the last thirty years.

This Article demonstrates that courts and scholars have so far followed the wrong reasons to the wrong answers. Instead, this Article takes trader motives seriously, drawing on insights and solutions from the broader jurisprudence of mixed motive. This analysis generates a new legal test and demonstrates the test’s superiority.

Verstein, Andrew, Mixed Motives Insider Trading (March 21, 2020). Iowa Law Review, Vol. 106, 2020. Available at SSRN: https://ssrn.com/abstract=3558540 or http://dx.doi.org/10.2139/ssrn.3558540

Recommended.

University of California system to phase out the SAT and ACT at the undergraduate level: Is the LSAT Next?

The WSJ is outraged:

Applicants to the largest university system in the U.S. will now be judged entirely on how well they can flatter admissions bureaucracies with coached personal statements, as well as high school grade-point averages whose meanings are obscured by grade inflation. ...

The higher education business model was already under pressure before the coronavirus, and the recession may force deep cuts in the UC. The regents’ political move to compromise educational quality against faculty advice does not bode well for the future of a system that for decades was an engine of opportunity.

I must confess that this is not an issue I have followed closely and I'm certainly not prepared to assume it'll either be a disaster or a huge success.

Instead, I'm mostly curious as to whether the anti-standardized testing activists who successfully lobbied the Regents on undergraduate admissions testing will turn their attention to graduate and professional schools. Will the LSAT likewise be thrown out?

ASU has already dropped the LSAT. According to Inside Higher Ed, Oregon "may admit up to 10 percent of an entering class without requiring the LSAT from students in an undergraduate program of its own institution, who scored at or above the 85th percentile on the ACT or SAT and who are ranked in the top 10 percent of their undergraduate class through six semesters of academic work, or achieved a cumulative grade point average of 3.5 or above through six semesters of academic work."

And, of course, the coronavirus wreaked havoc on this Spring's testing.

I last looked at the data over 20 years ago, at which time it seemed to me that the LSAT did a reasonably good job of predicting first year law school grades but not ultimate class standing or bar exam passage. So, on the merits, it's not a hill on which I would be prepared to take a last stand.

Having said that, I can't imagine many law schools volunteering to abandon the LSAT as long as mean LSAT scores factor into US News rankings.

A Public Health Framework for COVID-19 Business Liability

New article by Daniel Hemel and Daniel Rodriguez:

Businesses that reopen amid the COVID-19 pandemic face possible legal liability to customers and workers who contract the novel coronavirus as a result of those enterprises’ operations. Federal and state lawmakers are actively considering proposals to narrow or expand the scope of such liability. These proposals have important implications not only for economic activity but also for public health. This article presents an analytical framework for evaluating liability regimes in the context of a communicable and deadly disease. The framework highlights the contrasting public-health consequences of liability before and after a customer or worker is exposed to the virus. Ex ante (before an exposure), the specter of liability generates incentives for businesses to take precautions that reduce the risk of virus transmission. Ex post (after an exposure), fear of liability may deter businesses from proactively informing customers and workers that they have been exposed to the virus through the business’s operations. The desire on the part of businesses to spare themselves from litigation may interfere with comprehensive contact-tracing efforts. To minimize the potentially perverse ex-post consequences of liability without sacrificing significant ex-ante benefits, the article proposes a limited safe harbor from liability for businesses that promptly contact customers and workers after learning about a possible exposure. The article also suggests changes to workers’ compensation rules that are designed to strike a balance between ex-ante benefits and ex-post costs.

Recommended.