January 15, 2011
Chapman University School of Law To Host Symposium on Dodd-Frank
On January 27 & 28, the Chapman Law Review will be hosting a symposium entitled: "From Wall Street to Main Street: The Future of Financial Regulation." You can find the schedule here, and I think you'll agree it looks like it should be an excellent conference. I'm looking forward to all of it, particularly Peter Huang's presentation on "How Behavioral Economics & Economic Theory Can Improve Financial Regulation." I am very grateful to Peter for encouraging me to submit a proposal for this symposium, and I'll be presenting my latest work-in-progress: "The Dodd-Frank Corporation: More Than a Nexus of Contracts?" (All credit for the first half of the title goes to Frank Partnoy, who was kind enough to let me steal it--though that should in no way incriminate him in terms of the substance of the project.) If you're a reader of this blog and attending the conference, please stop by and say hello.
PS--I'm currently looking out my window at about 8 inches of snow, with 2-4 more expected today. So, I have to admit that the great presentations aren't the only reason I'm looking forward to this conference, as should be clear when you view the first picture greeting you here.
January 14, 2011
Expect a Close Eye on Attorneys' Fees in Delaware Derivative Suits
According the National Law Journal (here), plaintiffs' attorneys plan to ask for $6.5 million in fees related to a derivative suit filed in connection with a proposed merger of Alberto Culver and Unilever. The Notice of Pendency and Proposed Settlement of Shareholder for In re Alberto Culver Co. Shareholder Litigation is available here. As the article explains, the shareholders derived no monetary benefit from the suit. Instead, the settlement achieved the following: (1) eliminated Unilever's right to match any competing higher offer; (2) reduced the failed merger break-up fee from $125 million dollars to $100 million; (3) required the Alberto Culver to share the same confidential documents given to Unilever to any higher bidders; and (4) delayed a shareholder meeting vote.
The question now is how the Delaware courts will look on these non-monetary gains in assessing the value added by the two plaintiffs' firms. Noted Delaware Courts expert Francis G.X. Pileggi noted in the article that it is likely the court will look closely at the settlement following the Chancery Court's decision in In re Revlon Inc. Shareholders Litigation (here) from March 2010. In that case, the court explained that "a systemic problem emerges when entrepreneurial litigators pursue a strategy of filing a large number of actions, investing relatively little time or energy in any single case, and settling the cases early to minimize case-specific investment and maximize net profit." The court in that case was concerned about "shirking by representative counsel" and determined that new counsel was necessary because "the original plaintiffs’ counsel failed to litigate the case adequately."
To me, the Alberto Culver case looks even more like In re National City Corp. Shareholders' Litigation (here), which I mentioned a while back. In that case, the court granted $400,000 in attorneys' fees and expenses, instead of the requested $1.2 million. In that case, too, no monetary benefit was gained from the settlement; only additional disclosures were gained for the shareholders.
At first glance, the Alberto Culver case seems to have gained more substantive changes and disclosures than were obtained than for National City's shareholders. In National City, the court determined that "regardless of the amount of hours spent," the gain was minimal and counsel "did not press any subsequent motion and only deposed two witnesses." For Alberto Culver shareholders, counsel did get a reduction in break-up fees, a delay, and eliminated a matching right, and apparently conducted six depositions. That said, counsel also requested about six times as much money in fees and expenses, too.
I have no inside information here, and my knowledge of the scope and quality of work done is (at best) extremely limited, but following National City and Revlon, I'd be surprised if anything close to the requested fees are granted. My best guess is that Alberto Culver counsel would be wise to expect something closer to the $1 million to $2 million range.
January 13, 2011
Harner and Marincic on Business Reorganizations
Michelle M. Harner and Jamie Marincic have posted Behind Closed Doors: The Influence of Creditors in Business Reorganizations on SSRN with the following abstract:
General corporate law delegates the power to manage a corporation to the board of directors. The board in turn acts as a fiduciary and generally owes its duties to the corporation and its shareholders. Many courts and commentators summarize the board’s primary objective as maximizing shareholder wealth. Accordingly, one would expect a board’s conduct to be governed largely by the interests of the corporation and its shareholders.
Yet, anecdotal and increasing empirical evidence suggest that large creditors wield significant influence over their corporate debtors. Although this influence is most apparent as the corporation approaches insolvency, the strength of the creditors’ negotiating position often is based on the terms of the pre-insolvency contract. Creditors typically obtain restrictive covenants and veto rights that allow them to assert control over various corporate actions.
Nevertheless, the extent of creditor influence is hard to gauge accurately because it frequently materializes behind closed doors, in negotiations between the corporation and creditors over refinancing terms, forbearance agreements, covenant waivers or rescue financing.
This Article attempts to shed some light on the nature and extent of creditor influence by examining creditor influence over corporate debtors and creditors’ committees in Chapter 11 reorganization cases. Specifically, it reports and analyzes data from an empirical survey of professionals and individual creditors participating in the Chapter 11 process. In many respects, the data confirm what commentators have gleaned from the terms of creditors’ contracts and activity documented on Chapter 11 dockets - creditors are trying to exert greater influence over corporate decisions in the restructuring context.
Zheng on Antitrust Law
Wentong Zheng has posted Transplanting Antitrust in China: Economic Transition, Market Structure, and State Control on SSRN with the following abstract:
This Article examines the compatibility of Western antitrust models as incorporated in China’s first comprehensive antitrust law – the Antimonopoly Law (“AML”) – with China’s local conditions. It identifies three forces that shape competition law and policy in China: China’s current transitional stage, China’s market structures, and pervasive state control in China’s economy. This Article discusses how these forces have limited the applicability of Western antitrust models to China in three major areas of antitrust: cartels, abuse of dominant market position, and merger review. Specifically, it details how these forces have prevented China from pursuing a rigorous anti-cartel policy, how they have led to a mismatch between monopoly abuses that are prohibited under the AML and monopoly abuses that are most prevalent in China’s economy, and how they have prevented the merger review process under the AML from being meaningfully applied to domestic firms. This Article demonstrates that despite having a Western-style antitrust law, China has not developed and likely will not develop a Western-style antitrust jurisprudence in the near future due to these local conditions. Finally, the Article explains how China developed a consensus on the need for a formal antitrust law despite local conditions that were not entirely compatible with such a law.
Following Up on Matrixx v. Siracusano
A while back, I was honored to sign on to the "Brief for Professors at Law and Business Schools as Amicus Curiae In Support of Respondents, Matrixx v. Siracusano," arguing that "The Use of Statistical Significance as a Bright-line Test for Determining Materiality Is Inconsistent with the Analytical Framework Set Out By This Court in Northway and Conflicts with the Reasoning in Basic." However, I also noted here that if one followed the "pro-business" storyline for the Roberts Court, that argument would be a loser. Alternatively, I suggested the Court might adopt a presumption in favor of finding data that was not statistically significant immaterial as a sort of compromise. (I guess you could say I was covering all the bases.)
Well, the Court recently heard oral argument in the case and early reports suggest the Professors' brief's argument will be a winner after all (which continues to strike me as the correct result). Writes Jay Brown here:
While it is hard to predict the outcome of a case from oral argument, this one seems straightforward. Respondents will win and the Supreme Court will reject the "statistical significance" test, reaffirming the traditional Northway/Basic analysis.
January 12, 2011
So That's Where the Internet Money Comes From
McKinsey Quarterly recently conducted a study, which found that the Web is currently running a "€100 billion annual surplus." (The article about the study is available here, free registration required.) The study surveyed Web users in Europe and the United States and concluded that "Web use" is worth €150 billion a year. They then subtracted €30 billion in consumer payments for services and subscriptions and €20 billion in "pollution" consumers experience, such as privacy fears, pop-up ads, etc., to arrive at the number.
The article proposed three possible way internet economics could shift: (1) increased service costs (e.g., more subscriptions, charges for premium content); (2) increased advertising; and (3) other monetization plans. These are not especially groundbreaking conclusions, but the assessment of the Web surplus is interesting. It sure helps explain Goldman's recent valuation of Facebook and indicates that another internet boom (though perhaps more modest than the first one), is around the corner. For the economy, that's probably a good thing. For individual investors, it's likely a very mixed bag.
January 11, 2011
The Subprime Crisis and Cinema...
Students often ask me what films best capture these frenzied financial times.
For a brief but scathing look at Congress' exemption of credit derivatives from the purview of both the SEC and CFTC, I suggest viewing an indie titled American Casino.
For a dramatic portrayal of a Bailout (scripted with dialogue including cumbersome terms like "credit default swaps" and "CDOs"), I like Wall Street II.
For a gripping account of the dangers one trader can visit upon the most traditionally conservative of institutions, see Rogue Trader (detailing the suicidal speculation of a desk at Barings Bank).
For a humorous look at taxpayer anger, I refer concerned citizens to Capitalism: A Love Story (which actually concludes with the solitary Michael Moore attempting a citizen's arrest of the Boards of bailed out Wall Street companies).
But for the best appraisal of the regulatory task at hand, I must endorse Transformers, wherein the nations of the earth join forces to combat an unprecedented monster of boundless energy and strength, ignoring cultural differences and nationalistic suspicions in the cause of subduing the alien threat, ultimately succeeding only in burying the problem at the bottom of the deep blue sea before its resurfacing about two years later...
January 10, 2011
EPA Moving Slowly; Texas Not Playing Well With Others
Following the Supreme Court's decision in Massachusetts v. EPA, the EPA is gearing up to regulate greenhouse gas (GHG) emissions, as is now required under the Clean Air Act. Most states have taken the steps they need to modify their state implementation plans to comply with EPA's requirements to regulate GHGs (whether they agree with the EPA's position or not). Texas, however, has not.
Apparently, Texas doesn't agree with the Clean Air Act's requirements or wants to deal with GHGs differently, which (according to a post from environmental scholar Victor Flatt) means "the EPA would have had the right to make an immediate finding and indeed take over ALL of the state of Texas’s permitting authority, since the communications from Texas indicate a profound misunderstanding of the health and environmentally based requirements of the Act." The EPA did not do so and only stepped in to issue a limited federal implementation plan related to GHGs in place of the Texas plan. This action led the state to seek a temporary stay (granted on Dec. 30, 2010).
The debate over GHG regulation is not going away any time soon, especially with the recent changes in Congress. One thing worth noting here, though, is that continuing and sustained uncertainty is one of the worst things for someone trying to run a business. Often, uncertainty is even worse for businesses than certain policies that businesses don't like. This is at least one reason companies like FedEx and Caterpillar have stated support for carbon taxes over cap-and-trade programs. As FedEx CEO Fred Smith said, “We very much believe that a straightforward graduated tax on carbon is better than the cap-and-trade.” A tax would provide some calculable certainty instead of "market distortions" than can come from other programs, as noted here.
I suspect a lot of executives wouldn't be willing to admit a preference for a tax at all, just to get some certainty, but it's still true that uncertainty breeds reluctance, which is likely to limit investment. This, in turn, isn't good for the economy. Maybe the economy would be better off without any programs to address GHG emissions (I don't think so, and neither does Fred Smith), but not making a definitive decision, in either direction, is almost certainly bad.
One last note on the EPA v. Texas. As Prof. Flatt explained,
the EPA only promulgated an “interim” emergency rule imposing a [federal implementation plan] because without such a [federal implementation plan], sources in Texas would be unable to receive permits under the Act at all. Indeed the EPA’s rulemaking is specifically accepting comments for the purpose of taking a different action if such is at all possible. What the EPA has proposed and has done is the minimum required of it under the CAA.
Whether you agree with the EPA or the Clean Air Act, the EPA got at least one thing here right: they did their best to provide a little certainty for the market while staying consistent with their mandate.
January 9, 2011
Another Corporate "Problem-Solution" Dance
A while back I blogged about the "problem-solution dance" introduction I usually give to my Corporations class. Here's another version based on the notes I took while listening to David Yosifon's presentation at the AALS panel on "Corporate Political Speech and Dueling Conceptions of the Corporation in Supreme Court Jurisprudence":
- Problem: All thoughtful people agree corporations should serve a pro-social purpose, but how do we best achieve that goal?
- Solution: Many believe elevating shareholder wealth maximization as the primary (Only?) corporate objective will achieve the greatest social good.
- Problem: Shareholder wealth will often be maximized, at least in the short term, via exploitative conduct and thus the market will often favor exploitative corporations even if no particular individual in the firm consciously pursues exploitative policies.
- Solution: Regulations specifically targeted at limiting exploitative conduct, like environmental or labor laws, will do a better job of correcting this problem than corporate governance adjustments.
- Problem: Corporations exercise sufficient political influence to keep such regulations from becoming meaningfully effective.
- Solution: Insulate politics from corporate influence.
- Problem: Citizens United.
- Solution: Now we're back to the "second best" solution of tweaking corporate governance. Yosifon favors imposing on corporate directors a duty flowing to stakeholders.
Putting aside for the moment questions about whether Citizens United actually created a new problem, I'm willing to consider solutions based on corporate duties flowing to shareholders so long as they are actually enforceable by stakeholders. Otherwise, they risk just serving as additional cover for management self-dealing. (I should note here the [paraphrased] comment of a member of the audience who claimed to have worked extensively at the highest levels of corporate hierarchies: "I've never seen any indication that directors or managers of corporations care about shareholders or the long-term well-being of the corporations that pay them. Rather, they appear solely concerned with their standing in the little club of well-paid executives and directors who will gladly sacrifice both shareholder and corporation when the pending bonus check quarantees a comfortable retirement.")
Proxy access is obviously another proposed solution currently garnering quite a lot of attention. I recently read some comments suggesting that one of the reasons empowering shareholders won't work is because they themselves favor excessive risk-taking since they are well-diversified. I would argue, however, that there is a difference between diversified shareholders favoring more risk than if they had all their eggs in one basket and favoring the sort of unconsidered risk-taking (i.e., the analysis seemingly stops with the finding that everyone else is "dancing") that seemed to mark the recent financial crisis.