March 13, 2010
The WSJ Law Blog has a post suggesting shaming may take on an increasing role in the sentencing of corporate offenders. Personally, I have been unimpressed by the idea of shaming as an effective form of deterrence or punishment ever since I heard the comments of a Big Corp board member effectively affirming what I had long believed to be true: That at least for the top execs, they'll gladly take your shame all the way to the bank. They don't live in the same circles as the rest of us and they are about as impacted by our scorn as I would be by the disapproval of my cat (actually, I hate when my cat views me with disdain--so that's not a great example). Now, I can't remember the source of the comment so I have to submit it as apocryphal. But my point is nicely summarized by a comment I received from someone else in connection with this story: "Really? Who is supposed to be 'ashamed'? The entity itself? The people who run it (and who can simply move on)? I am very dubious."
Ultimately, this is an empirical question. And I am certainly willing to be convinced that shaming has an effective role to play in the punishment of corporate offenders (both as to the corporate entity and the individuals who run it). But for now, if more punishment is actually warranted I'd prefer to see more jail time or fines.
March 12, 2010
Law Office SpaceThis blog is about business law, which I am taking to include the business of law (at least for this post). A recent ABA Journal article reports that, according to a consultant, midsize law firms are at "serious risk" because of “complacency.” It may be that the film Office Space has unfairly and forever jaded my view of consultants (remember the Bobs?), but I am skeptical.
I mean, I am sure he’s right to some degree, but I am not sure anyone needed a consultant to figure that out. Complacency is a problem in any profession, including the legal profession. That, of course, applies to legal academics, too. If you think you have it all figured out and you don't need to adjust, evolve, and improve, you’ll get left behind. Someone else will fill the void, and take your spot.
This whole idea might be news if there were a study or some other indication that midsize firms were, on the whole, complacent in some specific way that was likely to lead to problems. However, this appears to be simply an assertion based on anecdotal evidence. The consultant has every right to make such a claim; I’m just not clear how it qualifies as news.
March 11, 2010
See if you can guess why I think these two items are related.
Item 1: "How to Get Attorneys to Read Something: E-Mail Them Telling Them Not to"
Item 2: "Securities and Banking Industries Urge Senate to Retain Fed Regulatory Powers"
Josh Fershee has kindly accepted our offer to join us as one of our co-editors. The list of Blog Editors should be amended shortly. Onwards and upwards!
Comments will be moderated...now that I know where to find them.
It turns out a number of you have been commenting on our posts. I was completely unaware of this till yesterday. (The secret is out, I actually don't read every word of every email / attachment / instruction that crosses my desk.) Unfortunately, there are too many for me to go back and review them all now--and I really want to maintain my belief that they aren't all spam. But I fully intend to stay on top of them going forward. Please forgive my oversight.
March 10, 2010
Heminway on the Financial Crisis
Joan MacLeod Heminway has posted The Best of Times, the Worst of Times: Securities Regulation Scholarship and Teaching in the Global Financial Crisis on SSRN with the following abstract:
This short piece is an annotated version of remarks that I gave to introduce a roundtable discussion on securities regulation scholarship at the University of Maryland School of Law program on “Corporate Governance and Securities Law Responses to the Financial Crisis” held on April 17, 2009. The piece represents my current thoughts about what it is like to teach, research, and write in the area of securities regulation. Ultimately, the message I deliver is a positive one; there is much opportunity for securities regulation teachers and scholars in an environment like the one we have been wrestling with since at least the fall of 2008. The text is quite short, but I have offered many citations in support of my ideas in the hope that they may be helpful to those exploring aspects of the areas I cover.
Going CanadianWhile Lions Gate is considering a move from Canada, a North Dakota pasta company is considering a merger with a Canadian suitor. Dakota Growers Pasta Co. is the third largest pasta company in the United States and has about 1000 shareholders. Viterra Inc., the acquiring company, saw its stock rise more than 2% today, following a positive financial report and news of the proposed acquisition.
This talk of Canadian mergers reminded me of an interesting article I came across awhile back, Analysis of a Merger from a Governance Perspective: The Case of Abitibi-Consolidated and Donohue. The abstract:
Adopting a governance perspective, this clinical study analyses the merger between closely-held Donohue Inc. and widely-held Abitibi-Consolidated Inc. Some key findings emerge. First, the absence of a controlling shareholder and weak board governance at Abitibi might explain both (a) its executives' interests in the transaction and (b) its CEO's compensation increase despite underperformance. Second, an inter-generation shift of control at Quebecor (Donohue's parent company) led to a strategic reorientation that (a) transformed Donohue into a target and (b) insured that Donohue's executives had incentives to pursue a deal. Finally, Donohue's non-controlling shareholders benefited from the transaction while Abitibi shareholders experienced wealth reduction. The merger's aftermath provides some counter evidence regarding blockholders' power in widely-held firms.
March 9, 2010
The Volcker Rule
The very name suggests a return to more stable economic times. The text condemns a practice that, for better or worse, has added liquidity to many domestic markets.
To ban "proprietary trading" (transactions for a company's own trading book) among federally chartered banks and their holding companies appears, foremost, to fulfill some long overdue promise of punitive regulatory reform. But the Treasury's legislative proposal, coming on the heels of the White House's suggestion in January of the same, may have the following effects:
Further pushing domestic private equity firms and hedge funds to seeking monies overseas;
Discouraging foreign banks from planting a branch on U.S. soil; and
Further balkanizing existing bank regulators (consolidation of which has been recently abandoned by Senator Dodd ).
Additionally, the exceptions for broker-dealers (whose proprietary trading keeps stock exchanges afloat) and government securities (which are already the investment of choice for stressed banks) appear likely to make enforcement difficult while further limiting yields on Treasury instruments.
Such economic and practical uncertainties argue in favor of Congress taking up debate of the more conventional reforms, such as regulation of credit rating agencies and credit default swaps. This time last year, a series of well-meaning White House moves contributed to banks not acting as banks; the Volcker rule might serve primarily to prevent them from acting as customers.
March 8, 2010
Do Limits on Ownership Rights Eliminate Ownership?Last week, I wrote, “A shareholder move seeking a greater voice in corporate governance seems proper to me because it is about the exercise of ownership rights.” Professor Bainbridge disagreed (although he did concede that shareholders’ residual claim on the corporation's assets provides "certain ownership-like rights”). I appreciate Professor Bainbridge’s nexus of contracts theory (the reason he disagrees), and I find it to be a useful tool in conceptualizing some of the relationships between corporate stakeholders. However, it doesn’t completely satisfy my view of the shareholder relationship with the corporation.
I view shareholders as having “an ownership interest” in the corporation, an interest that is, I admit, often quite limited. I think comparing shareholders to those who own homes (or condos) with a restrictive homeowners’ association (HOA) as an apt analogy. When owning a home governed by an HOA, the homeowner gives up a number of rights often attributed to ownership — such as limits on exterior modifications or choice of color. However, just because those rights (and the related decision-making ability) were ceded to the HOA board, we don’t tend to think that means there is a lack of ownership. Beyond HOAs, there often are additional contracts (such as mortgages, easements, etc.) related to (and restrictive of) home ownership. We nonetheless still conceptualize these people as “owners.” (Incidentally, I don’t view the tangible/intangible difference here as significant, because I am of the mind that people can also own patents, copyrights, goodwill, etc., that are similarly created by law.)
I suppose this is just an area in which we'll have to agree to disagree.--Josh Fershee
"Fall of the Economy" Symposium at SJU
This past Friday, I was fortunate enough to take part in a full-day discussion of the government's responses to the continuing economic crisis. Hosted by The Journal of Civil Rights and Economic Development of the St. John's University School of Law, the conference included elected officials, academics, practitioners and even the head of Common Cause.
Some of the salient observations:
--a significant percentage of adjustable rate mortgages have yet to re-calibrate,
--the "Bailout" figures, when calculated to include guarantees, purchases of investments, and lines of credit, far exceed the $1.4 trillion number attending discussions of TARP and ARRA, and
--federal legislative solutions to, among others, the problems of unregulated credit derivatives and varying definitions of 'mortgage loan originator' have yet to be adopted.
One of the most enlightening subjects was the apparent rush to declare TARP funds re-paid, as though the system has successfully "pushed a re-set button", in the words of Professor cummings of West Virginia law school. Professor cummings and other insightful observers can be followed via their Corporate Justice Blog, available at http://corporatejusticeblog.blogspot.com/.
March 7, 2010
Reuveni on Securities Regulation
Erez Reuveni has updated his draft of Extraterritoriality as Standing: A Standing Theory of the Extraterritorial Application of the Securities Laws on SSRN. The draft includes the following abstract:
Article contends that the current treatment of the extraterritorial
scope of the 1934 Securities Exchange Act as a question of subject
matter jurisdiction is wrong. Although the Act is silent as to its
extraterritorial application, for over forty years courts have analyzed
the Act’s extraterritorial scope as a question of subject matter
jurisdiction, relying on the so-called “conduct” and “effects” tests.
Because courts apply these tests in an ad hoc, case-by-case manner,
they are inherently unpredictable and unnecessarily complicated. This
state of affairs has become particularly troublesome in recent years,
as so-called “foreign-cubed” securities fraud lawsuits - lawsuits filed
by foreign plaintiffs against foreign defendants, alleging fraud in
connection with the sale or purchase of shares in foreign markets -
have proliferated in federal courts. This Article argues that contrary
to current practice, the extraterritorial reach of Section 10(b) and
Rule 10b-5 of the 1934 Act is really a question of statutory standing.
Under the analysis developed here, the appropriate question for courts
to ask is not whether they have jurisdiction over foreign claims, but
whether Congress intended for the statutory scheme to provide a remedy
to foreign plaintiffs. As this Article shows, only foreign investors
who purchase or sell stock in the United States have standing to invoke
the securities laws. This approach resolves the problems inherent in
jurisdictional analysis and provides a simple, easily understood
bright-line rule whose predictive value and procedural benefits ensure
an optimal enforcement regime where American interests are affected by