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California's Racial/Ethnic Quota Bill Is Amended To Expand Definition Of "Underrepresented Communities"

Keith Paul Bishop has the details.

The Bainbridge Hypothetical Makes it into the National Law Review

From the National Law Review:

The problem of stakeholderism is brilliantly illustrated by the eponymous Bainbridge Hypothetical:

"[S]uppose that the board of directors is considering closing an obsolete plant. The closing would harm the plant's workers and the local community.  However, the closing would benefit shareholders, creditors, and employees at a more modern plant to which the work previously performed at the old plant would be transferred.  Moreover, the closing would benefit 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 to this otherwise difficult situation--close the plant.  The alternative to following the shareholder wealth maximization norm would, on the other hand, force directors to struggle with indeterminate balancing standards. In turn, such standards would deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, thereby raising the transaction costs of corporate governance."

BTW, it turns out that post was from Keith Paul Bishop.

Dorothy Lund's Passive Investing and Corporate Governance: A Law and Economics Analysis

I love literature reviews and wish more legal academics did them. Dorothy Lund's new chapter on passive investing for the Encyclopedia of Law and Economics is an excellent example of how a critical review of the literature can strengthen our understanding of a field.

Abstract: An important debate in corporate governance is whether passive funds — a term that includes ETFs and index funds — have incentives to provide adequate oversight of their portfolio companies. One set of scholars contends that agency cost problems likely thwart passive fund stewardship for several reasons. First, passive funds suffer from an acute collective action problem because any investment in improving the performance of a company will benefit all funds that track the index equally, while only the activist fund will incur the costs. Indeed, these scholars point out that investments in stewardship are particularly costly for the passive fund portfolio manager, which lacks the firm-specific information necessary to participate in governance in a beneficial way. Second, passive fund portfolio managers may have inadequate incentives to invest in beneficial stewardship because they capture only a small fraction of the gains. And third and finally, passive fund portfolio managers have ample incentive to be excessively deferential to management, who are often their clients. These scholars conclude that because of these flawed incentives, the rise of passive investing portends economic harm and justifies wide-ranging regulatory intervention — from incentivizing passive fund stewardship, to restricting passive fund voting rights. Another set of scholars contend that passive fund stewardship is likely to be as good as, if not better than, stewardship by other investors. They contend that passive funds compete for investor dollars not just against other passive funds, but also against actively managed mutual funds. This competition provides an incentive for passive funds to invest in stewardship that will attract asset inflows. In addition, the large size of the institutional investors that offer passive funds affords them economies of scale and scope in stewardship. And because these large institutional investors have massive stakes in portfolio companies, capturing even a small fraction of any gain will substantially increase their take home pay, providing an incentive to be engaged for a small number of material votes that occur each year. These scholars contend — in the words of Adam Smith, and later, Jack Bogle — that the invisible hand is all that is needed. This is a chapter from the forthcoming Encyclopedia of Law and Economics (Adam Badawi, ed., 2nd edition 2020).

Keywords: Mutual Funds, Passive Funds, ETFs, Index Funds, Corporate Governance, Law and Economics, Corporate Law

JEL Classification: K22, K20, K2

Lund, Dorothy S., Passive Investing and Corporate Governance: A Law and Economics Analysis (June 9, 2020). Available at SSRN: https://ssrn.com/abstract=3623381 or http://dx.doi.org/10.2139/ssrn.3623381

Making Sense of The Business Roundtable’s Reversal on Corporate Purpose

Bainbridge, Stephen Mark, Making Sense of The Business Roundtable’s Reversal on Corporate Purpose (July 30, 2020). UCLA School of Law, Law-Econ Research Paper No. 20-03, Available at SSRN: https://ssrn.com/abstract=3664078

Abstract: In August 2019, the Business Roundtable (BRT) issued a statement on the purpose of the corporation in which it reversed a longstanding position. Since 1978, the BRT has periodically issued statements on Principles of Corporate Governance, which purport to summarize law and best practice in this area. Since 1997, all versions of those statements had embraced the view that corporations exist primarily to serve their shareholders. In contrast, the 2019 version contains a much broader conception of corporate purpose, which posits that corporations should “commit to deliver[ing] value to all of” the corporation’s stakeholders.

Obviously, the BRT cannot unilaterally change the law. As this article explains, the law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and maximize profits for those shareholders.

What people do matters more than what they say. To date, the evidence is most BRT members remain committed to shareholder value maximization, despite their recent rhetoric to the contrary. This should not be surprising. The incentive structure faced by directors and managers still skews in favor of shareholders.

Why then did the BRT shift position? This article suggests two possibilities. First, the members may be engaged in puffery intended to attract certain stakeholders for the long-term benefit of the shareholders. Specifically, they may be looking to lower the company’s cost of labor by responding to perceived shifts in labor, lower the cost of capital by attracting certain investors, and increase sales by responding to perceived shifts in consumer market sentiment. They may also be trying to fend off regulation by progressive politicians. Second, some BRT members may crave a return to the days of imperial CEOS.

This article is a response to Jeffrey M. Lipshaw, The False Dichotomy of Corporate Governance Platitudes, Journal of Corporation Law (forthcoming).

Keywords: corporate law, corporate social responsibility, ESG, board of directors, corporate purpose

JEL Classification: K22, M14

Does California Corporate Law Really Look "Pretty, Pretty Good" Compared to Delaware?

I have developed tremendous respect for Keith Paul Bishop, whose blog on California corporate and securities law is essential reading, but I must respectfully dissent from his recent suggestion that California law looks "pretty, pretty good" compared to Delaware law.

The gist of his argument is that Delaware corporate law has become overweighted "with its intricate distinctions and interpretations.  At some point, this may prove to be Delaware's undoing as the law becomes just too inaccessible for most practitioners and their clients." In contrast, "California courts have not adopted in reported decisions many of Delaware's most famous decisions."

What Keith sees as a potential weakness, I think of as a strength. Delaware law is extremely detailed, which means a good lawyer can almost always--not 100% of the time, but close--come up with an answer to a client's question. In contrast, California corporate law is remarkably sparse and underdeveloped. Even experienced lawyers often have trouble finding clear answers to very basic questions.

• "Given the dearth of California case law, the California trial courts frequently look to Delaware law and apply their own interpretation of Delaware case law, even though no California precedent indicates that such borrowing is appropriate." Jeffrey S. Facter, Fashioning A Coherent Demand Rule for Derivative Litigation in California, 40 Santa Clara L. Rev. 379, 383 (2000)
• "Delaware now has a more robust canon of case law regarding corporate issues, leading to predictability of legal outcomes." -- Bryan Springmeyer
• In comparing incorporation of a startup in California or Delaware, DLA Piper notes "Delaware's well-developed body of corporate law."

A brilliant flow chart of Delaware corporate law standards of review

I wish I had done this, but I am glad to have found the brilliant flowchart by 3 Troutman lawyers accurately summarizing Delaware law standards of review.

H/T: Keith Paul Bishop

UCLA School of Law announces that Fall 2020 will be almost exclusively remote learning

Dean Jennifer Mnookin announced the policy in a lengthy letter to the faculty, students, and staff. Here's the key point:

Given the current situation surrounding the COVID-19 pandemic, especially here in Southern California, I have made the decision, with the approval of our Executive Vice Chancellor and Provost, that our fall semester’s courses at the law school, with very limited exceptions possible for a small number of live-client experiential classes, will be entirely remote. ...

It's worth reading the whole thing.

My new UCLA Law Colleague Andrew Verstein elected to the American Law Institute

I am delighted to report that my friend and new UCLA Law colleague Andrew Verstein has been elected to the American Law Institute, which drafts restatements of the law and other resources for legal scholars, judges and practitioners. An outstanding recognition for this brilliant young scholar.

New UCLA Law Faculty

Six leading scholars join UCLA Law’s faculty in 2020-21: Mario Biagioli, an expert in law, science and technology; Kimberly Clausing, a prominent voice in international trade and public finance; Meirav Furth-Matzkin, who explores the meeting of contract law, consumer protection and regulation; Jonathan Glater, who examines how the law both enables and acts as a barrier to access to higher education.

Great additions all, but I'm especially pleased that we hired Fernán Restrepo, who trains his empirically based research on corporate law in the context of financial and non-financial companies and Andrew Verstein, an authority in contract law, corporate law, and securities regulation and litigation.

Padfield on Lipshaw on Corporate Purpose

Stefan Padfield writes:

Jeffrey Lipshaw has posted "The False Dichotomy of Corporate Governance Platitudes" on SSRN.  I have set forth the abstract below.  I had the pleasure of reading an early draft, and I highly recommend the paper.  Among other things, Jeff brings a level of practical experience to the topic ("more than a quarter century as a real world corporate lawyer and senior officer of a public corporation") that makes his views a must-read.  Having said that, my own view is that the “shareholder vs. stakeholder” debate is meaningful even if it only really matters in "idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised."

In 2019, the Business Roundtable amended its principles of corporate governance, deleting references to the primary purpose of the corporation being to serve the shareholders. In doing so, it renewed the “shareholder vs. stakeholder” debate among academic theorists and politicians. The thesis here is that the zero-sum positions of the contending positions are a false dichotomy, failing to capture the complexity of the corporate management game as it is actually played. Sweeping and absolutist statements of the primary purpose of the corporation are based on arid thought experiments and idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised. In the real world, management regularly commits itself to multiple competing constituencies, including the shareholders.

There are three arguments. The first is from reality, borne out by a survey of pre-amendment CEO annual report letters to shareholders (2017) and post-amendment responses (2020) to the COVID-19 pandemic. The second is from economics. Neo-classical economic theory supporting the doctrine is misplaced; transaction cost analysis under the New Institution Economics does a far better job of explaining the primacy of wide corporate discretion in allocating surplus among the corporate constituencies. The third is from jurisprudence. Doctrinal dicta like “corporations exist primary to maximize shareholder wealth” are not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.

Watch this space for a related announcement coming soon.

Huli Huli Chicken with Coconut Lime Rice in a Multicooker

Buy 1 broiler-fryer organic, free-ranger, air chilled chicken. Break it down into quarters. Save the wings and backbone for making stock.

Marinade and Basting Sauce

• 1/4 cup ketchup
• 1/4 cup soy sauce
• 1/4 cup organic honey (I like to use 5 tablespoons of local wild honey with 1 tablespoon of Manuka honey
• 3 tablespoons Worcestershire sauce
• 2 tablespoons dark sesame oil
• 1 teaspoon (or more) Siracha
• 2-3 cloves garlic, crushed
• 1 tablespoon grated ginger
• 5-10 grinds black pepper
• 1 teaspoon garlic powder
• 1 teaspoon onion powder
• 1 teaspoon ground ginger
• 1 teaspoon paprika

Whisk the marinade ingredients together in a medium mixing bowl and dish out about 2/3 of a cup to reserve for basting. 

Add chicken quarters to the mixing bowl and turn several times to coat. Place in refrigerator for 1-3 hours. Turning occasionally.

Preheat your gas grill on high. Light some wood pellets in your A-MAZE-N 6 Inch smoker tube and light. After pellets have burnt for about 10 minutes, if the flames haven't gone out on their own, blow them out. Be careful!

When the grill is hot, turn the middle burner off and reduce the outer burners to  grill to medium. Turn chicken in marinade one last time, shake off excess marinade, and place chicken in a grill basket that you pre-lubricated with cooking spray.

Add grill basket to grill bone side down. Grill about 35 minutes or until the thigh meat is about 170°. Turn about every 10 minutes, basting each time.

Multicooker Coconut-Line Rice

I used my 6-quart Fagor multicooker, which is now sold under the Zavor brand name.

1. 1 cup uncooked Basmati or long grain white rice, rinsed
2. 1 and ¼ cups coconut water
3. juice of 1 lime
4. ½ tablespoon grated ginger
5. ½ teaspoon garlic powder
6. ½ teaspoon sea salt
7. ¼ teaspoon ground black pepper
8. white parts of 2 green onions, sliced thinly

• 2 tablespoons shredded coconut
• green parts of 2 green onions, sliced thinly
• ¾ cup roasted and salted cashews

Combine first 8 ingredients in the pot of your multicooker. Close cover. See valve to pressure. Turn on white rice program. When program is finished, do a 10 minute natural release.

Garnish with last three ingredients right before serving.

More evidence that much (most?) CEO social activism is window dressing not social justice warriorism

HomRoy, Swarnodeep, All That Is Left to Say: Why Are CEOs Speaking on Social Issues? (June 01, 2020). Available at SSRN: https://ssrn.com/abstract=3622605

Abstract: CEO social activism is increasingly common, but little is known about the motivations and the economic consequences. In this paper, I show that CEO social activism is linked to political polarisation in the US. Social activism is concentrated in states with higher within state political polarisation. I show that Republican-donor CEOs are 88% more likely to speak on social issues with a Democrat-slant. Using a sample of CEO activism events from 2014-2019, I find that CEO activism is associated with a 1.3% increase in firm value and a short-term increase in sales in the next quarter. The gain in firm value and growth in sales are higher for firms selling consumer goods and in highly competitive industries. These results suggest that CEO social activism is motivated by strategic reasons.

Material Adverse Effect Clauses in M&A: Is COVID-19 a Material Adverse Change?

Miller, Robert T., Material Adverse Effect Clauses and the COVID-19 Pandemic (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3603055 or http://dx.doi.org/10.2139/ssrn.3603055

This paper considers whether the COVID-19 pandemic, the governmental responses thereto, and actions taken by companies in connection with both of these constitute a “Material Adverse Effect” (MAE) under a typical MAE clause in a public company merger agreement. Although in any particular case everything will depend on the exact effects suffered by the company and the precise wording of the MAE clause, this paper concludes that, under a typical MAE clause, given the current tremendous contraction in economic activity, most companies will have suffered a material adverse effect as such term in used in the base definition of most MAE clauses. The question thus becomes whether the risks of a pandemic or of governmental responses thereto have been shifted to the acquirer under exceptions to the base definition. This paper considers some of the difficult causal questions that would arise in answering this question, including the relation of actions taken by the company to remain solvent while suffering the effects of COVID-19 and governmental lockdown orders, and concludes that, in some instances, a company will have suffered an MAE even if the MAE clause contains exceptions for pandemics, changes in law, or both.

Padfield on Politics and Corporate Governance

Stefan Padfield: The Specter of Political Bias Is Haunting Corporate Governancehttps://t.co/LcWLKkQnl2

— Professor Stephen Bainbridge (@PrawfBainbridge) July 22, 2020

Qualcomm latest company to be hit with shareholder derivative suit alleging various diversity-related board breaches of duty

I mentioned the other day that there appears to be an emerging trend of plaintiff lawsuits alleging that boards of directors have committed various breaches of fiduciary duty and/or disclosure obligations in connection with their companies' diversity or lack thereof.

The invaluable Kevin LaCroix brings word of yet another suit, this time targeting Qualcomm:

... a Qualcomm shareholder has filed a derivative lawsuit against the company’s board, alleging that the company’s directors violated their duties to the company and shareholders by falling short of stated objectives on diversity and inclusion and by falling to include a single African-American either on the board or among the company’s senior officers. The lawsuit against Qualcomm follows similar lawsuit filed earlier this month against Oracle and Facebook. A copy of the July 17, 2020 complaint against the Qualcomm board can be found here.

The complaint alleges that despite the company’s various public statements about the importance of diversity and inclusion, the company’s board includes no African-Americans (though it does include three women), and there are no African-Americans among the company’s top executives. Even the company’s Chief Diversity Officer is white. The company’s workforce is only 1.5% African American and the company has made no progress in increasing the number of African American employees since 2017. The problem, the complaint alleges, is that not just been lack of diversity but also discrimination against African Americans. ...

Like the complaints previously filed against Oracle and Facebook, this new complaint against Qualcomm is not directly tied to the current racial justice protests. There is no mention in the complaint to the Black Lives Matter movement. There is no reference to the complaint to the death of George Floyd or of the demonstrations and civil unrest that followed his death. However, the three complaint undeniably are linked to the current racial justice movement and are obviously being filed now because of the heightened visibility of racial diversity and inclusion issues as a result of the protests and demonstrations.

I am unaware of any cases determining whether either state law fiduciary duty claims or the federal disclosure claims of the sort brought here have merit. In any case, this is a very interesting development that bears watching.