Business Law Prof Blog

Is "over-regulation" or greed a bigger problem?

Two different points of emphasis:

Fox Business is running a series asking:  Is the World Broke?  Causes for concern include entitlements, unions, spending, corruption, lack of ethics, over-regulation and over-taxation.

CNBC is running a series on Greed, focusing on "the dark side of the American Dream."

I wonder whether Gulf Coast residents would pick over-regulation as one of our bigger problems.

SJP 

North Dakota's Anti-Corporate Farming Law: No Piecemeal Approaches Allowed

In May, the North Dakota Supreme Court issued an opinion related to the state’s anti-corporate farming law. Until the decision, I did not know there was such a law. In my defense, I never really had a reason to look.

The background: Crosslands is a nonprofit corporation formed to “preserve and protect migratory waterfowl habitat in North Dakota.” Crosslands bought 949 acres of rural land in 2003 “for the express purpose of maintaining and preserving habitat for migratory waterfowl and other wildlife.” The court below determined, after a detailed analysis, that 267 acres of the 949-acre tract were not farmland or ranchland. The State argued that the whole parcel should be deemed farmland.

The statute starts with a general prohibition found in the North Dakota Century Code § 10-06.1-02:

All corporations and limited liability companies, except as otherwise provided in this chapter, are prohibited from owning or leasing land used for farming or ranching and from engaging in the business of farming or ranching.

The statute then provides a number of exceptions, one of which permits certain nonprofit organizations to own farmland, as long as they meet a long list of requirements. One of the requirements provides: “Before farmland or ranchland may be purchased by a nonprofit organization for the purpose of conserving natural areas and habitats for biota, the governor must approve the proposed acquisition.” N.D. Cent. Code § 10-06.1-10.

Crosslands did not comply with this requirement, but the court below determined that the nonprofit should be allowed to divest the farmland it had acquired, but keep other rural (nonfarm) land it had purchased. The North Dakota Supreme Court reversed, stating that the statute required the court to consider the land as a single parcel and ordered divestiture within a year.

The case is fairly straightforward, but both the case and the statute provide a few puzzles. For example, another requirement for nonprofit organizations is that the nonprofit organization must have been either incorporated in this state or issued a certificate of authority to do business in this state before January 1, 1985, or, before January 1, 1987, have been incorporated in this state if the nonprofit organization was created or authorized under Public Law No. 99-294 [100 Stat. 418].” N.D. Cent. Code § 10-06.1-10. The court quotes this part of the statute, but interestingly doesn’t state the date Crosslands was formed.

Perhaps that was addressed by the court below, but in North Dakota, lower court decisions aren’t reported, so I can’t be sure. It does appear that Crosslands has been around since 1984, based on an old newspaper report, but it still seems odd not to mention it in the decision.

Furthermore, why does it matter if the nonprofit was formed before 1987 (or earlier) if it meets the other requirements? I assume this was grandfathering older nonprofits, but it seems rather odd. Why not just outlaw the practice generally?

Anyway, I find the case and the statute section quite interesting. I suppose that’s why I do what I do.

--Josh Fershee

UPDATE:  A kind reader provided a link to the lower court decision at National Ag Law Center's website here.

When Regulators Get It Wrong: Why Major League Baseball Should Award Galarraga His Perfect Game

Speaking of Detroit, odds are you’ve heard about the blown call at the end of Detroit Tigers game yesterday that kept Armando Galarraga from getting his historic perfect game. As a life-long Tigers fan, I admit my bias, but nonetheless I think Major League Baseball (MLB) should have fixed this call, even though they apparently won't. And this could be a good lesson for all regulators (are you listening SEC?): when possible, getting it right is more important than being right.

Here’s why MLB should have fixed this:

First, it’s clear it was a blown call. The umpire knows it, the players know it, and MLB knows it. The proper call was out, and there is no reasonable debate on that issue.

Second, it was not just a blown call; it was a call that, on its own, cost the players and the sport a part of history. I say that to differentiate this from the same call in the second inning or the eighth inning, when the rest of what happens is impacted by the call. That is, even if a pitcher gets what would be a perfect game after a blown call in the middle of the game, it’s not clear he would have had a perfect game but for the blown call. Perhaps the next batter would have hit a home run, but the pitcher settled down after the blown call. Here, the game would have been over. Period. There was nothing else left to happen.

Third, MLB has had a rough time over the past number of years by not making the right call. The sport was too slow to ban steroids, so a number of records were broken that perhaps would not have been. But we can’t know. Would Barry Bonds have hit so many home runs if there had been steroid testing? Who knows? Bonds was never caught doing anything wrong by MLB, so certainly baseball can’t know how to fix that. Similarly, when Sammy Sosa and Mark McGwire had their historic chase for Roger Maris’s home run record, there were serious questions raised about whether their performances were “enhanced.” But we can’t know, so MLB can’t fix that either. They can fix Galarraga’s perfect game because we all know what would have happened.

Fourth, speaking of Maris, although they never actually put the storied asterisk next to Maris’s record, MLB still got that wrong. It was not Maris’s fault they extended the baseball season to 162 games from 154. It was just that the 1961 baseball commissioner, Ford Frick, had a thing for Ruth and was afraid the longer season would lead to the record falling. During his life, (Fargo’s own) Maris never got the validation he deserved for being baseball’s single-season home run king. Eventually MLB did try to fix it, but it was after Maris had passed away. They can fix Jim Joyce’s call today, and give Galarraga his due in a (somewhat) timely manner.

Fifth, MLB could let their umpire off the hook. There is no value to the game in punishing someone unnecessarily. This call will almost certainly, no matter what happens, be Joyce’s defining call in his career. By most accounts he has had a good career, and he knows he blew the call. Fixing it will not make umpires less likely to make a tough call; it would simply say to all involved, when MLB can get it right, absolutely right, without impacting others, they will.

Sixth, if there is any question whether baseball should have stepped in if the Tigers had lost the game following the call, the answer would be no. In that case, the team from Cleveland would suffer by MLB’s action. Again, though, here, but for erasing an undeserved hit, the game can be fixed without any negative consequences on those involved. Thus, this is the perfect situation to fix something that went wrong. MLB has the power and the information necessary to fix it, and they can and should. There is no slippery slope, because again, we have the information necessary to know the impact on all involved. There’s only upside in this situation, with essentially no downside.

I am all for the “human element” in sports, but I believe that (at least where possible) umpires, referees etc., should be able to blow calls, not games or history. And I suspect most umpires would appreciate the help in such situations. MLB should give umpires at least a choice for replay in such cases moving forward. For this game, MLB should have fixed it.

At the end of the day, there’s no discernable harm in fixing the call and getting it right, but a failure to act would cause nearly irreparable harm.  Alas, it appears MLB got the call wrong, too, compounding Joyce's honest mistake, even when it had the chance to get it right.  

But then, what would you expect a Tigers fan to think?

--Josh Fershee

Poker, Business & Law

Cleveland.com has an article on the on-going finalization of regulations governing Ohio's four pending casinos.  The money quote is actually in the comments:

[W]hile you guys screw around we are in [Detroit] spending money....

A slight twist on Cleveland's unofficial theme song: "We're Not Detroit!"

SJP

Did Warren Buffett Believe Housing Prices Would Go Up Forever?

The Wall Street Journal has an article today with an interesting quote in the paper edition:

Most people believed home prices couldn't fall, said Mr. Buffett, "I was wrong on it, too."

Now, I did not watch Buffett's testimony or read the transcript, but I would be surprised to hear him admit to believing house prices couldn't fall (as others have claimed as a defense).  Elsewhere in the article he is quoted as saying his error was thinking we were dealing with a "bubble-ette" as opposed to a "four-star bubble", and that: "Perhaps no one spoke out enough in the past years during the bubble. Certainly, I could have done more."  This all suggests to me that Mr. Buffett realized housing prices were due for a correction (as I believe most of the key actors did)--his error was misjudging the severity and repercussions thereof.

SJP

Bruner on Corporate Governance

Christopher M. Bruner has posted Corporate Governance Reform in a Time of Crisis on SSRN with the following abstract:

In this article I argue that crisis-driven corporate governance reform efforts in the United States and the United Kingdom that aim to empower shareholders are misguided, and offer an explanation of why policymakers in each country have reacted to the financial crisis as they have. I first discuss the risk incentives of shareholders and managers in financial firms, and examine how excessive leverage and risk-taking in pursuit of short-term returns for shareholders led to the crisis. I then describe the far greater power and centrality that U.K. shareholders have historically possessed relative to their U.S. counterparts, and explore historical and cultural factors explaining this distinction - notably that the more robust U.K. welfare state has deflected political pressure to accommodate non-shareholders' interests within the corporate governance system, while the opposite has occurred in the United States. This, I argue, looms large in the observed crisis responses. The U.K. initiatives reflect reinforcement of the more shareholder-centric status quo, while the U.S. initiatives reflect a populist backlash against managers, fueled by middle class anger and fear in a far less stable social welfare environment. I conclude with a discussion of corporate governance challenges facing U.S. and U.K. policymakers following the crisis.

ECC

Wilson on Delaware Law

David M. Wilson has posted Climate Change: The Real Threat to Delaware Corporate Law, Why Delaware Must Keep a Watchful Eye on the Content of Political Change in the Air on SSRN with the following abstract:

Delaware is the corporate law capital of America. However, when the blowing winds of change alter the environment in which it operates, simply maintaining its bearing will not keep Delaware on course. This article outlines the tactics Delaware must execute in a changing political climate to successfully maintain its course as the leader in corporate law. To understand these tactics one must first be familiar with Delaware’s current bearing and the environment in which it navigates by appreciating the origins of Delaware’s preeminence and the strengths of its system. Equipped with this knowledge one will then be prepared to identify and assess potential threats.

Section two of this article begins with a discussion of the history of corporate law in America, the origins of Delaware’s rise, and the significance of Delaware’s strengths. Next, section three outlines and evaluates common views of Delaware’s role in corporate law, including the race theories of a race to the top or race to the bottom, and symbiotic federalism. Then, section four discusses and dismisses several potential threats to Delaware corporate law. Section five outlines Delaware’s current strategy to maintain its course of corporate law predominance. A casual navigator of this article may choose to skip these initial sections, opting to dive directly into the deep waters of the new and intriguing perfect storm described in section six. However, even if one begins the voyage of this article well prepared, aware of Woodrow Wilson’s significance and able to quote the works of Kahan and Rock, there is considerable foundational and analytical benefit gained by investing a few moments to enjoy the familiar concepts presented in these introductory sections. Such a reading will ensure smooth passage through the final section with a more precise understanding of the tactics Delaware must execute and the strategic reasons underlying them.

ECC

If Goldman Discloses a Conflict in Delaware, Does Anyone Make a Sound?

At the end of April, the Delaware Supreme Court approved a settlement in shareholder litigation related to National City Corp.’s (NCC) merger with PNC Financial Services Group. The settlement resulted only in additional merger-related disclosures (i.e., no financial terms were modified). The Supreme Court affirmed on the “basis of and for the reasons assigned by the Court of Chancery” in the decision approving the settlement.

In his July 2009 opinion, Chancellor Chandler approved the settlement, but reduced the attorneys’ fees from the negotiated amount of $1.2 million to $400,000 because the disclosures “amount[ed] to an exceedingly modest benefit to the shareholder class.” The Chancellor explained that plaintiffs' counsel “only achieved meager additional disclosures that failed to be significant enough to warrant placement as an amendment to the proxy statement and were only reported on NCC's form 8-K.” Finally, the opinion states that there was no evidence the additional disclosures had any significant impact on the ultimate shareholder vote, and that, in fact, “NCC's shareholders overwhelmingly voted in favor of the merger.”

I found one of the disclosures that plaintiffs’ counsel obtained particularly interesting: “The potential conflict of NCC's financial advisor, Goldman Sachs, which advised both PNC and NCC at various times.” Obviously, at the time, this disclosure did not mean much to the shareholders, but I have to wonder if shareholders might feel differently today in light of what they know about Goldman’s behavior with other clients. Furthermore, how many other cases are out there where Goldman did not disclose such a potential conflict. (My guess: many.)

I’m not sure that disclosure in every case where Goldman (or any other bank) might have had a conflict would change shareholder behavior. As I have noted before, I’m inclined to think it would not matter much. But it might, so I still think there is continued value in requiring the required disclosures.

For the record, I also happen to think Chancellor Chandler got the fees right on this one. As he explained, counsel achieved a

non-monetary, therapeutic and modest achievement in a case where counsel bitterly complained that NCC shareholders were being shortchanged, plaintiffs' counsel seeks the princely sum of $1.2 million as their fees and expenses. . . . Moreover, plaintiffs' counsel, after winning an early motion to expedite, did not press any subsequent motion and only deposed two witnesses. This effort, regardless of the amount of hours spent, does not justify a fee award of $1.2 million, especially since the benefit obtained for the shareholder class was miniscule.

--Josh Fershee

Still a dangerous game...

My Securities Regulation students are always amazed at the aggressiveness with which the SEC pursues insider trading.  While it is true that the federal courts often frown upon the theories by which "outsiders" (i.e., non-employees of the subject company) are charged, the Commission does not seem to be lessening its nearly 50-year crusade against the violation anytime soon.

Last week was no exception.  The Commission's Complaint against Pequot Capital Management focuses on alleged tips from a Microsoft employee to a hedge fund.  Careful readers will note 1) that the alleged inside information concerns earnings estimates (as opposed to news on merger talks, the fabled grist of inside trading), that the defendant CEO is 69 years old (belying notions of leniency premised upon age and/or title), and that a stock jump of only 96 cents (from a share price of $68.04 to $69) is characterized as 'material' (seemingly because the hedge fund's alleged accompanying bet and profits were so large). 

You can view the SEC complaint at http://www.sec.gov/litigation/complaints/2010/comp-pr2010-88.pdf.

--JSC, 6/1/10

Let's Hope this Works & Happy Memorial Day

So, BP hasn't figured out the oil leak yet, but at least people are appreciating this country's great veterans who are no longer with us.  

Happy Memorial Day, and for all our sake, I sure hope BP can figure this out.

--Josh Fershee 

The Cruel Irony of Stock Market Competition

The past 20 years have seen the erosion of the "stock exchange" as the nucleus of trading information.  Technological advancements paved the way for what would develop into electronic communication networks (blessed by the SEC in 1998 via adoption of Regulation ATS).  A confluence of forces pushed for an end to NYSE Rule 390 (which had largely prohibited member trading in NYSE listings on other exchanges); the limitation was formally rescinded in 2000.  In 2005, the SEC passed Regulation NMS, furthering the desire of the 1975 Congress for cross-market trading. 

With the push for exchanges permitting/facilitating trading at their rivals came a concomitant emphasis on each exchange enhancing its own audit trail in a manner most meaningfully capturing its order flow.  Now, as the SEC and others strain to piece together the market swoon of May 6th, consolidated trading records is the popular remedy.  But such a concentration of previously dispersed data poses many collateral questions, chief among which are the following:

• Who would own the consolidated audit trail, both in terms of responsibility for its creation and profits from the sale of its daily numbers?  

• How are the triggers for circuit breakers to be set when such brakes presently vary among exchanges?

• Will exemptions for internalized customer orders (fulfilled by firms against their proprietary holdings) and alternative trading systems render meaningless a consolidated trail (which obligates only exchanges and trading associations) ?  

• How does this all effect the anonymity that firms enjoy by placing their large trades in lesser publicized market centers?

Perhaps the mandating of cross-exchange stock histories - and the likely resulting ease in trading reconstruction - is truly inevitable.  But many other painful (and costly) decisions will have to be made, both by the chief market players and their regulators.  And the price of any rushed solution may be the progress achieved for the consumer in recent times, as exchanges unable to meet new records requirements become less viable options for traders.

In sum, any inartfully imposed consolidation of data may further set markets apart.  Thus, this fix may not be as simple as its immediate predecessor (i.e., banning universally- disdained flash trading).  A summary of the consolidated audit trail proposed last week by the SEC is available at http://www.sec.gov/news/press/2010/2010-86.htm.

---JSC, 5/31/10   

The Cruel Irony of Stock Market Competition

The past 20 years has seen the erosion of the "stock exchange" as the nucleus of trading information.  Technological advancements paved the way for what would develop into electronic communication networks (blessed by the SEC in 1998 via adoption of Regulation ATS).  A confluence of forces pushed for an end to NYSE Rule 390 (which had largely prohibited member trading in NYSE listings on other exchanges); the limitation was formally rescinded in 2000.  In 2005, the SEC passed Regulation NMS, furthering the desire of the 1975 Congress for cross-market trading. 

With the push for exchanges permitting/facilitating trading at their rivals came a concomitant emphasis on each exchange enhancing its own audit trail in a manner most meaningfully capturing its order flow.  Now, as the SEC and others strain to piece together the market swoon of May 6th, consolidated trading records is the popular remedy.  But such a concentration of previously dispersed data poses many collateral questions, chief among which are the following:

• Who would own the consolidated audit trail, both in terms of responsibility for its creation and profits from the sale of its daily numbers?  

• How are the triggers for circuit breakers to be set when such brakes presently vary among exchanges?

• Will exemptions for internalized customer orders (fulfilled by firms against their proprietary holdings) and alternative trading systems render meaningless a consolidated trail (which obligates only exchanges and trading associations) ?  

• How does this all effect the anonymity that firms enjoy by placing their large trades in lesser publicized market centers?

Perhaps the mandating of cross-exchange stock histories - and the likely resulting ease in trading reconstruction - is truly inevitable.  But many other painful (and costly) decisions will have to be made, both by the chief market players and their regulators.  And the price of any rushed solution may be the progress achieved for the consumer in recent times, as exchanges unable to meet new records requirements become less viable options for traders.

In sum, any inartfully imposed consolidation of data may further set markets apart.  Thus, this fix may not be as simple as its immediate predecessor (i.e., banning universally- disdained flash trading).  A summary of the consolidated audit trail proposed last week by the SEC is available at http://www.sec.gov/news/press/2010/2010-86.htm.

---JSC, 5/31/10