September 18, 2010
Is the Roberts Court Pro-Business?
The animating question of the 2-day colloquium I recently attended at Case Western School of Law was whether the Roberts Court is pro-business. This is obviously not a novel question, but nonetheless one that will likely continue to generate interesting discussion. I certainly found the colloquium interesting, and wanted to share my take on some of the perspectives that were offered there.
The first thing I found particularly interesting was all the alternative formulations of “pro-business” that were considered. For example, even if one agrees that the Court’s rulings have generally favored business, one may rightly conclude that a better explanation of those rulings is that the Court is (1) pro-private ordering, or (2) trying to rein in the role of courts by effectively forcing plaintiffs to look for support from non-judicial actors, be they private or other governmental actors. One of my responses to the foregoing (though admittedly somewhat non-responsive) is that in a world of “new governance”, deference to non-judicial actors may ultimately equate to powerful business interests writing the rules of the game for practical purposes, and it is precisely the role of the courts to serve as a check on this sort of consolidation of power.
Another interesting point of discussion was whether it is somehow silly to talk about the Court being pro-business in the context of antitrust litigation because, (1) the cases often pit business against business, and (2) business losing does not necessarily equate to consumers winning (e.g., a business may lose the right to reduce prices in a way that negatively impacts competition, but the lost ability to reduce prices hurts consumers as well as the defendant business). One response I have here is that there may be a meaningful distinction between pro-“big” business and pro-business generally, and that there is likely also a meaningful distinction between short-term and long-term impact on consumers.
Finally, the point was made that as far as political scientists are concerned, “pro-defendant = pro-business = anti-consumer” is basically the default assumption for purposes of categorizing Supreme Court decisions. My sense is that despite all the criticisms, this remains a fair default assumption and will even serve as a good predictor. My expectation is that if you survey consumers as business cases continue to come before the Court, they will have little problem coming to a general consensus as to which outcome constitutes the pro-business outcome, and these cases will generally be resolved largely in a pro-business manner as identified.
September 17, 2010
Is the Revlon Duty Creeping into the Business Judgment Rule? (No)
When Chancellor Chandler decided eBay v. Newmark (pdf) (aka “the craigslist case”), the case triggered all kinds of discussions, including the implications of poison pills and analogies to Dodge v. Ford. I remain interested in the Dodge v. Ford angle and the role of philanthropic goals of a corporation.
There are some who see the craigslist case as an adoption of the Sen. Al Franken version of a corporation’s obligations to shareholders: “[I]t is literally malfeasance for a corporation not to do everything it legally can to maximize its profits.” Of course, there are others who disagree. The Franken-like argument seems be that Delaware’s Revlon duty (as explained in Time, Inc. - pdf) of requiring the “board to enhance short-term shareholder value” now applies all the time, not just when the board puts the company up for sale. While that makes for good sound bites, and I suppose it is a plausible interpretation, that’s pretty clearly not what Chancellor Chandler meant.
Instead, the Chancellor stated that craigslist’s majority owners “prove[d] that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future.” Thus, he concluded, “The corporate form in which craigslist operates . . . is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.” As such, corporations clearly can do at least some things that are philanthropic; it’s just that they can’t be “solely” philanthropic – thus the Dodge v. Ford connection.
Okay, but I have a problem with this on two fronts. Regardless of their stated view, craigslist is not a nonprofit, and as I understand it, files and pays taxes like any other (proper, for-profit) corporation. According to a BusinessWeek article, the company has been profitable since 1999. That said, it is also true that the company’s leaders make clear that they are not trying to takeover the world or maximize wealth. I’m not clear that’s a problem any more than it is inherently a problem for a company to decide to grow to fast and fail miserably (I’m looking at you, Krispy Kreme and Boston Market.)
Second, under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. I think Chancellor Chandler concedes as much when he notes that it is at least conceivable that a philanthropic company may be okay when there are no “other stockholders interested in realizing a return on their investment.”
Thus, it seems to me, the next question should be what it means to say there was a stockholder "interested" in realizing a return on their investment. As I noted in an earlier post, eBay knew the kind of company in which they were buying shares (and taking a minority position. craigslist is operating exactly with the same philosophy as they had before eBay bought in to the company. And, in fact, that philosophy is probably why eBay decided to reserve its right to compete.
If that’s the case, why did eBay buy in? I think it’s pretty clear it is not primarily because they had any specific expectation of a return on investment. I think eBay invested as something of a hedge -- they recognized that if craigslist were to monetize itself, it would likely be a huge revenue source and they wanted to ensure eBay was part of that process if (not necessarily when) that were ever to happen. They reserved the right to compete in case eBay figured out a way to monetize a similar product. (And note that it’s not clear they were not getting a return; it’s simply a lower return than some people think that return could be.) As such, it would be improper to allow eBay, simply by virtue of being a shareholder, to require a change in the way in which the craiglist operates. This is not a bait and switch where craiglist changed the rules of the game (at least with regard to their corporate philosophy) after cashing eBay’s check.
I guess I simply don’t agree with Chancellor Chandler’s assessment that craigslist is operating as a “purely philanthropic” corporation, and I don’t think eBay is being deprived of any expected potential return on investment. Just because craiglist’s majority owners use a lot of pro-philanthropic language, I see a market leader who is seeking to perpetuate that position. At the end of the day, then, craigslist is a “largely” philanthropic entity, and it is exactly the kind of small-but-profitable entity eBay bought a portion of in the first place. And that, to me, is just fine under Delaware law. At least, it should be.
September 16, 2010
Symposium: The Changing World of Securities Regulation
I'll be attending a colloquium at Case Western Reserve School of Law today and tomorrow, enjoying discussion of paper presentations by A.C. Pritchard, Thomas Lambert, Matthew Bodie, and Brian Fitzpatrick. Unfortunately, I'll be unable to attend the upcoming (Oct. 8) Case symposium: The Changing World of Securities Regulation, but at least I can plug the event here. The list of speakers is absolutely stellar, and I hope I will be able to review the presentations online later (I don't have the notice I received in the mail in front of me, but I believe it mentioned making the webcast available). I'd also like to take this opportunity to plug a recent publication of one of the presenters -- the second edition of Roberta Romano's Foundations of Corporate Law (a book that should easily support an excellent seminar class).
September 15, 2010
Lessons Learned from Calvin Johnson and Life as a Lions Fan
The NFL's response (for more on that, see here) to the ridiculously poor interpretation of what constitutes a touchdown catch in Sunday's Detroit Lions game reaffirms my view that the goal of rulemakers and rule interpreters is to get the call right, not be right. This is something we need to remember as lawyers, too. There are things we can do under the law, but nonetheless we should not do. And there are times when circumstances indicate that a rule is not having its intended consequences, so we need to adjust.
Sometimes that means that the person to whom the old rule applies suffers -- see, e.g., Calivin Johnson. And let's face it, if anyone can handle a little extra suffering, it's the Lions and their fans. We're used to it (and it's why my kids are being raised Saints fans). But it's one thing to enforce the rules as they exist; it's quite another to insist they are right because they exist.
September 13, 2010
A Fine Start...
The New York Times yesterday described the changes to global banking rules agreed to by representatives of 27 nations. See Jack Ewing, "World Panel Backs Rules to Avert Banking Crises," NY Times (Sept. 12, 2010). The changes would triple bank reserves (3% of total assets) and raise bank ownership of common equity to 7%.
The new rules, which would become "Basel III" standards, must be ratified and then enacted by individual nations, with a deadline of January 2013 for implementation. American regulators and certain domestic banks have expressed support for the measures, which 1) fall short of requiring the controversial "boom times" reserves, and 2) follow a liberal phase-in period of 2-5 years.
It would be a shame to classify the events of recent years as an unforeseeable, perfect storm not warranting redress to the system. In that regard, Basel III can be seen as an enlightened and necessary step forward, and a move far superior to simply retaining the status quo.
Adding, Retaining, and Unmaking Partners at Goldman
The New York Times reports that Goldman Sachs will be making several new partners this year and "unmaking" several others. Unlike many firms (law and otherwise) Goldman apparently regularly removes partners to ensure they have room for their "talented up-and-comers."
According to the article, Goldman removes about 30 partners every two years -- or about 8%. They expect that number will be higher this year because of the slower economy, so perhaps more than 10% of Goldman's current partners will be "de-partnered." As the article explains:
Removing partners like this is unique to Goldman. When companies go public, they shed the private partnership system, and ownership of the company is transferred to shareholders. Goldman’s ownership was also transferred to shareholders, but it created a hybrid partner model as an incentive for employees.
Beyond the shareholder ownership language likely to make Professor Bainbridge scream, I am intrigued by this "hybrid partner model," and I have to assume that, to a large degree, Goldman sought to retain the same type of interaction among partners (and payment structure) they had before they went public. After all, it seems to have served them well, and the managing directors kept 60% of the company at the time of the IPO.
Interestingly, though not surprisingly, at the time of Goldman's IPO, they specifically noted (pdf here) that the change from partnership to corporate form was a "Risk Factor." They noted: "Our Conversion to Corporate Form May Adversely Affect Our Ability to Recruit, Retain and Motivate Key Employees. . . . The incentives [used under the corporate form] to attract, retain and motivate employees provided by these awards or by future arrangements may not be as effective as the opportunity, which existed prior to conversion, to become a partner of Goldman Sachs."
It appears that they figured that one out.
September 12, 2010
Some Thoughts on Income Inequality
Following nicely on the heels of yesterday's reference to increasing U.S. poverty, I give you some smart people discussing income inequality (the smart people are Henderson and Bainbridge--my comments at the end are just "deep thoughts"):
Over at Truth on the Market, Todd Henderson provides a nice summary of some of the competing stories (and also provides a possible explanation for the rise in income inequality):
It seems there is a reasonable debate to be had about whether this is a good or bad thing. The political debate goes something like this. Republicans either disclaim the growing gap (e.g., the data, as seen below, excludes government transfers, which are large), tell an incentive story (i.e., if the inequality represents increasing returns from education, as it seems to in part, then growing inequality would be a strong incentive for individuals and society to invest in education), argue that income does not correspond to well being or happiness, or invoke Gerald Ford (“If the government is big enough to give you everything you want, it is big enough to take away everything you have.”). Democrats, on the other hand, note how wealth concentration can breed political tension and unhappiness.
Meanwhile, Stephen Bainbridge questions the notion that education is the answer to the problem of stagnant middle class incomes.
As for me, I'm still trying to decide whether I think a family of four living on $23,000 per year should qualify as living in poverty. If someone has a link, I'd be interested in seeing to what extent it is possible to provide for reasonable food, clothing, shelter, education and health care at that income level. I am also, like Todd Henderson, unsure of whether the growing income gap is good, bad or neutral. At what point does an uprising become likely?