Business Law Prof Blog

I'm on Spring Break In Vegas

Here's your business: Sahara Becomes Latest Victim Of Gambling Industry Meltdown

Here's your law: No Override of New Jersey Internet Gambling Bill Veto Expected

Here's what jumped out at me from the latter article: "[G]iven a Republican controlled House of Representatives, a Federal solution has several major hurdles."

You know what they say: Republicans want to de-regulate business but regulate morals, while Democrats want to regulate business but de-regulate morals.

SJP

Schools for Misrule

I recently read Walter Olson’s new book, Schools for Misrule: Legal Academia and an Overlawyered America. I opened the book expecting to like it. As a libertarian, I’m sympathetic to Olson’s claim that the United States is overregulated and over-lawyered. But, although Olson is a forceful advocate and the book is well written, I was disappointed.

To begin with, this is not really a book about legal education. Olson does talk about the work of law professors, but more as advocates and writers than as teachers. Except for a few obligatory comments about professors pushing a liberal agenda in class, the book does not venture into the classroom.

Olson’s real concern is law professors’ advocacy outside the classroom—in influential law review articles and as consultants and activists. He uses legal scholarship and the work of law clinics as starting points to criticize a number of developments in the law, from strict liability to international human rights. Olson’s basic thesis is that law professors have bad ideas, and those bad ideas become bad law. 

At the end of the book, Olson does call for law schools to train students “in the skills and knowledge they will need in legal practice.” But, since he doesn’t focus on curriculum, it’s difficult to know exactly what Olson would change. Olson’s bêtes noire are law school clinics, especially the so-called “public interest” clinics. But he focuses on the substance of their advocacy, not whether those clinics teach students the skills they will need in legal practice.

For the most part, Olson neglects the business-law side of law schools. In fact, he specifically singles out business law as one of the few areas where there is “a decided mix of left and right voices.” I like to think we business law professors have as many screwy ideas as the rest of the legal academy, so the lack of attention is disappointing.

People who disagree with Olson’s views of what the law should be aren’t going to find much of value in this book, for his main thesis is simply that the legal changes wrought by law professors are wrong. And people who agree with Olson’s substantive views are not going to find much new here. Olson relies almost exclusively on published sources and doesn’t appear to have done much hands-on investigation.
 
-Steve Bradford

Being Right Isn't Always That Great

Early this week, I posted about the possible increase in corporate relocations to Ohio and Pennsylsvania. That post also mentioned that the North Dakota Publicly Traded Corporations Act seems to have fallen off the proxy and governance radar.  Professor Bainbridge noted that he was right that North Dakota was not going to be any sort of competitor with Delaware on this front. His essay is here. I would note that his rationale (as is often the case) is hard to refute, and he most certainly was right, but it was a little like picking the Patriots over my beloved Lions last Thanksgiving. 

I wrote an article (pdf) in the same symposium issue, where I posed a different question. That is, I didn't think North Dakota was going to have a serious influx of new companies. I figured four or five was probably the cap.  But I think that the law, with the significant news interest generated, offered an opportunity, if seized, for North Dakota to make a statement that the state is open for, and open to, big business. My point:

Although the Act was not a part of a focused and concerted branding effort for North Dakota, or apparently even a significant ideological commitment to increasing shareholder rights, the state could stand to reap some benefits of offering the first-of-its-kind statute. To do so, however, the state must embrace its position. If the Act is to be taken seriously, North Dakota should: (1) embrace the federal shareholder choice legislation, (2) promote the Act with a coordinated pubic relations and/or advertising campaign to raise awareness of the state’s innovative approach, and (3) pass and promote other innovative legislation that makes clear North Dakota is a forward-looking, forward-thinking state as far as businesses are concerned. 

If the Act is a singular, isolated piece of legislation that is quietly available for anyone who wants it, it is simply some small state law written by large investors (and their advocates) to irritate large companies. But, by embracing the Act and the potentially innovative corporate governance it represents, North Dakota has an opportunity to change, or at least modify, some perceptions about business in the high plains. To do so, would require some effort. (footnotes omitted)

Unfortunately, that effort has not been put forth, and (at least so far) this has been a missed opportunity.  

--JPF

"sex, lies and audiotapes"

And with that (from the WSJ), we kick off "the biggest insider trading trial in a generation."  Usha Rodrigues shares some of her idle thoughts on the case here.  The WSJ also has an interesting graphic of "Galleon's Web" here (apparently, even Adam Smith got caught up in this one).

SJP

More on Abdicating Responsibility: The Buckeye File

Yesterday I noted that a Deutsche Bank analyst publicly apologized to CBS Corp. CEO Leslie Moonves for asking the question everyone wanted answered during an interview.  In my view, avoiding the tough and obvious question in that setting is coming up short on the job of an analyst, although I also admit, in that context, there is some discretion and judgment.  

[Full disclosure:  I grew up in Michigan and earned my B.A. at Michigan State Unversity. I maintain this doesn't affect my views on the following, but I leave that for others to decide.]

Yesterday word came that Ohio State football coach Jim Tressel was in the hot seat because he failed to report NCAA violations to his school for nine months.  This, despite a clause in his contract requiring he immediately report any such information to the school.  Tressel now takes "full responsibility" for his actions, although one has to wonder how he missed his responsibility to tell his compliance office last April when, according to one report, he "received an e-mail . . . telling him that two of his players were caught up in a federal drug-trafficking case and the sale of memorabilia, breaking NCAA rules."

But that's not the part that shocks me -- this kind of thing, unfortunately, happens all the time.  What gets me is the public acknowledgement of just how important football (successful football) is at Ohio State.  In announcing a two-game suspension and $250,000 fine, it was reported: 

[Ohio State University President Gordon] Gee also said he had not considered firing Tressel, who has a 106-22 record over 10 seasons.

"No, are you kidding?" Gee said with a laugh. "Let me be very clear. I'm just hoping the coach doesn't dismiss me."

Wow.  I knew athletics were a big deal for the public and for alumni at OSU.  And trust me, I know it's not just OSU.  But from my experience, most university leaders still believe that academics and integrity come first.  And the rest of them are savvy enough to pretend they do.  

--JPF

Pennsylvania and Ohio "Compete," But Delaware Exodus Unlikely

Westlaw yesterday published an article by Erik Krusch called Corporate Governance: So We Loaded Up the Family and Moved to Ohio?!  Here's the beginning: 

Low corporate taxes and high corporate governance standards combined with discretion for directors sounds a lot like Delaware. According to Abercrombie & Fitch, however, shareholders will get all of this and more by reincorporating from Delaware to Ohio. In recent years, several other companies and shareholders have attempted to move from Delaware to other U.S. domiciles such as Ohio and Pennsylvania. So the question is: has Delaware met its match in either Ohio or Pennsylvania?

Short answer: No. States can make changes to make their state law more attractive on the margins, but it's not easy to make it worth massive changes for all or most companies. Certain state changes may attract some interest, but it's not likely to have any serious impact on Delaware's dominance.  Perhaps there is an idea out there to make that happen, but I haven't seen it or come up with it myself.  

As discussed previously, North Dakota put its hat in the ring a few years ago, but only one company, American Railcar, made the switch.  And that company was controlled by Carl Ichan, so the proposal was in good shape with his support.  As the Krusch article notes, despite several proxy proposals to reincorporate in North Dakota in prior years, there have been no such proposals this proxy season.  

Now that Carl Icahn has decided to stop investing other people's money, maybe he will refocus his energy on bringing some companies to the Northern Plains.  But probably not. 

--JPF

Ribstein Article on the Future of Legal Education

Joe Yockey at the University of Iowa has brought to my attention a paper by Larry Ribstein addressing the future of legal education, Practicing Theory: Legal Education for the Twenty-First Century.  Larry addresses some of the same changes I addressed in today's blog post on the future of law practice.  Here's an abstract of Larry's paper:

Law practice and legal education are facing fundamental changes. Many assume that these changes will force law schools to give up on theory and focus more on training students for the practice of law. However, this essay shows that the future may be more uncertain and complex. The only thing that is certain is that law schools may face, for the first time, the need to provide the type of education the market demands rather than serving lawyers' and law professors’ preferences. Legal educators must respond to these demands by serving not just the existing U.S. market for legal services but also a global market for legal information. This may call for training in some, but not all, of the theories and disciplines that have been developing in law schools.

-Steve Bradford

The Future of Law Practice (?)

I have been wondering about the effect of three trends on lawyers in the United States:

1.  Outsourcing. United States clients are outsourcing to places like India and China some of their simpler legal tasks, work that young associates and paralegals would previously have done. The reason is clear: a lawyer in India is much cheaper than a lawyer in the United States. 

2. Automation. As a recent New York Times article points out, some tasks that lawyers formerly performed, such as document review, can now be done more cheaply and more efficiently through automation.

3. Internet Resources. The Internet provides people many legal resources that didn’t exist twenty years ago—statutes and regulations; forms; answers to legal questions; summaries of legal concepts.  Nolo is probably the best-known example of a site that offers forms and answers to legal questions.  Even Wikipedia offers fairly accurate explanations of many legal concepts.  Here, for example, is the Wikipedia explanation of the business judgment rule. My guess is that more and more people, for better or worse, are using these resources to do their own legal work and avoid the cost of a lawyer. 

What do these three trends mean for the practice of law?  First, routine legal work is likely to be responsible for a dwindling proportion of a lawyer’s fees.  Wealthy, sophisticated clients will outsource their routine work and less wealthy, unsophisticated clients will turn to the Internet. Second, mere knowledge of the law is unlikely to command high fees, except perhaps in very technical, specialized areas. Lay people will no longer need lawyers to tell them what the basic legal rules are. 

Then what value will transactional lawyers be able to offer clients?  The answer is, I believe, exactly what the best lawyers are doing for their clients now—not just filling out forms or explaining the legal rules, but being creative problem-solvers.  A good lawyer’s stock in trade is not just a knowledge of the law and a good form file, but the analytical abilities to see the ambiguities and possibilities in the law and the creativity to come up with a solution that achieves the client’s objectives.

Substantive knowledge of the law is still a prerequisite to being a good lawyer.  Creativity without substance is dangerous at best.  But substance without creativity will be less and less marketable as time passes.

Of course, my crystal ball could be wrong. If I really could predict the future, I’d be playing the futures markets instead teaching in a law school.

-Steve Bradford

Financial Analysts and Charlie Sheen: Taking Us Back to the Future?

Deutsche Bank media analyst Doug Mitchelson showed, in my opinion, why investors need to take a closer look at analysts' recommendations.

This, from the Los Angeles Times:

[CBS Corp. Chief Executive Leslie] Moonves made it clear he wasn't interested in discussing whether CBS would be missing its No. 1 comedy, "Two and a Half Men," next season. Perhaps he was feeling burned by his comments at the Morgan Stanley investor conference last week, when he said he would like to see the return of the show's rogue star, Charlie Sheen. On Monday, Moonves told the conference audience: "We are not going to talk about "Two and A Half Men " -- yet."  

Deutsche Bank media analyst Doug Mitchelson tried, however, when Moonves boasted that some of the network's cost-containment strategies involved killing off high-priced actors in prime-time shows.

"I wonder if you have successfully changed out a lead actor in a show before," Mitchelson asked.
Moonves cleared his throat -- twice. 

"OK, I'm sorry. I promised no Charlie Sheen questions," Mitchelson said.

Analysts (like reporters) often make promises to cover (or avoid) a certain range of issues when conducting an interview.  For reporters, it's about getting the story they can publish, and that often means having good relationship so they can get the "scoop."   For analysts, it's also about building relationship so they can get the inside track on company information. However, analysts' role is to provide information about the company so that investors can make better informed decisions.  

For a reporter, when something goes wrong -- think, perhaps, Tiger Woods -- when the public figure is ready to talk, that reporter who has earned trust is likely to get the call. And the scoop.  For an analyst, I seriously doubt that's the call that is going to happen.  More likely, the call will go to an analyst with good news or just to raise the profile of the analyst.  I fail to see the upside -- public information needs to be made public anyway.  

Maybe I am being too sensitive to this. After all, I just got done teaching Enron, and reviewing the abject failure of analysts in that context always raises an eyebrow or two. As Forbes.com reported in 2002:

In short, the analysts are all different, but in exactly the same way. 

The Governmental Affairs Committee held the hearing to inquire into what committee members called "inherent conflicts of interest" between analysts who recommend stocks and investment bankers who advise companies and sell securities, as well as the possible too cozy relationships between the analysts and the companies they cover. 

Despite many reports to the contrary, all of the four Wall Street analysts testifying said they felt no pressure either from their own firms or from Enron to tout the stock. Rather, they all believed, based on public information and their own analyses, that Enron's "core business" was sound and profitable and that its business model was "portable" beyond buying and selling energy to other markets. 

The analysts say they reached their conclusions separately. But, even in a universe where two-thirds of the recommendations are "buy," the mathematical odds of a dozen analysts all reaching the same conclusion independently are less than one-in-100.

I'll always take Michael J. Fox over Charlie Sheen, but in this case, Back to the Future is not a good call. 

--JPF

Poison Pills Make for a Distorted Market

I guess I really just don't care for poison pills.  Today the Delaware Supreme Court upheld the poison pill Barnes and Noble put in place to "protect" itself and its shareholders from Rob Burkle. Yucaipa American Alliance Fund II, L.P. v. Riggio, No. 565, 2010 (Del. Supr. Mar. 3, 2011). The Delaware Corporate and Commercial Litigation Blog provides a good summary (and links to background) here. 

I understand Unocal and its progeny (I think), but it seems to me there needs to a more compelling reason to block acquistions than what I see in most of the cases.  Here, for example, the Court of Chancery said: 

[T]he board was concerned that Yucaipa could, along with Aletheia as an admiring and devoted fellow traveler, essentially form a control bloc without paying a control premium.” 

It was never my undersanding that shareholders had a right to a control premium, just that they were permitted to seek a control premium.  

Maybe I'm wrong and this is a better course of action. After all, it could be that many shareholders aren't sophisticated enough to figure out when they aren't getting a sufficient premium for their shares.  But I also think that many people who will support this outcome hate the idea of paternalistic securities regulations.  I suppose such people are being internally consistant because they support director primacy over almost anything else, but poison pills don't, in my view, facilitate a free market.

To me, these kinds of poison pills operate as unnecssary market-distorting protections, and I think the courts should require a much stronger showing of a threat to uphold them. Again, if a shareholder wants to sell at a given price and has a willing buyer, absent some sort of fraud, I'm inclined to let them.  

--JPF

Unusual Tax Deductions

CNN has posted a feature on “10 of the wackiest things taxpayers have tried to deduct."  Among the entries: a taxpayer who kept records of his visits to prostitutes and tried to deduct their cost, as well as the cost of pornography, as medical expenses.  The full story is here.

Wait.  The punchline is still coming: The taxpayer in question was a lawyer.

Things like this almost make me want to teach tax, but then I remember that my law school income tax class wasn't filled with things like this.

-Steve Bradford

Knowledge is often essentially worthless without the ability to communicate it effectively.

The Wall Street Journal reports on students writing badly at business schools.  It's a good thing we don't have that problem at law schools. 

SJP