Business Law Prof Blog

Taking Concession Theory Seriously

Prof. Bainbridge takes issue with Justice Stevens's position, in his dissent in Citizens United, that corporations have been "effectively delegated responsibility for ensuring society's economic welfare."  Bainbridge proclaims that:

It has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously. In particular, concession theory is plainly inconsistent with the contractarian model of the firm, which treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering.

I remember a very powerful lesson I learned in private practice about being willing to ask "why" when everyone else is saying "it's obvious".  And at the risk of sounding like the first-year grad student Clark in "Good Will Hunting", I have to say that I remain puzzled as to how the state can be deemed merely to be facilitating private ordering through the corporate form when, as far as I can tell, the private citizens could not in any meaningful way privately order themselves to mimic the corporate form.  As far as I can tell, the state is doing something more than just facilitating private ordering.  And for that "something more" to be legitimate, there arguably must be some public good served.  Given that the most obvious public good served by the corporation is economic development via the leveraging of its utility as an incredibly efficient capital accumulation device, it is not clear to me why the state cannot require as one of the terms of doing business in the corporate form that corporate funds be directed solely at profit maximization and not electioneering without violating the Constitution--especially since all the actual citizens whose ordering is being more-than-facilitated retain all their personal First Amendment rights.

I will be chewing on all this for some time.  And I reserve the right to change my mind.  But for now I just can't help but continue to wonder why exactly we're not supposed to take the concession theory seriously.

SJP

Alai on International Business Law

Padideh Alai has posted Controlling Corruption in International Business: The International Legal Framework on SSRN with the following abstract:

Since 1995, the anti-corruption movement has had success in developing a global legal framework to combat transnational bribery and corruption. A distinguishing feature of the current anti-corruption movement is its emphasis on the economic cost of corruption and the involvement of the international financial institutions such as the World Bank, the International Monetary Fund and regional development banks, in the efforts to combat corruption. As part of their efforts to combat corruption, international financial institutions have made effective anti-corruption reforms a prerequisite for future allocation of funds. The current anti-corruption movement has also been successful in enlisting the participation of sectors of international and domestic civil society, as well as the business community, through integrity pacts and codes of conduct.

Notwithstanding its relative success, the current anti-corruption movement faces serious hurdles as incidences of transnational corruption keep rising. On a philosophical level, the economic repackaging of the problem of corruption has made the anti-corruption effort more acceptable by excluding any explicit moral judgments that may lead to charges of moral or legal imperialism; however, the re-packaging is proving to be inadequate given the irrefutable moral and ethical dimension of corruption. Increasingly, scholars of international business ethics, as well as anti-corruption advocates, are emphasizing a “virtues’’ approach to combating corruption. The failure of the anti-corruption movement may also contribute to the de-legitimization of the “science” of economics. On a more practical level is the difficulty of distinguishing among different categories of illicit payments, such as a facilitation payment that can be legal; a bribe, which is illegal, and maintaining a favorable climate payment, which may be legal or illegal.

Finally, the current anti-corruption movement must address the legacy of colonialism and its impact on how developing countries view anti-corruption efforts. For centuries, corruption has been associated with the East and anti-corruption with the West. Making free markets, rule of law, and democratic reforms a part of the anti-corruption campaign may lead to the perpetuation of the rule of geographical morality and the imposition of Western values. To some, this approach opens the anti-corruption movement to charges of neo-colonialism.

ECC

Ahdieh on Corporate Law

Robert B. Ahdieh has posted Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance on SSRN with the following abstract:

Trapped in a metaphor articulated at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of William Cary and Ralph Winter’s famous exchange is better understood as two competitions, each serving distinct normative ends. Managerial competition advances the project that has motivated corporate law since Adolf Berle and Gardiner Means - effective regulation of the separation of ownership and control. State competition, by contrast, does not promote a race to either the top or the bottom in shareholder-managerial relations.

Rather than the vertical allocation of wealth between shareholders and managers, state competition is directed to its horizontal allocation between the state and the firm as a whole. Even as state competition shifts surplus from state to firm, thus, it is agnostic as to the distribution of that surplus within the firm. Although it may generate effective rules of corporate law, it is not determinative of the substantive quality of corporate governance. Understood as such, the metrics of “efficiency” in corporate governance - and hence the core inquiries of the corporate law literature - must necessarily shift. Prevailing approaches to questions from the potential utility of federal corporate law to the long persistence of state antitakeover statutes must likewise be reconsidered.

ECC

Introduction of Guest Contributor – Tracy E. Houston, M.A.

Tracy is a board advisory consultant headquartered in the Denver, Colorado area. With a focus on leadership, strategy and risk management, she consults primarily with directors, presidents and senior officers providing input on high level, sensitive and complex issues. Her partner for board evaluation is The Board Institute www.theboardinstitute.com

Tracy, with six years of experience as a sitting director, was one of the nation's youngest women to sit on a board in the electric utility sector where she provided leadership during a period of industry change driven by deregulation, privatization, technology and globalization forces. She is the past chairman of the board of the International Center for Appropriate and Sustainable Technology. Together, her board roles span the evolutionary to revolutionary decision-making environments. In 2008 she was inducted into one of Colorado's Women Hall of Fame groups.

An internationally published author, Tracy’s work has been seen in many publications from The Denver Business Journal, and The Center for Healthcare Governance's Trustee Magazine, to the U.S. Green Building Council. Her book, Leading By Belonging: A Pathway to Knowing Yourself, delves into today's key leadership traits that create sustainable competitive advantage.

Tracy is currently writing a book on board leadership with a premise that directors provide extraordinary guidance by asking the proper questions. The purpose of the book is to improve directors' and organizational performance by fostering a positive culture of inquiry. A special feature of the book is personal stories from directors that pertain to lessons learned around board issues. To contribute, please contact Tracy directly at www.linkedin.com/in/tracyehouston

Whose Business Is It Anyway?

Perhaps only tangentially responsive to the assertion that we are simply protecting the free speech rights of owners when we strengthen the free speech rights of corporations, Steven Davidoff has a nice post over at The Deal Professor explaining how:

Kraft has deliberately structured its final offer to acquire Cadbury so that it won’t need the approval of its shareholders. That act of shareholder disempowerment isn’t sitting well with Warren E. Buffett.

SJP

Ahdieh on Corporate Law

Robert B. Ahdieh has posted The (Misunderstood) Genius of American Corporate Law on SSRN with the following abstract:

In this Reply, I respond to comments by Bill Bratton, Larry Cunningham, and Todd Henderson on my recent paper - Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance. I begin by reiterating my basic thesis - that state competition should be understood to have little consequence for corporate governance, if (as charter competition's advocates assume) capital-market-driven managerial competition is also at work. I then consider some of the thoughtful critiques of this claim, before suggesting ways in which the comments highlight just the kind of comparative institutional analysis my paper counsels. Rather than a stark choice between a race in one direction or another, institutional design in corporate law requires a more careful analysis of how precisely state competition benefits the modern public corporation, as well as of its resulting limitations.

ECC

Hovenkamp on Law and Economics

Herbert J. Hovenkamp has posted Coase, Institutionalism, and the Origins of Law and Economics on SSRN with the following abstract:

Ronald Coase merged two traditions in economics, marginalism and institutionalism. Neoclassical economics in the 1930s was characterized by an abstract conception of marginalism and frictionless resource movement. Marginal analysis did not seek to uncover the source of individual human preference, but accepted preference as given. It treated the business firm in the same way, focusing on how firms make market choices, but saying little about their internal workings.

“Institutionalism” historically refers to a group of economists who wrote mainly in the 1920s and 1930s. Their place in economic theory is outside the mainstream, but they have found new energy with the rise of behavioral economics and socio-economics. The institutionalists emphasized the importance of human created institutions that allocate resources and power, institutional rules of social control, and the effect of institutions on the economy. The institutionalists severely qualified marginalist analysis as well as the emergent neoclassical creed that the study of naked individual preference is the exclusive methodology of economic science. By contrast, most institutionalists defended the study of the biological and behaviorist sources of preference. Finally, unlike mainstream neoclassicists, most institutionalists believed that market exchange is only one of many institutions that move resources through the economy.

Coase’s work merged neoclassicism with institutionalism by incorporating marginalist analysis into the study of institutions. As the neoclassicists, he was not concerned about the source of preferences but only with the mechanisms by which they are asserted. More explicitly, by recognizing individual preference orderings and market exchange as the only efficient movers of resources, he reduced the problem of resource movement to one of “transaction costs.” The result was a new brand of institutionalism that was far more palatable to neoclassicists but largely unacceptable to traditional institutionalists.

This revised institutionalism became an important source of theory for modern law and economics. First, it recognized marginalism and the conception of the rational actor as central to economic analysis of legal institutions. Second, it preserved the Pigouvian, fundamentally institutionalist concern that economics consider the costs of moving resources from one spot to another. Third, its market-oriented marginalism led Coase to assume that the only relevant costs of resource movement are the internal value maximizing decisions of individual economic agents, captured by Coase’s 1937 essay on The Nature of the Firm; and the costs of bargaining, reflected in his 1959 and 1960 articles on social cost.  

ECC

Legal Fiction Gains More Free Speech Rights; Democracy Loses

The Supreme Court, in a 5-4 decision, has greatly expanded the political free speech rights of corporations.  You can probably guess from the title of this post where I come out on this issue.  I'll have more on this after I've read the opinion, but for now you can go here and here for some initial reaction.

SJP

The Dwindling Specialists...

Last Thursday, it was reported that Barclays Bank had purchased LaBranche & Company's New York Stock Exchange specialist business.  The roughly 700 listed stocks covered by LaBranche will be joined with the approximately 900 others handled by Barclay's other specialist businesses.

The number of specialists - recently re-titled "Designated Market Makers" - now stands at four (with six other firms chipping in as "Supplemental Liquidity Providers").  Whereas live order fulfillment on the famed Floor of the NYSE was estimated at 25% a couple of years back, the number is presently thought to be considerably less, as computerized trading/direct order routing has grown.

Numbers aside, the resilience of the "open outcry" system of trading may be the more interesting story than its diminished role.  NASDAQ, a cyberspace stock exchange employing numerous "market makers" in each listing, commenced operations in the early 1970s.  Separately, the London Stock Exchange abandoned "peopled" Floor trading over 20 years ago.

For a discussion of the history of the Specialist system in the U.S. and a federal case having impact thereon, see the abstract of my 2008 article, "Not Dead Yet: How New York's Finnerty Decision Salvaged the Stock Exchange Specialist."  The abstract is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1517214 .

---JSC, 1/19/10

The SEC and the FCPA

The Foreign Corrupt Practices Act remains an SEC priority, as touted in the Commission's 2009 Performance and Accountability Report, available at http://www.sec.gov/about/secpar2009.shtml.  The Report's 'Year in Review' section describes the December 2008 Siemen's case (p.130), wherein the German company agreed to pay $350 million in disgorgement (while simultaneously settling actions brought by the U.S. Department of Justice and the Office of the Prosecutor General in Munich) in settlement of SEC charges alleging violative conduct around the globe.  The PAR Report cites misconduct by former senior management, as well as the conglomerate's "inadequate internal controls."  

The case holds a wealth of insights on international law.  While jurisdictionally premised  -at least in part - upon Siemen's listing of ADRs on the New York Stock Exchange, the case was made possible by a general Memorandum of Understanding in effect and signed by both Germany and the U.S.  Further, observers will note that the FCPA action was brought in the presence of Germany's own, longstanding anti-bribery statute.

The Siemen's case marked the largest settlement in the history of the 33-year old FCPA.  Looking forward, the PAR Report more generally cites the SEC's continued desire to "vigorously enforce" the anti-bribery provision of the FCPA.

For a summary of all FCPA highlights last year, see a dedicated FCPA blog at http://fcpaprofessor.blogspot.com/2010/01/look-back-at-2009.html .

--JSC, 1/19/10     

The First Casualty of Debate is Ignorance

Late last week, President Obama proposed (albeit in very broad strokes) a "Financial Crisis Responsibility Fee", to be levied upon financial firms of all types with more than $50 billion in consolidated assets.  The fee would commence on June 30, 2010 and last for 10 years (in hopes of reimbursing the federal government for an estimated $117 billion shortfall from the TARP program of 2008).  Apart from the obvious expected opposition from Wall Street, the tax has prompted debate over whether the proposal is old (in that it's been secretly in the works since last Summer) or new (in that it signals a newfound unity with Europe over such measures). 

But perhaps the debate will succeed in helping to educate us all as to where stock market fees start and end.

For example, the notorious "Section 31 Fees" from the Securities Exchange Act - authorized by Congress, paid to the SEC by the stock exchanges, who pass on the penny-sized fees to member broker-dealers, who may, in turn, collect them from customers whenever they sell stock - consistently surprise all who learn of them.  Cryptically referenced on order confirmations, and quite nominal in amount, the fees have undergone name changes and often invite disbelief.  The SEC even has a dedicated explanation on its web site (http://www.sec.gov/answers/sec31.htm).  That page emphasizes that the Commission routinely adjusts the percentage charged exchanges, that the monies offset costs of regulation, and that the exchanges are not forced to pass the charges onto customers.

Such discretionary recouping is likely to be discussed as the details on the Financial Crisis Responsibility Fee become available.  The Treasury Department's facts sheet certainly does not preclude a financial firm from passing some part of its crisis responsibility fee onto its customers; commentators have opined that firms avoiding such a charge on their customers will enjoy a market advantage.

Whether implemented in its present form, attenuated, or outright loopholed, the fee should serve to make investors question more deeply the charges and costs attending each stock transaction.  In that regard, the first casualty of present debates on the ultimate responsibility for the bailouts may safely be said to be ignorance (Well, at least we hope, as the Congressional Financial Crisis Oversight Commission marches toward its year-end deadline for a report of final findings...).

--JSC, 1/18/10       

 

 

Warren on Securities Regulation

Manning G. Warren III has posted An Essay on Rule 506 of Regulation D; Its Questionable Origins, Regulatory Oblivion and Judicial Revitalization on SSRN with the following abstract:

This essay, based on the author’s presentation last September to the annual meeting of the North American Securities Administration Association (NASAA), addresses several issues related to Rule 506, the most widely-used of the SEC’s transactional exemptions from federal registration of securities offerings. First, the essay questions the validity of Rule 506, given its claimed statutory base in Section 4(2) of the Securities Act of 1933. Second, the essay reaffirms the burden of proof required of issuers on the functionally equivalent issues of preemption and exemption following the metamorphosis of Rule 506 securities to “covered securities” under the National Securities Market Improvement Act of 1996. The essay concludes with suggested regulatory and statutory solutions aimed at restoring the preventive authority of the states in combating securities fraud in their local marketplaces. This restoration would certainly be concordant with the Obama Administration’s directive last spring to all federal departments and agencies to respect the vital role of the states in the pursuit of their regulatory prerogatives, and, thusly, to strengthen the core principles of federalism.

ECC

Listokin and Taibleson on Credit Rating Agencies

Yair Jason Listokin and Benjamin Taibleson have posted If You Misrate, then You Lose: Improving Credit Rating Accuracy Through Incentive Compensation on SSRN with the following abstract:

Credit rating agencies (CRAs) serve many roles in maintaining properly functioning debt markets. Their contribution to both Enron-era financial scandals and the 2008-2010 financial crisis, however, has led to many calls for credit rating reform. This Essay proposes an incentive compensation scheme in which CRAs are paid with the debt they rate. If a CRA overrates debt, then the CRA suffers a financial penalty because the debt the CRA receives as compensation is less valuable than the cash compensation that the debt is replacing. We believe that this reform, though imperfect, would be more likely to generate accurate ratings than other credit rating reform proposals. We also discuss extensions of our basic debt compensation proposal that mitigate some of debt compensation’s weaknesses, though at the cost of greater complexity.

ECC

Stucke on Antitrust Law

Maurice E. Stucke has posted Am I a Price-Fixer? A Behavioral Economics Analysis of Cartels on SSRN with the following abstract:

This article considers why executives risk prison, their careers, and their status in the community, and violate the antitrust laws. The generally accepted approach today is that price-fixers behave as “rational” profit-maximizers. Executives engage in a cost-benefit analysis to see if the benefits from the crime are worth taking the risks. To achieve optimal deterrence, the economic theory goes, the antitrust penalty should equal the violation’s expected net harm to others (plus enforcement costs) divided by the probability of detection and proof of the violation. Despite increasing antitrust fines and jail sentences, cartels continue to exist. Before the United States responds with greater fines and jail sentences, it makes sense to evaluate several assumptions underlying optimal deterrence theory. In reviewing the behavioral economics literature, policymakers will have a better grasp of the situational and dispositional factors that promote price-fixing.

ECC

Barzuza on Antitakeover Law

Michal Barzuza has posted The State of State Antitakeover Law on SSRN with the following abstract:

This Article is the first to examine systematically state antitakeover law outside Delaware. It conducts a research of all available cases to find whether states with pill endorsement and other constituency statutes follow Delaware’s enhanced fiduciary duties or replace them with weaker standards. It finds substantial variations from Delaware’s law. Unlike Delaware, most of the states with relatively strong other constituency and pill endorsement statutes do not impose enhanced fiduciary duties on managers in change-of-control situations. Instead, they apply only the ordinary business judgment rule to management’s use of antitakeover tactics.

This Article has implications for antitakeover law, the market for corporate law, and the desirability of federal intervention. In particular, it provides support for adopting Delaware’s enhanced fiduciary duties - Unocal, Revlon, and Blasius - as federally imposed minimum standards. This would not only improve state antitakeover law outside Delaware, but may also result in improvements to Delaware law since Delaware is currently dragged down by other states.

ECC