Business Law Prof Blog

The Privatization of Wall Street

The Wall Street Journal reported yesterday and today on SEC proposals to lift some existing restraints on private capital raising.  See:

U.S. Eyes New Stock Rules (“[T]he likely changes would include raising from 499 the number of shareholders private companies can have without being required to open their books, and also making it easier for such companies to publicize share offerings.”)

SEC Boots Up for Internet Age (“Federal securities regulators are weighing demands to make it easier for fast-growing companies to use social networks such as Facebook and Twitter to raise money by tapping thousands of investors for very small amounts of shares.”)

Larry Ribstein is skeptical about these proposed changes being anything other than the SEC playing catch-up in a market that has already figured out how to get around the limitations without the SEC's help and, more importantly, that the changes don't address the real problems facing U.S. capital market competitiveness.  His comments are well worth a read, and you can find them here.  Particularly, Larry is concerned about the current regulatory climate in the U.S. incentivizing a move away from public financing:

The privatization of US markets could have important indirect effects.  Broad public participation helps democratize capitalism.  A move in the opposite direction could deepen Americans’ suspicion of capitalism as the playground of the wealthy.  Also, the securities markets are the primary source of data about large companies.  Closing these markets reduces transparency for everybody and not just investors.

Mike Sykuta responds here that, while "I believe Larry is on point for the big picture ... the proposed regulation changes don’t seem to be all bad."

SJP

 

In North Dakota, Breaching Fiduciary Duties Can Be Very Costly

The North Dakota Supreme Court, in Thompson v. Schmitz, 2011 ND 70, recently upheld a significant award of attorney's fees under the state's Business Corporations Act because the district court determined than an officer/director of a corporation violated his fiduciary duties.  The defendant, the district court found, had violated his duty to the plaintiffs "to not use corporate assets preferentially, . . .violated his duty of loyalty, . . .diverted and misappropriated corporate funds, and acted fraudulently or illegally." The Court also determined that the Business Corporations Act permits courts to award expert witness fees,even where the expert did not testify. 

The case seems reasonably straightforward, but it struck me just how significant the attorney's fee award was relative to the investment.  The court explained:

The district court concluded Schmitz and RES converted both his $300,000 stream-of-income contribution to ARRK and the Thompsons' $150,000 capital contribution. The Thompsons were awarded half of the value of those contributions, as assets of ARRK, plus pre-judgment interest.

[¶8] The parties submitted briefs and the district court held a hearing to consider attorney's fees, costs, expenses, and disbursements. The court awarded the Thompsons $511,066.16 in attorney's fees and nontaxable expenses, and $80,648.16 in costs and disbursements, including fees and interest on the Thompsons' expert witness fees.

Note that the attorney's fees are more than three times the initial investment.  Word to the wise: sometimes, violating fiduciary duties can be very expensive.  As it should be.

--JPF

Harvard Law Exams Online

Harvard Law School has posted all of their law school exams from 1871 to 1998. (Thanks to Orrin Kerr at the Volokh Conspiracy for the link.)

It was fun to look at the very first Harvard exams in Corporations and Partnership. The questions are much more general than today’s exams and, at least in my opinion, much easier.

Here, for example, are some of the Corporations questions:

• "Give a brief and general definition of a corporation."

• "To what extent , and for what objects has a corporation power to make by-laws? And when, and for what reasons will a by-law be deemed void?"

• "What do you understand by the doctrine of ultra vires?"

Here are some of the Partnership questions:

• "In whom does the legal title to partnership property vest, and why?

• "What is the liability of a partner for the debts of the firm; and is such liability joint, or several, or both joint and several?"

• "In what cases cannot a partner sue his co-partner at common law?"

• "If one member of a firm, consisting of three or more, violates any of the covenants or agreements contained in the partnership articles, can or not an action at law be maintained against him; and if so, by whom and why?"

Strangely enough, I couldn’t find any securities exams from 1871. I wonder why? (Please, no comments on this point. This is sarcasm; I’m not that  stupid.)

It was disheartening to look at the Corporations and Securities Regulation exams I took as a student. For those of you curious how someone like me could graduate from law school, the Corporations exam I took as a student is available here and my Securities Regulation exam is here. I am embarrassed to admit that, even though I teach Securities Regulation, I still can’t answer some of Professor Louis Loss’s multiple choice questions off the top of my head. I have no idea how I managed to get an A.

-Steve Bradford

Interested in Attending Interact Legal & Compliance Technology Forum As a Complimentary Guest?

You can find the conference website here.

And here’s the offer:

The event organizers of Interact, a peer-driven Legal & Compliance Technology Forum have offered some complimentary tickets for BLPB readers to their upcoming conference in Miami May 15-18; a $1095 value.  Please note winners are responsible for their own travel expenses, the hotel rate at the venue is a reasonable $199.

If you are interested, please drop Danna Shapiro a line at danna@eventstudio.com explaining why you are interested in attending—winners will be picked at random.  Please enter by April 19 for consideration.

About Interact

Interact brings together General Counsel, AGCs, and Chief Compliance Officers to share industry best practices for optimizing operations, improving performance, and maximizing value to their organizations.  The conference takes place May 15–18, 2011 at The Fairmont Turnberry Isle in Miami, FL and is focused on delivering the essential education needed to help achieve optimum performance  -- strategies that have been tested by peers in the industry. As we all search for ways to increase accomplishments with diminished resources and achieve greater business agility, Interact facilitates discussions on the most prevalent issues facing the industry today.

Their schedule includes a Legal, GRC and Technology track so attendees can tailor their own personal agenda to attend sessions that have the most relevance for them.  Supporting organizations include the Association of Corporate Counsel, ILTA, OCEG, InsideCounsel, Council on Litigation Management, and The Society of Corporate Compliance and Ethics.

SJP

Proxy Fight in Japan

Public corporate governance disputes disputes are uncommon in Japan, and wins by dissident shareholders are even less common in Japan than they are in the United States. But here's one worth watching--a Japanese proxy fight where the dissident may actually win.

The Wall Street Journal reports that Aeon Co., which owns 12.3% of the voting stock of Parco Co., is planning a proxy fight to oust Parco's President and four other board members. Aeon may win the fight. Parco's largest shareholder, Mori Trust Co., which owns 33.2% of Parco, will support Aeon's effort.

-Steve Bradford

Are Lawyers to Blame for Poor Risk Management?

In the past year, we have seen some significant and tragic environmental disasters in the oil industry.  The question I pose here:  are lawyers to blame?

As for the disasters, first, of course, was the Deepwater Horizon disaster in the Gulf of Mexico, which released 4.9 million barrels (205.8 million gallons) of oil into the Gulf. In addition to some $20+ billion in cleanup and spill-related claims, BP lost (by my estimate), $531,797,000.00 @ today's price of $108.53/bbl. A second, smaller spill occurred last year when Enbridge Inc.'s oil pipeline dumped 800,000 gallons of oil into Michigan's Kalamazoo River. That's about 19,047 gallons of oil, a loss of $2,067,238.10 at today's price per barrel. Enbridge today announced that the cleanup would cost about $550 million.  

I know some people feel differently, but I think it is pretty clear no one at these companies wanted anything like this to happen.  The economic incentives are clearly there to try to avoid such spills, even before you take into account the necessary (and far more expensive) costs of remediation. I do think, however, this highlights that people are often very bad risk managers, even when they are highly educated and highly sophisticated.  

This is true well beyond the oil industry.  As the flood waters have begun to rise again in the Northern Plains, we again see the risk that returns annually when significant and permanent flood-avoidance measures are delayed or avoided.  Fargo, North Dakota, and the rest of the area are once again working diligently to prepare for potentially disastrous flooding.  

In years past, as I have argued elsewhere, we have seen the dangers of such floods when a city lacks adequate protection. In 1997 in Grand Forks, ND, flooding and a related fire led to $4 billion in losses and a $400 million dike system to protect the city from similar future events. The impact of Hurricane Katrina, and the resulting flooding, on New Orleans was even larger: $100 billion lost ($40B private).  The present value cost (at least arguably) of flood protection is about $1.5 billion. Thus, in both circumstances, the cost of prevention was far cheaper than the cost of repair.  And in both cases, the cost of prevention was also incurred (or needs to be).

We see this problem with corporate managers every day.  Managers, of course, must deal with risks in a variety of ways.  As Robert Eli Rosen explained in his dissertation, Lawyers in Corporate Decision-Making:  a manager’s job is "balancing risks, developing a risk-portfolio, [and] securing support from others to minimize risks."  And it may be that lawyers are failing their client managers.  

Again, as Rosen explains: "The lesson to be learned in the risk analysis approach is that the lawyer must approach managers in a constructive fashion to effectively serve the corporation.  The lawyer must approach the manager from the position of helping the manager realize his objectives.  If the lawyer doesn't adopt this stance, the client will not consult him and will find ways to circumvent him."

Lawyers, especially in the non-litigation context, need to help their clients assess risk and help them solve problems. That can’t mean saying no all the time.  It means learning their clients’ business, and understanding what their clients need, then providing options and solutions.  Of course, some things are simply illegal. But, for the most part, it’s a not question of whether the clients can do something. It’s whether it’s worth it.

Risk management, obviously, can be done well.  For example, in Winnipeg (Canada), a floodway was completed in 1968 to protect the city from flooding of the Red River, which is the same (north running) river that flooded Grand Forks and threatens Fargo today.  Known as Duff's Ditch and Duff’s Folly (after its chief proponent, Manitoba premier Duff Roblin), it cost $63 million (about $300-$900m today, depending on how you do the calculation). In the years since its construction, "Duff's Folly" has saved billions of dollars, not to mention the human and social costs related to traumatic events.  

I’d like to think Premier Roblin had very good legal advice.

--JPF

Computer-Assisted Legal Instruction

Most U.S. law professors are familiar with the Center for Computer-Assisted Legal Instruction (CALI). (Full disclosure: I am a member of CALI’s board of directors and editorial board.) CALI offers computer-assisted lessons in various areas of the law. (A listing of the lessons organized by subject matter is available here.) CALI currently has around 850 lessons and, in 2010, there were over a million lesson runs.

Student and Faculty Use

I list the available business-associations lessons in my syllabus, and also require students to complete two of the lessons. (Those two lessons involve some rather complicated corporate law statutes; the lessons are a great way to force each student to work his or her way through the language of the statute.) I often get unsolicited comments from students about their helpfulness. As an author of several CALI lessons, I also get e-mails from students at other law schools to the same effect.

CALI lessons are available for free to any faculty member or student at a school that belongs to CALI, and almost every U.S. law school is a member. If you’re a student or a faculty member, it’s worth a look.

Use by Lawyers and Others

Many people are not aware that CALI lessons are also available to law firms and others who pay a fee to join CALI. I have found the lessons to be a great introduction to areas outside my areas of expertise, and practicing lawyers could use them similarly.

Want an introduction to the treatment of architectural design under copyright law? Want to know the basics of Clean Water Act permitting? Need an introduction to alimony law? CALI has lessons covering all of those topics.

CALI also has a large number of lessons on specialized legal research topics, including state-by-state guides. Have a Georgia law question and don’t know anything about how to research Georgia law? There are two lessons, one on primary sources and one on secondary sources. Have a question about California ballot measures?  There’s a lesson on how to research those.

Take a look at the CALI web site. You might find something useful.

-Steve Bradford

What Passes for News

From today's New York Times Dealbook: Harvard M.B.A. Students Stroll the Catwalk for Charity.  An excerpt: 

Eighteen designers were represented, and “smart casual” was the look of the night, according to Ms. Magoon. The retail and luxury goods club, members said, looked for outfits that might be equally appropriate for the dance floor and the trading floor.

. . . .

To this Wall Street reporter’s fashion-blind eyes, the women seem to have taken to runway modeling slightly more easily than the men, although many of the men had the film character Derek Zoolander’s “Blue Steel” look down pat.

Sigh.  At least this event was for charity.  I suppose this is a mild improvement over the New York Times Dining Page article, Frump-Free Cooking: The Look That Sizzles, which had nothing to do with cooking or dining, and instead tells us that the women of the Food Network have moved to sweaters for their fashion: "Depending on who the cook is, the fabric may be cashmere or cotton. The neckline may be a V-neck or a scoop neck. But the look, sexy meets utilitarian, is the same."

Sigh. 

--JPF

While Many Continute to Debate the Financial Crisis, Others Are Laughing All the Way to the Bank

From USA Today: Goldman CEO's pay package skyrockets to $14.1M from $1M.

Although, as Frank Pasquale points out, Blankfein may actually be nervously wringing his hands wondering whether $14M will be enough.

Some additional arguably related links:

The WSJ: The Return of the Class System.

Yahoo: House Republicans to end government assistance for homeowners hurt by the housing crisis.

SJP