Monday, December 9, 2013
Thanks to Professor Brian Quinn (Boston College) for passing along the video posted below on "Material Adverse Change" in the M&A Context (Part 1) from law firm Weil Gotshal. Weil Gotshal has posted a number of similar clips, which I have found useful in the past.
This past Sunday, Robert B. Schumer (Paul Weiss) authored a related post over at the Harvard Law School Forum on Corporate Governance and Financial Regulation. His post is entitled "Delaware Court: Missed Sales Forecasts Could be 'Material Adverse Effect"' and opens with the following paragraph:
In Osram Sylvania Inc. v. Townsend Ventures, LLC, the Delaware Court of Chancery (VC Parsons) declined to dismiss claims by Osram Sylvania Inc. that, in connection with OSI’s purchase of stock of Encelium Holdings, Inc. from the company’s other stockholders (the “Sellers”), Encelium’s failure to meet sales forecasts and manipulation of financial results by the Sellers amounted to a material adverse effect (“MAE”). The decision was issued in the context of post-closing indemnity claims asserted by OSI against the Sellers and not a disputed closing condition.
Few, if any, Delaware cases have found a triggering of a MAC/MAE clause, but such cases obviously depend on the wording of the agreement and the relevant facts. Read the entire post here.
If you have an interest in entrepreneurship and innovation, or if you just want to know more about the company whose boxes are currently appearing on porches across the nation, read Brad Stone’s new book, The Everything Store: Jeff Bezos and the Age of Amazon.
Stone is not a corporate shill; his portrait of Bezos is not always flattering. But the book is well written and entertaining, and a good study of what made Amazon successful. Budding entrepreneurs could derive a number of important lessons from Jeff Bezos.
The Goal of a Business is to Serve Customers
Entrepreneurs often chase the wrong rabbit. The goal of a business is not to create the fanciest technology. The goal of a business is not to get ready to make a public offering. The goal of a business, and the way it makes money, is to serve customers—to fulfill some customer need more effectively than any other company.
It’s clear that customers have been Bezos’ top priority from the beginning, and that’s what has made Amazon successful. The most obvious example of that philosophy? Putting both positive and negative customer reviews on the Amazon web site. We take that for granted now—many online retailers do it—but it was business heresy at one time. I have foregone some purchases because of those negative reviews, but those reviews are also one of the main reasons I keep going back.
Innovation: You Have to Break Eggs to Make an Omelet
Forgive the cliché, but innovation depends on risk-taking. For every success, there are many, many failures. Jeff Bezos has wasted a lot of money going down blind alleys, but once in a while, those ideas have paid off in a major way. Amazon is successful because of its willingness to fail.
“Good Enough” is Not Good Enough
It is clear from The Everything Store that Bezos is driven to succeed. He demands results and he doesn’t tolerate failure. I don’t think I would want to work for Bezos. If Stone’s portrayal is accurate, Bezos can sometimes be an unpleasant person; ridicule is one of his tools. But that drive, that demand for results, is one of the reasons Amazon has become such a giant.
Costs Matter Too
Profitability depends on two things, revenues and expenses. You have to be willing to spend money to make money (Cliché No. 2). But that doesn’t mean you should spend as much money as possible. I read a lot of business history and the level of extravagance at some start-up companies amazes me.
Bezos is, to put it bluntly, cheap. He doesn’t waste money. He may take the idea so far as to make it a fetish, but that’s better than the alternative.
The “Everything” Store
I highly recommend Stone’s book. It’s an entertaining look at how one company went from start-up to behemoth.
Sunday, December 8, 2013
Schragger & Schwartzman argue that “debates about the ontological status of group or corporate entities are largely irrelevant.”
Richard Schragger & Micah Schwartzman have posted “Some Realism about Corporate Rights” on SSRN. Here is the abstract:
Can we meaningfully speak of a church’s right to conscience or a corporation’s right to religious liberty? One way to approach this question is by inquiring into the nature of churches and corporations, asking whether these are the kinds of entities that can or should have rights. We have recently seen this kind of reasoning in public debates over whether corporations have free speech rights, and, relatedly, in arguments about the religious free exercise rights of churches, non-profits, and for-profit corporations. Those in favor of such rights sometimes argue that corporations and churches are moral agents, capable of exercising rights separate and apart from the rights and interests of their members; whereas, those opposed tend to argue that churches, corporations or groups are mere aggregations of individuals, or else artificial persons created or recognized by the state to advance the interests of those who compose them.
In this paper, we argue that this form of argument is mistaken and that debates about the ontological status of group or corporate entities are largely irrelevant. One does not need a particular theory of a corporation, organization, or group’s metaphysical status in order to determine its legal rights. To defend this claim, we first consider and reject H.L.A. Hart's semantic critique of corporate personality theories. Instead we follow John Dewey's realist argument against corporate metaphysics. We develop that argument and apply it to current litigation over whether for-profit corporations can assert rights of religious free exercise against the requirement that they provide health insurance coverage for contraception.
Saturday, December 7, 2013
Eric Chiappinelli has posted “The Underappreciated Importance of Personal Jurisdiction in Delaware's Success” on SSRN. Here is the abstract:
The judges of the Delaware Court of Chancery are aggressively trying to stop stockholder/plaintiffs from filing corporate law cases outside of Delaware. Delaware believes that its position as the center of corporate litigation is in danger because cases are no longer filed exclusively there. If litigation continues to flow away from Delaware, it would jeopardize Delaware’s prominence in corporate law and the large revenues Delaware receives from out of state businesses that are incorporated there.
I argue that scholars and the Delaware judges underappreciate the vital importance of personal jurisdiction over corporate directors in Delaware’s quest to become and remain the center of corporate litigation. I show that Delaware’s dominance in litigation in large part stemmed from, and is now dependent upon, its unique system of personal jurisdiction.
None of Delaware’s attempts to stop cases from flowing out of Delaware will be enduringly successful without addressing the weaknesses in its current personal jurisdiction statute. I argue that Delaware should adopt a new statute that both will remedy the current flaws and will be effective in encouraging stockholder/plaintiffs to litigate in Delaware.
Friday, December 6, 2013
There's an interesting slide show available on Forbes, 10 Terms You Must Know Before Raising Venture Capital.
It's interesting, but it overlooks the most important thing entrepreneurs should know before raising venture capital: the need to hire an experienced lawyer. Learning the terminology won't substitute for representation by someone who knows what he or she is doing.
Behavioral economist Dan Ariely (Duke) spoke on Belmont's campus yesterday on his book Predictably Irrational. His talk was similar to his TED talk from a few years ago (with a few additions), and I thought some of our readers might find it interesting. At the very least, he is an entertaining speaker, and I do think his underlying research (mentioned in more detail in the book) might be useful for those of us interested in business law. Predictably Irrational is an easy read; I read all 325 pages last night and this morning. The book was published the same year as Nudge and is similar in many respects. A colleague of mine prefers Professor Ariely's more recent book, The (Honest) Truth About Dishonesty, which I have not read yet.
Thursday, December 5, 2013
Yesterday was the last day of a fantastic three-day conference at the UN in Geneva on business and human rights, and I will blog about it next week after I fully absorb all that I have heard. As I type this (Wednesday), I am sitting in a session on corporate governance and the UN Guiding Principles on Business and Human Rights moderated by a representative from Rio Tinto. The multi-stakeholder panel consists of representatives from Caux Roundtable Japan (focused on moral capitalism), the Norwegian National Contact Point (the governmental entity responsible for responding to claims between aggrieved parties and companies), Aviva Public Limited (insurance, pensions UK), Cividep (a civil society organization in India), and Petrobas (energy company in Brazil).
If you want to learn more about the conference, I have been tweeting for the past two days at @mlnarine, and you can follow the others who have been posting at #UNForumWatch #unforumwatch or #businessforum. 1700 businesspeople, lawyers, academics, NGOs, state delegates and members of civil society are here. Economist Joseph Stiglitz presented a fiery keynote address. Some of the biggest names in business such as Microsoft, Unilever, Total, Vale and others have represented corporate interests.
Depending on where you are, by the time you read this, I will be in Oslo attending a conference on climate change and global company law and will be speaking on the US perspective on Friday. I will blog on that conference on my Thursday spot in two weeks.
On a completely unrelated note, with Bitcoin appreciating over 5000% in the past year (see here) and reaching $1000 last week, I thought readers would be interested in this article, “Whack-A-Mole: Why Prosecuting Digital Currency Exchanges Won’t Stop Online Money Laundering”by Catherine Martin Christopher. Au revoir from Geneva. Hallo from Norway.
The abstract is below.
Law enforcement efforts to combat money laundering are increasingly misplaced. As money laundering and other underlying crimes shift into cyberspace, U.S. law enforcement focuses on prosecuting financial institutions’ regulatory violations to prevent crime, rather than going after criminals themselves. This article will describe current U.S. anti-money laundering laws, with particular criticism of how attenuated prosecution has become from crime. The article will then describe the use of Bitcoin as a money-laundering vehicle, and analyze the difficulties for law enforcement officials who attempt to choke off Bitcoin transactions in lieu of prosecuting underlying criminal activity. The article concludes with recommendations that law enforcement should look to digital currency exchangers not as criminals, but instead as partners in the effort to eradicate money laundering and — more importantly — the crimes underlying the laundering.
Wednesday, December 4, 2013
After meeting Colin Mayer (Oxford) and hearing him present at Vanderbilt’s 2013 Law and Business Conference, I purchased and read his recent book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it. The book is organized in three parts: (1) how the corporation is failing us; (2) why it is happening; (3) what we should do about it. While the first two parts contain some helpful background and interesting case studies, I found the third part the most useful. In the third part, Professor Mayer suggests:
These three straightforward adaptations of current arrangements – establishing corporate values, permitting the creation of a board of trustees to act as their custodians, and allowing for time dependent shares - together solve the fundamental problems of breaches of trust in relation to current and future generations. (pg. 247)
In discussing corporate values, Professor Mayer writes:
Corporate social responsibility was rightly dismissed as empty rhetoric and jettisoned when recession forced a return to more traditional shareholder value. Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers? Without commitment, there is no reason why there should be any trust in the corporation, however much its fine promotional material suggests otherwise. Values need value. They need to be valuable to those upholding them and costly to those who do not. They need to inflict pain on those who abuse them and gain on those who do not. (pg. 244)
While Professor Mayer was writing about corporations generally, and not benefit corporations specifically, the same commitment concern is present with these new corporate forms (called benefit corporations or public benefit corporations) that claim to be focused on society and the environment.
As one possible solution to the commitment problem, Professor Mayer suggests time dependent shares. Time dependent shares would provide greater voting power to shareholders who commit to hold shares for a longer period of time. This feature, Professor Mayer argues, would focus the managers on long term value, which could benefit all stakeholders. Professor Mayer does not favor requiring time dependent shares for all corporations, but suggests that time dependent shares might be useful for those firms that need or desire long-term investment and commitment. I am still thinking through all the possible implications of time dependent shares, especially in the M&A context, but appreciate the effort to fight short-termism and focus management on longer term goals for the corporation.
Interested readers can find Firm Commitment through Oxford University Press.
Cross-posted at SocEntLaw.
Earlier this week the SEC released its 2014 rulemaking agenda and excluded from the list is a proposal for public companies to disclose political spending. In 2011, the Committee on Disclosure of Corporate Political Spending, comprised of 10 leading corporate and securities academics, petitioned the SEC to adopt a political spending disclosure rule. This petition has received a historic number of comments—over 640,000—which can be found here.
The Washington Post reported that after the petition was filed,
A groundswell of support followed, with retail investors, union pension funds and elected officials at the state and federal levels writing to the agency in favor of such a requirement. The idea attracted more than 600,000 mostly favorable written comments from the public — a record response for the agency.
Omitting corporate political spending from the 2014 agenda has received steep criticism from the NYT editorial board in an opinion piece written yesterday declaring the decision unwise “even though the case for disclosure is undeniable.” Proponents of corporate political spending disclosure like Public Citizen are “appalled” and “shocked” by the SEC’s decision, while the Chamber of Commerce declares the SEC’s omission a coup that appropriately avoids campaign finance reform.
Included in the 2014 agenda are Dodd-Frank and JOBS Act measures, as well as a proposal to enhance the fiduciary duties owed by broker-dealers. More on the agenda in future posts….
Tuesday, December 3, 2013
Here in West Virginia, it's exam time for our law students. For my Business Organizations students, tomorrow is the day. For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.
Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here): In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer. A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck. Andrew filed suit against the employee and M & W Milling claiming personal property damage to the truck and the loss of income derived from the use of damaged truck. Notably, the LLC was not a named plaintiff in the lawsuit.
Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.)
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.
Monday, December 2, 2013
For a long time, law, business, and economics professors have used “widgets” in their hypotheticals and examples. A widget is a purely hypothetical manufactured product; there’s no such thing.
The advantage of using widgets instead of real products is that the product and the market may have whatever characteristics the professor attributes to them. The professor doesn’t have to fit the example to any real-world attributes or worry that some student will say, “That’s not how the market for widgets actually works.”
I’m not sure where the term came from, but it’s been used for a long time. The Oxford English Dictionary includes a reference from 1931. "Widget" is commonly used; in a recent Westlaw search, I found 3,569 law review articles using the term.
Now, of course, a widget is a real thing. A widget is software used on cellphones, tablets, and computers. When a professor today says “widget,” students don’t automatically think of a manufactured article; they think of software—a real product with real attributes.
Given that real-world association, I think it’s time to stop using the term “widget” to describe a hypothetical manufactured object. (The alternative, for law professors to actually know enough about real businesses and products that they can tailor their examples to fit reality, is simply unthinkable.)
I propose that we now use the term “bradfords.” I have checked my dictionary and there’s no real product with that name. Given my relative obscurity, it’s highly unlikely students will see the term as anything other than a hypothetical product.
So, from now on, professors’ examples will look something like this:
Acme Corporation produces bradfords. It currently has 1,032 bradfords in its inventory. If it produces 231 bradfords in November and sells 497 bradfords, how many bradfords will it have in its ending inventory?
I hope everyone else will follow my example. It's my one chance at fame.
So long, widgets.
Sunday, December 1, 2013
- Matteo Tonello on “The Separation of Ownership from Ownership”
The increase in institutional ownership of corporate stock has led to questions about the role of financial intermediaries in the corporate governance process. This post focuses on the issues associated with the so-called “separation of ownership from ownership,” arising from the growth of three types of institutional investors, pensions, mutual funds, and hedge funds.
- Frank Reynolds: “Delaware must fix state takeover law now, law professor warns”
Originally, the anti-takeover law passed its court challenges because the judges accepted faulty data that showed investors could acquire at least 85 percent of the target corporation and satisfy the Williams Act, Subramanian said. But none of the cases used to support the anti-takeover law actually allowed hostile suitors to acquire a controlling 85 percent of a target company, he said, and plaintiffs using research from new studies would be able to convince a judge that the statute is unconstitutionally restrictive.
- Pascal-Emmanuel Gobry: “Let’s Listen to Pope Francis on Economics”
For me, the financial crisis was an eye-opening moment. I’ve long believed in free market economics and believed that the Church would do a lot of good in the world if it embraced it. And I still believe those things. But what the financial crisis has laid bare is that the most conventional version of free market economics was actually dead wrong.
- Martin Lipton: “Some Thoughts for Boards of Directors in 2014”
In many respects, the relentless drive to adopt corporate governance mandates seems to have reached a plateau: essentially all of the prescribed “best practices”—including say-on-pay, the dismantling of takeover defenses, majority voting in the election of directors and the declassification of board structures—have been codified in rules and regulations or voluntarily adopted by a majority of S&P 500 companies…. In other respects, however, the corporate governance landscape continues to evolve in meaningful ways.
Saturday, November 30, 2013
- If you are looking for some books to help you better understand our economic history, try: Timothy Shenk on “The Long Shadow of Mont Pèlerin” – reviewing Angus Burgin’s The Great Persuasion (“[U]ncovering a history where the supposed founders of the American chapter of neoliberalism at the University of Chicago reprimand Hayek’s The Road to Serfdom for overdoing its indictment of the state while Keynes reports himself “in a deeply moved agreement” with the very same text.”).
- I thought I knew what it felt like to be scatterbrained and distracted, then I started spending time on Twitter. Let’s just say my belief that meditation is an integral part of work-life balance was reinvigorated. Relatedly, try: (1) bidushi on “The corporate world’s flirtation with meditation” and (2) “Free Video – ‘3-minute breathing space’ Guided Meditation” from the Oxford Mindfulness Centre.
- For the blogroll: Jennifer Taub’s "perpetual crisis" blog (“a blog on banking, corporate governance, and financial market reform”).
- Finally, you might be interested in Michael Pettis on “When Are Markets ‘Rational’?" (“To me, much of the argument about whether or not markets are efficient misses the point. There are conditions, it seems, under which markets seem to do a great job of managing risk, keeping the cost of capital reasonable, and allocating capital to its most productive use, and there are times when clearly this does not happen. The interesting question, in that case, becomes what are the conditions under which the former seems to occur.”).
Friday, November 29, 2013
In the movie Margin Call, which “[f]ollows the key people at an investment bank, over a 24-hour period, during the early stages of the financial crisis,” one of the main characters says: “There are three ways to make a living in this business: be first, be smarter, or cheat.” Given that only a few folks will be first or smarter, it may not be surprising that a “new report finds 53% of financial services executives say that adhering to ethical standards inhibits career progression at their firm.” In a piece over at The Guardian, Chris Arnade, a former Wall Street trader describes why. What follows is an excerpt from that piece, but you should go read the whole thing here.
After a few years on Wall Street it was clear to me: you could make money by gaming anyone and everything. The more clever you were, the more ingenious your ability to exploit a flaw in a law or regulation, the more lauded and celebrated you became. Nobody seemed to be getting called out. No move was too audacious. It was like driving past the speed limit at 79 MPH, and watching others pass by at 100, or 110, and never seeing anyone pulled over. Wall Street did nod and wave politely to regulators’ attempts to slow things down. Every employee had to complete a yearly compliance training, where he was updated on things like money laundering, collusion, insider trading, and selling our customers only financial products that were suitable to them. By the early 2000s that compliance training had descended into a once-a-year farce, designed to literally just check a box….
As Wall Street grew, fueled by that unchecked culture of risk taking, traders got more and more audacious, and corruption became more and more diffused through the system. By 2006 you could open up almost any major business, look at its inside workings, and find some wrongdoing. After the crash of 2008, regulators finally did exactly that. What has resulted is a wave of scandals with odd names; LIBOR fixing, FX collusion, ISDA Fix. To outsiders they sound like complex acronyms that occupy the darkest corners of Wall Street, easily dismissed as anomalies. They are not. LIBOR, FX, ISDA Fix are at the very center of finance ….
[So,] where is the real responsibility? … [T]he people who really should be held accountable have not. They are the bosses, the managers and CEOs of the businesses. They set the standard, they shaped the culture…. The managers knew what was going on. Ask anyone who works at a bank and they will tell you that. The excuse we have long accepted is ignorance: that these leaders couldn't have known what was happening. That doesn't suffice. If they didn't know, it's an even larger sin.
Thursday, November 28, 2013
On Saturday evening I leave for Geneva to attend the United Nations Forum on Business and Human Rights with 1,000 of my closest friends including NGOs, Fortune 250 Companies, government entities, academics and other stakeholders. I plan to blog from the conference next week. I am excited about the substance but have been dreading the expense because the last time I was in Switzerland everything from the cab fare to the fondue was obscenely expensive, and I remember thinking that everyone in the country must make a very good living. Apparently, according to the New York Times, the Swiss, whom I thought were superrich, "scorn the Superrich," and last March a two-thirds majority voted to ban bonuses, golden handshakes and to require firms to consult with their shareholders on executive compensation. Nonetheless, last week, 65% of voters rejected a measure to limit executive pay to 12 times the lowest paid employee at their company. According to press reports many Swiss supported the measure in principle but did not agree with the government imposing caps on pay.
Meanwhile stateside, next week the SEC closes its comment period on its own pay ratio proposal under Section 953(b) of the Dodd-Frank Act. Among other things, the SEC rule requires companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts. It does not specify a methodology for calculation but does require the calculation to include all employees (including full-time, part-time, temporary, seasonal and non-U.S. employees), those employed by the company or any of its subsidiaries, and those employed as of the last day of the company’s prior fiscal year. A number of bloggers have criticized the rule (see here for example), business groups generally oppose it, and the agency has been flooded with tens of thousands of comment letters already.
The SEC must take some action because Congress has dictated a mandate through Dodd-Frank. It can’t just listen to the will of the people (many of whom support the rule) like the Swiss government did. It will be interesting to see what the agency does. After all two of the commissioners voted against the rule, and one has publicly spoken out against it. But the SEC does have some discretion. The question is how will it exercise that discretion and will the agency once again face litigation as it has with other Dodd-Frank measures where business groups have challenged its actions (proxy access, resource extraction and conflict minerals, for example). More important, will it achieve the right results? Will investors armed with more information change their nonbinding say-on-pay votes or switch out directors who overpay underperforming or unscrupulous executives? If not, then will this be another well-intentioned rule that does nothing to stop the next financial crisis?
Tuesday, November 26, 2013
Every day MIDAS collects about 1 billion records from the proprietary feeds of each of the 13 national equity exchanges time-stamped to the microsecond. MIDAS allows us to readily perform analyses of thousands of stocks and over periods of six months or even a year, involving 100 billion records at a time.
MIDAS collects posted orders and quotes, modifications/cancellations, and trade executions on national exchanges, as well as off-exchange trade executions.
The methodology for MIDAS is available here.
Happy Thanksgiving BLPB readers!
Monday, November 25, 2013
The news media and blogs have been filled with discussions of the “nuclear option” adopted by U.S. Senate Democrats last week. No, Senate Democrats are not threatening the Republicans with weapons of mass destruction (well, not all the Senate Democrats). It’s just a new way to end a filibuster. A simple majority vote is now sufficient to stop filibusters of executive and some judicial nominations.
I’m sure your first thought about the nuclear option had nothing to do with politics or judicial appointments. Your first thought was undoubtedly the same as mine: what would happen if the Senate were a closely-held corporation? (What? That wasn’t your first thought? I guess I’m too much of a business law geek.)
Duties of Controlling Shareholders; Oppression
As I’m sure you know, many jurisdictions impose a stronger fiduciary duty on those in control of a closely held corporation. See, e.g., Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975). Actions that disadvantage the minority are subject to careful review. In addition, many corporate statutes allow courts to dissolve the corporation if those in control of the corporation have acted oppressively. See, e.g., Revised Model Business Corporation Act section 14.30(a)(2)(ii).
The Democratic rule change could violate its fiduciary duty to the minority Republican Senators and constitute oppression. The Republican Senators would argue that the rule change unfairly deprives them of most of their power over corporate affairs, upsetting the reasonable expectations they had when they entered the Senate.
That claim would be difficult for the Democrats to refute. The filibuster rule is a longstanding one and the express purpose of the change was to take away power from the minority. But that’s not the end of the matter. The Democrats could still win if they could show a legitimate business purpose for the action and no less drastic means of accomplishing that purpose. See, e.g., Wilkes v. Springside Nursing Home, 353 N.E.2d 657 (Mass. 1976).
The Democrats will argue that they had a legitimate “corporate” purpose: ensuring that our nation’s courts have sufficient judges. Moreover, they would say, they tried other, less drastic means to end the stalemate, with little success.
As with many of these majority-minority disputes, the resolution of these arguments by the court would depend on what the judge had for breakfast.
Dissolution for Deadlock
Of course, if the Senate were a closely held corporation, the Democratic senators might not have needed to resort to the nuclear option. Instead, they could have taken advantage of provisions like section 14.30(a)(i) of the Revised Model Business Corporation Act, which allows a court to dissolve the corporation if
the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock.
Because of the filibuster rule, the directors (the Senators) were deadlocked and the shareholders (the voters) have been unable to break that deadlock for quite a while now. But is that deadlock causing irreparable injury to the country? Judges aren’t being appointed but there are, after all, other judges. The nation’s courts haven’t ground to a halt. And many people would argue that the business and affairs of the Senate have never been conducted to the advantage of the shareholders generally; if so, it’s hard to say that’s “because of the deadlock.”
I have a better idea: let’s imagine the Senate as a general partnership. Then, we can hold them all personally liable for their actions.
Sunday, November 24, 2013
The CFA Institute, the Journal of Corporate Finance, and the Schulich School of Business are sponsoring a Conference on Financial Misconduct, April 3-4, 2014, in Toronto, Canada. Deadline for submissions is December 15, 2013. You can go here for all the information. What follows is the stated rationale, along with suggested research questions.
Financial market misconduct erodes investors trust, and in turn influences stock market liquidity and performance, and exacerbates volatility. Financial market misconduct includes but is not limited to fraud. Despite the widespread media attention on market misconduct, the causes and consequences of market misconduct are often misunderstood and under researched around the world. The evolving structure of markets gives rise to new work on topic
This international conference will provide a timely debate on financial market misconduct. The conference also encourages, but does not require, submission to the Journal of Corporate Finance. Papers submitted to the Journal of Corporate Finance would go through the normal review process.
Some research questions that contributors to the conference might address are:
- Is market misconduct more common in different countries or across different exchanges? If so, what types (earnings management, insider trading, market manipulation, dissemination of false and misleading information, other)?
- What are the causes of international differences in expected or detected misconduct?
- What are the consequences of market misconduct, and do they differ across countries or exchanges?
- Can regulation be designed to improve ethical standards and corporate governance?
- Does high frequency trading mitigate or exacerbate market misconduct?
- Does crowdfunding facilitate potential financial market misconduct, and how might such potential misconduct be mitigated through regulation?
- Do intermediaries such as lawyers, auditors, and investment bankers mitigate or exacerbate financial market misconduct?
- Is financial market misconduct exacerbated or mitigated under different types of ownership, such as government, institutional, or family ownership?
- How is market misconduct related to activist investors such as venture capital, private equity, and hedge fund investors?
- How is fraud risk and ethics priced in markets?
- How does the risk of market misconduct affect corporate valuation?
- To what extent has the failure of regulation and reporting standards exacerbated the incidence of market misconduct and the recent financial crisis?
- What encourages the adoption of ethical standards in public firms versus private firms?
- Related research questions on both publicly traded and privately held institutions are welcome.
Saturday, November 23, 2013
I was reading the introduction to the 35th anniversary edition of Atlas Shrugged the other day, and a number of quotes taken from Ayn Rand’s related journal entries struck me (bold highlights are mine):
- I must show in what concrete, specific way the world is moved by the creators. Exactly how do the second-handers live on the creators. Both in spiritual matters—and (most particularly) in concrete, physical events. (Concentrate on the concrete, physical events—but don’t forget to keep in mind at all times how the physical proceeds from the spiritual.)
- [I]t is proper for a creator to be optimistic, in the deepest, most basic sense, since the creator believes in a benevolent universe and functions on that premise. But it is an error to extend that optimism to other specific men. First, it’s not necessary, the creator’s life and the nature of the universe do not require it, his life does not depend on others. Second, man is a being with free will; therefore, each man is potentially good or evil, and it’s up to him and only to him (through his reasoning mind) to decide which he wants to be. The decision will affect only him; it is not (and cannot and should not be) the primary concern of any other human being.
- [A] creator can accomplish anything he wishes—if he functions according to the nature of man, the universe and his own proper morality, that is, if he does not place his wish primarily within others and does not attempt or desire anything that is of a collective nature, anything that concerns others primarily or requires primarily the exercise of the will of others.
To the extent one can sum up the foregoing as asserting that some type of essentially limitless creative power exists within humans, which is exercised via thought or reason, and need not – in fact should not – concern itself with the success or suffering of others, this sounds an awful lot like some of the rhetoric associated with “The Secret” or “The Law of Attraction.” For those not familiar with the law of attraction, here is an excerpt from a review of “The Secret” that might help (for a version of the law of attraction presented by a disembodied spirit, as channeled by Esther & Jerry Hicks, go here – you might also want to check out Frank Pasquale’s post on the false advertising implications of The Secret here):
Supporters will hail this New Age self-help book on the law of attraction as a groundbreaking and life-changing work, finding validation in its thesis that one's positive thoughts are powerful magnets that attract wealth, health, happiness... and did we mention wealth? Detractors will be appalled by this as well as when the book argues that fleeting negative thoughts are powerful enough to create terminal illness, poverty and even widespread disasters.
I am certainly not the first person to have considered the possible connection between Ayn Rand’s philosophy and the law of attraction. For other examples, go here (“Homage to Atlas Shrugged & Ayn Rand” page on “Powerful Intentions,” which describes itself as “a unique Law of Attraction Online Community”) or here (“50 Prosperity Classics,” citing Ayn Rand, The Secret, and Esther & Jerry Hicks). The Atlas Society itself suggests (in a post entitled, "False Beliefs and Practical Guidance"): “If practical advice from ‘law of attraction’ preachers helps you keep focused on your goals, then use it.”
Anyway, I have not spent a lot of time researching this question (readers that have made it this far are likely now thinking either, “good” or “you’ve already spent way too much time on this”), but I would be curious to hear from anyone who knows of some better sources that either associate Ayn Rand with, or distinguish her from, the law of attraction.
Friday, November 22, 2013
Peter Turchin recently posted an interesting piece on Bloomberg entitled, “Blame Rich, Overeducated Elites as Our Society Frays.” Here is an excerpt:
The “great divergence” between the fortunes of the top 1 percent and the other 99 percent is much discussed, yet its implications for long-term political disorder are underappreciated…. Increasing inequality leads not only to the growth of top fortunes; it also results in greater numbers of wealth-holders…. There are many more millionaires, multimillionaires and billionaires today compared with 30 years ago, as a proportion of the population…. Rich Americans tend to be more politically active than the rest of the population. They support candidates who share their views and values; they sometimes run for office themselves. Yet the supply of political offices has stayed flat …. In technical terms, such a situation is known as “elite overproduction.” … [Another example:] Economic Modeling Specialists Intl. recently estimated that twice as many law graduates pass the bar exam as there are job openings for them…. Past waves of political instability, such as the civil wars of the late Roman Republic, the French Wars of Religion and the American Civil War, had many interlinking causes and circumstances unique to their age. But a common thread in the eras we studied was elite overproduction. The other two important elements were stagnating and declining living standards of the general population and increasing indebtedness of the state…. Elite overproduction generally leads to more intra-elite competition that gradually undermines the spirit of cooperation, which is followed by ideological polarization and fragmentation of the political class. This happens because the more contenders there are, the more of them end up on the losing side. A large class of disgruntled elite-wannabes, often well-educated and highly capable, has been denied access to elite positions…. History shows a real indeterminacy about the routes societies follow out of [such] instability waves. Some end with social revolutions, in which the rich and powerful are overthrown…. In other cases, recurrent civil wars result in a permanent fragmentation of the state and society…. In some cases, however, societies come through relatively unscathed, by adopting a series of judicious reforms, initiated by elites who understand that we are all in this boat together. This is precisely what happened in the U.S. in the early 20th century. Several legislative initiatives, which created the framework for cooperative relations among labor, employers and the government, were introduced during the Progressive Era and cemented in the New Deal. By introducing the Great Compression, these policies benefited society as a whole.