January 30, 2010
Corporate Rights? Yes. Corporate Responsibility? No.
The WSJ Law Blog notes that the U.S. Sentencing Commission has proposed reduced criminal penalties for corporations. Thanks to my RA, Kristina Melomed for the link--and for her one line commentary:
Well, if they're good enough to spend whatever they want like the rest of us, they can jolly well sit in jail like the rest of us.
January 29, 2010
Gilson, Hansmann, and Pargendler on Corporate Governance
Ronald J. Gilson, Henry Hansmann, and Mariana Pargendler have posted Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU on SSRN with the following abstract:Countries pursuing economic development confront a fundamental obstacle. Reforms that increase the size of the overall pie are blocked by powerful interests that are threatened by the growth-inducing changes. This problem is conspicuous in efforts to create effective capital markets to support economic growth. Controlling owners and managers of established firms successfully oppose corporate governance reforms that would improve investor protection and promote capital market development. In this article, we examine the promise of regulatory dualism as a strategy to diffuse the tension between future growth and the current distribution of wealth and power. Regulatory dualism seeks to mitigate political opposition to reforms by permitting the existing business elite to be governed by the old regime, while allowing other firms to be regulated by a new parallel regime that is more efficient. Regulatory dualism goes beyond similar but simpler strategies, such as grandfathering and statutory menus, by incorporating a dynamic element that is key to its effectiveness, but that requires a sophisticated approach to implementation.
A paradigmatic example of regulatory dualism is offered by Brazil’s “New Market” (Novo Mercado), a voluntary premium segment within the São Paulo Stock Exchange that allows companies to commit credibly to significant protection of minority shareholders without imposing reform on companies controlled by the established elite. Yet regulatory dualism as a strategy for capital market reform is not unique to Brazil, nor is it suited just to developing countries. The long-standing U.S. approach to state-level corporate chartering is arguably better understood as a form of regulatory dualism than -- as is the custom -- as a form of regulatory competition, and the same can be said of EU corporate law post-Centros. The dramatic failure of Germany’s Neuer Markt illustrates some of the pitfalls of regulatory dualism. If thoughtfully deployed, however, regulatory dualism holds substantial promise in overcoming political barriers to reform, not just of corporate governance and capital markets, but of other economic institutions as well.
Wyatt on Corporate Law
Timothy R. Wyatt has posted The Doctrine of Defective Incorporation and its Tenuous Coexistence with the Model Business Corporation Act on SSRN with the following abstract:At common law, where an entity had failed to incorporate, its shareholders could still obtain limited liability if the courts elected to apply one of two equitable concepts – “de facto corporation” or “corporation by estoppel.” In the 1950s, an influential empirical study of cases involving these “defective incorporation” concepts concluded that courts applied them inconsistently, and that the doctrine should be abandoned. At the same time, many states were adopting the 1950 Model Business Corporation Act (MBCA), which purported to abolish the doctrine.
A subsequent regression analysis of the pre-MBCA defective incorporation cases concluded that, contrary to the earlier study, the cases were highly predictable. Another empirical study of post-MBCA defective incorporation cases concluded that courts continued to apply the defective incorporation doctrine to grant limited liability to unincorporated entities despite the MBCA’s attempt to abolish the doctrine, making cases more unpredictable than before.
This paper revisits the earlier studies and demonstrates that the apparently inconsistent findings were the result of analytical flaws. The paper then presents a new extensive study of post-MBCA defective incorporation cases, and demonstrates by statistical regression that the courts have continued to apply the defective incorporation doctrine (the MBCA notwithstanding) and that the courts have applied the doctrine in a way that is highly predictable: Where the defendant is active in the management of a business entity that is not validly incorporated, he will not be held personally liable for his actions on behalf of the corporation so long as he believed the corporation was valid at the time of the actions.
Casey on Corporate Fiduciary Duties and Honest Services Fraud
Lisa L. Casey has posted Twenty-Eight Words: Enforcing Corporate Fiduciary Duties Through Criminal Prosecution of Honest Services Fraud on SSRN with the following abstract:
article examines the federal government's growing use of 18 U.S.C. §
1346 to prosecute public company executives for breaching their
fiduciary duties. Section 1346 is a controversial but under-examined
statute making it a felony to engage in a scheme "to deprive another of
the intangible right of honest services." Although enacted by Congress
over twenty years ago, the Supreme Court repeatedly declined to review
the statute, until now. In 2009, Justice Antonin Scalia pointed to the
numerous interpretive questions dividing the federal appellate courts
and proclaimed that it was "quite irresponsible" to let the "current
chaos prevail." Since then, the Court has granted certiorari in no
fewer than three separate cases construing the honest services law.
The questions before the Supreme Court are of particular interest to public company executives and their professional advisors. Following revelations of massive fraud and management wrongdoing at Enron and other public companies, the Justice Department employed § 1346 to indict executives accused of breaching their fiduciary duties. Former Enron CEO Jeffrey Skilling and former Hollinger CEO Conrad Black are just two of the corporate fiduciaries found guilty of breaching their duties and convicted under the statute. Traditionally, Delaware law has governed the content and enforcement of executives' legal duties, largely protecting public company fiduciaries from civil liability. Now, with the emergence of honest services fraud as a weapon against corporate wrongdoing, and pressure from Congress for more prosecutions, civil and criminal law are trending in opposite directions. Corporate fiduciaries may become criminally liable for conduct that would not subject them to civil sanctions. Furthermore, because these fiduciaries look to state law for the standards governing their conduct, this anomalous development has profound implications for public company governance.
This article analyzes the issues before the Supreme Court in light of these contradictory enforcement trends. Spill-over from federal criminal jurisprudence to state fiduciary duty doctrine is one concern, but overcriminalization and prosecutorial abuse also must be considered. I conclude this article by proposing a statutory amendment that may advance Congress's interest in prosecuting public company executives for serious fraud while limiting federal interference with potentially conflicting fiduciary obligations arising under state law.
Nees on Citizens United
Anne Tucker Nees has posted Politicizing Corporations: A Corporate Law Analysis of Corporate Personhood and First Amendment Rights after Citizens United on SSRN with the following abstract:
derivative suits to the derivative speech rights recognized in Citizens
United, the watershed 2010 Supreme Court opinion overturning
regulations on corporate political speech in the form of independent
expenditures, our law
takes inconsistent stances on how corporations speak, on whose behalf,
and for whose benefit. The question of corporate personhood is central
to the determination of corporations’ claim to First Amendment rights.
The evolution of corporate personhood culminating in the Citizens
United opinion holding that the First Amendment recognizes no
distinctions between individual and corporate speakers can be
juxtaposed to the development of corporate law
in areas such as derivative suits, the proxy process, and SEC
regulations which recognize the complexity of corporate speech due to
its various stakeholders. Additionally, an analysis of corporate law
leads to the conclusion that when corporations speak, it is speech of
an economic, not a political nature due to corporations’ singular
fidelity to profit maximization. Citizens United leaves unexamined
questions such as how economic speech should be treated in the
marketplace of political speech. From a corporate law
perspective, Citizens United leaves shareholders, particularly those of
mutual funds, without meaningful control over how their investments are
utilized in the political arena, placing such investors in the unhappy
position of potentially choosing between political integrity and
economic gain. Further blurring the lines between economic and
political interests for corporations and shareholders undermines both
the First Amendment principals supposedly advanced in Citizens United
and tenants of corporate law
that, like our political system, seek to appropriately balance the
competing and distinct interests of the corporation as an entity, its
management (directors and officers), and its shareholders.
Will the new SEC rules for 2010 put your board leadership at greater risk?
Starting in the 2010 proxy season, all U.S. public companies are required by the SEC to include in their proxy the extent of the board’s role in risk oversight and the effect this oversight has on the board’s leadership structure. In order to frame a company's responses with an eye toward their strategic goals, it’s not only an issue of asking the right leadership questions pertaining to risk management – but the most relevant.
As the drafts of new disclosure statements are created here are a few of the questions directors should ask themselves:
1. To what level does our current leadership structure support our risk oversight?
2. In what ways is the board most confident about risk oversight?
3. Is there another plausible interpretation that might diminish our confidence level?
4. Are we relying too much on a few board members with impressionable backgrounds?
5. How do we decide what we are supposed to monitor?
January 28, 2010
May You Live in Interesting Times
I started teaching law in 2005. My first semester I taught Securities Regulation and had the pleasure of getting up to speed on the Offering Reform Rules. A few years later, I got to be called an "expert" for purposes of discussing the greatest financial crisis our country has seen since the Great Depression. Now, in my fifth year, I get to opine on what Larry Ribstein says "may turn out to be one of the most important business decisions in a generation." Does someone have a more interesting 5-year run for corporate law types?
Citizens United and the Issue of Shareholder Protection
Over at the Glom, Usha Rodrigues opines that:
The shareholder protection rationale has real traction in the public company context, and I find Kennedy's reliance on the protections of shareholder democracy laughable ....
Meanwhile, Larry Ribstein feels that:
the shareholder protection rationale for corporate speech restrictions ... ignores the powerful market forces that discipline the terms of state corporation laws.
Personally, I don't think shareholder protection constitutes an independent compelling interest justifying the regulation of speech. But when one combines shareholder protection concerns with antidistortion and anticorruption concerns--a compelling interest arguably begins to emerge.
January 27, 2010
Brummer on International Financial Law
Chris Brummer has posted How International Financial Law Works (and How it Doesn't) on SSRN with the following abstract:
The “Great Recession” has given way to a dizzying array of international agreements aimed at strengthening the prudential oversight and supervision of market participants. How these international financial rules operate is, however, deeply misunderstood. Theorists of international law view international financial rules as merely coordinating mechanisms in light of their informal “soft law” quality. Yet these scholars ignore the often steep distributional implications of financial rules that may favor some countries over others and thus fail to explain why soft law would be employed where losers to agreements can strategically defect from their commitments. Meanwhile, political scientists, though aware of the distributional dynamics of financial rule-making, rarely, if ever, examine international law as a category distinct from international politics. Law is instead cast as an inert, dependent variable of power, as opposed to an independent factor that can inform the behavior of regulators and market participants.
This Article presents an alternative theory for understanding the purpose, operation and limitations of international financial law. It posits that international financial regulation, though formally “soft,” is a unique species of cross-border cooperation bolstered by reputational, market and institutional mechanisms that have been largely overlooked by theorists. As a result, it is more coercive than classical theories of international law predict. The Article notes, however, that these disciplinary mechanisms are hampered by a range of structural flaws that erode the “compliance pull” of global financial standards. In response to these shortcomings, the Article proposes a modest blueprint for regulatory reform that eschews more drastic (and impractical) calls for a global financial regulator and instead aims to leverage transparency in ways that more effectively force national authorities to internalize the costs of their regulatory decision-making.
Is your Board’s leadership strategy sufficient to meet new SEC rules for 2010? To answer, begin by asking the right questions.
Starting in the 2010 proxy season, all U.S. public companies are required by the SEC to describe their board leadership model and why they chose it. In order to frame a company's responses with an eye toward their strategic goals, it’s not only an issue of asking the right leadership questions – but the most relevant.
As the drafts of new disclosure statements are created here are a few of the questions directors should ask themselves:
1. How is the current structure of the CEO/Chairman working for us?
2. What makes the separation or combination of the position relevant?
3. Will the chosen role hold up under closer scrutiny?
4. With a board that has a combined CEO/Chairman with a lead director, what type and level of leadership contributions does the lead director make?
5. Are we taking into account changes in our current strategic environment and how our leadership structure may need to evolve meet new challenge?
And the Grammy for Best Economics Related Rap Video Goes to . . .
Fear the Boom and Bust
NPR reported about the origins of this song and video on Monday, and you can find those details here.
January 26, 2010
On Corporations as People...
The Supreme Court has previously held that the 5th Amendment protection against self-incrimination extends only to natural persons, and not the corporation.
Which helps make the recent Supreme Court decision in Citizens United v. Federal Election Commission all the more provocative. Does the ruling simply reinforce our traditional notions of protected political speech? Or does it signal a new era of protected liberties for the corporate entity?
It has been noted that internet blog entries communicating customer complaints and reviews have begun irking retail companies. What will be an interesting case is when a business alleging defamation by a former customer simultaneously asserts its First Amendment right to decry a political candidate. The courts may then be forced to apply First Amendment tests for commercial and political speech to the same entity. As Citizens United instructs, the First Amendment "stands against attempts to disfavor certain subjects or viewpoints or to distinguish among different speakers." May the least disfavored subject win...
Those Tricky Sub-penny Increments
Today's Wall Street Journal is reporting that the stock exchanges are seeking permission to alter the pricing parameters in place for nearly a decade. Specifically, SEC approval shall be sought allowing the market centers to price quoted/traded securities in sub-penny increments (e.g., $13.124) as opposed to the current penny standard (e.g., $13.12).
For decades, stocks traded at arcane, fractional levels only appreciated by trading professionals - 1/8, 1/4, 3/8. 1/2, 5/8, 3/4. At the insistence of regulators, these cryptic intervals were eliminated in favor of simple "penny" divisions that more accurately disclosed prices (and, ultimately, total costs) to the lay investor. Another prime consequence of the "decimalization" of April 2001 was reduced prices for that investor, as specialists and market makers were now forced to compete at prices "between the spread." Further, the NYSE reported a dramatic rise in system orders and trades. However, other ramifications included shorter-lived quotes, quotes with less depth (i.e., less stock offered at a price), and smaller trades.
The exchanges now argue that the loss of business to private trading systems (a.k.a. "dark pools") warrants another recalibration. The request is represented as responding to the concerns of institutional traders while also benefiting lay investors, who will once again see tighter price spreads at the exchanges.
The first consequence of sub-penny trading would surely be transparency, with investors breaking out calculators to confirm prices, charges and commissions. Moreover, in 2004, the SEC rejected a similar request for sub-penny pricing, stating:
...as the pricing increment for equity securities decreases beyond a certain level, the potential costs to investors and the markets may increase and could , at some point, surpass any potential benefit of permitting securities to be quoted in finer increments.
Regulation NMS Proposal, Release No. 34-49325.
A possible consequence of another modification would be loss of limit order protection, as firms hesitate to guarantee trade prices to customers in a rapidly changing market.
The SEC would likely study a request for sub-penny trading for many months. Overall, while "dark pools" and other private trading systems have taken their lumps during the economic crisis, it would seem that the exchanges have hurdles to overcome in seeking a further division of a trade price.
January 25, 2010
Does your company’s board composition conform with new SEC rules for 2010?
Does your company’s board composition conform with new SEC rules for 2010? To answer, begin by asking the right questions. (First of three posts on new requirements found in Item 407(h) of Regulation S-K under the Securities Exchange Act of 1934.)
Starting in the 2010 proxy season, all U.S. public companies are required by the SEC to describe their board composition model and why they chose it. In order to frame a company's responses with an eye toward their strategic goals, it’s not only an issue of asking the right composition questions – but the most relevant.
As the drafts of new disclosure statements are created, here are a few of the questions directors should ask themselves and those that support the work of the new disclosures:
1. Is our board composition working for us?
2. How does our board composition compare to our industry peers?
3. What concerns do our stakeholders have about our leadership?
4. Is our self-perceived role out of alignment with that of key stakeholders?
January 24, 2010
Regulatory Reform Scorecard
I am somewhat chagrined that, over 17 months since the news first broke that the global financial system almost dematerialized, there is still no meaningful domestic regulatory reform. Here's a quick status report:
The House of Representatives passed a Bill in December (H.R. 4173) that, among other things, would rein in some of the unregulated derivative products blamed for billions in losses and establish a new consumer protection agency to deter unsavory mortgage practices. That Bill would also create a private cause of action for investors harmed by the gross negligence of credit rating agencies (whom Professor Coffee of Columbia Law School fears may be sued out of existence). To address systemic risk, H.R. 4173 would also create an oversight council including agents from entities that failed to identify systemic risk in the years 2004-2008.
The Senate has yet to take up the Bill, but is rumored to be dropping the proposed consumer agency as a concession to Republicans (especially since the Banking Chair has announced that he's not seeking re-election).
Meanwhile, a bipartisan Congressional Commission is taking testimony from bank chiefs and regulators alike as part of a formal inquiry expected to last until December. That Commission is authorized to subpoena documents and make criminal referrals.
Separately, the SEC (which is seeking self-funding to counter its annual budgetary obstacles and staffing shortages) is lobbying for the authority to register thousands of hedge funds (to add to the roughly 30,000 entities presently registered with the Commission) (I'm not embellishing -see Chair Schapiro's House testimony from March 2009 at this URL: http://www.sec.gov/news/testimony/2009/ts031109mls.htm ).
The Federal Reserve Chairman is embroiled in a contentious renomination while being forced to defend Fed monetary policy from 2002-2006 (see his January 3rd speech in Atlanta at http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm). Separately, the Chairman is lobbying for a humble "role" for the Fed in supervising banks going forward while acknowledging that "the Federal Reserve cannot and should not be responsible for oversight of the financial system as a whole" (see the January 13, 2010 letter to Senate Committee on Banking at http://www.federalreserve.gov/BoardDocs/RptCongress/supervision/supervision_report.pdf ).
And the President is expected next month to unveil a budget that will make up for TARP program shortfalls with a 10-year tax on very large banks. Or individual securities transactions. Or Wall Street profits. Or any/some/all of the above.
Making me realize: When I watch various government officials randomly blaming the various market meltdown culprits, I am somewhat encouraged that, over 17 months since the news first broke that the global financial system almost dematerialized, there is still no meaningful domestic regulatory reform....
The Harvard Law School Proxy Access Roundtable
The Harvard Law School Proxy Access Roundtable with the following abstract:and
This paper contains the proceedings of the Proxy Access Roundtable that was held by the Harvard Law
School Program on Corporate Governance on October 7, 2009. The
Roundtable brought together prominent participants in the debate -
representing a range of perspectives and experiences - for a day of
discussion on the subject. The day’s first two sessions focused on the
question of whether the Securities and Exchange Commission should
provide an access regime, or whether it should leave the adoption of
access arrangements, if any, to private ordering on a
company-by-company basis. The third session focused on how a proxy
access regime should be designed, assuming the Securities and Exchange
Commission were to adopt such an access regime. The final session went
beyond proxy access and focused on whether there are any further
changes to the arrangements governing corporate elections that should
Speakers in the roundtable included Joseph Bachelder (The Bachelder Firm), Michal Barzuza (University of Virginia School of Law), Lucian Bebchuk (Harvard Law School), Robert Clark (Harvard Law School), John Coates (Harvard Law School), Isaac Corré (Eton Park Capital Management L.P.), Steven M. Davidoff (University of Connecticut School of Law), Jay Eisenhofer (Grant & Eisenhofer P.A.), Richard Ferlauto (American Federation of State, County and Municipal Employees [AFSCME]), Abe Friedman (Barclays Global Investors), Byron Georgiou (Of Counsel, Coughlin Stoia Geller Rudman & Robbins LLP), Kayla Gillan (U.S. Securities and Exchange Commission), Jeffrey Gordon (Columbia Law School), Edward Greene (Cleary Gottlieb Steen & Hamilton LLP), Joseph Grundfest (Stanford Law School), Howell Jackson (Harvard Law School), Roy Katzovicz (Pershing Square Capital Management, L.P.), Stephen Lamb (Paul, Weiss, Rifkind, Wharton & Garrison LLP), Mark Lebovitch (Bernstein Litowitz Berger & Grossmann LLP), Lance Lindblom (The Nathan Cummings Foundation), Simon Lorne (Millennium Management LLC), Robert Mendelsohn (formerly of Royal and Sun Alliance Insurance Group), Ted Mirvis (Wachtell, Lipton, Rosen & Katz), James Morphy (Sullivan & Cromwell LLP), Toby Myerson (Paul,Weiss, Rifkind, Wharton & Garrison LLP), Annette Nazareth (Davis Polk & Wardwell LLP), John F. Olson (Georgetown University Law Center), Mark Roe (Harvard Law School), Eric Roiter (Boston University School of Law), Leo Strine (Delaware Chancery Court), Daniel Summerfield (Universities Superannuation Scheme), Greg Taxin (formerly of Glass, Lewis & Co.) and John C. Wilcox (Sodali Ltd).