June 12, 2010
Moving Beyond the Duality of Government and Business
I am often advised, as part of my Buddhist practice, to move beyond my dualistic perceptions. One particularly tempting duality is government and business. And yet, at some point the revolving door between the public and private sector raises serious questions about the deceptiveness of that dualistic view. I have addressed an aspect of this in my article, "Finding State Action When Corporations Govern." More recently, one of our Akron law librarians, Lynn Lenart, has put up an interesting post over at the Akron Law Cafe reviewing some "Revolving Door Reports."
June 11, 2010
The Missing Good Samaritan: Are Hopes of Acquiring BP Dragging Out the Oil Spill?
I can't seem to stop thinking about Andrew Ross Sorkin's column from Tuesday's New York Times, Imagining the Worst in BP’s Future. He wrote that, as the possible costs from BP's oil spill continue to rise, BP becomes more and more likely to be a takeover target. Others are considering ways in which BP can figure out a way to segregate BP's potential losses in a prepackaged bankruptcy, separating the cleanup costs into a separate entity. All of these considerations makes sense, given that BP still has strong assets and pulled in $17 billion in profits last year.
I have been wondering during all of this, where are the other oil companies? As I have noted before, the government doesn't have the equipment, training, or personnel to do much of anything about the ongoing spill. But shouldn't Shell, Exxon, Chevron or Anadarko? If anything, those companies appear to be better run, better managed, and better prepared for such an event than BP. In early May, BP asked other companies for help, and Exxon Mobil suggested injecting dispersants "directly into the oil stream," and Royal Dutch Shell "pitched in," by giving "BP access to subject-matter experts to help them resolve the situation." Beyond that, I haven't seen anything indicating that the industry has mobilized to address what seems, at least in part, like an industry issue. It is certainly a major environmental issue that should warrant action given the widespread damage that is still happening.
Of course, the other oil companies have some motivation to try to lay low and let this seem like a BP-only issue. BP's safety record and public statements have certainly helped in that process. I appreciate that other companies might want to keep their distance, although it would seem that being the hero in this case would have long-term benefits if another company could help in some significant way. There should also be value (beyond being morally right) in trying so the other companies can show they were on the right side of things as Congress starts moving forward on new legislation.
Sorkin's article, though, notes that there may be another reason no one is rushing in to help: "Shell and Exxon Mobil are both said to be licking their chops." Apparently both Shell and Exxon could take over BP without a problem, as long as BP's liability exposure could be segregated in some way.
I have no inside knowledge or any way to know if there is something the other oil companies could actually do to help, and perhaps I have missed something or there is a lot going on behind the scenes. But all of this seems a little like watching the neighbor's store burn in the hope of gaining customers. It may be legal, but it's definitely not right.
June 10, 2010
The Next Bubble?
The Wall Street Journal had an article this week citing some money managers as seeing a bubble in bonds. One might expect bond-pushers to address these concerns specifically in their disclosures to investors. But somehow I see them relying on some combination of "truth on the market," boilerplate cautions about the future, and investor "sophistication" to conclude silence is golden.
Can legalized online poker in Ohio be far behind?
June 9, 2010
Warren on International Securities Regulation
Manning G. Warren III has posted The Harmonization of European Securities Law on SSRN with the following abstract:
The European Union’s (EU) mission has been and continues to be the establishment of a single, internal market for financial services comprising the entire territory of its fifteen Member States. Achieving a single market was historically dependent on provision of market access and development of a comprehensive securities regulatory regime to displace or otherwise harmonize disparate national laws. Excluding the United Kingdom, the Member States prior to the 1990s had no significant retail securities markets, virtually no comprehensive securities regulation, and, consequently, no national securities commissions. Their stock exchanges were self-regulated with minimal, if any, governmental oversight. As a result, the EU’s challenges have been to legislate access, to legislate virtually the entire field of securities law, and to legislate regulatory harmony. Harmonization proved the most difficult and most improbable of these preconditions to a single market in financial services. Fortunately, the forces driving its achievement never yielded to the anti-harmonization view that a single, harmonized regulatory system would deny investors optimal choices among diverse national regimes and thus eliminate the supposed benefits of regulatory competition. Rather, the EU has steadfastly pursued the ultimate goal of maximum harmonization, both to unify fifteen markets into one and to prevent refragmentation of the emergent single market as a result of diverse nationalistic regulatory philosophies. In a meaningful sense, commonality has triumphed over diversity.
This symposium essay first addresses the evolutionary history of harmonization of the Member States’ financial systems. After briefly evaluating the various directives aimed toward harmonization, the focus turns to contemporary measures aimed to achieve more expedient and efficient responses to the accelerating, evolutionary changes in European financial markets. While recognizing the EU’s considerable ongoing success in regulating and integrating its financial markets, the author concludes with recommendations for improvements in the legislative and regulatory processes aimed toward the continued development of regulatory harmonization.
Foreshadowing the BP Disaster?Apparently I continue to be fascinated by the BP oil disaster. I was doing a little project research and came across a June 15, 2007, article in the Houston Chronicle titled, "New CEO aims to help BP overcome deadly past." The article discusses the rise of BP CEO Tony Hayward to the company's top spot and notes that he would be committed to "safety" to help restore confidence in the company.
The article goes on to report that Hayward admitted that BP and other oil companies cut costs because of low profit margins and oil prices in the late 1990s and early 2000s, but claimed "no link" between cost cutting and a Texas City explosion or Alaskan oil spill. He did, however, say that "cutbacks in skilled engineers and other professionals in the same time period did lead to BP's problems with Thunder Horse, its ambitious oil platform." The article continues, "In hindsight, [Hayward] said BP lacked engineering capacity to handle [that project's] scale and complexity."
Sound familiar? This old news can't be good news for BP or its shareholders.
BP May Be Innocent Until Proven Grossly Negligent
Law.com reports that some energy experts are warning about possible breach of contract claims against the federal government if Congress were to remove the $75 million liability limit "for an offshore facility except a deepwater port" provided in the Oil Pollution Act of 1990, 33 U.S.C. § 2704. The claim is that the oil and gas companies purchased leases from the federal government, and those leases are contracts that were signed with certain liability expectations.
The Oil Pollution Act of 1990 carries an exception to the $75 million limit. Specifically, the liability limit
does not apply if the incident was proximately caused by--
(A) gross negligence or willful misconduct of, or
(B) the violation of an applicable Federal safety, construction, or operating regulation by, the responsible party, an agent or employee of the responsible party, or a person acting pursuant to a contractual relationship with the responsible party (except where the sole contractual arrangement arises in connection with carriage by a common carrier by rail).
Thus, if BP were found to be grossly negligent or if the incident were caused by a violation of an applicable Federal regulation, the cap doesn't apply to BP, anyway.
I don't like the cap because I think it clearly underestimates the potential cost of remediation and compensation, but frankly, if BP doesn't fall into the exceptions, we, through our representative democracy, signed up for such a cap. I find that appalling, and I have a hard time believing the exception doesn't apply in this case, but I have been appalled by a number of laws on the books. My (or our collective) outrage doesn't make such laws not applicable.
There may be other bases for liability, even if the exception doesn't apply (some of which I may discuss later). Regardless, the cap needs to change and BP needs to stop the spill and clean up the mess as soon as possible.
June 8, 2010
Bring Back the Good Old Civil Fine...
In these days of Ponzi schemes and pernicious hedging, there arises once again the call for increased criminal penalties. Why burden our regulators with the attendant procedural obstacles?
Any agency fashioning a "penalty" or "fine" is subject to 28 U.S.C. sec. 2462, which imposes a 5-year statute of limitations.
And the Supreme Court's decision in U.S. v. Halper, 490 US 435 (1989), clarified that a civil fine so large as to be punitive in nature can trigger considerations of double jeopardy.
Which makes the announcement yesterday of the FTC's $108 million civil settlement with two Countrywide subsidiaries all the more exemplary. The activities underlying the settlement were tawdry. The subsidiaries of the failed mortgage servicer were alleged to have imposed and collected inflated fees from subprime mortgagors who had fallen behind on payments and also "made false or unsupported claims...about amounts owed " to bankrupt borrowers; the FTC Chairman himself was quoted as saying, "Life is hard enough for homeowners who are having trouble paying their mortgage. To have a major loan servicer like Countrywide piling on illegal and excessive fees is indefensible."
The settlement - fashioned as a reimbursement to the victimized homeowners - reaches events before July 2008, when Countrywide was acquired by Bank of America. FTC settlements avoid characterization as a fine and do not constitute an admission by defendants, but the current order permanently bars the defendants from recurring violations and requires the subsidiaries to change their bankruptcy servicing practices.
Which reminds us that there are effective regulators of banking practices besides the Fed, the Treasury, and the Securities and Exchange Commission. And that it was the FTC who actually enforced the Securities Act of 1933 for one year until the birth of the SEC. And that the most effective regulation may just be those actions that place money directly back in the hands of customers at the heart of (and yet most marginalized by) current events.
June 7, 2010
More on the North Dakota Anti-Corporate Farming Law: Reifying Trusts and Estates?
After reading Stenehjem v. Crosslands, Inc., which I discussed last week, I took a look at some of the other provisions of North Dakota’s corporate farming laws. Section 10-06.1-12 of the North Dakota Century Code provides the requirements for corporations or limited liability companies the state allows to engage in the business of farming or ranching.
Overall, the law seems fairly straightforward in its intent, although the drafting of the statute isn't ideal. Laws like this one should be able to function as a statutory checklist. The attorney (?) creating the family-farm corporation or LLC should be able to go through the list to ensure they have met the requirements. Unfortunately, section 10-06.1-12 doesn’t quite operate that way.
The statute begins by providing that a corporation or LLC engaged in farming must meet the requirements of the state’s corporation or LLC laws. In addition, there are eight “requirements” that “also apply.” I will focus on the first three requirements, the third of which, as drafted, inherently violates the second requirement. Here are the provisions:
1. If a corporation, the corporation must not have more than fifteen shareholders. If a limited liability company, the limited liability company must not have more than fifteen members.
2. Each shareholder or member must be related to each of the other shareholders or members within one of the following degrees of kinship or affinity: parent, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, brother, sister, uncle, aunt, nephew, niece, great-grandparent, great-grandchild, first cousin, or the spouse of a person so related.
3. Each shareholder or member must be an individual or one of the following:
a. A trust for the benefit of an individual or a class of individuals who are related to every shareholder of the corporation or member of the limited liability company within the degrees of kinship or affinity specified in this section.
b. An estate of a decedent who was related to every shareholder of the corporation or member of the limited liability company within the degrees of kinship or affinity specified in this section.
Note that in item two, each corporate shareholder or LLC member must be related to the others through the described relationships. Item three then allows that a trust for the benefit of someone described in item two or an estate for a decedent who was similarly related to be a shareholder or member. However, to my knowledge, there is no way for a trust or estate to be related to anyone. Despite the fact that we often reify the corporation or LLC, such trusts and estates cannot meet the kinship or affinity requirement.
The easiest fix, if not the most elegant, would probably involve changing item two to begin with the following clause: “Unless the shareholder or member is an approved trust or estate, as described in this section, . . . .”
The intent here seems clear, so I suppose this is picking nits, but it seems to me there is value in having the statute say what it means to say. As an example, my friend, Jeff Kahn, reminded me of the S Corp rules at 26 U.S.C. 1361(b)(1). There, the Internal Revenue Code provides that S Corp must not, among other things “have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual.” (Incidentally, I don't like that this U.S. code section operates in the negative, either.)
I haven’t come up with a parade of horribles likely to follow from this glitch, but I imagine something is out there. Regardless, until it is fixed, I have another example to use in my “careful drafting” discussions.
Too Big To Fault
An article by The Wall Street Journal last week reported the exchange between members of the Congressional Financial Crisis Inquiry Commission and star witness Warren Buffett ("Buffett Defends Moody's Managers"). The topic was the credit rating agencies. Buffett defended the entities as having been hoodwinked by a tremendous real estate bubble. The stock market guru was quoted as saying "I think they made a mistake that virtually everybody in the country made." On the conflicts raised by the issuer pays model (whereby the agencies profit from repeat use by vendors), Buffett said, "It's very difficult to think of an alternative where the user pays. I'm not going to pay."
How tragic that even in the wake of calamity we are forced to listen to such conflicted defenses and hollow threats. The article stated that Berkshire Hathaway had a "stake" in Moody's" in the recent past and inferred that Buffett still owns Moody's shares (which are currently sensitive to news about proposed credit rating agency regulation). While no one doubts Buffett's expertise, experience and insights, at this point can he play any other role but apologist?
The real lesson from the testimony may thus lie in Congress' unseemly need to rely on the chief market players for judgment. A Commission co-chairman pushed Buffett to issue stronger comments ("This may be your real legacy"), cuing a potential condemnation that might lead to meaningful reform. But harsher words were not to be uttered by the famed CEO. And the Commission, with only 6 months left until its report is due, does not appear ready yet to condemn on its own.
For the investing public, it's hard to avoid concluding that Gramm-Leach-Bliley and deregulation created structures that could not be controlled; for Congress, the ugly, inevitable truth may be that it is equally impossible for it to independently assess those same leviathan organisms, despite their undisputed failures.
June 6, 2010
Davis on Boilerplate
Kevin E. Davis has posted Interpreting Boilerplate on SSRN with the following abstract:Economists often presume that the costs of drafting contracts are directly related to the ‘completeness’ of the contracts in question. This may be a reasonable presumption when contractual documents are drafted from scratch. But anyone who has drafted a contract knows that it is typically much easier to proceed by finding and copying an existing widely used document (“boilerplate”), even one that generates a very detailed contract, than to draft from scratch. This observation has important implications for debates about the optimal method of interpretation. This paper analyses the merits of alternative ways of interpreting contractual documents when parties use boilerplate. Legal practices such as gap-filling, the use of extrinsic evidence, uniform laws, and allowing parties to choose the method used to interpret their documents are examined. One notable finding is that it is not necessarily desirable to allow parties to choose the method of interpretation. The analysis highlights the potential importance of the stock of boilerplate available to contracting parties as a factor that determines the impact of contract law.
Speir on Constitutional Law and Corporations
Ian S. Speir has posted In Search of an Originalist View of the Corporation on SSRN with the following abstract:
separate opinions in Citizens United v. Federal Election Commission,
Justices Stevens and Scalia spar over “original understandings” of the
First Amendment and whether a corporation would have been viewed by the
founding generation as within the Amendment's protections. This paper
picks up where the Justices leave off, seeking answers to the questions
they raise: How did America’s founding generation view the corporation?
Did the founders see it as a “private” or a “public” entity? Was it
considered the private property of its owners or did it exist to serve a
public function? In a similar vein, what was the extent of legislative
power over corporations?
The conclusion ultimately drawn is that the search for the founders’ views on the corporate entity is something of a snark hunt. That is, how the corporation was conceived, socially and legally, in the dawn of America is elusive and indeterminate. This is so for two reasons.
First, the early American corporation is a moving target. Even in its earliest incarnations, it was an entity in which public purpose and private interest coexisted. In the late eighteenth century and prior, the public purpose dominated. But as the nineteenth century dawned, the corporation was poised for rapid change, and by 1830, its status as a general-purpose vehicle for conducting private business (such as manufacturing) was unquestioned. The phase shift the corporation underwent over this period suggests that the founding generation (which, after all, did not die out in 1800) was innovating.
In parallel to this historical development, there was tension in the views held by late eighteenth and early nineteenth century American jurists. At that time, the debate over corporations centered on the power retained by state legislatures over their charters. Was a corporate charter – a document specially granted by a legislature to legally constitute a corporation – a general act of legislation, revocable and amendable at the legislature’s will? Or was it a private contract between the state and the corporation’s owners? This early debate would be resolved by the Supreme Court in 1819 in Trustees of Dartmouth College v. Woodward, where the “private contract” argument won the day, buttressed by the Court’s distinction between “public” and “private” corporations. But prior to that, these topics were subjects of some discussion and disagreement among American lawyers.
My modest goal in all of this is to articulate the considerable state of flux in which the corporation found itself in early American history. The founding generation held divergent views of the corporate entity. They were, it appears, as “schizophrenic” as we are today about the corporation. The moral of the story is that engaging in an originalist analysis for answers to the questions that vex us is simply unavailing. In this area, originalism is likely to produce indeterminate judicial and policy outcomes because the founding history and the views held by that generation are in obvious tension.
Edelman on American Needle
Marc Edelman has posted American Needle Ruling May Have Impact in Other Areas of Sports Business on SSRN with the following abstract:
This legal commentary discusses the implications of the United States Supreme Court's ruling in the case American Needle v. National Football League on both sports leagues and players unions.