ProfessorBainbridge.com

In Defense of SPACs

Rodrigues, Usha and Stegemoller, Michael A., Why SPACs: An Apologia (2022). University of Georgia School of Law Legal Studies Research Paper No. 2022-04, Available at SSRN: https://ssrn.com/abstract=4072834 or http://dx.doi.org/10.2139/ssrn.4072834

Special purpose acquisition companies (SPACs) dominated the initial public offering (IPO) market in recent years, but the Securities and Exchange Commission (SEC) has proposed rules that have chilled the SPAC market and, if made final, will likely strangle it completely. It is time to examine what, if anything, SPACs offer the capital markets.

Most commentators and regulators view SPACs as a mere regulatory sleight of hand. This Article focuses on SPACs’ fundamental—but overlooked—innovation. Traditional securities law views average investors as prone to hysteria, and therefore relegates them to investment in public companies, reserving investment in private firms for the wealthy. The traditional securities law regime thus has the effect of preventing the general public from investing in private companies until after more wealthy investors have had their turn. But SPACs allow the public to trade based on information about a still-private company. Allowing free trading of this information is a radical departure from the basic structure and original purposes of U.S. securities law.

SPACs thus challenge securities law at its core. We use an original empirical dataset to argue that their success—or, to be precise, the success of some of them—is evidence that securities law may be overly paternalistic in its attitude toward the general public. Our data provide evidence that, as long as the SEC implements reforms that realign shareholders’ interests with those of SPAC managers, SPACs can offer a valuable new opportunity in the markets.

Quasi-East Asian Meat Sauce with Penne Pasta

Seasoning Sauce

• 2 tablespoons low-sodium soy sauce
• 1 tablespoon Red Boat fish sauce
• ± 1 tablespoon Sriracha (to taste)
• 1 tablespoon rice wine vinegar
• 1 tablespoon sake
• 1 tablespoon sesame oil
• 1 teaspoon honey
• 1 teaspoon mirin
• pinch red pepper flakes (to taste)
• black pepper to taste

Meat Sauce

• ½ cup finely diced carrot
• ½ cup finely diced celery
• ½ cup finely diced onion
• 3 garlic cloves, minced
• 1 tablespoon grated ginger
• 1 tablespoon tomato paste
• 5 ounces ground beef
• 5 ounces ground pork
• ½ ounce dried shiitake mushrooms, reconstituted, and chopped very finely
• 1 teaspoon Better Than Bouillon Beef Base Bouillon

Other

• sliced green parts of 2 scallions
• 6 ounces penne pasta prepared as per package directions 

Mix seasoning sauce in a measuring cup. Add enough water to bring total liquid to ¾ cup and set aside.

Heat a 4 quart sauté pan over medium heat. Add 1 teaspoon olive oil. Add beef and pork. Season with salt and pepper. Brown meat. Transfer to a paper towel lined plate to drain. Do not wipe out pan.

Add another teaspoon of olive oil to pan. When oil begins to shimmer, add carrot, celery, and onions. Cook until onions are translucent and carrots have softened (about 10-12 minutes). 

Add garlic, ginger, and tomato paste. Sauté for 2 minutes (do not let garlic burn). 

Return meat to pan and add mushrooms. Add seasoning sauce. Raise heat to high and bring to a boil. reduce heat to low and allow to simmer until sauce thickens to your taste (probably around 20 minutes).

Serve over penne pasta topped with scallions.

We drank a Saldo Zinfandel. Black cherries, blackberries, briars, pepper, anise. Yum.

 

Simplified Coq au Vin

• 1 ounce porcini mushrooms reconstituted in 1 cup hot water
• ¾ cup diced carrot
• 2 chicken legs (preferably free range, organic, and air chilled)
• 1 quart sweet brine
  • 4 tablespoons pickling salt 
  • 2 tablespoons brown sugar
  • 1 quart water
• 2 ounces diced pancetta
• 4 ounces cremini mushrooms, sliced thickly
• ½ teaspoon dried thyme
• 1 teaspoon dried Italian parsley
• 1 large shallot, minced
• 4 garlic cloves, sliced thinly
• ½ tablespoon tomato paste
• 1 tablespoon Wondra® flour
• 1 tablespoon brandy
• ¼ cup red wine (I keep some 187 ml bottles of Woodbridge® Merlot around to cook with)
• 1 teaspoon Better Than Bouillon Organic Reduced Sodium Roasted Chicken Base

Put chicken in a large zip-top plastic bag with the brine. Put in refrigerator for 2 hours. Remove chicken from brine. Pat chicken dry with paper towels. Season well with salt and pepper.

Drain porcini mushrooms in a sieve over a bowl. Rinse the mushrooms, dice them, and set aside. Strain the reconstituting liquid through a coffee filter into a measuring cup. If necessary, add water to bring liquid up to 1 cup.

Put carrots in a microwavable bowl, add 1 tablespoon of water, cover and microwave on high for 3 minutes. Set aside.

Heat a 4 quart sauté pan over medium-high heat. Add 1 tablespoon olive oil. When the olive oil begins to shimmer, add chicken skin side down. Cook 6 minutes. Turn and cook an additional 2 minutes. Remove to a plate.

Reduce heat to medium and add pancetta. Cook until browned and crispy (abut 6 minutes). Using a slotted spoon, remove the pancetta to a paper towel-lined plate to drain.

Pour all the fat into a small dish. Return 2 tablespoons fat to pan and heat using the medium heat setting. Add cremini mushrooms and season with thyme, parsley, and salt and pepper. Sauté until well browned (about 7 minutes). Add shallots and garlic. Sauté for two minutes. Add tomato paste and sauté for 1 minute. Sprinkle with flour and stir well to combine. Increase heat to high and add brandy. Reduce to a glaze. Add wine, the strained liquid from the mushrooms, the reserved carrots and porcini mushrooms, and chicken base. Bring to a boil. Nestle chicken legs into liquid, cover, reduce heat to law and allow to simmer until the thighs reach an internal temperature of about 170° (about 15 minutes). 

Check the thickness of the sauce. If it is too runny for your taste, remove the chicken to a plate and boil until reduced to your preference. (You may also want to add a teaspoon of flour, well whisked in.) Otherwise, allow chicken to rest uncovered in the sauce for 5 minutes before serving.

I served the coq au vin with Alessi mushroom risotto prepared as per package direction s, except that I used 1 tablespoon of the reserved fat from sautéing the chicken and pancetta instead of olive oil.

We drank a The Prisoner Pinot Noir (Sonoma Coast) 2019. I liked it despite the fact that it is an unusual Pinot Noir. If I had tasted it blind, I might have thought it was a Zinfandel. Robust. Black cherry and blackberry. Plums. Well integrated oak notes.

Just a few reasons to be skeptical about ESG

• There is some evidence that purportedly antisocial corporate conduct can result in superior stock market performance. Firms with high carbon emissions have higher stock market returns than low carbon emitters, for example, although the result may reflect liquidity issues arising from divestment campaigns. Hao Liang & Luc Renneboog,
  Corporate Social Responsibility and Sustainable Finance: A Review of the Literature
  14 (ECGI Finance Working Paper No. 701 2020), http://ssrn.com/abstract_id=3698631.
• A 2019 survey of CEOs and CFOs of large corporations, for example, found them almost equally divided between those who thought their companies’ ESG efforts would produce long-term gains and those who thought it would increase long-term costs. David F. Larcker et al., Seven Myths of ESG 1 (Stanford Closer Look Series, Nov. 3, 2021).
• A 2021 literature review of over 1,100 peer-reviewed studies and 27 published meta-analyses determined that the risk-adjusted financial performance of ESG investing was indistinguishable from that of conventional investing. David F. Larcker et al., Seven Myths of ESG 1 (Stanford Closer Look Series, Nov. 3, 2021).
• A 2020 study found that companies with high ESG ratings were less likely to cut CEO pay in response to the crisis than firms with lower ESG scores. Amit Batish et al.,
  Sharing The Pain: How did Boards Adjust CEO Pay in Response to Covid-19?
  (Stanford Closer Look Series, Sept. 1, 2020).
• Many ESG-based compensation disclosures offer “vague and underspecified goals, such as increasing sustainability, diversity, inclusion, or employee well-being, without any specific targets or additional information.” Widespread proliferation of such vague metrics would further reduce CEO accountability, “as it gives them the opportunity to get rid of painful incentives and increase their pay while at the same time pretending to steer the company toward social responsibility and stakeholder welfare.” Lucian A. Bebchuk & Roberto Tallarita,
  The Perils and Questionable Promise of ESG-Based Compensation
  17 (Mar. 1, 2022),
  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4048003.

• According to an evaluation by the Gibson Dunn law firm of ESG-related shareholder proposals in the 2020 proxy season, the number of proposals relating to environmental and social issues dropped by 10 and 21 percent, respectively. Average support for social proposals was 21.5%, while environmental proposals average 30.2% support.

Fifth Circuit Decision Sharply Limits SEC Enforcement Actions (and May Have Gutted Much of the Modern Administrative State)

A 2-1 decision by the Fifth Circuit in Jarkesy v. SEC reviewing an SEC enforcement action against a hedge fund manager had held much of the SEC's enforcement apparatus is unconstitutional:

The SEC brought an enforcement action within the agency against Petitioners for securities fraud. An SEC administrative law judge adjudged Petitioners liable and ordered various remedies, and the SEC affirmed on appeal over several constitutional arguments that Petitioners raised. Petitioners raise those same arguments before this court. We hold that: (1)the SEC’s in-house adjudication of Petitioners’ case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.

The jury trial right, the non-delegation doctrine, and the "take care" clause are all way outside my wheelhouse. But I don't see anything in the opinion that limits the application of the analysis of those issues to the SEC. If the decision holds up, it would seem that much of the modern administrative state would be vulnerable.

There is a discussion of the jury trial and ALJ issues in Gideon Mark, SEC and CFTC Administrative Proceedings, 19 U. Pa. J. Const. L. 45 (2016). Available at: https://scholarship.law.upenn.edu/jcl/vol19/iss1/2.

I'll post updates if those with more expertise discuss the matter.

This case is the clearest cert grant in the history of cert grants. https://t.co/qUM13rzEur

— Joshua J. Prince (@JoshuaJPrince) May 18, 2022

My thought is that they may only take the ALJ issue and side with Jarkesy. That way the case is remanded back to the SEC and the Court can duck the bigger issues. I don’t think this is the delegation vehicle they want TBH

— Bradley Larson (@Brad_Larson14) May 18, 2022

Embracing Stakeholder Capitalism Will Not Save CEOs Who Let Shareholder Down

JPMorgan Chase CEO Jamie Dimon chaired the Business Roundtable in 2019, when the Roundtable's pro-stakeholder capitalism corporate purpose statement was adopted, and who was widely credited with having promoted it, suffered a major setback recently.

JP Morgan Chase’s 2022 proxy statement made much of Chase’s commitment to “sustainable business practices,” “including our engagement in communities and commitment to provide economic opportunity to underserved communities, and address environmental and social issues such as climate change and racial equity” and “creating a diverse, inclusive, respectful and accountable environment.” To be sure, the proxy statement also stressed how Chase’s pay practices “focus on risk-adjusted performance,” but that claimed focus had not prevented Chase from underperforming both the S&P 500 and the KBW Nasdaq Bank Index in 2021. Despite that underperformance, Chase paid Dimon $34.5 million in standard compensation for 2021 and gave him a one-time $50 million retention bonus.

In 2022, when Dimon’s pay package was subject to a say on pay vote, both ISS and Glass Lewis recommended a negative shareholder vote because Dimon’s pay package  was inadequately linked to firm performance. At the annual meeting, unlike typical shareholder say on pay votes, which receive 90%-plus favorable votes, only 31% of Chase’s shares were voted in favor of the bank’s pay plans.

Although it would be pure speculation to suggest that Dimon and Chase’s high profile commitment to ESG was a factor in the negative shareholder vote, it is safe to say that that commitment did not prevent shareholders from objecting to Dimon’s pay.

Do we really need a Restatement of Corporate Governance?

Either the Restatement of Corporate Governance will restate Delaware law (in which case who needs it) or it will not restate the law but rather propose changes (in which case it will be ignored). But I'll be waiting. pic.twitter.com/XXCuzWgMhF

— Steve Bainbridge (@PrawfBainbridge) May 17, 2022

Actually, I already weighed in: The American Law Institute is going to try writing a Restatement of Corporate Governance. Again. Oh joy. https://t.co/YZfbMnmnkU

— Steve Bainbridge (@PrawfBainbridge) May 18, 2022

California trial court strikes down gender quota statute (SB 826)

The WSJ reports and provides a link to the opinion. The decision is entirely based on equal protection considerations. No discussion of the internal affairs issue.

Coverage of the law Professor Comment Letter Opposing the SEC's Climate Change Disclosure Proposal

Epoch Times, ‘Small But Powerful’ Group Pushing SEC Climate Disclosures: Professors (May 13, 2022)

ICR Inc. D.C. Insider, The SEC Climate Disclosure Plan (May 11, 2022)
Intrinsic Value by Roger Lowenstein, The SEC Should Stay in Its Lane (May 11, 2022)

Argus, US Gives more Time for Climate Disclosure Input (May 9, 2022)

Roll Call, Legal Debate over SEC’s Authority Clouds Climate Rule Proposal (May 5, 2022)
Mayer Brown, Academics from 17 Universities Question US SEC’s Authority to Adopt Proposed Climate Disclosure Rules (May 5, 2022)
Crowd Fund Insider, SEC Climate Risk Disclosure: What are People Saying About Proposed Rules? (May 4, 2022)
Ballotpedia News, Economy and Society: Academic pushback against SEC climate action (May 3, 2022)
Wealth Briefing, You're Out of Line Over Climate Disclosure Rule, Academics Tell SEC (May 3, 2022)
Business Law Prof Blog, To Say They Are Shareholders Only Begins Analysis (May 2, 2022)

Law 360, SEC Climate Plan Caters to Profit-Driven Funds, Profs Say (April 29, 2022)
Business Law Prof Blog, Twenty-Two National Professors Urge SEC to Withdraw Climate Disclosure Proposal (April 29, 2022)
Professor Bainbridge, Twenty-Two Leading Law & Finance Professors Urge SEC to Withdraw Climate Disclosure Proposal, including yours truly (April 28, 2022)

 

When Did Elon Musk Need to File His Schedule 13D re Twitter?

2/ The issue is that nobody knows for sure if the 10 day window is calendar or business days. https://t.co/OiQgiYTRch If it's business days he had until March 28

— Steve Bainbridge (@PrawfBainbridge) May 13, 2022

Director independence inquiries vary by context

In Sciabacucchi v. Liberty Broadband Corp.,[1] Delaware Vice Chancellor Glasscock explained that the independence inquiry varies by context:

Where the independence inquiry relates to special litigation committees, it requires a showing of independence by the special litigation committee, having displaced the common-law presumption of director independence. . . .

The independence inquiry as it relates to demand futility arises in the context where the challenged directors are not themselves interested in the question posed in the demand, but are alleged not to be independent of those who are. Where the latter are fellow directors, the required demonstration appears to be the easiest for a plaintiff to clear, given the natural reluctance of directors to take the action demanded—ultimately, choosing to sue fellow directors. If . . . the difficulty of impartially assessing a demand to sue fellow board members (or to sue business associates, friends, family, etc.), is high, it follows that a plaintiff would find it easier to impugn a director's independence in the context of demand futility. Successfully impugning a director's independence with respect to voting on transactions, conversely, should be more difficult than challenging that same independence with respect to assessing a demand. The ultimate factual burden upon a plaintiff to prove a director's lack of independence at trial will vary accordingly. The important point is that the decision in question must be viewed in the context of the director's relationship and her ability, in light of that relationship, to apply her business judgment thereto. . . .

“Delaware law does not contain bright-line tests for determining independence but instead engages in a case-by-case fact specific inquiry based on” the facts. Facts submitted to rebut the presumption of independence should be reviewed “holistically, because they can be additive.” Plaintiffs seeking to show that a director was not independent must demonstrate that the director in question had ties to the “person whose proposal or actions he or she is evaluating;” ties so substantial that she could not “objectively discharge ... her fiduciary duties.” The inquiry is whether those ties were material such that they displace the impartiality of the individual director.

 

[1] CV 11418-VCG, 2022 WL 1301859 (Del. Ch. May 2, 2022).

Roger Lowenstein: "The SEC Should Stay in Its Lane"

Great critique of the SEC's climate change disclosure proposal:

The SEC has a very important but distinct mission. The agency was conceived in the spirit of Louis Brandeis’s memorable dictum: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

The Depression-era Securities Acts directed the agency to prescribe disclosure “necessary or appropriate in the public interest or for the protection of investors.”

The “public interest” was certainly mentioned, but it was interpreted to mean the public interest consistent with the agency’s mission of investor protection. The SEC did not seek data on the spread of infectious diseases, or on all sorts of other public concerns.

The SEC was not even an omnibus corporate policeman. It left antitrust concerns to the FTC and Department of Justice; labor issues were left to the NLRB.

The SEC’s charter was to compel disclosure of corporate information relevant to an investor, and bring enforcement against violators. This was a full-time job. Greed may not be good, but it is enduring. Markets need the policeman’s flashlight.

Go read the whole thing.

Twitter and Stakeholder Capitalism

Liz Dunshee observes that Twitter's CEO "emphasized that the board had to act in the best interest of the shareholders, and determined this offer was the best they could do. ... In his “Money Stuff” column yesterday, Matt Levine highlighted how this is a weird thing to hear after so much emphasis on stakeholder capitalism the past several years." It is a fundamental; thesis of my forthcoming book "The Profit Motive" that when push comes to shove the shareholder value maximization norm still trumps stakeholder capitalism.

Activists Using SEC Shareholder Proposal Rule to Drag Companies into Abortion Debate

Bloomberg reports that the recent SEC changes liberalizing shareholder access under Rule 14a-8 are now coming into play in the abortion debate:

Walmart Inc., Lowe’s Cos., and TJX Cos. represent what’s potentially the tip of a burgeoning trend in shareholder activism in this area: All three companies will face votes on proxy proposals in the coming weeks aimed at shaping internal policies related to abortion access. ...

Proposals at Walmart, Lowe’s, and TJX ask the companies to assess the risks they face when abortion access to their employees is restricted—and to report on ways they are mitigating the impacts of the disruption.

Regardless of one's views on abortion, this ought to disturb anyone who thinks that the purpose of business is to make profits. At the moment, the rule is being used by abortion rights activists and any proponent of abortion rights who owns a few thousand dollars worth of stock in a company can use the shareholder proposal rule as a soapbox to get subsidized publicity for their cause. But there is nothing to stop abortion rights opponents from coming at the issue from the other side--assuming, and this is a huge assumption as to which I have serious doubts, that Gary Gensler's SEC uses neutral principles to decide which proposals get included and which get excluded.

I am not making a pro-Roe or an anti-Roe argument (although may view are probably no secret). I am making an anti-shareholder proposal rule argument. The rule functions on a tax on investors to subsidize a soapbox for gadflies and activists.

I used to believe the proposal rule could be fixed. https://ir.lawnet.fordham.edu/flr/vol85/iss2/15/… I'd still like to see that proposal adopted as a minimum. But I've come to believe the only real solution is repeal.

The SEC Climate Disclosure Proposal: The 22 Critics Get More Attention

From WealthBriefing.com:

A group of 22 law and finance professors in the US have urged the Securities and Exchange Commission to scrub plans to force publicly listed companies to disclose the climate impact of their activities. The academics say the SEC is significantly exceeding its authority. ...

“We respectfully urge the SEC to withdraw the Proposal. We are concerned that the passions of this topic have led the SEC to overzealous rulemaking that exceeds its authority. Governments, above all, must adhere to the rule of law, especially when officials believe honestly and fervently in a specific agenda. The federal securities laws focus on investor protection generally, while the Proposal prioritizes the demands of a subset of the global investment industry. We encourage the SEC to focus on all American investors, not just the most vocal and activist voices,” the letter said.

The letter is signed by figures such as Stephen M Bainbridge (UCLA), Bernard S Black (Northwestern), Jessie M Fried (Harvard), Paul G Mahoney (Virginia), Julia D Mahoney (Virginia), and Todd J Zywicki (George Mason).