ProfessorBainbridge.com

Third edition of my Agency, Partnership, and LLC treatise is available for preorder

You can preorder the new edition of my Agency, Partnerships & LLCs text via @amazon https://t.co/D1XaQ7qpb8

— Professor Bainbridge (@ProfBainbridge) November 7, 2018

Sullivan & Cromwell, Keith Paul Bishop, and Yours Truly on California Board of Director Quota Law

Sullivan & Cromwell:

On September 30, 2018, Governor Brown of California signed into law a bill, SB-826, to require female representation on the boards of directors of publicly traded companies who identify as being headquartered in the state.  SB-826 makes California the first state to attempt to enact female gender quotas for boards of directors.  SB-826 will become effective on January 1, 2019 and will require companies subject to the legislation to comply with the first phase of requirements (requiring boards of directors to have at least one female member) no later than December 31, 2019. ...

The California Secretary of State is required to assess compliance annually and is empowered to impose fines for noncompliance.  Any corporation subject to Section 301.3 that fails to file on a timely basis information about its board members with the Secretary of State may incur a $100,000 fine.  The content and timing of required filings with the Secretary of State will be established through regulations that have not yet been issued.  Separately, a corporation’s first failure to have the requisite number of female directors may result in a $100,000 fine and each subsequent violation may result in a $300,000 fine. ...

Even if SB-826 is ultimately invalidated, the legislation reflects the growing sentiment in favor of diversity for boards of directors.  According to Institutional Shareholder Services (ISS), more than 80% of investors and 60% of non-investors (including corporate directors and other market constituents) who participated in the ISS 2018 governance principles survey believed it would be problematic if a board of directors did not include any female members.  Glass, Lewis & Co. has indicated that beginning in 2019 it will generally recommend against election of the chair of the nominating committee of any Russell 3000 company having an all-male board, and ISS is reported to also be considering adopting a similar policy.  Large institutional investors, including State Street Global Advisors, Inc., BlackRock, Inc. and The Vanguard Group, Inc., have also indicated that gender diversity on the board of directors may influence their voting decisions.

Keith Paul Bishop on what female means for purposes of the new statute:

Given the substantial penalties that may be assessed for failure to have the prescribed minimum number of female directors, who counts as a female director could be an important question.  The legislature provides a Delphic answer ("γνῶθι ἑαυτόν") by defining a "female" for purposes of the gender quota requirements as "an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth".  Cal. Corp. Code § 301.3(f)(1).  

Keith Paul Bishop on the tasks assigned to the California Secretary of State's tasks under the statute:

One of the first tasks will be for the Secretary of State's office to publish a report on its web site "documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one female director".  Cal. Corp. Code § 301.3(c).  The deadline for this report is July 1, 2019.  One difficulty that the Secretary of State will be to determine the gender of directors inasmuch as the Securities and Exchange Commission has no gender disclosure requirements.  Although many first names are traditionally associated with a gender, many (such as Kim) are not.  Implementing this requirement also will likely require the Secretary of State to promulgate rules interpreting the statute and adopting forms.  See Cal. Corp. Code § 301.3(e).  Rulemaking under California's Administrative Procedure Act is a time consuming process that requires public notice and comment.  While the Secretary of State may choose to adopt emergency regulations, this would require a finding that immediate action is required to avoid serious harm to the "public peace, health, safety, or general welfare".  Cal. Gov't Code § 11342.5.

The Secretary of State is also charged with enforcing the new law and is authorized to impose fines on violators.  Although the Secretary of State does have some existing investigative and enforcement powers with respect to notaries and elections, it has not have substantial experience as a civil prosecutor.  The office will undoubtedly need to add staff and adopt regulations to carry out these new tasks.

Lastly, yours truly on whether the bill will survive constitutional scrutiny under the dormant commerce clause.

Replacing the Board: Henderson and Bainbridge's "New Book Explores the Benefits of Outsourcing Corporate Governance"

From the University of Chicago Law School:

In his new book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance (Cambridge University Press), he and UCLA School of Law Professor Stephen M. Bainbridge propose giving corporations the option of hiring a new kind of firm, a Board Service Provider (BSP), to serve as their boards. Today, corporations hire law firms, accounting firms, and consulting firms to give them the expertise needed to run their highly complicated businesses. So why not a corporate governance firm?

“There is a whole literature that precedes us advocating for professional board members with standards and education,” Henderson said. “But even that plan has shortcomings because it focuses on the individual rather than on the entity. If there were firms that provided board services and that had employees with expertise in all the areas these corporations need, that would be much more efficient than 12 part-time people. The firm could hire all the experts they need and have them down the hall when information is needed.”

...

“Right now, all that most boards have time for is oversight, but a BSP could spend time on other things because it would be a deeper entity, it would employ all the people it needs, and therefore, could be in compliance at a lower cost,” Henderson observed.

He also explained that BSPs, with their teams of experts, could overcome other corporate problems, such as having to make decisions without full information from management.

Scholarship alert

FYI: A very substantially revised and expanded version of my paper, Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies, is now available at SSRN: https://t.co/ph0pQ6VGQb pic.twitter.com/GJ7OyAAj1L

— Professor Bainbridge (@ProfBainbridge) October 9, 2018

SEC Commissioner Hester Pierce says corporate law is public interest law, which is true, but I said it first!

From her address to the Michigan Law School:

I want to urge you to expand your vision of how one can serve the public as a lawyer. Representing corporations also can be a form of public interest law because companies contribute so much to the well-being of society. I am not referring to corporate sponsorship of the local minor league baseball team, food bank, or youth orchestra. These charitable activities are laudable, but, to find something good, we need not look beyond the core profit-making activities of the corporation.

The hunt for profit drives companies to strive to identify and meet people’s needs using as few resources as possible. Companies communicate with their customers and suppliers through the price system. People tell companies what they value when they pay for the products and services those companies offer. Suppliers, by raising or lowering prices, tell companies how valuable the resources are that the companies use. Companies respond to what their customers and suppliers tell them. In this way, companies help to ensure that people spend their time wisely and that resources are used for the things society values most. Companies combine the diverse and complementary talents of their employees to research, develop, explore, produce, sell, and provide services to willing customers. In these activities, corporations play an important role in expanding scientific and technological knowledge, enabling people to profit from their hard work, and ensuring that society’s resources are allocated to the uses we most value.

As a lawyer representing companies in the courtroom, the boardroom, or the contract negotiating room, you are helping to build mutually beneficial relationships between companies and their creditors, shareholders, employees, suppliers, and communities. You are part of the process for ensuring that resources and human ingenuity are being put to their best use. It is easy to lose sight of the importance of your role particularly when you are an overtired attorney mired in a document-intense business dispute or interminable contract negotiation.

I couldn't agree more. Especially because I said the very same thing over a decade ago, in my article Reflections on Twenty Years of Law Teaching, 56 UCLA Law Review Discourse 1 (2008):

Legal education pervasively sends law students the message that corporate lawyering is a less moral and socially desirable career path than so-called “public interest” lawyering.[1]The corporate world is viewed as essentially corrupting and alienating, while true self-actualization is possible only in a Legal Aid office.

Our students get these messages not only in law school, of course, but also in the media. Films like “A Civil Action” or “Erin Brockovich” illustrate the general ill repute in which corporations—and corporate lawyers—are held, at least here in Hollywood.

In my teaching, I have chosen to unabashedly embrace a competing view. I tell my students about Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”

I tell them about journalists John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.”[2]

There is no doubt that the corporation is now the key economic institution in Western nations. In the United States, for example, the corporation is the predominant form of business organization by every measure except sheer number of firms. According to recent census data, although corporations account for only about one fifth of all business organizations, they bring in almost 90% of all business receipts.

The corporation also has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest.  Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.”[3]In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.”[4]

Yet, two centuries ago, leading business and economic thinkers – including the great Adam Smith – derided the joint stock company. Few businesses were organized as chartered companies. Each company’s charter required a special legislative act. In many places, legislatures granted charters only to quasi-public entities, such as railroads and canals. In most, legislatures rarely resisted the temptation to revise or even repeal existing charters arbitrarily. Even in the United States, where the Supreme Court’s famous Dartmouth Collegedecision gave corporations substantial constitutional protections at a relatively early date, such legislative meddling remained commonplace.

And so I ask my students: What explains the relatively rapid development in the mid-19th century of a recognizably modern corporation and, in turn, that entity’s emergence as the dominant form of economic organization?

The answer has to do with new technologies – especially the railroad – requiring vast amounts of capital, the advantages such large firms derived from economies of scale, the emergence of limited liability that made it practicable to raise large sums from numerous passive investors, and the rise of professional management.

For the most part, these advantages remain true today. The corporation remains the engine of economic growth, both at the level of giants like Microsoft and garage-based start-ups.

The rise of the corporate form thus has “improved the living standards of millions of ordinary people, putting the luxuries of the rich within the reach of the man in the street.”[5]The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, enhancing personal and social mobility. Many of the wealthiest businessmen of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.

And so I put it to my students this way: You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.

The goal isn’t just to make my students feel better about themselves. I firmly believe that too many of our students, when they get out in practice, may be more willing to act in ways that are ethically gray—to act as facilitators rather than gatekeepers—if they’ve been told repeatedly that they’ve already “sold out.”[6]If more legal academics were to celebrate the pro-social aspects of corporate practice, perhaps our students would be better gatekeepers once they get out in practice.

Henderson and Bainbridge Podcast on Outsourcing the Board of Directors

Law and Liberty's Symposium on the Crisis in the Catholic Church

From the Law & Liberty blog:

... we have put together a symposium by Paul Seaton, Richard Garnett, and Ed Condon to think about the legal, institutional, and reform issues the Catholic Church’s abuses puts to the law and to itself.

Paul Seaton – The Archbishop and the Pope

To begin with the obvious is a good place to start. In this case it is also quite dramatic. Archbishop Viganò’s recent J’accuse of the Pope and many high-up church men is not just another salvo in the ongoing civil war in the Catholic church, it changes the battlefield in a dramatic way. Its impact was immediately felt, while its full impact and significance remain to be seen, as responses and reactions unfold. Such is the nature of history with human agency involved. Since it is a battlefield with armed camps and live-fire, there will be casualties, including reputations and, to some extent, truth, and smoke aplenty. In the fog of battle, it helps to have some understanding of the state of the Church and who the combatants are.

Richard W. Garnett – The Catholic Church’s Accountability and Autonomy

[T]he recent horrifying and heartbreaking revelations, reports, and rumors of sexual abuse in the Catholic Church have supplied additional evidence that, reasonable people could well conclude, cuts against my positions. As Damon Linker put it, writing in The Week, the “monstrous, grotesque ugliness” of alleged and confirmed abuses reveals the Catholic Church “as a repulsive institution.” Respecting the rights of the “repulsive” is, for all of us, a challenge.

Ed Condon – Flouting the Canon Law, Once More

The recent series of scandals to engulf the Church in the United States, first around Archbishop Theodore McCarrick and then following the publication of the Pennsylvania grand jury report, have left the hierarchy in a difficult position. On the one hand, the evidence seems to be that previous reforms are working, albeit with now obvious gaps in its applicability—most notably for addressing allegations made against bishops. On the other, the presence of so many unresolved cases, even if they are historical, in many dioceses suggests a continued reticence to go “looking for trouble” in one’s own filing cabinet.

Predictably, of course, let me use that as a jumping off point for a little self-promotion:

Bainbridge, Stephen M., Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236

New article: Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies

Bainbridge, Stephen M., Restoring Confidence in the Roman Catholic Church: Corporate Governance Analogies. UCLA School of Law, Public Law Research Paper No. 18-32. Available at SSRN: https://ssrn.com/abstract=3249236

My essay "Conservative Critiques of Capitalism" in the latest issue of American Affairs Journal https://t.co/n7jk6Jl44O

— Professor Bainbridge (@ProfBainbridge) August 20, 2018

Yours truly is the third most cited corporate law professor for the period 2013-2017; UCLAW as a whole outperformed

Brian Leiter reports:

Based on the latest Sisk data, here are the twenty most-cited corporate law and securities regulation professors in the U.S. for the period 2013-2017 (inclusive) (remember that the data was collected in late May of 2018, and that the pre-2018 database did expand a bit since then).  Numbers are rounded to the nearest five.    Faculty for whom 75% or more of their citations (based on a sample) are in this area are listed; others with less than 75% of their citations in this field are listed in the category of "other highly cited scholars who work partly in this area."

Those in the know will find a certain amusement in the composition of the top three.

In related news:

Cite-specific honors: @UCLA_Law is 11th for scholarly citations in new Sisk study, up 2 from '15 ranking. Most-cited scholars come from many disciplines: @profkang @adamwinkler @ProfBainbridge @sandylocks @VolokhC @russellkorobkin H Motomora, J Salzman, K Raustiala, D Carbado. https://t.co/XqElbpM0yq

— Bill Kisliuk (@bkisliuk) August 15, 2018

We're ahead of excellent schools like Cornell, Michigan, Northwestern, Georgetown, Texas, USC (well, naturally), and my alma mater Virginia!

Now to swallow my pride and give credit where due. Longtime readers will recall that I strongly opposed creating the UC Irvne law school. I still think my arguments made sense at the time. But I must doff my cap to the good folks at Irvine. They are ranked 12th! For such a young law school to have done so well, is amazing and a credit to the faculty and the leadership. Kudos.

 

Bainbridge and Henderson on Limited Liability Gets a Strong Review

German scholar Thilo Kuntz has published a fairly lengthy essay reviewing my book with Todd Henderson, Limited Liability: A Legal and Economic Analysis. See Thilo Kuntz, Asset Partitioning, Limited Liability and Veil Piercing: Review Essay on Bainbridge/Henderson, Limited Liability. 19 European Business Organization Law Review 439-463 (2018), which unfortunately is not open access and is available to non-subscribers as a preview only.

Fortunately, however, a working draft is available on SSRN: Kuntz, Thilo, Asset Partitioning, Limited Liability and Veil Piercing - Review Essay on Bainbridge/Henderson, Limited Liability (March 14, 2017). European Business Organization Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2949685

Here's the working draft's abstract:

One of the core features of modern corporate law is the partitioning of the corporation’s assets and the shareholders’ (private) assets affirmatively and defensively in the sense that the claims of a corporation’s creditors are prior to those of shareholders’ personal creditors with respect to corporate assets and that claims of the shareholders’ personal creditors have priority over those of corporate creditors with respect to shareholders’ private assets. The second principle is the rule of limited liability. What makes it special is that it may not be created by contract – or only under severe restrictions. Courts in many jurisdictions curtail the rule of limited liability by doctrines such as “piercing the corporate veil”, exposing shareholders to a creditor’s claim and therefore to personal liability for the corporation’s debts. The circumstances giving cause to such measures are not clear, however. Additionally, in historical perspective, combining business entities with defensive asset partitioning is not a self-evident maneuver; even modern scholars challenge the idea of limiting liability in general, at least vis-à-vis tort creditors. Stephen Bainbridge and M. Todd Henderson thus take up an important and timely topic with their book on limited liability and veil piercing. Considering the many aspects they discuss, their book provides a welcome chance not just to write a short review, but to take up some general issues of asset partitioning and veil piercing. This review essay, accepted for publication in the European Business Organization Law Review, runs the following course: After providing a historical perspective on limited liability in section II., section III. turns to its relationship with incorporation. Section IV. deals with the question why limited liability should be accepted at all, thus preparing the stage for a look at alternative approaches in section V.

And here's the conclusion from the final, as published version:

Bainbridge and Henderson’s book has a lot to offer for readers interested in limited liability and veil piercing. They provide a rich survey of the most important US literature in the field and add to the discussion by bringing new and interesting arguments to the table. Taking into account how long this debate has been going on and the sheer mass of contributions, this is by no means a small feat. Furthermore, that the authors try to provide a comparative view is a welcome and enriching move as it pushes the academic debate to a broader forum, showing the importance and fruitfulness of comparative approaches. Bainbridge and Henderson make a strong case for abolishing veil piercing, offering a whole package of arguments in favor of reform. Their treatment of veil piercing concepts, the work’s prime rib, is a rewarding read.

I am sure Todd will join me in thanking Professor Kuntz for providing such a detailed, thoughtful, and helpful analysis of our work.

Quoted re Dr Mark McClellan

From Kaiser Health News:

McClellan is director of the Margolis Center for Health Policy at Duke University, the academic position by which he’s commonly identified. But he frequently has not disclosed another position he’s held since late 2013: He earned $285,000 last year on the board of pharmaceutical giant Johnson & Johnson, a company accused of blocking the sale of Pfizer’s Inflectra biosimilar, which competes against J&J’s blockbuster Remicade, a rheumatoid arthritis drug. ...

As a board member to these for-profit health care companies, McClellan has a fiduciary obligation “not to injure them” when writing articles and speaking, said Stephen Bainbridge, law professor at UCLA.

And while there is no legal requirement to disclose board memberships when writing for journals or speaking, Bainbridge and other experts agreed there is an ethical obligation.

“There’s certainly a potential conflict of interest there,” Bainbridge said, adding that while serving on the board of Johnson & Johnson “you are dealing with an enormous company that has fingers in a lot of different pies.”

For students of fiduciary law

New Research Handbook on Fiduciary Law https://t.co/uksslmWI1R. Edited by @BYULawSchool Dean @professor_smith & @DePaulLaw's Andrew S. Gold, with chapters by leading experts that shed new light on this rapidly growing field of study. Read free chapters: https://t.co/t7Mdnttz2V pic.twitter.com/hesaGA2Mb4

— Elgar Law (@Elgar_Law) May 21, 2018

FYI: MY essay on The Parable of the Talents is one of the chapters. Amazon link: 

Research Handbook on Fiduciary Law edited by D. Gordon Smith and Andrew S. Gold available for a whopping $290.00 https://t.co/BBdFG2QBA3 But what else are you going to spend your expense account on?

— Professor Bainbridge (@ProfBainbridge) May 21, 2018

My Certificate of Completion of the Course on Catholic Social Thought from University of Notre Dame STEP Program

Jeff Lipshaw and yours truly

Jeff Lipshaw touches on yours truly in passing in an article that is a response to "Pseudo-Contract and Shared Meaning Analysis" by Professors Robin Bradley Kar and Margaret Radin:

Here we have Professors Kar and Radin, whose access to information, education, and intelligence are unimpeachable. One of them (Kar) is a longstanding friend and correspondent. I have nothing but the highest regard for them. But, in this instance, I think of them the way I sometimes do about someone, also a friend, one of the world’s leading corporate law scholars, whose access to information, education, and intelligence is equally unimpeachable. That professor is also a very publicly committed Catholic,58 and I am quite sure has made his own ontological and epistemological commitments no amount of reasoned discourse could ever cause me to accept. Wittgenstein’s (and derivatively Ribeiro’s) assessment was that this kind of disagreement is incapable of reconciliation. Instead, a change in belief of one of the interlocutors requires conversion. “If reconciliation is to occur, then one of us must forsake reason-giving, (non-rationally) reject our old rule, and (non-rationally) accept a new rule, thereby ending the dispute.”

58 Stephen Bainbridge, On Closeted Christian Law Professors: Thoughts on Dreher’s Kingsfield, PROFESSORBAINBRIDGE.COM, http://www.professorbainbridge.com/professor bainbridgecom/2015/04/on-closeted-christian-law-professors-thoughts-on-drehers- kingsfield.html (Apr. 26, 2015).

I'm grateful for the kind words (which IMHO especially includes the part about being a "publicly committed Catholic," which is at the end of the day what matters most). I trust Jeff will not take it  amiss if I reward him by praying for his conversion, since reasoned discourse apparently won't work in his case.

Contract law geeks will definitely want to go read the whole article on its own merits, of course.