ProfessorBainbridge.com

Lipton on Pollman on the Supreme Court’s “Pro-Business Paradox”

Ann Lipton reports:

Elizabeth Pollman has a new Comment, published in the Harvard Law Review, on what she calls “The Supreme Court’s Pro-Business Paradox.”  She makes several very well-argued points.  First, that by weakening corporate regulation, the Supreme Court has put greater pressure on corporate governance to constrain antisocial corporate behavior; second, the Court’s rulings are arguably at odds with the preferences of corporate shareholders, whose interests the Court clams to be furthering; and third, that in its zeal to insulate corporations from liability, the Supreme Court has turned corporate governance concepts upside-down – by, for example, holding that the Alien Tort Statute makes corporations less responsible for the “decisionmaking” that occurs in boardrooms than for the actions of employee-agents lower down in the hierarchy.   

First, "decisionmaking" is not a word. "Decision making" is a word. As is the compound adjective, "decision-making." But I quibble.

Second, I agree that Elizabeth's article is well worth reading. But must respectfully dissent from of her arguments.

Is the Supreme Court "pro-business"? I refer you to Business and the Roberts Court, edited by friend Jonathan Adler, about which I wrote that:

"It is commonplace for politicians, journalists, and the public at large to debate whether the Supreme Court is 'pro-business.' As the essays in this outstanding volume demonstrate, however, this is not just the wrong question-it is an inherently incoherent question. One cannot analyze Supreme Court decisions by simply totting up wins and losses from a single term, as many mindless end-of-term articles try doing. Instead, one must take a longer view over many terms. But even if one does so it is rarely obvious that specific decisions can be easily categorized as pro- or anti-business."

Why should we care about the preferences of corporate shareholders? As famed Delaware Chancellor William Allen observed:

Our “corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.” Paramount Communications Inc. v. Time Inc., 1989 WL 79880 at *30 (Del. Ch. 1989), aff’d, 571 A.2d 1140 (Del. 1990).

 

Keith Paul Bishop asks: "Should Boeing Fly To Nevada?"

Mr. Bishop cites my post After Boeing, Caremark is no longer "the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment" and then points out that:

If Professor Bainbridge is correct, Caremark is no longer a tough claim to bring, Caremark claims will increase, and more stockholder money will be spent in defending and settling Caremark claims.

Boeing and its stockholders may want to take note of the fact that the Nevada Supreme Court has never mentioned, much less followed, Caremark.   Further, NRS 78.138 provides that, with certain exceptions, no director or officer is individually liable to the corporation or its stockholders for damages unless the business judgment presumption has been rebutted and it is proven that:

• The director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and

• Such breach involved intentional misconduct, fraud or a knowing violation of law.

I am the Ninth Most Cited Corporate Law Academic of All-Time

Fred Shapiro (Yale Law School) periodically published citation counts. He has just published a new one in The Most-Cited Legal Scholars Revisited, 88 U. Chi. L. Rev. 1595 (2021). As far as corporate law goes, he has me ranked ninth:

Unlike the Leiter-Sisk rankings, which look at citation counts over a recent span of years, Shapiro's count looks at all-time counts.

"Where will the elderly poor, disabled, or dying in our world fit into Mr. Zuckerberg’s metaverse?"

In other words, Mr. Zuckerberg wants us to become some kind of gods. That rings a bell. Wasn’t that vision the one the serpent in the Garden of Eden used to deceive Adam and Eve into eating forbidden fruit? ... Facebook knows human beings and their weaknesses well. Its team is again poised to prey on the youth, for whom the metaverse is designed, and pilfer large chunks of their lives while shaking down advertisers for access to their minds. ...

Where will the elderly poor, disabled, or dying in our world fit into Mr. Zuckerberg’s metaverse? They won’t. Their real-world isolation and suffering, and the groans and dreams of the developing world, will find no place in a make-believe playhouse ruled by a pioneering Meta-billionaire and his programmers and technocrats.

God’s Universe Beats Mark Zuckerberg’s Metaverse by Jim Towey https://t.co/4lrGykh5hW

— Steve Bainbridge (@PrawfBainbridge) November 5, 2021

By normalizing Caremark claims, the Delaware courts are encouraging litigation by jacking the settlement value of such claims into the heights

Regular readers will recall that my latest law review article is Don’t Compound the Caremark Mistake by Extending it to ESG Oversight (September 2021), which is available at SSRN: https://ssrn.com/abstract=3899528. They will also recall my PB.com post After Boeing, Caremark is no longer "the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment", in which I argued that:

“It has become among the hoariest of Chancery clichés for an opinion to note that a derivative claim against a company’s directors, on the grounds that they have failed to comply with oversight duties under Caremark, is among the most difficult of claims in this Court to plead successfully.” Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *1 (Del. Ch. Aug. 24, 2020).

As I explained in my post, Is Caremark still the hardest claim for plaintiffs to win in corporate law?, there has been a steady erosion of that principle in the Delaware courts. Indeed, it is getting easier and easier for a plaintiff to at the very least get past the motion to dismiss stage of the litigation (at which point the pressure on defendants to settle becomes almost unbearable).

Yesterday's opinion in In re The Boeing Company Derivative Litigation by  Delaware Vice Chancellor Zurn is the latest nail in that cliche's coffin. 

In today's WSJ, it was reported that:

Current and former Boeing Co. directors have reached an approximately $225 million agreement to settle a shareholder lawsuit that claimed the plane maker’s board failed to properly oversee safety matters related to the 737 MAX, according to people familiar with the matter.

As part of the proposed settlement, Boeing has agreed to hire an ombudsman to handle internal issues and appoint a board member with experience in aviation safety, some of these people said.

The article does not indicate how big of a chunk of that settlement will go to the plaintiff class' lawyers.

The erosion of Caremark coupled with a huge payout for the lawyers will make it more likely that suits like this will be filed, less likely that directors will be able to get Caremark claims dismissed at the motion to dismiss stage, and thereby drive up the settlement value of such claims. It'll be a vicious circle.

What's Martin Lipton of Wachtell Lipton up to with ESG?

Proposition: Wachtell Lipton spent the 1980s insulated boards of directors from hostile takeover bids. Today, Wachtell Lipton is pushing #ESG to insulate boards from hedge fund activists like Dan Loeb's run at Shell. See: https://t.co/nRWCFI5fow

— Steve Bainbridge (@PrawfBainbridge) November 1, 2021

Would a board failure to have cybersecurity oversight programs in place violate Caremark?

Gibson Dunn partner Eduardo Gallardo has a most interesting post at the CLS Blue Sky Blog on the titular question. He concludes:

In light of the emphasis that the SEC and other regulators have placed on cybersecurity issues, the increasing amount of  litigation over  cybercrime, and the guidelines offered by Caremark and its progeny, boards should assess whether cybersecurity is “mission critical” to their business and, if so, should proactively incorporate cybersecurity issues into their oversight functions.

I think that, given the direction of case law in Delaware, he's probably right; so go read the whole thing.

On the other hand, as a policy matter, I deplore the direction of Delaware law in this area. A revised version of my paper Don’t Compound the Caremark Mistake by Extending it to ESG Oversight is now up at SSRN. The abstract follows:

Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996), Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.” Accordingly, there is no doctrinal reason that Caremark claims should not lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.

The question thus arises as to whether Caremark should be extended to board failures to exercise oversight with respect to environmental, social, and governance (ESG) factors. Obviously, where existing legislation or regulations impose compliance obligations in ESG-related areas, such as human resources, the environment, or worker safety, Caremark already applies. As such, boards must “ensure that compliance and monitoring systems are in place” to oversee corporate compliance with those laws.

Many ESG issues are not yet the subject to legal requirements, however. The question addressed in this Article is whether the board’s Caremark obligations should be extended to encompass oversight of corporate performance with such issues. In other words, should the board face potential liability not just for failing to ensure that the company has adequate reporting and monitoring systems in place to insure compliance with ESG-related legal requirements, but also to monitor ESG risks in areas where corporate compliance would be voluntary or aspirational.

Padfield and Heminway discuss viewpoint diversity shareholder proposals

Joan Heminway has a blog post discussing a paper by Stefan Padfield and for response thereto with regard to viewpoint diversity shareholder proposals. Good stuff all around.

Dan Loeb wants Shell to split its brown and green assets

Dan Loeb has been my favorite hedge fund manager ever since his campaign against Warnaco, during which he famously compared Warnaco's CEO to Burt Reynolds’ character, the pornographic producer, in the film "Boogie Nights.”

Loeb is now making a run at Shell, arguing for breaking Shell up into "multiple standalone companies:

For example, a standalone legacy  energy  business  (upstream,  refining  and  chemicals)  could  slow  capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy).  A standalone LNG/Renewables/Marketing business could combine modest cash returns with aggressive investment in renewables and other carbon reduction technologies (and this business would benefit from a much lower cost of capital).  Pursuing a bold strategy like  this  would  likely  lead  to  an  acceleration  of  CO2  reduction  as  well  as  significantly increased returns for shareholders, a win for all stakeholders.

Ann Lipton has a post discussing the issues raised. She points out that:

Shell argues – and apparently some of its large investors agree – that you can’t split them up that easily.  Part of the claim has to do with how the different sides of the business are integrated, and part of it has to do with cash flows, namely, that the brown assets are funding the green ones.  As Matt Levine points out, though, investors themselves could do that if they wanted to – they could take the cash they make from the brown assets and plough it back into green investments ....

This strikes me as plausible. It's basically the same argument that was made to show why conglomerate mergers are value destroying; namely, that diversification at the investor level will almost always be superior to intra-company diversification. 

The even more interesting and provocative part of Ann's post, however, is her argument that Loeb is purporting "to appeal to ESG strategists and possibly take a leaf out of Engine No. 1’s playbook." As she explains, however, "that’s actually not the strategy at all.  Loeb is in no way trying to make energy 'greener.'"

All of this relates to the question of whether traditional shareholder activists like Loeb are going to advance or oppose the ESG movement. Count me as dubious.

Recommended Reading: "Do Lawyers Make Good Gatekeepers?"

My friend and UCLAW colleague Sung Hui Kim has a new article up addressing the titular question:

This Chapter, which will appear in The Cambridge Handbook of Investor Protection, ed. Arthur Laby (Cambridge University Press, 2021), argues that there is a strong case for imposing gatekeeping duties on lawyers and reviews the growing body of empirical studies in the accounting and finance journals that partially illumine whether lawyers will act in ways that ultimately inhibit managerial malfeasance and benefit public investors. This Chapter briefly describes the traditional gatekeeping theory, the key elements of a gatekeeper enforcement strategy, and the principal attributes commonly ascribed to gatekeepers. It explains why the designation of lawyers as gatekeepers has been so controversial and argues that the case for imposing gatekeeping obligations on both outside and in-house lawyers is strong in light of the economies of scope that can be exploited from adding gatekeeping to the tasks that lawyers already perform for their clients. It then specifically addresses the potential efficacy of in-house lawyers as gatekeepers.

On the issue of whether lawyers make effective gatekeepers, this Chapter finds that the empirical evidence is both complex and mixed, but that the weight of the evidence generally supports that general counsel are effective (albeit conflicted) gatekeepers, who appear willing to police material illegalities but who also tolerate a good deal of aggressive and perhaps unethical conduct. The more limited evidence about outside lawyers suggests that they may be less likely to press their client representatives to comply with the law, opting instead to perform their strictly advisory role as neutral risk-assessors. Nonetheless, their involvement in disclosure matters appears to generate some salutary, longer term effects, demonstrating perhaps a net benefit to public investors.

Finally, this Chapter reviews the findings of one study, which highlighted the promising gatekeeping potential of board members with legal backgrounds. It raises the possibility that appointing lawyers to the board may offer the best strategy for promoting compliance within the firm and deterring corporate malfeasance. It calls for further research to be conducted on the efficacy of these understudied legal gatekeepers.

Kim, Sung Hui, Do Lawyers Make Good Gatekeepers? (June 16, 2021). in The Cambridge Handbook of Investor Protection, edited by Arthur Laby (Cambridge University Press, forthcoming 2021), UCLA School of Law, Law-Econ Research Paper No. 21-07, Available at SSRN: https://ssrn.com/abstract=3868555