Business Law Prof Blog

Bank of America: Principles of Government Regulation

Bank of America announced yesterday that it will start charging customers who use their Bank of America debit cards a fee of $5 a month. The New York Times reports that other banks are already testing similar fees. The Dodd-Frank Act restricted the fees that banks may charge merchants for debit-card transactions. Unable to charge merchants more, the banks have turned to the other side of those debit-card transactions, the consumers.

These changes illustrate two principles of government regulation. First, the government cannot legislate costs out of existence. The cost to banks of handling debit card transactions doesn’t go away just because Congress wants it to. And a decision by Congress as to how much debit card transactions should cost doesn’t change the market. If banks can’t charge merchants, they will try to recover from consumers. If the government next limits what banks can charge debit-card consumers, they will try to cover their costs by raising other banking costs. If they can’t do that, bank shareholders will bear the cost.

Second, government regulation often has unintended consequences. I’m pretty sure that whoever came up with the limit on merchant charges didn’t intend for consumers to pay more. But it’s very hard to control how people respond to regulation. It’s like a balloon: squeeze it at one point and it bulges out at another point. And, no matter how hard you try, you can’t legislate to prevent all the possible bulges.

-Steve Bradford

CML V, LLC v. Bax: In Defense of (My Read of) DGCL Section 327

A little while back I wrote that section 327 of the Delaware General Corporate Law, as written, excluded the right to a derivative action for anyone but a shareholder. (In CML V v. Bax, the court determined that the Delaware Limited Liability Company Act, 6 Del. C. § 18-1002, does not permit creditor-based derivative actions for LLCs, despite the argument that the LLC Act was meant to track the court's interpretation of the DGCL.)  Obviously, the Delaware Supreme Court does not agree with me about section 327, as the Court granted creditors the rights to proceed in a derivative suit where the company is insolvent.  N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).

A comment to my prior post also takes issue with my read of section 327. Ht4 says:

You're putting the rabbit in the hat.

This is where your analysis breaks down: "My reading of section 327 is that derivative claims are unambiguously reserved to shareholders." I disagree. 327 applies it restrictions to "derivative suit[s] instituted by a stockholder of a corporation." It does not purport to apply its restrictions to all derivative actions and, therefore, leaves open the possibility of other derivative suits. 18-1002, on the other hand, is written in exclusive language; it applies to ALL derivative actions. It does not leave open the possibility of other proper plaintiffs. That is the crutial difference.

I appreciate the comment, and I guess we'll have to agree to disagree.  I concede that ht4's interpretation is plausible, especially in light of current Delaware law. (And, after all, there is a maxim or canon of construction that can help lead to most any conclusion on this.)  Still, I think that inherent in section 327 was the assumption that only a shareholder could bring a derivative action. Section 327 explains which shareholders have such a right of action. The failure to mention in the statute any other type of derivative action tells me that no other type was contemplated.  Section 327 simply limits the scope of shareholder derivative actions that are permitted.  

It is certainly plausible that the drafters intended to allow creditors or even other stakeholders to have a right to a derivative action, but then why not have some mention, or some prerequisite, as provided for shareholder actions in section 327, to allow the suit to proceed?  It is hard for me to imagine a legislature contemplating an easier road to a derivative action for someone other than shareholders, and yet that's what is implied (or at least permitted) if section 327 is not exclusive to shareholder actions.

Further, in affirming the right of derivative actions for creditors, the Delaware Supreme Court provided a prerequisite for creditor standing: insolvency (or, arguably, a company close to insolvency).  N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).  The Court determined that "equitable considerations," and not the DGCL, "give creditors standing to pursue derivative claims against the directors of an insolvent corporation."  Id. Thus, the DGCL provides the scope of shareholders who can bring such suits, and equity (via the Court) does the same for creditors. Although this outcome is one reasonable interpretation, it is hardly required.

I'm of a mixed mind about whether creditors should have a right bring a derivative suit against an insolvent corporation or LLC.  I am, however, reasonably certain that if there is to be such a right, it should be created via statute.  In Delaware, I maintain that, as drafted, neither the DGCL or the LLC Act permit such rights to creditors. Obviously, the Court has spoken, and there is now a body of law that makes the law clear in both instances. But section 327 still looks exclusive to me.

--JPF

Welcome Back Guest Blogger Anne Tucker

We here at the BLPB are excited to welcome Prof. Anne Tucker back for a month of guest blogging.  You can find her full bio here, but an an edited version follows:

Anne Tucker is an Assistant Professor at Georgia State University College of Law. Professor Tucker researches in the areas of corporate law and governance examining questions such as how to balance the authority of the board of directors with appropriate accountability to the shareholders…. Professor Tucker also researches broader policy questions that examine the roles, rights, and responsibilities of corporations within our democratic society. To that end, Professor Tucker has been examining questions of corporate political speech rights as advanced in the January, 2010 Citizens United v. FEC Supreme Court opinion. Her current research frames the fundamental First Amendment debate of the case in the context of traditional corporate law principles to examine the ways in which our law recognizes, restricts, and respects a "corporate voice".

SJP

Verret on the Economic Analysis of SEC Rulemaking

J. W. Verret has posted a very interesting outline of an article he is writing on economic analysis of SEC rulemaking. He discusses the proposed article here and here. As I have discussed earlier, when the SEC engages in rulemaking, it has a statutory obligation to consider the effect of its proposed rule on “efficiency, competition, and capital formation.” This requirement, which  was added in 1996 by the National Securities Markets Improvement Act, was the basis for the D.C. Circuit’s recent opinion in Business Roundtable v. SEC, striking down the SEC’s proposed proxy access rule.

Verret plans a two-part article. The first part will discuss what he calls the “four pillars” of securities regulation: investor protection, efficiency, competition, and capital formation, the history of the NSMIA requirements, and the logistical problems those requirements create. The second part of the article will try to relate these ideas to various strands of economic theory: public choice, Austrian economics, behavioral economics, and financial economics. 

It’s an ambitious undertaking that should be fascinating when he finishes it, but the outline alone is worth reading.

-Steve Bradford

Harlow on Corporate Criminal Liability



James Harlow has posted Corporate Criminal Liability for Homicide: A Statutory Framework on SSRN with the following abstract:

Since the nineteenth century, judges, legislators, prosecutors, and academics have grappled with how best to accommodate within the criminal law corporations whose conduct causes the death of others. The result of this debate was a gradual legal evolution towards acceptance of corporate criminal liability for homicide. But, as this Note argues, the underlying legal framework for such liability is ill fitting and largely ineffective. Given the public benefit that would accrue from a clearly defined and potent liability scheme, this Note proposes a model criminal statute that would hold corporations directly liable for homicide. The proposed statute draws upon basic precepts of corporate criminal liability, as well as legislative developments in the United Kingdom and the insights of organizational theory. Ultimately, this Note argues that a statutory scheme would allow prosecutions of corporations for homicide to proceed more accurately, effectively, and fairly.

-- Eric C. Chaffee

Facebook and Learning: Evil or Benign?

Reynol Junco (Lock Haven University - Department of Academic Development and Counselin) and Shelia R. Cotten (University of Alabama at Birmingham - Department of Sociology and Social Work) posted their paper, A Decade of Distraction? How Multitasking Affects Student Outcomes, on SSRN (here). (H/T: Nicholas Economides)  The abstract: 

The proliferation and ease of access to information and communication technologies (ICTs) such as Facebook, text messaging, and instant messaging has resulted in ICT users being presented with more real-time streaming data than ever before. Unfortunately, this has also resulted in individuals increasingly engaging in multitasking as an information management strategy. The purpose of this study was to examine how college students multitask with ICTs and to determine the impacts of this multitasking on their college GPA. Using web survey data from a large sample of college students at one university (N = 1,839), we found that students reported spending a large amount of time using ICTs on a daily basis. Students reported frequently searching for content not related to courses, using Facebook, emailing, talking on their cell phones, and texting while doing schoolwork. Hierarchical (blocked) linear regression analyses revealed that using Facebook and texting while doing schoolwork were negatively associated with overall college GPA. Conversely, emailing was positively associated with college GPA. Engaging in Facebook use or texting while trying to complete schoolwork may tax students’ capacity for cognitive processing and preclude deeper learning, while emailing may be directly related to learning. Our research indicates that the type and purpose of ICT use matters in terms of the educational impacts of multitasking.

It's not shocking that people who are distracted are less likely to perform well in their courses. It is intriguing, though, that it's not just how much time people spend doing something like Facebook or the fact that students use Facebook that may predict success or failure -- it might be how students use Facebook that matters.  The authors explain: 

While the finding that using Facebook and texting while doing schoolwork was negatively related to GPA was congruent with previous research on multitasking as well as Mayer and Moreno’s (2003) framework for understanding how multitasking can affect the learning process, the finding that using email while doing schoolwork was not. The distinction between using Facebook or texting and email may lie in the nature of how the technologies are used. Previous research on Facebook use has shown that how Facebook is used is a better predictor of academic outcomes than how much time is spent on the site (Junco, in press). Specifically, Junco (in press) differentiates between using Facebook for activities that involve collecting and sharing information which predicted better academic outcomes than using Facebook for socializing. The social/information gathering or sharing distinction seems to apply for multitasking behaviors as well—clearly, text messaging and use of Facebook are social activities while using email can be considered academic because students tend to use email for communication with their professors and their university and not for communication with friends (Carnevale, 2006; Lenhart, et al., 2005; Salaway, et al., 2007).

It's hard to imagine using Facebook during class would facilitate learning in very many instances, but this is a good reminder that Facebook (and the like) are neither inherently evil nor benign.  As is often the case in the law, it depends.

--JPF

Baer on Corporate Criminal Law

Miriam H. Baer has posted Organizational Liability and the Tension between Corporate and Criminal Law on SSRN with the following abstract:

This Essay, written as part of the 2010 Hon. David G. Trager Public Policy Symposium, recasts the corporate criminal liability problem as a tension between corporate and criminal law. On one hand, we would like to use criminal law to exact retribution from corporate entities, express our moral condemnation for the acts that have taken place within and through those entities, and to impose structural reforms that prevent future wrongdoing. Where publicly held corporations are concerned, however, it is difficult to do to impose entity-level criminal liability without also invoking responses from shareholders and innocent employees, who argue quite forcefully that they are not the proper repositories of blame. In response to this critique, some proponents have suggested that shareholders ought to play a greater role in managing the corporation and that criminal liability is valuable insofar as it spurs shareholders to exercise greater oversight over corporate managers. But this question – the role that shareholders ought to play in the management of the publicly held corporation – is not ordinarily the province of criminal law. Rather, it is the preoccupation of corporate law, whose doctrines purposely leave shareholders with relatively little power to run the corporation’s daily affairs. It may be that there is reason to alter this balance of power, but if so, the issue is more appropriately left to the architects of corporate, and not criminal, law.

-- Eric C. Chaffee

Kwoka on the Legal Academy

Margaret B. Kwoka has posted Entering the Law Teaching Market on SSRN with the following abtract:

This essay was prepared for a Pipeline to Law Teaching event organized by the Society of American Law Teachers (SALT). It contains practical tips for going on the academic market.

-- Eric C. Chaffee

Blount and Markel on Dodd-Frank

Justin Robert Blount and Spencer Markel have posted The End of the Internal Compliance World as We Know It, or an Enhancement of the Effectiveness of Securities Law Enforcement? Bounty Hunting Under the Dodd-Frank Act’s Whistleblower Provisions on SSRN with the following abstract:

In the wake of Bernard Madoff’s $65 billion Ponzi scheme and the recent economic crisis stemming largely from loosely regulated subprime lending and mortgage-backed securities, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) on July 21, 2010, signaling loudly and clearly that change is coming to Wall Street. But Wall Street is not the only one receiving a message. Buried deep within the 2,319 pages of the Dodd-Frank Act, companies can find Section 922, the whistleblower provision, which provides a bounty for whistleblowers who report securities violations to the Securities and Exchange Commission.

These bounty provisions and the subsequent rules implementing them have been criticized by many as ineffective and unnecessarily intrusive on established internal compliance programs. In light of these criticisms, this Article analyzes the Dodd-Frank bounty program and its likely effect on corporate internal compliance programs, relying largely upon literature and studies in the areas of behavioral economics, organizational behavior, and business ethics relating to whistleblowing. The authors argue that rather than undermining internal compliance programs, the Dodd-Frank bounty program will serve as a much needed check on poorly administered internal compliance that are not adequately policing fraud and unethical behavior.

-- Eric C. Chaffee

Athletic Conference Exit Fees and the Law of Liquidated Damages

Thinking about college football today, and, yes, this does have a business law tie.

Intercollegiate athletic conferences have been plagued lately by a string of defections. The Big 12 alone has lost three members in a little more than a year: Colorado to the Pac 12, Nebraska to the Big Ten, and, most recently, Texas A&M to the Southeastern Conference. Pittsburgh and Syracuse recently announced that they are exiting the Big East conference to join the ACC.

One way to stem such departures is to increase the exit fee a school has to pay when it leaves. The higher the exit fee, the better the deal the new conference has to offer to make a change worthwhile. Shortly before it lured Pitt and Syracuse from the Big East, the ACC reportedly raised its exit fee from between $10-13 million to $20 million. This has led some sports commentators to call on other conferences to increase their fees, to prevent further defections. For example, Kirk Bohls, a writer for the Austin American-Statesman, calls for the Big 12 to hike its exit fees: “Exit fees must be beefed up. Write in language that states the very minute a Big 12 team announces it has accepted an invitation to a new conference, it has to write a check for $20 million to the Big 12. No out clauses, no exceptions.”

It’s important to keep in mind that these exit fees are, in essence, liquidated damages. Conference members pay the exit fee only when they breach their agreement to remain in the conference. Liquidated damages clauses like this are enforceable only if they are genuine attempts to estimate uncertain damages and not if they are penal in nature. That’s why the ACC can’t establish an exit fee of $500 million. No one would consider that a reasonable forecast of the damage the conference would suffer if one of its members left. Courts would treat it as a penalty and strike it down.

That raises two interesting questions:

1. When the conferences set exit fees in the first place, how well are they documenting their status as forecasts of actual damages? Is there a full discussion of the likely damages if a member leaves, or do they just throw out some number they think will keep schools from leaving?

2. Don’t conferences that raise their fees have an even tougher burden, particularly if the original fees were set not too long ago? Presumably, the original fee was a reasonable attempt to approximate damages. If nothing has changed to increase the likely damages, is the increase just a penalty? Without a doubt, the risk that schools will leave conferences has risen in recent weeks, but that’s not the issue. An increase is justified only if the damages when they do leave has increased. That’s much less clear.

-Steve Bradford

Forward-Looking Statements and the Business Judgment Rule

Berkshire Hathaway today announced that the Board of Directors has authorized the company "to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares."   (The press release PDF is here; H/T: Bloomburg Businessweek.)  The company explains:

In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.

The release, as it should, has its forward-looking statement safe harbor language about the uncertainty of any future performance. I have often wondered if releases such as these should also include a statement of the business judgment rule.  That is, the release explains: "If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest."  Perhaps added to that should be the statement:  "And if we're wrong, the shareholders retaining their interests will have no recourse, because (1) they will have had the opportunity to participate in the repurchase or otherwise sell their shares  in the market and (2) the business judgment rule protects such decisions."  

Obviosuly, that's the state of the law generally, anyway, but perhaps pointing it out would have some effect on how shareholders view derivative suits down the road. By specifically reminding them of their options at the time of annoucement, it might just reduce later lawsuits predicated on disappointing results when the board of directors is not "correct."  Perhaps, but I admit, not likely.  

--JPF

Davidoff on Britain’s new takeover rules

Over at DealBook, Steven Davidoff provides some excellent analysis of Britain’s new takeover rules, which went into effect this past Monday.  The title of his post sums up his predictions:  “British Takeover Rules May Mean Quicker Pace but Fewer Bids.”

If this sort of thing interests you, you’ll definitely want to read the entire post—but I’ll note some of the highlights here.  First, Davidoff reports that a wide array of rules were originally considered by the Takeover Panel of Britain, but the most controversial of these (requiring a two-thirds vote, requiring disclosure upon acquisition of 0.5 percent, and disenfranchising shareholders who acquired shares after the offer was announced) were rejected.  Second, the rules that were adopted, “set up a nice dichotomy with the American takeover scheme”:

In the United States, targets can agree to large termination fees and provide extensive deal protections to an initial bid. Targets can also adopt a shareholder rights plan, or poison pill, which can prevent a company from acquiring the target. But in Britain none of these devices are allowed.

As mentioned above, Davidoff sees the net result of these new rules being less initial bids (because bidders will be entering the fray subject to more risks), but more competition for targets once bids are launched.

SJP

Westbrook on the 100th anniversary of the first “blue sky” law

Amy Westbrook has posted “Blue Skies for 100 Years: Introduction to the Special Issue on Corporate and Blue Sky Law” on SSRN.  Here is the abstract:

Kansas enacted the first state securities law in the United States on March 10, 1911, thereby ushering in a new era of financial regulation. House Bill 906, entitled “An Act to provide for the regulation and supervision of investment companies and providing penalties for the violation thereof” (1911 Act), was the product of disparate forces, including the ongoing struggle over Kansas’ new bank guarantee act, progressive pressures within the Republican Party, strong agricultural markets, the increasing prevalence of traveling securities salesmen, and the work of the charismatic Kansas Commissioner of Banking, Joseph Norman Dolley. This year marks the 100th anniversary of the Kansas “blue sky” law, and this issue of the Washburn Law Journal uses the occasion to look back on the genesis of securities regulation and to think about its future. It is true that the financial markets in 2011 are profoundly different from the markets in 1911. Moreover, the 1911 Act was passed under a specific combination of politics, economics, technology and social forces at work in Kansas in 1911. Although a lot has changed in 100 years, the persistence of the regulatory systems established during the early twentieth century, with respect both to securities and to corporate governance more generally, suggests that era may have more to interest us than “mere” history.

SJP

Want a Raise? Be Disagreeable.

That's the conclusion of a study by Timothy A. Judge (Mendoza College of Business, University of Notre Dame), Beth A. Livingston (School of Industrial and Labor Relations,Cornell University, and Charlice Hurst (Richard Ivey School of Business, University of Western Ontario).  The study, Do Nice Guys – and Gals – Really Finish Last? The Joint Effects of Sex and Agreeableness on Income, is to appear in the Journal of Personality and Social Psychology, and a pdf of the paper is here.

The was reported in a number of venues in August, but I am just getting to it now. Here's the abstract:

Sex and agreeableness were hypothesized to affect income, such that women and agreeable individuals were hypothesized to earn less than men and less agreeable individuals. Because agreeable men disconfirm (and disagreeable men confirm) conventional gender roles, agreeableness was expected to be more negatively related to income for men (i.e., the pay gap between agreeable men and agreeable women would be smaller than the gap between disagreeable men and disagreeable women). The hypotheses were supported across four studies. Study 1 confirmed the effects of sex and agreeableness on income and that the agreeableness – income relationship was significantly more negative for men than for women. Study 2 replicated these results, controlling for each of the other Big Five traits. Study 3 also replicated the interaction, and explored explanations and paradoxes of the relationship. A fourth study, using an experimental design, yielded evidence for the argument that the joint effects of agreeableness and gender are due to backlash against agreeable men. 

This excerpt from the study was especially interesting to me:   

Although being disagreeable does not mean that one is more competent or agentic—communion and agency are not opposite ends of the same construct (Wiggins, 1991)—it may imply as much in the minds of employers. People who are low in agreeableness may be perceived as more competent by virtue of their lack of warmth (Benyus, Bremmer, Pujadas, Christakis, Collier, & Warholz, 2009). Amabile and Glazebrook (1982) found that people who were highly critical of others were rated as more competent than those offering favorable evaluations. Furthermore, in an experimental study, Tieden (2001) found that people recommended a higher-status position and higher pay for job applicants who expressed anger—a display that is more likely among disagreeable people (Jensen-Campbell, Knack, Waldrip, & Campbell, 2007; Meier & Robinson, 2004). 

I'm hoping this knowledge helps me to think a little more consciously (and carefully) about how I assess current or potential new colleagues.

--JPF

Harmonizing the Federal Securities Laws’ Treatment of Small Businesses

The Securities Act treats small businesses in a fundamentally different way than the Securities Exchange Act. Harmonizing those two statutes would go a long way towards solving the problem of small business capital formation in the United States.

The Mandatory Disclosure Requirements

Both statutes impose mandatory disclosure requirements on American businesses. The Securities Act requirement is episodic. When a company offers securities, it must file a registration statement with the SEC and make a prospectus available to investors. The mandatory disclosure in the Exchange Act requirement is periodic. Companies must file annual and quarterly reports (Forms 10-K and 10-Q), and also report on certain important events occurring between those regular filings (Form 8-K). The Securities Act disclosure protects investors at the entry level; the Exchange Act disclosure protects existing investors.

Small Business Under the Exchange Act

The two federal statutes treat small businesses very differently. The Exchange Act absolutely and categorically exempts small businesses from the mandatory disclosure requirements. Unless a company’s securities are traded on a national securities exchange or the company has both $10 million in assets and a class of equity securities with more than 500 record holders, it usually doesn’t have to worry about Exchange Act registration.

Small Business Under the Securities Act

The Securities Act does not categorically exempt small business offerings from its registration requirement. In fact, the Securities Act doesn't exempt small business offerings at all. The registration requirement applies regardless of the size of the offering or the size of the company making the offering. (The statute exempts non-public offerings, but the Supreme Court held long ago that the private offering exemption depends primarily on the character of the offerees, not the dollar amount of the offering.)

The Securities Act does authorize the SEC to create exemptions for smaller offerings, and the SEC has adopted several such exemptions, but all of those exemptions add non-trivial restrictions and conditions. There is no unconditional exemption for small offerings or small companies.

It is almost universally recognized that, because of economies of scale, the cost of registering smaller offerings is prohibitive. The Securities Act’s registration requirement therefore imposes a serious burden on small business capital formation.

A Proposal for a Categorical Securities Act Exemption

Why not just follow the approach of the Exchange Act and free all smaller companies from the Securities Act registration requirement as well? The SEC usually points to the higher risk of fraud in small business offerings and argues that registration, or at least some limitations on the offering, are needed to protect investors from that fraud.

It’s true that small businesses are riskier, and that includes a disproportionate risk of fraud. But that risk exists whether the small business is engaged in an offering of securities or just dealing with its existing investors on a day-to-day basis. If the offerees in small business offerings need the protection of one-time mandatory disclosure, then the investors in small businesses equally need the protection of periodic mandatory disclosure. The fraud argument, if you accept it, works for both statutes.

Requiring small companies to file annual and quarterly reports would, of course, be silly. The enormous cost of Exchange Act reporting clearly outweighs any possible gain to the investors. Requiring a company with a total value of only $200,000 to file Exchange Act reports would quickly bankrupt the company.

But the same is true under the Securities Act. Assume that a new business startup wants to raise $100,000 by selling securities. The most that the investors in that offering could possibly lose is $100,000, so the maximum possible benefit of registration is $100,000. (That assumes investors would lose everything without registration and that registration would completely prevent such losses.) Registering that offering would clearly cost more than $100,000, so it doesn’t make economic sense to require registration, no matter how risky the offering is. In short, for the same reason a categorical Exchange Act exemption makes sense, a categorical Securities Act exemption makes sense.

How about adding something like this to the Securities Act:

Section 5 of this Act shall apply only to offerings by an issuer that

(a) has, or will have after the offering, a security traded on a national securities exchange;

(b) has, or will have after the offering, total assets in excess of $10 million.”

-Steve Bradford

Is our current system "benefiting the few instead of the many"?

A Reuters column by Peter Apps (here) identifies the widening wealth gap as central to growing discontentment and possible increased political instability.  He quotes U.S. counterinsurgency specialist Patricia DeGennaro, a senior fellow at the World Policy Institute and professor at New York University, as seeing a wider "global uprising" or "worldwide insurgency," with the rising wealth gap as key:

"That is at the root of the insurgency.  In essence, people are tired of how the system is benefiting the few instead of the many ….”

William Galston, a former policy adviser to President Bill Clinton and now a senior fellow at the Brookings Institution in Washington, is also quoted:

“[W]hen you have a large middle class that is shrinking and where you have alarm and despondency over the future, that is where politics can become very volatile and even dangerous. That's what we saw in Europe in the 1930s.”

Apps cites the rise of the right-wing Tea Party as being “widely seen as part of a trend toward extremes and volatility.”

As I've noted recently (here), whatever rising tide there is left--it appears to no longer be lifting all boats.  And, as I've also noted previously (here), it has been written that: "REVOLUTIONS arise from inequalities . . . ." 

SJP

David Becker Webcast on Ethics at the SEC

David Kotz, the SEC Inspector General, has determined that David Becker, the SEC’s former general counsel, had a conflict of interest with respect to the Bernard Madoff matter. Kotz indicated he is referring the matter to the Justice Department for criminal investigation. A copy of the Inspector General’s report is available here and a New York Times story on the matter is here.

Becker’s mother had an account with Madoff. When she died in 2004, Becker and his brothers inherited the account. They liquidated the account for $2 million, of which $1.5 million was fictitious “profits” generated as part of the Madoff Ponzi scheme. The Inspector General’s report finds that “Becker participated personally and substantially in particular matters in which he had a personal financial interest by virtue of his inheritance of the proceeds of his mother's estate's Madoff account and that the matters on which he advised could have directly impacted his financial position.”

In October 2010, while Becker was still SEC general counsel, he spoke on ethics at the SEC. Becker was a participant in a program at the Case Western Reserve University School of Law on The Changing World of Securities Regulation. In response to an earlier presentation criticizing the “revolving door” at the SEC, Becker set aside his prepared remarks and instead defended the ethics of enforcement personnel at the SEC. The webcast is available here. (Becker’s talk is in the Panel 2 webcast, beginning at about 4:56.) He even speculates (at 11:50) about why Madoff got away with what he did.

-Steve Bradford

Will BP Derivative Suit Become the U.K. version of Caremark?

A U.S. District Court has dismissed a BP shareholder derivative suit claiming that BP's directors and officers breached their fiduciary duties to the corporation when they "engaged in a pattern of disregard for the safety of BP's energy exploration operations."  The PDF of the opinion is available here. The opinion explains that the basis for the suit is the United Kingdom Companies Act of 2006, "which governs the fiduciary duties that officers and directors owe English companies." Law.com reports that the Act is "a relatively new statute with little case law interpreting it."

So, we'll see how this proceeds in the United Kingdom. If the case were in the United States, it would be an awfully tough one to prove, anyway.  As Professor Bainbridge has explained,

Shareholder losses attributable to absent or poorly implemented risk management programs are enormous [and e]fforts to hold corporate boards of directors accountable for these failures likely will focus on so-called Caremark claims. The Caremark decision asserted that a board of directors has a duty to ensure that appropriate "information and reporting systems" are in place to provide the board and top management with "timely and accurate information." 

Furthermore, in the Caremark decision, Chancellor Allen explained that such claims are “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959, 967 (Del. Ch. 1996). With the law still evolving in the United Kingdom, it should be interesting to see what the U.K. version of Caremark looks like.

--JPF

Academic Economists Aren't Practical Either

I just came across the paper Economists’ Hubris - The Case of Award Winning Finance Literature, by Shahin Shojai and George Feiger.  It appears that it is not just Chief Justice Roberts who thinks academics could be doing some more practical work.  Here's the abstract:

In this fifth article in the Economists’ Hubris series, we investigate the practical applications of eight papers that won best-article awards in 2008 and 2009 from the Journal of Finance or the Journal of Financial Economics, the two leading journals in finance. We find that these articles are unlikely to help financial executives improve the way they evaluate risk or manage either risk or their institutions. Finance academics appear to live in a parallel universe, completely oblivious to the nature of the financial services sector that they purport to study. Some of the papers do challenge long-held beliefs, which is very encouraging, but academics still need to go much further than that to write articles that are of any practical value.

I happen to believe that there are a lot of excellent law review articles out there with significant practical application. Sometimes, those articles are not at the top journals or winning the top awards (though some are and do). Earlier this year, there were some discussions on the general subject of law reviews and their value and impact.  See, e.g., here, here, here, and here.  And there is value in academic writing (legal and otherwise) that is not especially practical, but that adds to the discourse in other ways.  Perhaps one day we'll figure out how to value (and assess the value of) different kinds of scholarship.  Perhaps.

--JPF

"New" Shareholder Proposal Rule to Take Effect

The SEC has announced that it will allow a previously adopted amendment to Rule 14a-8, the shareholder proposal rule, to become effective as soon as notice is published in the Federal Register. Rule 14a-8 requires public companies to include in their proxy materials certain proposals for shareholder vote submitted by shareholders. The SEC adopted the amendment in August 2010, but it has been in limbo since the Business Roundtable challenged the SEC’s adoption of Rule 14a-11, the rule allowing shareholders to nominate candidates for the board of directors. The SEC stayed the effectiveness of both 14a-11 and the amendment to 14a-8, pending resolution of the Business Roundtable case. even though the amendment to 14a-8 was not challenged. The SEC lost the Business Roundtable case, so Rule 14a-11 is gone, but the amendment to Rule 14a-8 is finally going into effect.

The new amendment relates to proposals concerning elections to the board of directors. Rule 14a-8(i)(8) formerly barred a shareholder proposal that “relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.”

The new rule bars a shareholder proposal only if it

(i) Would disqualify a nominee who is standing for election;
(ii) Would remove a director from office before his or her term expired;
(iii) Questions the competence, business judgment, or character of one or more nominees or directors;
(iv) Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
(v) Otherwise could affect the outcome of the upcoming election of directors.

In other words, proposals dealing with specific candidates for election or that will affect the upcoming election are barred. But the rule now allows proposals about election procedures or rules—such as a proposal requiring a majority vote for a director to be elected.

Even after the amendment, the SEC does not have the final word. A proposal could still be excluded under another section of the federal rule [Rule 14a-8(i)(1)] if the proposal is not a proper subject for shareholder action under state law. The new rule only eliminates the federal obstacle to shareholder proposals concerning election procedures.

-Steve Bradford