Business Law Prof Blog

Rose on Risk Regulation

Paul Rose has posted Regulating Risk by 'Strengthening Corporate Governance' on SSRN with the following abstract:

This paper, presented at the “Regulating Risk” symposium at the University of Connecticut School of Law, April 16, 2010, briefly reviews the connection between risk and corporate governance, then examines the “strengthening corporate governance” provisions of Subtitle G of the Restoring American Financial Stability Act of 2010 (also known as the “Dodd Bill”). The corporate governance provisions, covering majority voting for director elections, proxy access, and the separation of the roles of CEO and chairman of the board, seem likely to have one of two possible effects. On the one hand, the provisions may be pernicious, in that they further enhance shareholder power without a clear justification for increased shareholder power, and more particularly without a justification for shareholder power as a risk management device. Indeed, the Dodd Bill’s corporate governance provisions may work at cross-purposes to the risk management intent of the remainder of the Dodd Bill: the corporate governance provisions operate under the assumption that enhanced shareholder power will result in better monitoring of managerial behavior, which presumably will help to prevent future crisis, but both theory and evidence suggests that diversified shareholders generally prefer companies to take risks that other constituencies (including taxpayers) would not prefer.

On the other hand, the Dodd Bill may have very little effect on investor behavior or risk management. Increases in shareholder power over the past years (fundamentally the result of increased federal regulation) have made management more responsive to - and in some cases probably overly responsive to - shareholder concerns over agency costs. Indeed, some of the proposed reforms already have been or were likely to have been put in place at most public companies. If private ordering is already working, what is the point of imposing strict governance constructs across the market as a whole, especially when most of the affected firms are victims of, rather than contributors to, the Financial Crisis?

ECC

Loza on Entrepreneurship

Emile Loza has posted The Entrepreneurship Crisis: The Urgent Need for a Comprehensive Innovation Policy on SSRN with the following abstract:

More than small business ownership, entrepreneurship means innovation. The world’s leading corporations endlessly hunger for innovation to sustain and grow their businesses in global competitive markets. Much of that innovation originates in clever new businesses and tech start-ups. In the United States, we have a poor track record of sustaining those start-ups, keeping them alive and growing and their innovations protected. As a result, major innovation consumers like Hewlett-Packard Company, Proctor & Gamble, and many more lose out on opportunities to bring start-up innovations on board and commercialize them. Technology start-ups fail at an alarming rate, wasting their intellectual assets wasted and bankrupting their so desperately needed innovators. As a result, American business suffers the loss of innovations vital to its competiveness and the American economy and employment suffers. Policymakers need to wake up to the devastating wastage of innovation and develop a cohesive, comprehensive plan to fuel innovation, support technology start-ups, and facilitate the transfer of these innovations to the major corporations that can commercialize them and bring home high-paying American jobs in the innovation industry.

ECC

Suarez on Bilski

Roberto Manuel Suarez has posted Business Methods and Patent-Eligible Subject Matter in Light of Bilski v. Kappos on SSRN with the following abstract:

The legal, business, and scientific communities eagerly await the Supreme Court’s ruling in Bilski v. Kappos and many scholars, business leaders, and legal professionals try their best to anticipate how the Court will rule. Many patent attorneys and patent agents are drafting two sets of claims for their clients and the one they file will depend on how the Supreme Court rules.

For all of the opinions, articles, and conjecture, all one need do is study the law and look at the precedents to know that anticipating how the Supreme Court will rule in a case is akin to trying to gaze into a crystal ball. So, what will be the future of business methods as patent-eligible subject matter? Will the machine-or-transformation test stand? What will be the fate of the Bilski patent? An educated guess is the best that one can hope for in this situation.

ECC

A "New" Risk to Markets: Inebriated Exuberance

A British financial regulator recently revealed that a U.K. oil trader pushed oil prices up $1.65 per barrel in a little over two hours of trading while he was drunk.  He also apparently lost his firm $10 million.  

This story provides a couple good reminders.  First, there are lots of things that are a really bad idea when drinking.  Driving tops this list, and trading and texting (the new dialing) are some others to clearly avoid. Second, markets are subject to all sorts of influences, even those of market participants under the influence.  In the case, it wasn't irrational exuberance, it was inebriated exuberance. 

--Josh Fershee

The (Slightly) Flawed PCAOB

Yesterday, the Supreme Court handed down a provocative 5-4 decision in Free Enterprise Fund v. Public Company Accounting Oversight Bd.  Writing for the majority, Chief Justice Roberts found unconstitutional the vesting of authority in the PCAOB because of the structure's "more than one level of good cause tenure" (i.e., executive power was conferred upon a Board beyond the President's control).

While the opinion simultaneously clarified that the rest of Sarbanes-Oxley remains intact, the decision will undoubtedly shape the consumer protection agency expected to be created this week.  Heck, the opinion's worth a skimming if just for the detailed dissent (Justice Breyer uses charts to list the varied examples of federal officers removable only for cause).  The Free Enterprise Fund decision can be found at http://www.supremecourt.gov/opinions/09pdf/08-861.pdf.

--JSC, 6/29/10

The Real Costs of Traffic Jams, Big and Small

Despite several years growing up knowing Detroit traffic, living in Washington, DC, Los Angeles, New Orleans, and New York City, and regularly visiting Chicago, now that I live in a smaller city in a low population state, I apparently forgot easily what real traffic is like.  As I was moving three miles over forty minutes on 696 approaching Evergreen Rd (Detroit Area), I was reminded of a blog post about a paper a while back related to the externalities of traffic jams.  

I also was reminded of another externality as my five-year-old son did the potty dance in the back seat as we crawled toward the next exit.  Thankfully, the only externality was a little stress for both us, as he handled himself brilliantly until we reached the Kroger.

--Josh Fershee   

Of World Cup Commentary and Financial Reform...

I have been most impressed by the consistent cordiality of the BBC broadcasters who are bringing the World Cup games to America.  A defender who has been behind the rush all day is said to be "suspect on crosses."  North Korea's 7-0 loss to Portugal evidenced "a lackluster performance."  And, of course, the British and American efforts were "found wanting" in upset losses over the weekend.    

In the spirit of such dignified euphemism and old world gentility, I hereby summarize three of the main compromises about to be signed into law as domestic financial reform:

"Lackluster"

Remember when hedge funds and private equity firms were thought to be unregulated beasts populating the dangerous and new "shadow banking system"?  Well, not so much anymore.  Wall Street titans will still be able to invest up to 3% of equity in such entities. 

"Found Wanting"

Although cited as the primary folly in the economic crisis, derivatives ultimately were characterized as just too much darn fun to place squarely on the regulator's hit list.  Thus, the "common and relatively safe derivatives" (NYT, 6/25/2010) will still be permitted (funny, I thought credit default swaps were thought to be common and relatively safe, at least until 2007?).   

"Suspect"

Net capital requirements, of course, are the chief means of limiting suicidal risk.  But, as Congress has edified, one man's suicidal speculation is another's entrepreneurial nature.  Thus, the largest entities will be given 60 months to comply with the new limits on their coffers (which of course provides much time for repeal/modification of these limits).

Overall, let's hope these Congressional games need not take place every four years.

---JSC, 6/28/10

Compromise on Reform Bill Lifts Bank Stocks

House and Senate Democrats have reached a compromise on the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The House could approve the bill as soon as this coming Tuesday.  Senate approval is not guaranteed, but there is a strong possibility the bill could be signed into law by July 4.

The Wall Street Journal provides a nice four-part summary here.  The Huffington Post reports bank stocks rose in reaction to the news.  Draw your own conclusions. 

SJP

Yockey on Corporate Governance

Joseph W. Yockey has posted On the Role and Regulation of Private Negotiations in Governance on SSRN with the following abstract:

Developments in corporate law continue to give shareholders greater levels of power over public companies. Instead of using their power to seek changes within firms through such traditional means as proxy contests and litigation, shareholders are increasingly relying on private negotiations with directors as a key component of their governance activities. Regulations enacted in response to the recent financial crisis will likely trigger even more widespread use of negotiations in the years to come.

In this Article, I analyze the legal and policy implications generated by the use of private negotiations as a means of corporate governance. I make two related claims. First, I contend that negotiations provide shareholders and boards with several unique benefits that will often make them a more desirable method for resolving intra-firm differences than traditional means of corporate communication. In this sense, negotiations add value by filling a governance gap. Secondly, however, I argue that board-shareholder negotiations may never realize their full potential in governance due to current restrictions on corporate speech – namely, the SEC’s Regulation FD. The way in which Regulation FD impedes private negotiations stands at odds with many of the SEC’s own policy goals. To address this tension, additional regulatory intervention will be required for negotiations to continue to play a valuable role in governance.

ECC

Rhee on Corporate Social Responsibility

Robert J. Rhee has posted Crisis, Rescue and Corporate Social Responsibility Under American Corporate Law on SSRN with the following abstract:

This chapter discusses the legal issues of rescue and corporate social responsibility during times of public crisis. It analyzes a corporate board’s fiduciary duty related to the management of a public crisis and the provision of aid to government and the public. The thesis is that American corporate law adequately provides corporate boards authority to assume broad principles of corporate social responsibility, and that during a public crisis this authority is specially recognized in the enabling statutes of corporate law and should be broadened even further to pursue the public good in exigent circumstances.

ECC

Dutch Utility "Demerger" Law Violates EU Law

In July 2007, the Dutch enacted an unbundling law to require all integrated utilities companies to separate their operations into two distinct groups: one that handles transmission (grid management) and another for generation and operations. This law is not unlike the Federal Energy Regulatory Commission's Order 888, issued in 1996, which required utilities to separate generation and marketing functions, allow open access to transmission lines, and provided for the recovery of stranded costs. The Hague Court of Appeal just determined that the Dutch law violated EU law. (H/T: Baker McKenzie)

Industry regulation may have value, and (in my opinion) separating generation and transmission functions is worthwhile, but it is rarely as easy it may seem. Especially in infrastructure intensive industries, the transition is extremely complex. The market system that one might choose if starting from scratch is rarely one that can be easily implemented fifty or one hundred years into the process. Just ask anyone who worked in the stranded cost issues related to the unbundling process in the United States.

--Josh Fershee

Reporting Back From the Midwest Corporate Law Scholars Conference

I thoroughly enjoyed the presentations and interactions at the University of Cincinnati School of Law this past Tuesday, and was reminded (among various other things) that I do myself a disservice when I don't regularly check in on Steven Davidoff's blog.  Here's an interesting recent post from David reviewing the vexing problem of regulatory capture.  I have elsewhere suggested that part of the solution may be to make it easier to treat private actors as state actors when their interactions with regulators result in effective capture.

SJP

Our Great Old System

A new study of health care finds that: "Among the seven nations studied—Australia, Canada, Germany, the Netherlands, New Zealand, the United Kingdom, and the United States—the U.S. ranks last overall ...."

But hey, at least our health insurance company CEOs were doing well.

SJP

The Worst Contract You'll Ever Adhere To...

Have you taken a look at your Mets ticket stub lately?  The face of the ticket outright precludes rainchecks for games canceled by weather.  The flip side is riddled with six paragraphs of miniaturized print.  With the assistance of a magnifying glass the seatholder learns - among many other things, and after purchase - that he is prohibited from aiding in the transmission of "any information about the event", that smoking is permitted in designated areas only, that the event date/time are subject to change, that "noisemaking devices" are prohibited, and that he assumes "all risk, danger and injury incidental to the game of baseball" even if occurring in the parking lot.

Upon arrival at CitiField, the ticketholder learns that smoking is outright prohibited, that his ticket may not allow access to certain restaurants, escalators, elevators, and stadium levels, or even attendance at batting practice if he wishes to stand in a seating section within 200 feet of the batter.

Golly.  I thought these ticket stubs were bad when they attempted to shield club owners from any liability for foul balls proceeding with the G-Force of a comet.  Now the adhesion contracts thereon serve to not only eradicate all responsibility but also to either validate or cloak the class warfare occasioned by costly stadiums that have embarrassingly overestimated demand.  See Ken Belson, "Despite Success at Home, Something's Missing for Mets," NY Times, June 5, 2010 (noting that attendance at CitiField is down 15% this year).                        

As the Orwellian division of fans attending (and astronomical prices for) professional baseball proliferate, perhaps the law needs to catch up.  One thought is to extend New York's 3-day right to cancel to cover tickets purchased online (which often take more than three days to arrive).  Maybe each ticket needs an incorporation by reference clause to a website clearly detailing ALL terms and conditions.  Personally, I'd like to see a creative Federal Reserve come down on the undisclosed parking fees:  Nineteen dollars to park at CitiField is surely just as surprising as a credit card late fee for twenty five. 

---JSC, 6/23/10

A Tesla Stakeholder Request

The New York Times reports that Elon Musk, one of the PayPal founders, is "cash poor," despite his extensive investments. Musk made about $200 million dollars when eBay bought PayPal (he also made about $300 million from interests in another company he sold), but is now living off loans from friends. He is apparently getting by "on $200,000 a month and still flies his private jet." Nice friends. 

Musk is the "Chairman, Product Architect and CEO" of Tesla Motors, the high-end electric sports car company. (I'm a big fan of Tesla's cars, but haven't quite managed to get one.) He has money tied up in the company, and the company's scheduled initial public offering has the company expected to be valued around $1.4 billion.  In addition to Musk's money, the Department of Energy has provided the Tesla $465 million in low-interest loans and requires that Musk maintain 65% ownership of the firm. 

As a taxpayer and, thus, Tesla stakeholder, I would like to make this request:  I would appreciate it if Musk would stop using company funds for his private plane. Once the loan is paid off, it's up to him how he runs the company.  At that point, his shareholders, via their board, can complain if they see fit.  Just ask F. Ross Johnson.   

 --Josh Fershee

A Lost Opportunity for Washington?

In the decades preceding the recent economic crisis, the federal government - often at the urging of the White House - stimulated home ownership through steerage of tax breaks, interest rates, or HUD policies.  Now, as the foreclosure numbers continue at unfathomable highs, intervention by Washington, D.C. seems restrained, at best.

Thus leaving it to the states to fashion remedies for the growing problem of "strategic defaults" (i.e., homeowners simply walking away from mortgages).  Apart from the legal and ethical ramifications of that move, can such a mass response be good for consumers in general?  Banks are pretty good at spreading the cost of credit card fraud to the model consumers; I find it hard to believe that we won't all similarly end up paying for a practice that leaves lending institutions in the undesirable role of negative equity homeowner.  I find it harder to believe that an administration seemingly dedicated to touting the curative powers of big government has yet to propose a meaningful solution to a national foreclosure problem that promises to get worse.

For a discussion of California's debate over legislation aimed at capping foreclosure amounts, see "Battles in California Over Mortgages" in today's New York Times at http://www.nytimes.com/2010/06/22/business/22default.html?ref=business.

--JSC, 6/21/10   

 

Investing in the Gulf

The SEC website has an alert warning investors about stock scams related to the BP's oil disaster in the Gulf: Oil Spill Stock Scams—Don’t Get Cleaned Out by False Cleanup Claims.  It's hard to be surprised that some shady people are trying to cash in on this disaster.  This kind of unfortunate behavior regularly occurs following a tragedy, as it did after Hurricane Katrina, the September 11 attacks, and many others.    

To help avoid such scams, the SEC provides a number of suggestions for potential investors: (1) Investigate before you invest, (2) Find out who sent the message, (3) Find out where the stock trades, (4) Read a company’s SEC filings, and (5) Exercise some skepticism. I certainly can't argue with any of these, but if I were making the list, I think I'd start with the last one.   

--Josh Fershee

D. Daniel Sokol on Mergers

D. Daniel Sokol has posted Antitrust, Institutions, and Merger Control on SSRN with the following abstract:

This article provides a descriptive, analytical overview of the various institutions to better frame the larger institutional interrelations for a comparative institutional analysis. In the next Part it examines mergers as a case study of how one might apply antitrust institutional analysis across these different kinds and levels of antitrust institutions. The Article utilizes both quantitative and qualitative methods based on survey data of antitrust practitioners on merger issues to better understand institutional choice and the decision-making process. The surveys reveal results that run counter to the popular antitrust discourse about the level of merger enforcement under Bush. Slightly more than half of all practitioners surveyed found no change in merger enforcement under Bush in their own practice and the vast majority of the rest found a change in enforcement to be merely at the margins. The Article concludes with observations from the case study and appeals for more theoretical and empirical work in antitrust institutional analysis.

ECC

Reporting Back From the Institute for Law Teaching and Learning Conference

I am looking forward to the Midwest Corporate Law Scholars Conference.  Eric Chaffee will be presenting his idea, "A Modest Proposal for a Global Securities and Exchange Commission," in the afternoon--and I'm certainly looking forward to that, as well as all the other presentations.  But first I'd like to praise the Institute for Law Teaching and Learning for putting on its own great conference, which I also recently attended.  If you are interested in the art of teaching and couldn't make the conference, I suggest you take a few minutes to review the Session Workshops listed at the website.  Just reading the proposals might spur you on to try something new in the classroom that can have a positive effect on the learning experience of your students.

SJP

Millon on Corporate Social Responsibility

David Millon has posted Enlightened Shareholder Value, Social Responsibility, and the Redefinition of Corporate Purpose Without Law on SSRN with the following abstract:

Enlightened shareholder value (ESV) is the idea that corporations should pursue shareholder wealth with a long-run orientation that seeks sustainable growth and profits based on responsible attention to the full range of relevant stakeholder interests. This approach to management contrasts with a short-term focus on current share price even when that objective entails immediate or longer-term negative effects on nonshareholders. The combination of a long-run, sustainable conception of value coupled with acknowledgement of the importance of stakeholder considerations for achievement of that goal resonates with notions of corporate social responsibility (CSR). In this paper I consider whether market pressures might generate a version of ESV that could have the effect of shifting US transnational corporations away from narrowly focused shareholder primacy. The model I explore here is based on corporate risk management practices. Activities – such as labor and environmental policies – that reduce operating expenses in the short-term may present litigation and reputational risks because of the threat of public exposure, especially by non-governmental organizations (NGOs) and the media. The result may be significant litigation and settlements costs, as well as negative reputational effects in product, labor, and capital markets. Extra-legal pressures rather than new legal mandates could thereby redefine management responsibility and corporate purpose, and, because concerned private actors apply the pressure, public opinion about socially acceptable behavior drives management's rethinking of its role. The result may be a richer, more socially-oriented notion of the corporate objective, shaped by public opinion rather than legal intervention. Having presented this model, I then suggest that some caveats are in order. It is highly doubtful that private actors alone can generate the amount of information needed to hold transnational corporations fully accountable for their behavior. And, even when misdeeds are exposed and pressure brought to bear, it is not clear that corporations necessarily deal fully with the problems they have created. Public relations and reputational recovery may be the real objective. Finally, and most importantly, this approach to CSR is driven by bottom-line considerations. ESV is still about shareholder value after all, and this objective imposes a limit on how far corporations are likely to be willing to go. To the extent this is true, critics of transnational corporations should not expect that a commitment to shareholder value – even if enlightened – will necessarily generate the measure of socially responsible behavior that they believe to be appropriate. There may still be a role for law.

ECC