Business Law Prof Blog

Reconciling the Joneses

Without delving too deeply into Jones v. Harris Associates, which has already been covered quite well by others, I share a small observation:  I think the Seventh Circuit’s standard and the Supreme Court’s standard (by way of the Second Circuit in Gartenberg) could be reconciled, anyway.
 
The Seventh Circuit determined that under § 36(b)(1) of the Investment Company Act of 1940, “[a] fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation.” Jones v. Harris Assoc. L.P., 537 F.3d 728, 729 (7th Cir. 2008).  The United State Supreme Court disagreed, unanimously stating: “By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred.”
 
The Supreme Court instead determined that even a disinterested board’s fee approval is subject to review in certain circumstances:  “[A] fee may be excessive even if it was negotiated by a board in possession of all relevant information, but such a determination must be based on evidence that the fee ‘is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Jones v. Harris Assoc., L.P., slip op. at 15 (quoting Gartenberg). 
 

I am inclined to agree with that the Seventh Circuit's view that market forces and disclosure should carry more weight than they are currently provided under Gartenberg.  However, I also agree that disclosure, alone, is not sufficient under current law.  Nonetheless, it seems to me that these cases could be reconciled, provided that under the Seventh Circuit’s standard, evidence that a fee "is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining” is evidence that a fiduciary is, in fact, “play[ing] tricks.”

--Josh Fershee

Supreme Court Rules on Jones v. Harris Associates

The eagerly anticipated Supreme Court decision in Jones v. Harris Associates came down earlier today.  The case asked whether mutual fund customers could utilize the Investment Company Act to contest excessive adviser fees.  In a unanimous decision, the Court remanded the case to the Seventh Circuit with the instruction to use a standard announced in the 1982 Second Circuit case of Gartenberg.  That standard requires a showing that an adviser charged a fee so large as to bear "no reasonable relationship to the services rendered."

Today's decision is available at http://www.supremecourt.gov/opinions/09pdf/08-586.pdf.

---JSC, 3/30/10

And the first shelved reform is...

...the harmonization of the standards of care owed customers by, respectively, brokers and investment advisers.  For although successive administrations called for the move (and the courts long ago abolished SEC attempts to distinguish the two), lobbyists simply couldn't let the notion proceed to debate.

As described in the March 26th speech by SEC Commissioner Luis Aquilar:

The Senate Bill, however, has abandoned its strong position in the face of determined lobbying by the insurance and brokerage industries. The revised version that was voted out of the Senate Banking Committee on March 22nd has eliminated the provision applying the fiduciary standard to brokers who provide investment advice. It would, instead, require a one-year study by the SEC concerning the effectiveness of existing standards for "providing personalized investment advice and recommendations about securities to retail customers."

See http://www.sec.gov/news/speech/2010/spch032610laa.htm.

As a result, the sizable number of brokers who in recent years registered as both brokers and investment advisers (in anticipation of the long overdue reconciliation) find themselves voluntarily subjected to regulations not required by law any time soon.  

Talk about your reverse moral hazard.  Funny, most of us thought the most exotic contribution of the Crisis would be a multi-tiered debt obligation securitized by means of a series of unrelated multi-tiered debt obligations...

---JSC, 3/30/10

Perhaps a little more light has shone...

There was an interesting article in The New York Times this past Friday.  "Does This Bank Watchdog Have A Bite?" by Andrew Martin highlighted the preemption controversy continuing between State banking regulators and the Office of the Comptroller of the Currency, one of five federal banking regulators purportedly on the beat.  See generally http://www.sec.gov/answers/bankreg.htm.

The Times piece quotes two Attorneys General who cite outright favoritism towards banks at the OCC, an agency from which tens of thousands of customers annually seek redress.  The OCC chief is a former bank lobbyist who during the present crisis has voted against 1) limits on banks' ability to raise interest rates on existing credit card balances and 2) assessments on banks to strengthen the FDIC insurance fund,  Joining the State officials in bewilderment are a law professor, a lawyer for the Center for Responsible Lending, an official at the Consumer Federation of America  - even a judge who debunked one bank's effective choosing of the more lenient regulator by filing for a national charter amidst a State investigation.  See Capital One Bank v. McGraw, 563 F. Supp. 2d 613 (S.D.W.Va. 2008 )(J. Goodwin).  As Judge Goodwin aptly noted,

If the OCC fails adequately to enforce state law against national banks, state officials could bear the brunt of public disapproval while federal officials remain insulated from the electoral ramifications of their enforcement policies.  Moreover, it is questionable whether the OCC will be as motivated or as effective in protecting the consumers of West Virginia as is the West Virginia Attorney General.

If there is a sliver of a silver lining in this recession, perhaps we've collectively learned that what masquerades as bureaucratic waste can be something much more pernicious.  And if there is to be justice, perhaps Congress will eliminate the right duplicative banking agency when it takes up H.R. 4173, the House reform Bill from December that proposes the outright elimination of the Office of Thrift Supervision (at section 1207).

---JSC, 3/29/10   

 

Pro-Market and Pro-Business: A Prescription for Confusion

Ezra Klein at the Washington Post today writes about the differences between “pro-market” and “pro-business” in the healthcare context.  Without delving into the health care issue he raises, I very much appreciate the overarching point:  Pro-business does not necessarily equal pro-market.  In fact, often pro-business is anti-market because businesses (appropriately) want as much of the market as they can get for themselves.  

A similar discussion surrounds the North Dakota Pharmacy Ownership Law (NDCC 43-15-35(e)), which requires pharmacies in the state to be majority owned by a licensed pharmacist.  As such, the mass-market retail chains in the state (like Target and Wal-Mart) do not have pharmacies.  This law has been criticized by large retailers and others as anti-market and anti-consumer, but certainly it is “pro-business” for current pharmacy owners in the state. 

As Klein notes in his piece, pro-business forces often confuse the issue by using pro-market rhetoric, and this is true in the North Dakota pharmacy debate, too.  A press release announcing a study by the Institute for Local Self-Reliance (ILSR) claims that repealing the law could lead to $23 million in lost economic benefits. The release continues, “North Dakota residents not only benefit from ready access to pharmacies, but the state’s average prescription price is well below the national average.” 

Notice how this quote tries to imply the law is pro-market.  First, it states that the law provides more pharmacies to rural areas.  This seems to imply more competition, and certainly provides more access to pharmacies for certain regions.  Next, the quote states that prescription prices are lower in the state than most of the country. This tries to imply causation, but the report never provides any support to indicate anyone actually thinks prices would be higher without the law.   

A more accurate statement would probably be: “The North Dakota pharmacy law provides greater access to a pharmacy in many parts of the state that would not otherwise have access.  Because the average price of prescriptions in the state is lower than the national average, you should be okay with paying more than you need to for prescriptions.” 

And that may be a choice people would like to make – we often balance such decisions in the same way we might choose to pay an extra dime a gallon to buy gasoline from the local service station instead of going to a big company station. But note that the decision under the pharmacy law is not, “Do we prefer to buy local?” Rather, it is,” Do we prefer to ensure the market only offers local options?” 

Note that I’m not criticizing any group for using language that puts their position in the best light, and I am not saying that both sides haven't confused the issues for their benefit.  (They have.)  I’m simply saying we need to read and listen closely to ensure we frame the issues for ourselves. That way, we can know exactly what we are choosing to support –  businesses or markets – and why. 
 
-- Josh Fershee

Caron, Kowal, and Pratt on Pursuing a Tax LLM

Paul L. Caron, Jennifer M. Kowal, and Katherine Pratt have posted Pursuing a Tax LLM Degree: Why and When? on SSRN with the following abstract:

This Article and a related article, Pursuing a Tax LLM Degree: Where?, provide information and advice about Tax LLM programs to American law students and JD graduates who are thinking about pursuing a Tax LLM degree. This Article (1) discusses the costs and benefits of pursuing a Tax LLM degree, (2) explains the circumstances in which prospective Tax LLM students may be able to expand their employment options by pursuing a Tax LLM degree, and (3) compiles information and advice that tax law professors typically provide to prospective Tax LLM students in individual counseling sessions. This information includes a primer on tax practice employment opportunities, which vary based on (1) the nature of the work (i.e., transactional work or controversy work) (2) the type of tax subspecialty that is the focus of the tax practice and (3) the type of tax practice employer. The primer includes descriptions of various tax subspecialty areas, including business tax, international tax, estate planning, employee benefits, tax-exempt organizations, and tax controversies. This Article also offers advice to prospective Tax LLM students who are searching for tax positions with various types of employers, including (1) law firms (large, elite law firms, medium-size law firms, or smaller law firms), (2) accounting firms (Big Four accounting firms or smaller accounting firms), (3) the IRS, Treasury Department, or Department of Justice, (4) state taxing authorities, (5) corporations or other organizations, or (6) the U.S. Tax Court. For prospective Tax LLM students who hope to become full-time law professors, this Article also discusses the value of a Tax LLM degree in making the transition from tax practice to academia. In addition, this Article provides information regarding aspects of Tax LLM programs about which prospective Tax LLM students frequently inquire and addresses some common misconceptions about Tax LLM programs.

ECC

Draw Your Own Conclusions

Item 1.  The Wall Street Journal reports on a couple of post-Citizens United campaign finance cases here.  In at least one of them (according to the story), the Republican National Committee was against the particular restriction at issue while the Democratic National Committee was in favor. 

Item 2.  An affiliate of the U.S. Chamber of Commerce has ranked Delaware No. 1 in terms of "litigation climate" for the 7th year in a row.

SJP

Davidoff on International Securities Regulation

Steven M. Davidoff has posted Rhetoric and Reality: A Historical Perspective on the SEC's Regulation of Foreign Private Issuers on SSRN with the following abstract:

Rhetoric can drive reform. Watch-words like “mutual recognition” and “global competition” have masked a political economy story which has driven the SEC’s deregulation of foreign private issuers. While the substantive result may have been appropriate, the over-all SEC regulatory process did not produce a nuanced and holistic regulatory product. Instead, this process resulted in one-size fits all regulation for foreign private issuers. Filipino or Chinese issuers listed only in the United States are now regulated in equal measure as a U.K. issuer listed on the London Stock Exchange and New York Stock Exchange. This is despite the differing risk profiles and regulatory posture of these issuers. This essay's historical analysis highlights these issues as well as the difficulty of implementing more rigorous and insulating regulatory techniques such as cost-benefit analysis as rhetoric and the politics of regulation overwhelm such approaches. The relevance of this story is front and center as we face coming SEC regulatory reform in light of the financial crisis under new watch-words such as “investor protection”.

ECC

Implicitly Too Big To Fail

Senator Richard Shelby yesterday provided a letter to Treasure Secretary Timothy Geithner listing his complaints related to the financial reform bill that was approved by the Senate Banking Committee on Monday.   The Banking Committee bill includes a provision requiring large financial companies to pay into a $50 billion fund to be used for dismantling a failing company deemed critical to the market (see, e.g., AIG). Senator Shelby complains that the market would view the firms required to pay into the fund as (1) having been designated “too big to fail” by the federal government and (2) “implicitly backed by the government.” 
 
As for the first part, I agree with Senator Shelby.  It’s hard to argue that the list of companies required to pay into the fund wouldn’t be deemed companies the government views as critical to the market, even if there were no guarantee the government would actually use the fund if the company failed. 
 
For the second part, he is probably right, too, but it shouldn’t matter.  I have never been fond of “implied guarantees,” either in this context or in the context of government-related entities such as Fannie Mae and Freddie Mac.  (For good, and somewhat competing, overviews, see this article, by Richard Scott Carnell, and this one, by David Reiss.)

At least in the world of high finance, I just don’t like the concept of implied or implicit guarantees at all. If you are savvy and sophisticated and you want a guarantee, get one – the explicit kind.  If not, there isn't one.  Otherwise, the guarantee is simply a hope – a calculated risk – that someone will step in and conduct a bailout if it is needed 
 
This is not unlike a local shop granting a 22-year-old child of wealthy parents a line of credit. The shop knows who the child is and knows who his parents are, and figures it’s worth the risk because the parent will likely cover any outstanding charges. The parent may choose, and perhaps is likely to choose, to pay the bill to protect the reputation of the child, the family, or both.  However, unless the parent has agreed to be obligated to cover the bill, the shop always runs the risk that the parents will decide it is no longer worth it.
 
This holds true on the large scale, too.  The debate shouldn’t be about whether the government has made implicit guarantees, and, in fact, the bill should explicitly state the government is not making any guarantees.  Absent explicit guarantees, the debate needs to be about whether the government should step in, not whether it must. 

-- Josh Fershee

Symposium on International Finance After the Crash: Regional Responses to the Global Financial Crisis

Cleveland-Marshall College of Law's Global Business Law Review is hosting a symposium on Friday, April 9, entitled: International Finance After the Crash: Regional Responses to the Global Financial Crisis.  For more information, go here.

SJP

If you think the lack of diversity in corporate boardrooms is a problem...

...then the composition of South Carolina University's Board of Trustees will likely make you apoplectic.  In a state where over a quarter of the population is African-American, the 22-member board will apparently not have a single African-American representative by the end of next month.  In good SEC fashion, the debate is reaching the gridiron.

SJP

Flechtner on International Commercial Law

Harry M. Flechtner has posted Globalization of Law as Documented in the Law on International Sales of Goods on SSRN with the following abstract:

This paper, presented as part of the 2008-09 Willy Delva Lecture series at the University of Gent (Belgium) and published in Nieuw Internationaal Privaatrecht: Meer Europees, Meer Globaal 541 (J. Erauw & P. Taelman, eds.) (Kluwer, 2009), explores the extent to which the United Nations Convention on Contracts for the International Sales of Goods (“CISG”) is meeting the most fundamental challenge it confronts. The CISG adopts a particularly demanding vision of globalized law, but eschews the most potent means to achieve the uniform interpretation that vision requires. The CISG relies instead on an admonition that it be interpreted with regard for, inter alia, “its international character and the need to promote uniformity in its application....” Remarkable resources have appeared to aid in achieving this goal, creating a new information infrastructure and a new method of conducting legal research and practicing law. This paper analyzes three specific issues to test the success of courts and arbitral panels in employing these resources and achieving a uniform interpretation of the CISG: 1) the interpretation of choice of law clauses that designate the law of a Contracting State; 2) determining whether a seller must deliver goods that comply with domestic regulations of the buyer’s state; 3) incorporation of standards terms under the CISG, including adoption of the “rolling contract” theory under the Convention. Examining the treatment of these issues shows a mixed picture of success in implementing the uniformity mandate of the CISG, but one that leaves the author hopeful about the future of the Convention and its lofty ambitions.

ECC

It's Time to Trust the Housing Market Again

A major, and continuing, part of the financial crisis relates to the struggling housing market. According to the National Association of Realtors, housing inventories are up slightly, possibly driven by those seeking to “trade up” in the “down market.”  This could help signal (and fuel) a turn around in the housing market.  However, credit remains difficult to obtain, and just as important (and unfortunate), home buyers (and sellers) are facing a difficult appraisal market, too.  An interesting aside:  All-cash sales are a remarkable 27% of all sales (10% is the more typical number), another indicator that banks aren’t fueling a recovery in the market.  All-cash sales, of course, skip the need for mortgage approval (and appraisal).
 
The Home Valuation Code of Conduct, or HVCC, which went into effect last year, puts restrictions on appraisals for any loan with funds related to Fannie Mae and Freddie Mac. The rules place significant restrictions on the process used for appraisers, and while designed to help solidify the industry, there are indications that it adding additional restrictions to the process that are further limiting a housing market rebound. 
 
The biggest concern with home sales used to be that the buyer would not get financing approval or that the inspection would be a problem.  Now appraisals are become a major concern, with appraisals coming back as much as 30% below the negotiated sale price.  It’s hard to argue that the appraisal system was not out of control during the housing boom in the early part of the decade, when the negotiated price seemed to dictate the appraisal.  (Of course, market price is not necessarily a bad standard for valuation, but there is no reason for a third-party appraiser if the negotiated price is going to be the appraised value, anyway.)  In this market, though, allowing market negotiations to determine prices should be more, not less, accurate than during a boom cycle.  There is a surplus of homes on the market and buyers are not (usually) competing in bidding wars that will cloud their judgment.  Thus, buyers have time to see what is available, analyze the market, and determine a wise price.  Realtors, similarly, are able to consider the market and work with their clients (on both sides of the negotiation) to assess the value of a home in a way that moves the property.   
 
Obviously, sellers and realtors on both sides of the transaction are interested in getting the most money they out of the transaction that they can.  This doesn't necessarily mean they are wrong in their price estimations (or at least not wildly wrong), especially once a buyer agrees to a price.  After all, if there is no transaction, there is zero benefit for the realtors or the seller. 

When, as now, a market is hard to assess, perhaps a mechanism for expressly considering the negotiated price as part of the appraisal process is needed. Otherwise, gun-shy appraisers may be compelled to “over learn” their lesson, thus exacerbating a problem they helped create.

--Josh Fershee

My, what changes 3 years (and $3 trillion in recovery money) can bring...

"Prominent figures in the U.S. are warning that the nation's financial markets have been handicapped by post-Enron regulatory overreach.  Treasury Secretary Henry Paulson has made addressing the problem a signature political issue.  A blue-ribbon committee chaired by former Bush economist Glenn Hubbard has echoed this sentiment, as does a report commissioned by Sen. Charles Schumer of New York and New York City Mayor Michael Bloomberg.  Their key evidence is data suggesting that U.S. stock markets are increasingly unattractive places for companies to list shares...Their solution: a lighter touch in regulating corporate behavior...."   [from "In Call to Deregulate Business, a Global Twist," The Wall Street Journal, January 25, 2007].

Such was the collective sentiment on strong regulation three years ago.  Scholars, elected officials, and others rallying opposition to Sarbanes-Oxley, itself a reaction to the costs of the notorious frauds of 2001/2002.

With the health care issue decided, regulatory reform seems poised for the full attention of the White House.  This time, may academia, Washington, Wall Street and Main Street understand the true cost of the subordination of regulation to theories on competition.

---JSC, 3/23/10 

On Regulatory Staffing

An op-ed piece in The New York Times on Friday questioned whether the mission of S.E.C. reform is best served through traditional remedies.  Specifically, "A Foreign Service for Wall Street," while acknowledging that the Commission has already "taken steps" to raise employee pay, enhance training, and employ experts, nonetheless stated, "But as long as the agencies are plagued by high turnover rates, increasing their training budgets will simply result in better-trained former staffers, while the establishment of new departments will only move vacancies around the organizational charts". 

It is encouraging that the revolving door at the S.E.C. is being both noted and critiqued.  Perhaps the manifest urgency to keep the most experienced at the Commission must simultaneously confess the following:

1.  The Need for Budgetary Independence

The Congress of 1934 never anticipated that the agency would be apolitical - Section 4 of the Exchange Act contemplates an ideally bipartisan Commissioner level.  But even the default goal of bipartisanship has resulted over time in the agency becoming subject to the philosophy of the party holding the White House.  Combine this subservience with the annual quest for funding and the S.E.C. most always focus on headlines, a strategy that applauds such specialization as victories in actions centering on insider trading and foreign bribery (as opposed to success in demanding net capital compliance and preventing good old fashioned theft).

If either self-funded or funded by taxes on the industry membership, the Commission would be free to  diversify its training to equally focus upon detection and advisement.  Such a reshuffling would, in turn, dilute the diploma of the most celebrated graduate: The expert S.E.C. litigant. 

Of course, such a re-prioritization of goals and means would also require that all acknowledge the true scope of the Commission's powers.

2.  The Need for Clarification of the Role of Self-Regulatory Organizations 

The stock exchanges (Self Regulatory Organizations, or "SROs" under Section 6 of the Exchange Act) perform myriad duties in the regulatory mosaic.  Indeed, students of the subject are often surprised to see that it is the SRO rulebook that solely caps commissions and day-to-day margin.  In other areas, sovereignty is shared with the S.E.C., who may, of course, at any time supersede more local regulatory efforts.      

A crucial step involves cleaning up those jurisdictional turf wars that have cemented over time. Is an NYSE broker-dealer examination the first line of defense, or is the S.E.C. solely responsible when a firm has "cooked the books"?  Either reporting line might be adequate, but a supervisory system vaguely relying on both wastes resources, forestalls effectiveness, and clouds deterrence.   

3.  The Imposition of a Time Bar on Subsequent Employment

Industry arbitrators are accustomed to limitations on their roles based upon the nature of their employment.  For example, a former brokerage house attorney is classified as "Industry" (as opposed to "Public") for five years after leaving the securities private sector; the result is that such arbitrator, among other things, 1) is subject to a heightened scrutiny during the selection process, and 2) cannot serve as a panel Chair in cases involving customers.  Is such a presumption arbitrary and cumbersome?  Most definitely.  But the arbitrator knows the rules governing his service upon seeking inclusion in the FINRA pool.

Likewise, the countless applicants to the Commission should be subject to such clearly stated limitations.  Leave the Commission Division of Enforcement, and you have to wait three years to represent firms/individuals to represent clients.  Perhaps more young attorneys would stay at the Commission, and the Commission would benefit from a more robust institutional knowledge.

Alternatively, the S.E.C. could reaffirm its storied "3-year commitment," an agreement asked of new hires that weds them to the job for a period exceeding their training.

In sum, the Times op-ed piece represents an enlightened look at a taboo topic.  Unfortunately, like so many other issues clouded by the continuing economic storm, the solution may be staggered and multi-faceted.  When it comes to the thorny problem of S.E.C. staffing, several of those facets will likely involve  compromising with other regulators, addressing political influence, and imposing some awkward but justifiable employment limitations.

---JSC, 3/22/10                   

Free Market + Adam Smith = Regulation?

In President Obama’s weekly radio address, he explained his view that “free markets” and “regulation” are not inherently contradictory:   
 

I have long been a vigorous defender of free markets. And I believe we need a strong and vibrant financial sector so that businesses can get loans; families can afford mortgages; entrepreneurs can find the capital to start a new company, sell a new product, offer a new service. But what we have seen over the past two years is that without reasonable and clear rules to check abuse and protect families, markets don’t function freely.  In fact, it was just the opposite.

 
At first, I thought of the many people who would be shocked (and/or appalled) at this notion of regulating “free” markets; Adam Smith’s “free hand” theory, after all, seems to be all many people need to know about economics.  This, in turn, reminded me of the introduction Michael Lewis (Moneyball, The Blind Side) wrote as editor to The Real Price of Everything, an enormous compilation of fundamental works in economics from Adam Smith, Thomas Malthus, David Ricardo, Charles Mackay, Thorstein Veblen, and John Maynard Keynes.  (For what it’s worth, I have found this to be a great, and daunting, resource.) 
 
Lewis explains that there are (at least) two Smiths – one who believed that self-interest is the primary motivator of how people (and markets) operate and another who believed that there were times when a “visible hand” needed to step in to ensure that markets operate appropriately.  So why is the first Smith so well known?  Lewis theorizes that the famous “pin factory” example is on page 2; later, and darker, views of the market, including the need for government to play a role in avoiding abuse of the “ordinary worker,” don’t show up for hundreds of pages.
 

None of this means that the recent regulatory proposals (supported by the President) are the perfect (or even proper) means of providing government oversight, or even that Adam Smith was right on either count. It does mean, though, that when using economics as the basis for new laws and regulations (or repealing old ones), there is real value in going beyond page 2. 

--Josh Fershee

Thomas and Wells on Executive Compensation

Randall S. Thomas and Harwell Wells have posted Executive Compensation in the Courts: Board Capture, Optimal Contracting and Officer Fiduciary Duties on SSRN with the following abstract:

This Article proposes a new approach to monitoring executive compensation. While the public seems convinced that executives at public corporations are paid too much, scholars are sharply divided. Advocates of “Board Capture” theory believe officers so dominate their boards that they can negotiate their own employment agreements and set their own pay. “Optimal contracting” theorists doubt this, contending that, given legal and economic constraints, executive compensation agreements are likely to be pretty good and benefit shareholders. Disputes about which theory is correct have hampered efforts to reform executive compensation practices.

Recent developments in corporate law point to a way out of this theoretical impasse. Last year, in Gantler v. Stephens, Delaware’s Supreme Court resolved a major unanswered issue in corporation law when it held that a corporation’s officers owe the same fiduciary duty to the corporation and its shareholders as do its directors. Gantler opens the door for courts to scrutinize rigorously officers’ actions in negotiating their own compensation agreements. The Delaware Chancery Court has taken up this invitation by holding that corporate officers are bound by their duty of loyalty to negotiate employment contracts in an arm’s-length, adversarial manner. If the officers do not do so, but instead try to take advantage of the Board, they will open themselves up to shareholder lawsuits and give courts the opportunity to examine the compensation agreements and their negotiations. This will provide a new level of judicial scrutiny of executive compensation arrangements, and should go far to answer criticisms leveled by Board Capture theorists, who believe the present negotiating system is corrupt, while Optimal Contracting theorists will welcome judicial intervention that improves the present negotiating environment.

ECC

More on Shaming Corporate Criminals: It's Complicated

Over at Simple Justice, criminal defense lawyer Scott Greenfield points out some problems with my fine/jail alternative to shaming corporate defendants:

Fines don't cut the mustard ... the people who run corporations aren't the people who have to pay the fine .... The folks who pay are the shareholders ....  To the extent it's a good smack, it's the wrong face.  The jail time alternative is interesting.... [But] the crime [often] can't be attributed to any particular individual ....  It's a problem.

I have to admit that when I suggested fines and jail time in lieu of shaming I was thinking of cases where the crime could be attributed to a particular individual or set of individuals.  But as Greenfield points out, that is often not the case because of the often inherent (Convenient?) dispersion of responsibility within the corporation.

This may all lead us to conclude that as we weigh the pros and cons of making it easier or harder to prove scienter or attribute corporate statements to individual defendants, the fact that erring on the side of protecting individuals makes applying effective sanctions more difficult should be part of the analysis.

SJP

When Just A Little Charity Is Not Enough

The Illinois Supreme Court yesterday issued an opinion upholding an appellate court decision revoking a hospital’s charitable property-tax-exempt status.  This ruling will lead to property tax liability in the seven figures. The decision has already prompted significant criticism (along with some accolades).
 
I don’t have a major problem with the outcome, although I am inclined to agree with concerns (as noted in Justice Burke’s concurrence and dissent) that the plurality decision improperly imposes a required level of care requirement and dollar threshold (i.e., at least more than “de minimus”) for the charitable exemption.  The statute is silent as to a threshold, and as such it seems the court may have overreached here. 
 
Regardless, this case will play a role in my future Business Associations classes. First, the case demonstrates the significant role subsidiaries can have on a parent and the importance of considering how one structures multiple businesses. Second, the case reinforces the separate nature of state and federal laws as they impact corporations (e.g., it dispels the common misunderstanding that a federal tax exemption automatically creates a state tax exemption).  Finally, it demonstrates the heavy intersection between nonprofit and for-profit entities and that such interactions are anything but simple. 
 
--Josh Fershee

Afsharipour on the Financial Crisis

Afra Afsharipour has posted Integrating the Financial Crisis in the Business Associations Course: Benefits and Pitfalls on SSRN with the following abstract:

In a time of economic turmoil, teaching business law classes can be both inspiring and precarious. The inspiration is easy to come by; in a class that students once took somewhat begrudgingly, they are now participating in impassioned discussions. At the same time, one cannot ignore the difficulties that can arise when discussing such tumultuous activity. The challenges of teaching about economic turmoil are magnified when teaching about a global financial crisis, the likes of which the world has not seen in many decades. It is often difficult to balance conveying the essential substantive material that should be covered in a class with the undertaking to help students comprehend the crisis, especially at a time when its causes and full effects are not yet fully understood. This essay provides a first-hand account of integrating the financial crisis in the Business Associations course and discusses the benefits and pitfalls in doing so.

ECC