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Forthcoming: Rethinking Securities Law by Marc I. Steinberg

Marc Steinberg is one of the preeminent securities law scholars in the country. His new book Rethinking Securities Law should be a strong candidate for the law book of 2021.

From Amazon:

The system of securities regulation that prevails today in the United States is one that has been formed through piecemeal federal legislation, Securities and Exchange Commission (SEC) invocation of its administrative authority, and self-regulatory episodic action. As a consequence, the presence of consistent and logical regulation all too often is lacking. In both transactional and litigation settings, with frequency, mandates apply that are erratic and antithetical to sound public policy. This book focuses on "rethinking" the securities laws, with particular emphasis on the Securities Act and Securities Exchange Act.

In 1978, the American Law Institute (ALI) adopted the ALI Federal Securities Code. The Code has not been enacted by Congress and its prospects are dim. Since that time, no treatise, monograph, or other source comprehensively has focused on this meritorious subject. The objective of this book is to identify the deficiencies that exist under the current regimen, address their failings, provide recommendations for rectifying these deficiencies, and set forth a thorough analysis for remediation in order to prescribe a consistent and sound securities law framework. By undertaking this challenge, the book provides an original and valuable resource for effectuating necessary law reform that should prove beneficial to the integrity of the U.S. capital markets, effective and fair government and private enforcement, and the enhancement of investor protection.

This will be a must read for business lawyers and scholars.

Using Insider Reverse Veil Piercing to Vindicate the Free Exercise Rights of Close Corporation Shareholders

Kent Greenfield and Daniel Rubens want courts to invoke the legal fiction of corporate personhood to frustrate the free exercise rights of close corporation shareholders (although they frame the issue somewhat differently):

Corporations increasingly assert the right to discriminate, based either on free speech claims, religious freedom claims, or statutory claims arising from the Religious Freedom Restoration Act. Such claims have been considered by the Supreme Court in Hobby Lobby (RFRA) and Masterpiece Cakeshop (First Amendment), and in both cases the Court held in favor of the business.

In neither case, however, did the Court address a fundamental flaw with the arguments of the company asserting the speech and religion claims: that the claims depend on the rejection of corporate personhood. The putative religious and speech claims arose not from the beliefs of the companies but of their dominant shareholders. But corporate “personhood” means the interests of the firm are distinct from those of the shareholders. Allowing companies to assert the beliefs of shareholders as their own contradicts established doctrine and risks corporate manipulation of regulations designed to be generally applicable.

Greenfield, Kent and Rubens, Daniel, Corporate Personhood and the Putative First Amendment Right to Discriminate (April 29, 2021). Forthcoming in the Research Handbook on Corporate Purpose and Personhood (Elizabeth Pollman & Robert B. Thompson, eds.,Edward Elgar Publishing),  https://ssrn.com/abstract=3836962

As long time readers know, I am not a far of either veil piercing or reverse veil piercing in its role as a corporate law doctrine. To the contrary, I have urged its abolition as a corporate law doctrine.

But the fact that a doctrine is not fit for one purpose does not mean that the doctrine may not be fit for another purpose.

I believe that insider reverse veil piercing makes sense as a constitutional law doctrine. Indeed, in this context insider reverse veil piercing is the only doctrinal way of deciding when a corporation's shareholders may assert their free exercise rights when the state infringes on those rights by regulating their corporation.

I was prompted to examine this issue by a colloquy between U.S. District Court Judge Reggie Walton and Department of Justice lawyer Benjamin Berwick in Tyndale House Publishers, Inc. v. Sebelius, which was one of the cases that led up to the Holly Lobby decision:

Berwick argued that employers who chose to incorporate their business are precluded from raising First Amendment free exercise of religion-based objections to regulations affecting their business. In response, Judge Walton posed the following hypothetical:

[M]y wife has a medical practice. She has a corporation, but she’s the sole owner and sole stock owner. If she had strongly-held religious belief and she made that known that she operated her medical practice from that perspective, could she be required to pay for these types of items if she felt that that was causing her to violate her religious beliefs?

Berwick replied that the corporation and its shareholders are separate legal persons. The judge thereupon summarized his understanding of the government’s position as being that his wife would “have to go as an individual proprietor with no corporation protection in order to assert her religious right.” Berwick did not contest that characterization.

I find Berwick (and the government's) position on this issue nonsensical. According to Berwick, a sole proprietor could raise a valid free-exercise-based challenge to the mandate, but otherwise identically situated businesspersons who had incorporated their company lose the ability to do so. Talk about elevating form over substance, which often makes sense in a transactional setting but makes no sense when fundamental rights are at issue. Remember we dealing here with a right the Founders expressly embedded in the very first amendment to the Constitution.

Insider reverse veil piercing is the only doctrinal option that allows courts to make the sort of fine distinctions that are at issue here. As I explain in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers (March 6, 2013). The Green Bag, Vol. 16, No. 3, Spring 2013,  https://ssrn.com/abstract=2229414. In it, I assert that:

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case.

I proposed a three-pronged version of RVP that should be adopted in the mandate cases:

Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?

How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?

Would reverse piercing this corporation’s veil advance significant public policies?

I elaborated that a court would balance a number of factors:

• Veil piercing is a close corporation doctrine.  In this context, in particular, a public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate. 
• Do the corporation’s articles of incorporation include a statement of purpose referencing religious beliefs and goals? 
• Is the ownership structure of the corporation designed to ensure continuity of its religious purposes even after the original founders have retired or died? 
• Are the directors and officers of the corporation obliged to share the founders’ religious beliefs? If so, are they required to document that fact, such as by signing a statement of faith? 
• Are religious practices such as devotions, prayer, scripture reading, or worship services routinely made a part of corporate meetings? 
• Are such practices made available to employees?
• Is some substantial portion of the corporation’s profits donated to religious charities or otherwise used to advance the founders’ religious beliefs? The biblical concept of a tithe springs to mind here as a possible metric.

The more of these factors that a court finds to be present, the more willing the court should be to treat the corporation as the shareholder’s alter ego.

In Hobby Lobby, no less than 44 corporate law professors--including Greenfield--thought it necessary to file an amicus brief arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. My argument apparently so scared the 44 professors that their brief expressly tackled my argument, asserting that my “argument fundamentally misunderstands the reverse piercing remedy.”

In fact, it was the 44 professors' brief that was replete with errors, overstated claims, or red herrings, and misdirection. I took on the brief in  A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobbyand Conestoga Wood (February 21, 2014). 100 Virginia Law Review Online 1 (2014),  https://ssrn.com/abstract=2399638

My article ticked off a lot of problems with the brief, as the table of contents will suggest:

II. The Brief Overstates the Corporation’s Separateness From Its Owners

III. The Corporation’s Separate Existence Does not Always Protect Shareholders from Liability for Corporate Debts

IV. The Brief’s Attack on Reverse Veil Piercing is Overstated and Inaccurate

A. The Brief Misrepresents Hobby Lobby’s and Conestoga Wood’s Argument 

B. The Law Does Not “Strongly Oppose” Reverse Veil Piercing

C. The Brief’s Sleight of Hand Should Not Obscure the Important Policy Issues at Stake

D. The Supreme Court Should Invoke RVP-I to Prevent the Government from Continuing its “Shell Game”

E. Applying RVP-I in the Contraception Mandate Cases Would not be “Disruptive to Business”

1. Protecting the Minority Shareholders’ Interests is Straightforward 

2. The Brief’s Misleading Use of Cede & Co. v. Technicolor, Inc.

F. RVP is not Outcome Determinative 

G. Even Assuming RVP-I Would Give Hobby Lobby and Conestoga Wood a “Competitive Advantage,” They Would not be Alone 

H. RVP-I Will Not Lead to “Disruptive Proxy Contests” 

At bottom, however, my core objection goes to a point Douglas Laycock made that echoed Judge Walton's point:

Laycock observes that:

The threshold issue in Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties Corp. v. Sebelius is whether any plaintiff’s free exercise of religion is substantially burdened within the meaning of the Religious Freedom Restoration Act.

On that issue, the government’s argument is a shell game. Only the individuals have religious-liberty rights; only the corporations are regulated. And more: Even the individuals have no rights when they act or refuse to act as directors, officers, or managers of the corporation. Not only are the individuals separate persons from the corporation, but the individuals are divided into additional separate persons, depending on the capacity in which they act. This is formalism in the extreme.47

By advancing the same sort of extreme formalism, the Brief provides academic cover for the government's shell game.

In Barium Steel Corp. v. Wiley,the Pennsylvania Supreme Court allowed a RVP-I claim so as to prevent just such a shell game. In that case, the court allowed the plaintiff shareholder (itself a corporation) to pierce the veil in reverse to recover damages suffered by a later-created subsidiary due to a breach of warranty, on the grounds that absent RVP, the defendants would never be liable for their breach due to lack of privity with the sub and the fact that the sub was not an intended third-party beneficiary.The Supreme Court likewise should use RVP-I in this case to prevent just such a shell game.

As I have argued elsewhere, the corporation is not a real entity and to argue the contrary is “transcendental nonsense." The legal fiction of corporate personhood should not stand in the way of free exercise of religious belief by shareholders of a closely held incorporated business.

For more on veil piercing, see:

What do Delaware Vice Chancellor Sam Glasscock, Mr. Burns, and Col. Potter have in Common?

In Thomas Sweeney, et al. v. RPD Holdings Group, LLC, et al. [Dandrea Holdings], C.A. No. 2020-0813-SG, letter op. (Del. Ch. May 27, 2021), VC Glasscock explains that:

Fifteenth century Italian financier Lorenzo de Tonti promoted an investment vehicle that was a mix of joint tenancy, life insurance and the lottery. In the tontine, investors paid a sum into the vehicle that was never to be repaid. Instead, once the vehicle was subscribed, the investor received modest annuity payments. The payments for each unit were fixed. Nonetheless, the investment was attractive to investors of a sporting nature, because as each unit-holder died, his right to receive payments went not to his heirs, but was spread among the surviving unit-holders, so that the last alive received cumulative annuities that were large indeed.

1 See, e.g., Agatha Christie, 4:50 from Paddington (1957); see also The Simpsons: The Curse of the Flying Hellfish (Fox television broadcast Apr. 28, 1996).

The Chancery Daily reminds us of the pertinent Simpson's dialogue:

Burns: How many of you are familiar with the concept of a "tontine"?

[all stare at him, until Ox raises his hand]

Burns: All right, Ox. Why don't you take us through it?

Ox: Duh, essentially, we all enter into a contract whereby the last surviving participant becomes the sole possessor of all them purty pictures.

Burns: Well put, Oxford.

What came to my mind, however, was Mash S08E18 "Old Soldiers":

Sadly, I must relate that the opinion has very little to do with a tontine. It's a motion to dismiss for forum non conveniens.

Woke CEOs Who Objected to Georgia Voting Law May Just be Sleepwalking, as Henry Manne Predicted

Today's WSJ reported on a Senate hearing in which bank CEOs got slapped around by both Democrats and Republicans, albeit for different reasons. This part caught my eye:

Pennsylvania Sen. Pat Toomey, the top Republican on the panel, pressed the firms on their stated support for “stakeholder capitalism.” Mr. Dimon led a group of executives who in 2019 said corporate decisions should take all stakeholders—employees, customers and society at large—into account.

“I would just ask you to reconsider this because stakeholder capitalism is meant to diminish the importance of a company’s obligation to shareholders, relative to other stakeholders, and I think that’s a contradiction of the fundamental aspect of capitalism,” Mr. Toomey said. ...

Some questions generated an awkward silence. Sen. Tim Scott (R., S.C.) pressed the executives to explain why some of their firms or executives signed a recent statement that expressed opposition to Republican-led voting bills in Georgia and other states.

Asked what specific portions of the Georgia law they objected to, none of the executives responded.

“It came out of our teammates…expressing grave concern,” Mr. Moynihan said.

You might almost think the CEOs had not familiarized themselves with the issues, but instead just echoed Democrat talking points.

Oddly enough, I've been reading the 1973 debate my dear friend and mentor the late Henry Manne had with Henry Wallich over corporate social responsibility. In it, Henry opined that:

Positive utility may be experienced by corporate executives either from the prestige and prominence that come from claiming to be "corporate statesmen," or it may come from removing some discomforting external pressure. Such pressures, coming either from one's business peers or from outside the business community, may create discomforts for corporate executives who do not conform to the standards demanded. ...

If a contribution, program or activity will free the relevant corporate executive from pressure and harangue by outside groups, such as the Project on Corporate Responsibility, other Ralph Nader supported groups, or various environmental protection groups, this may well be the use of funds which has the highest utility for that individual. As we have already noted, expenditures of this sort present little danger of adverse governmental or shareholder reaction, and thus to the extent that some positive utility is realized by the executive, it is also effectively concealed. ...

Another interesting implication of this theory of charitable giving is that it should make no great difference to the donor (realistically viewed as those in control of the corporation) whether or not the expenditures actually accomplish the purpose for which they are allegedly made. The important thing is that the contribution itself either gains the positive utility desired or relieves the donor of the disutility he is experiencing. In fact, as long as the contribution or activity is thought by its advocates to have the effect claimed for it, it will not be in the interest of the donor to expend any time or effort at all to find our what the actual result of the expenditure is. In other words, the satisfaction or utility will come from being seen to make the expenditure and not from the results allegedly purchased.

As applied to today's environment, we might infer that the bank CEOs don't really care about the voting rights of Georgians. Instead, what we're seeing is a form of greenwashing, in which the CEOs got to look like statesmen and appease their activist employees. Ironically, however, it doesn't;t appear to have bought them much credit with folks like Elizabeth Warren:

Sen. Elizabeth Warren (D., Mass.) criticized JPMorgan for collecting nearly $1.5 billion in overdraft fees in 2020. “You and your colleagues come in today to talk about how you stepped up and took care of customers during a pandemic, and it’s a bunch of baloney,” Ms. Warren said.

The Corporate Governance Mechanics of How ExxonMobil lost the Proxy Contest

A friend emailed this morning to ask:

Do you know what the mechanism was by which the dissidents were able to get two people on the Exxon board?

Of course I do.

As background, the WSJ reports that:

Exxon’s loss came at the hands of Engine No. 1, an upstart hedge fund owning only about 0.02% of the oil giant’s stock. It had waged an aggressive campaign challenging the company’s energy transition strategy and response to climate change, depicting it as a corporate dinosaur.

The vote at the company’s annual meeting capped a pitched, monthslong battle between the company and the activist to persuade Exxon shareholders, that turned into one of the most expensive proxy fights ever. ...

Engine No. 1 ran what is known as a short slate contest in which it nominated 4 candidates for election to Exxon's 12-member board of directors.

Exxon Bylaw Article 1 sec. 5 is a majority vote provision:

At a meeting of shareholders at which directors are to be elected and a quorum is present, a nominee for director shall be elected to the Board of Directors if the number of votes cast “for” such nominee’s election exceed the number of votes cast “against” such nominee’s election, excluding abstentions; provided, that directors shall be elected by a plurality of the votes cast if the number of nominees exceeds the number of directors to be elected at such meeting.

Exxon’s proxy statement explains that it worked as follows in this election:

Under ExxonMobil’s by-laws, in a non-contested election a director nominee must receive a majority of votes cast in order to be elected to the Board of Directors. However, the 2021 election is contested by Engine, which nominated four directors. As a result, there are 16 director nominees which exceed the number of directors to be elected, which is 12. In such a case, our by-laws provide for a plurality voting standard, which determines that the 12 persons who receive the greatest number of votes are elected to the Board for the following year.

Exxon has announced that:

Re-elected ExxonMobil directors were Woods, Michael Angelakis, Susan Avery, Angela Braly, Ursula Burns, Kenneth Frazier, Joseph Hooley and Jeffrey Ubben. Elected from Engine No. 1’s nominees were Gregory Goff and Kaisa Hietala.

The outcome was not yet determined for ExxonMobil director candidates Steven Kandarian, Douglas Oberhelman, Samuel Palmisano and Wan Zulkiflee, and for Engine No. 1 candidate Alexander Karsner. A fourth Engine No. 1 candidate, Anders Runevad, was not elected.

The interesting thing is that Exxon’s proxy card only listed its 12 candidates, while Engine No. 1’s proxy statement only listed its 4 candidates. If a shareholder returned an Exxon blue proxy card voting for 10 directors and also an Engine No. 1 white proxy card voting for two directors, only one would count. Engine No. 1’s proxy statement explains that:

THE ONLY WAY TO SUPPORT ALL FOUR OF ENGINE NO. 1’S NOMINEES IS TO SUBMIT YOUR VOTING INSTRUCTIONS “FOR ALL” THE NOMINEES USING THE WHITE PROXY CARD. PLEASE DO NOT SIGN OR RETURN A BLUE PROXY CARD FROM THE COMPANY, EVEN IF YOU INSTRUCT TO “WITHHOLD” ON THEIR DIRECTOR NOMINEES. DOING SO WILL REVOKE ANY PREVIOUS VOTING INSTRUCTIONS YOU PROVIDED USING THE WHITE PROXY CARD.

In order for the vote to come out as it did, I assume that a substantial number of shareholders returned the blue card voting for less than all 12 of Exxon’s candidates and a substantial number of other shareholders returned the white card voting for less than all of Engine No. 1’s candidates. As the WSJ reported, for example, "BlackRock Inc. backed three of Engine No. 1’s candidates" presumably by submitting the white proxy card with "for votes" for three of Engine No. 1's candidates. Interestingly, ISS had recommended a vote for three of Engine No. 1's candidates, but not all 4.

Many commentators argue that the process should be simplified by mandating a universal proxy card.  The Council of Institutional Investors explains:

When a director election has more nominees than available board seats, shareowners typically receive two versions of the proxy card: one from the company and one from the shareholder who nominated the alternative candidate(s). Each card provides a unique list of nominees, neither list is complete, and shareowners are prohibited from using both cards to vote. Thus, depending on the combination of candidates a shareowner supports, he or she may be disenfranchised.

"Universal" proxy cards solve this problem by listing all duly nominated board candidates, allowing shareowners to vote for the precise combination of nominees they wish to represent them. That precision is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. 

As of April 2021, the SEC appears to be on the verge of adopting a universal proxy rule. The SEC proposed a rule in 2016, about which CII has made available a brief FAQ. Since then the SEC Investor Advisory Committee and a special working group have added further support to the proposal's finalization. 

The Business Roundtable has offered 4 arguments against a universal proxy card:

1. The Proposed Rules May Disenfranchise Shareholders While Favoring Activist Shareholders Who May Be Driven By Self-Interest.

2. The Proposed Rules Will Likely Increase the Number and Frequency of Proxy Contests and Impede the Ability of Corporate Directors to Make Long-Term, Value-Driven Decisions.

3. The Proposed Rules Represent a Significant and Fundamental Shift Away From the Traditional Method of Electing Public Company Directors and Towards a Short-Term Focused Model. 

4. The Proposed Rules Exacerbate the Risk of "False Equivalency" Between Incumbent Directors and Candidates Nominated By Dissident Shareholders.

Delaware Chancery Court (per VC Slights) accepts outsider reverse veil piercing

Thread. But note that Slights is approving only of "outsider" reverse veil piercing. Not "insider" RVP. https://t.co/YhOcbo2QAG pic.twitter.com/xpY7o8Dt3l

— Steve Bainbridge (@PrawfBainbridge) May 25, 2021

On the distinction between insider and outsider reverse veil piercing, see https://t.co/EPFXkMBenm

— Steve Bainbridge (@PrawfBainbridge) May 25, 2021

In contrast, I am willing to accept insider reverse veil piercing at least as a matter of constitutional law. https://t.co/ayPZ4x4aHZ

— Steve Bainbridge (@PrawfBainbridge) May 25, 2021

Am I the Only One Who Thinks There is a Conflict Between Green Finance and Cryptocurrrency

Two articles in today's WSJ caught my attention. First, Green Finance Goes Mainstream, Lining Up Trillions Behind Global Energy Transition:

Some of the world’s biggest companies and deepest-pocketed investors are lining up trillions of dollars to finance a shift away from fossil fuels.

Assets in investment funds focused partly on the environment reached almost $2 trillion globally in the first quarter, more than tripling in three years. Investors are putting $3 billion a day into these funds. More than $5 billion worth of bonds and loans designed to fund green initiatives are now issued every day. The two biggest U.S. banks pledged $4 trillion in climate-oriented financing over the next decade. ...

But then there was Bitcoin Miners Are Giving New Life to Old Fossil-Fuel Power Plants:

Across America, older fossil-fuel power plants are shutting down in favor of renewable energy. But some are getting a new lease on life—to mine bitcoin. In upstate New York, an idled coal plant has been restarted, fueled by natural gas, to mine cryptocurrency. A once-struggling Montana coal plant is now scaling up to do the same. ...

The drive for power has its roots in bitcoin’s intractable mathematics: To operate securely, the cryptocurrency’s network relies on computers solving puzzles; in return the solvers get fresh bitcoin. The higher the bitcoin price, the more of these miners compete to solve the puzzles—a process that chews up electricity. The more competition, the harder the puzzles get and the more electricity is used.

A University of Cambridge index pegs the annual power consumption of bitcoin mining at around 130 terawatt-hours, more than three times higher than at the beginning of 2019. That would be more than the power consumption of Argentina.

The coal-fired Hardin Generating Station in Montana had been struggling for years. Late last year, a Nasdaq-listed miner called Marathon Digital Holdings Inc. MARA -4.57% partnered with Hardin’s owner to transform the power plant into a hub for mining bitcoin.

Here's what really hit me in this article:

The project is in the process of scaling up, with more than 100 megawatts of power capacity planned. Marathon Digital, whose investors include BlackRock Inc. and the hedge fund Renaissance Technologies LLC, said that by tapping the Montana coal plant, its break-even costs to produce a bitcoin will fall to $4,600, 38% less than previously. ...

BlackRock and Renaissance declined to comment.

This is the same BlackRock that claims fighting climate change is central to its business model.

AT&T Spin Off of Warner is the Latest Turn in the Sad Saga of Paramount Communications v. Time Inc.

In 1989, Time Inc. and Warner Communications, Inc., announced plans to merge. Before the deal could close, however, Paramount Communications, Inc., intervened with a cash tender offer for Time valued at $200 per share. Time responded by recasting the Warner deal as a tender offer and implemented various other efforts to ensure that Paramount would be unable to close its offer before Time could complete its offer for Warner. Since Paramount would be unable to raise funds to buy the combined Time-Warner entity, the restructured deal would put an end to Paramount's intervention.

When Paramount and Time shareholders challenged the restructured deal, Time's management justified its decision on grounds that pursuing the deal with Warner would in the long run produce higher returns to shareholders. As famed Delaware Chancellor William T Allen wrote:

In the longer term, Time's advisors have predicted trading ranges of $159-$247 for 1991, $230-$332 for 1992 and $208-$402 for 1993. ... The latter being a range that a Texan might feel at home on.

Paramount Commun. Inc. v. Time Inc., 1989 WL 79880, at *13 (Del. Ch. July 14, 1989), aff'd, 565 A.2d 281 (Del. 1989).

In a decision I still teach in my Mergers and Acquisitions class, the Delaware Supreme Court held that Time's management had not violated their fiduciary duties to Time's shareholders. Time was thus able to complete its merger with Warner.

Thus began a long and winding road, which the WSJ illustrated as follows:

All of which prompted me to post this tweet:

I wish some finance guru would answer the following question: If you were a #Time shareholder back in 1989 and had held through all the changes, would you be better off today than if they had taken the Paramount deal and you had invested your proceeds in a S&P500 index fund. https://t.co/dKpXSu9NWA

— Steve Bainbridge (@PrawfBainbridge) May 18, 2021

In response to which, a friend reminded me of a 2003 WSJ article observing that:

By now, even schoolchildren know of Time Warner's folly in merging with America Online. However, the story of shareholder value destroyed through acquisition starts much earlier, back in 1989 when shares in Henry Luce's empire, Time Inc., traded for around $100. That spring, Time tried to combine with Warner Communications in what M&A practitioners call a "merger of equals" -- neither party paying a premium for the other's shares. ...

The executives of Time Inc. got to keep their jobs but the shareholders didn't fare so well, particularly with the double whammy of the AOL combination. If you were a shareholder of Time back in 1989 and held your shares through various splits over the years, they would now be worth $113.76 each, about where they were trading more than 14 years ago and far below the Paramount offer. Meanwhile, if you'd just bought the stocks in the S&P 500 index, you would have almost tripled your money.

Meanwhile, I calculated that if you had taken the Paramount deal in 1989 and invested the $200 per share in the S&P 500, you'd have $5,182.69 today. I'd still love to know what those who held their Time shares all these years would have today. I'm betting it's a lot less than $5,000. 

You might think that I'd be critical of the Delaware Supreme Court decision that made all of this loss of value possible. And I am, but not for the reasons you might think. I think the Court reached the right result via hopelessly muddled thinking.

If you're interested, I refer you to my article Unocal at 20: Director Primacy in Corporate Takeovers. Delaware Journal of Corporate Law, Vol. 31, No. 3, pp. 769-862, 2006, available at SSRN: https://ssrn.com/abstract=946016 or my book Mergers and Acquisitions.

In the latter, I explain that:

Time’s defensive actions depended almost wholly on the combined entity’s great size. While the extent of the combined entity perhaps made it unlikely that a subsequent bidder would emerge to unwind the transaction, the possibility existed. The market for corporate control thus could exert some constraining influence on Time’s board, which reduced the likelihood that the board was acting for improper motives, especially in comparison to the defensive restructurings just described.

In addition, it’s critical to the outcome here that Time’s business strategy was motivated by a desire to advance legitimate corporate interests; it had not been cobbled together simply to justify takeover defenses. As a result, Paramount was essentially asking the court to enjoin Time’s board from continuing to operate the corporation’s business and affairs during the pendency of the takeover bid. The Delaware courts were properly reluctant to do so, as a hostile bidder has no right to expect the incumbent board of directors to stop an ongoing business strategy in mid-stream.

In sum, Time presented a highly unusual set of facts, which rebutted the inference that the board acted from improper motives and rendered the result—if not the reasoning—in that particular case relatively unobjectionable.

The Backlash Against Woke CEOs

The WSJ reports an unsurprising development; namely, an emergent backlash against social justice warrior CEOs:

The campaign launched Tuesday by Consumers’ Research, a conservative nonprofit, takes aim at Nike, Coca-Cola and American Airlines. But others could be the targets, says Will Hild, executive director of Consumers’ Research. The 30-second spots will air on national cable news, as well as “in local markets where the companies are headquartered,” the nonprofit said. One source says the overall ad buy could be up to $13 million.

Each ad treats the companies like a political candidate would an opponent, hitting the company’s reputation and contrasting its high-minded social-justice rhetoric with its other behavior. ...

My favorite of the three aims at American Airlines:

“Why is CEO Doug Parker trying to appease the radical left? To distract from billions in taxpayer bailouts, from his $10 million payday, from American’s record layoffs.” It takes the airline to task for losing baggage, shrinking leg room amid the pandemic, and attacking Texas’s voter ID law even as it requires identification from its passengers.

The Journal opines that:

The woke business trend isn’t healthy for the free-market cause. CEOs risk undermining support on the grass-roots and Congressional right for business, mirroring the anti-corporate sentiment that dominates the left. CEOs can never buy enough absolution from the left as long as they believe in profit. Alienating the right leaves them friendless. We warned CEOs that this would happen when they went for woke, and now it has.

I refer interested readers to my article Corporate Purpose in a Populist Era, 98 Neb. L. Rev. 543 (2019), available at: https://digitalcommons.unl.edu/nlr/vol98/iss3/2. In it, I make the point that:

Left-of-center corporate social responsibility campaigners have long advocated the use of “boycotts, shareholder activism, negative public- ity, and so on” to pressure corporate managers to act in ways those campaigners deem socially responsible. Right-of-center populists could use the same tactics to induce corporate directors to make decisions they favor.

I remain particularly puzzled why so few conservative activists have seized upon the SEC shareholder proposal rule (Rule 14a-8) to put proposals on company proxy statements supporting conservative causes or opposing woke policies by corporations. Especially when there's a slightly bored corporate law professor just waiting to advise them.

Does Socially Responsible Investment Improve Company Performance?

There is no evidence that SRI investment funds—standing alone—improves portfolio companies performance on environmental or social metrics, probably because such funds prefer investing in firms that already score high on those metrics. Davidson Heath et al., Does Socially Responsible Investing Change Firm Behavior? (ECGI Finance Working Paper No. 762 2021), https://ssrn.com/abstract=3837706.

A study of US-based ESG mutual funds from 2010 to 2018 relative to non-ESG funds offered by the same fund family counter-intuitively found that the former’s portfolio companies had worse records for environmental and social compliance. The same study further found that ESG funds portfolio companies had higher carbon emissions per unit of revenue than their non-ESG siblings, Finally, the study found that ESG funds charged higher fees and underperformed—on a risk-adjusted basis—their non-ESG siblings. Aneesh  aghunandan, & Shivaram Rajgopal, Do ESG Funds Make Stakeholder-Friendly Investments? (May 3, 2021), https://ssrn.com/abstract=3826357.

Piercing the Corporate Veil in the United Kingdom

Robert Goddard reports:

Judgment was delivered today by the Supreme Court in Hurstwood Properties (A) Ltd & Ors v Rossendale Borough Council [2021] UKSC 16. The case provided the opportunity for the court - once more - to consider corporate veil piercing, against the background of its earlier decision in Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34.

...

Lords Briggs and Leggatt delivered the leading judgment (with whom Lords Reed, Hodge and Kitchen agreed) and observed:

[In Prest] Lord Walker of Gestingthorpe questioned whether “piercing the corporate veil” is a coherent principle or rule of law at all, as opposed to simply a label used to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a corporate body (para 106). Although this is not the occasion for reaching any final view, we are inclined to share Lord Walker’s doubts .... Even if there is an “evasion principle” which may in “a small residual category of cases” (per Lord Sumption) justify holding a company liable for breach of an obligation owed by its controlling shareholder, we are not ourselves convinced that there is any real scope for applying such a principle in the opposite direction so as hold a person who owns or controls a company liable for breach of an obligation which has only ever been undertaken by the company itself".

The Prest decision makes very interesting reading for those of us who have toiled in the PCV vineyard. 

"Piercing the corporate veil" is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor. Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller's nominee or trustee for that purpose. For specific statutory purposes, a company's legal responsibility may be engaged by the acts or business of an associated company. ... Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon v A Salomon and Co Ltd [1897] AC 22, i.e. where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control.

 

The question is heavily burdened by authority, much of it characterised by incautious dicta and inadequate reasoning.

No kidding. Indeed, yours truly has argued that veil piercing is such a badly broken doctrine that it should be abolished. 

 

Anyway, back to Prest. The opinion goes on to discuss a number of UK precedents, from which it concludes:

In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities. It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced. It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds. But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive. I would not for my part be willing to explain that consensus out of existence.

...

 

The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.

As this analysis suggests to U.S. readers, veil piercing in the U.K. is quite different from that in the U.S. Todd Henderson and I discuss the differences between the two in our book Limited Liability: A Legal and Economic Analysis.

Although there are many reported cases, the reasoning is even more typically ad hoc than the American experience. Commentators attribute this approach to the fact that the English courts were reluctant to invent a new doctrine from whole cloth, preferring instead to use existing precedents from agency law or the law of trusts to fashion remedies for frustrated creditors. ...

The case of Adams v. Cape Industries plc (1990) is widely cited as the death of expansive enterprise liability and veil piercing in Britain. ... The end result has been that veil piercing is now “a rarity under English law,” especially in tort cases, “[e]ven where the case for applying the doctrine may seem strong, as in the undercapitalized one-person company.”

As a U.S. court noted, there is a “key distinction in English law between using the corporate form to evade or conceal existing legal obligations or wrongs on the one hand, and using it to insulate oneself from future or contingent liabilities on the other.” In re Tyson, 433 B.R. 68, 94 (S.D.N.Y. 2010). Only the former could justify veil piercing.

As a result, we concluded that "British courts are more reluctant to pierce the veil or combine a corporate group than American courts." 

I'm inclined to think it would be fun to revisit this issue and compare US and UK law in more detail.

The chapter from which I'm drawing, by the way, has discussion of veil piercing in the law of most major economies around the world.

For more on veil piercing in the UK, I suggest tracking down Marc Moore, "A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomon, J.B.L. 2006, Mar, 180-203. It's on Westlaw under International Materials.

Greenwood: "The goal of liberalism should not be individual self-determination but the freedom to live together in peace, prosperity and justice"

I really enjoyed reading Daniel Greenwood's new article, which sits at an interesting intersection of political theory, Jewish law, and partnership law:

Liberal political theory has long relied on a metaphor of contract: autonomous adults coming together to agree, by unanimous consent, on the basic structure of a just society. But contract is a strange metaphor with which to explain society. Contract law is based on a morality of strangers acting at arms-length. In contrast, decent societies and the governments they set for themselves must be based on a commitment of mutual responsibility. What makes us fellow citizens—fellows of any variety—is accepting that we are all in this together.

Jewish legal and midrashic traditions can be a useful corrective to the atomistic metaphors underlying most liberal political theory. The Jewish tradition has never had the luxury of imagining self-sufficiency, that government itself is the primary source of unjust power, or that individuals could be free in a state of nature. We too can no longer ignore that a solitary human being is a dead human being, that we need government to make spaces in which we can be free from want, resist oppression by non-governmental power, reverse the destruction of the natural commons on which we depend, and engage in the communal activities that make life meaningful.

The partnership metaphor, I argue, can make visible the mutual concern and collective effort that must characterize decent and just governments in an age of economic challenges and ecological crises. The goal of liberalism should not be individual self-determination but the freedom to live together in peace, prosperity and justice.

Greenwood, Daniel J.H., Partnership, Democracy, and Self-Rule in Jewish Law (May 3, 2021). Touro Law Review, Vol. 36, No. 959, 2021, Available at SSRN: https://ssrn.com/abstract=3838904

SEC Chairman Gary Gensler is not being serious about what investors want

Bloomberg reports:

The SEC is preparing a plan for companies to report more information about their employees as it eyes new environmental, social, and governance disclosures, Chairman Gary Gensler said.

Gensler didn’t give specifics about the ESG proposal in remarks he made at a financial market regulation conference Thursday. But he said earlier this year that the agency is considering what investors want in areas such as workplace diversity.

The best data on what investors really want comes not from surveys (as evidenced by the disastrous performance of the polling industry in recent years, which has cast doubt "on all types of survey research"), but from what people actually do when given the opportunity to vote on shareholder proposals relating to ESG issues.

In 2018, Angelo Martinez of Equilar reported on the low rate of support: 

In 2020, according to a Gibson Dunn report, only two shareholder proposals relating to employment workplace diversity actually passes. The average vote was only 32% in favor. 

To be clear, my point is not that workplace diversity is undesirable. My point is only that the SEC's claim that the new disclosure mandates in the works are responsive to investor demand is simply false.

Properly understood, corporate law can't do squat about sustainability

The European Commission review of company law mentioned in the previous post prompted European corporate law scholars Florian Möslein and Karsten Engsig Sørensen to argue that "Company law can be designed in ways to address the climate change problem, as sustainability and company law interact closely with one other."

Although they argue they are carving out a "middle ground," which relies on "nudging," I remain deeply skeptical.

I think remains the definitive work on this issue remains Gordon Smith's essay The Dystopian Potential of Corporate Law, available at SSRN: https://ssrn.com/abstract=976742. As Gordon's abstract explained:

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. 

This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question. 

In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.

I remain convinced that Gordon's essay was the (not a, but the) drop the mic moment in this debate.

Scholars Call for Reflection on Sustainable Corporate Governance

Prominent corporate law experts Alex Edmans, Luca Enriques, Jesse Fried, Mark Roe, and Steen Thomsen have issued a short response to "the European Commission’s efforts to ensure that companies create long-term social value," which was signed by a slew of prominent scholars. I find myself in agreement with almost the whole thing and recommend reading it.

Some key takeaways:

• "Solving one problem may not require addressing the second. For example, lengthening a company’s horizon need not require overturning shareholder primacy;"
• "Solving one problem may exacerbate the second. For example, tying pay to stakeholder targets may lead to short-term behaviour to hit the targets;"
• "The policy debate has typically assumed a “fixed pie”, that shareholder value is at the expense of stakeholder value and so the former must be reduced for the latter to be increased. However, improvements to stakeholder value typically increase (long-term) shareholder value."
  • This is true, of course, but the interesting (and difficult) cases are the ones where a firm is faced with a true zero-sum problem in which either shareholders or stakeholders must lose.
  • I am proud to say that this point is now known as the "Bainbridge Hypothetical."
• "The bigger danger for stakeholder value is not shareholder capitalism but “managerial capitalism”, where unaccountable managers shrink the pie for both shareholders and stakeholders."