May 28, 2011
Citizens United: Up Next, Contributions
Th[e] logic [of Citizens United] is inescapable here. If human beings can make direct campaign contributions within FECA’s limits without risking quid pro quo corruption or its appearance, and if, in Citizens United’s interpretation of Bellotti, corporations and human beings are entitled to equal political speech rights, then corporations must also be able to contribute within FECA’s limits.
Only one other court appears to have ruled on this issue since Citizens United. In Minnesota Citizens Concerned for Life, Inc. v. Swanson, the plaintiffs challenged a state-law ban on corporate contributions to candidates and political parties, arguing that the ban was unconstitutional under Citizens United. 741 F. Supp. 2d 1115 (D. Minn. 2010). The court disagreed, finding that Citizens United’s holding was limited to corporate independent expenditures and was not a repudiation of Buckley’s limitations on direct contributions to candidates. Because Citizens United did not overrule Buckley, the court held, a ban on direct corporate contributions remained constitutional. Id. at 1132-34.
This Court agrees that Citizens United did not overrule Buckley. Indeed, Citizens United noted that limits on direct contributions to candidates, “unlike limits on independent expenditures, have been an accepted means to prevent quid pro quo corruption.” Citizens United, 130 S. Ct. 909 (citing McConnell v. FEC, 540 U.S. 93, 136-38 (2003)). But this Court respectfully disagrees with the Swanson court as to the import of these facts. That Citizens United did not overrule Buckley and that it reaffirmed Buckley’s concern with preventing quid pro quo corruption does not justify flatly banning corporations from making direct donations while permitting individuals to make such donations within FECA’s limits. . . .
[F]or better or worse, Citizens United held that there is no distinction between an individual and a corporation with respect to political speech. Thus, if an individual can make direct contributions within FECA’s limits, a corporation cannot be banned from doing the same thing.
May 27, 2011
Vonnegut's Law: Pattern Finding in Law Reviews
Robert Krulwich, on his NPR blog, writes that that people are "pattern-finding animals." He goes on to say:
Do any of us live beyond pattern? Do great musicians, breakthrough artists, great athletes operate pattern free? Pattern indifferent?
I don't think so. Artists may be, oddly, the most pattern-aware. Case in point: The totally unpredictable, one-of-a-kind novelist Kurt Vonnegut (Slaughterhouse-Five, Cat's Cradle, God Bless You, Mr. Rosewater) once gave a lecture in which he presented — in graphic form — the basic plots of all the world's great stories. Every story you've ever heard, he said, are reflections of a few, classic story shapes. They are so elementary, he said, he could draw them on an X/Y axis.
The site then has a link (here) to a short excerpt of a talk from Kurt Vonnegut that is worth a look. (I think, anyway, but I am huge Vonnegut fan.)
What does this have to do with business law? Well, maybe not that much, but it seems relevant to me in the context of the discussion about the recent, but not new, concerns about law reviews Steve Bradford, Stephen Bainbridge, and others are talking about. The current focus of discussion is the concept of "specialty journals" and, as Steve wondered: "[W]hy are mainstream courses like tax and business associations considered “specialty” topics, unlike the constitutional law and jurisprudence articles that seem to fascinate law review editors so much?"
As someone who writes primarily on corporate law and energy law issues, I am well aware of the specialty journal concern. And I, too, find it frustrating sometimes. But maybe it is just that law review editors are pattern-finding animals, just like the rest of us.
More after the jump:As an aside, I'm always torn on the heavy critique of law reviews and the law review process. As a former editor in chief, I found the Law Review experience to be invaluable, and a major reason why I do what I do today. I learned something about scholarship; I learned something about process. I learned about how I wanted to be an author (and how I didn't want to be as an author). I learned I wanted to be law professor. And I know that learning almost certainly came at some expense to our largely outstanding group of authors. I think we were professional, and courteous, and careful. That was always our goal. But I also know I would have been a lot better at it the second of third time around.
I am now on the Board of Advisory Editors for the Tulane Law Review, and I sit on a board for the Tulane Law Review Alumni Association, a 501(c)(3) a group of us started to help support the law review. I am also proud to be the North Dakota Law Review faculty advisor. I spend so much time on this because still believe it is an invaluable experience for students, and it can be a very good experience from the author side, too. Maybe it is that the student value is the primary value. I think it's more than that, but I appreciate others have different views.
One way or another, the patterns are set in place, and we seem to follow them. Despite my frustrations with the process, I do think there are a lot of upsides to the law review and law journal system. And I don't think we should forget that either.
SEC No-Action Letters: Explanation, Please
The SEC should put explanations in its no-action letters.
For those not familiar with no-action letters or the SEC no-action process, here’s how it works. Someone, usually an attorney, submits a letter to the SEC staff detailing a proposed course of action and, in essence, asking whether the proposed action will violate some particular part of the federal securities laws. The SEC staff will usually respond in one of two ways:
1. On the basis of your representations and the facts set forth in your letter, the Division will not recommend enforcement action by the Commission under [whatever the relevant parts of the statute are] if [the client] engages in the activities described in your letter.
2. We are unable to offer you assurance that the staff of the Division would not recommend enforcement action by the Commission under [whatever the relevant parts of the statute are] if [the client] engages in the activities described in your letter.
The problem is that the staff seldom explains why it thinks the proposed action is or is not acceptable. Sometimes, the staff response merely repeats the facts from the request letter and concludes with the language above. Other times, the staff may specifically flag some of the facts as important. The response will say something like, “This response is conditioned on your representation that Client will not …..” But, even then, the staff doesn’t explain why those particular facts are important to the conclusion. Only rarely does the staff provide a full explanation of its conclusion.
This may be enough for the person requesting relief. They want to know if they may do what they propose and they have an answer.
But others rely on these letters. In areas of securities law where case law and regulations are sparse or non-existent, no-action letters are the primary source of guidance. Attorneys and others reviewing these letters must parse the facts of each one and try to reconcile the various positive and negative responses. It’s especially frustrating when you suspect that what’s really going on is that the staff’s view has simply changed over time.
I have been struggling through a long series of SEC no-action letters for a project I’m working on, and, I promise, the analysis isn’t easy. I realize that some of you might attribute this to my own lack of mental prowess, but the treatise writers in these areas struggle as well.
Would it be too much to ask the staff to give a brief explanation, particularly when they are refusing no-action relief?
The upside to lawyers (and law professors) who have to use these letters would be tremendous. No more treatises guessing about the rationale. Fewer future no-action requests from lawyers who can’t figure out what the SEC’s position is. More certainty.
The cost to the SEC would be minor. Presumably, the staff member is not just flipping a coin; he or she has some rationale for not granting the request. The additional effort to put that rationale on paper would be minimal. And the SEC makes it clear that no-action responses have no precedential value, so a poorly reasoned position taken by a single staff member in a single letter isn’t going to devastate the Commission.
May 26, 2011
Law Review Articles
Two things worth reading
1. I just read a great article on the choice between mark-to-market and historical cost accounting: Richard A. Epstein & M. Todd Henderson, Do Accounting Rules Matter? The Dangerous Allure of Mark to Market, 36 J. Corporation Law 513 (2011). Well worth reading if you have any interest in accounting issues. The Journal of Corporation Law has not yet posted the article on its web site, but a draft is available here.
Here’s a list of the symposium articles:
- Government Ethics and Bailouts: The Past, Present, and Future-Nicole Elsasser Watson
- The Financial Crisis of 2008-2009: Capitalism Didn’t Fail, but the Metaphors Got a “C”- Jeffrey M. Lipshaw
- Who Benefited from the Bailout?-Jonathan G. Katz
- Fiduciary-Based Standards for Bailout Contractors: What the Treasury Got Right and Wrong in TARP- Kathleen Clark
- Compromised Fiduciaries: Conflicts of Interest in Government and Business- Claire Hill and Richard Painter
- Government Governance and the Need to Reconcile Government Regulation with Board Fiduciary Duties-Lisa M. Fairfax
- Uncomfortable Embrace: Federal Corporate Ownership in the Midst of the Financial Crisis-Steven M. Davidoff
- Dodd-Frank: Quack Federal Corporate Governance Round II-Stephen M. Bainbridge
- Corporate Governance in an Age of Separation of Ownership from Ownership-Usha Rodrigues
Some real heavy hitters on that list. I’m looking forward to reading the symposium.
Law Reviews Generally
Finally, since we’re talking about law reviews, I simply must quote from one of Steve Bainbridge’s recent posts. Prompted by a Prawfsblawg comment about the difficulty of publishing speciality topics in law reviews, Steve expresses his view on law reviews in general:
I've reached a point of general frustration with law reviews. Getting jerked around on publication by third or, worse yet, second year law students. Being obliged to request expedited consideration as though I were a supplicant asking royalty for a favor. Having some wet behind the ears editor practically rewrite my article. Not getting paid. Frak the law reviews and the horse they came in on. Books or self-publish on Kindle.
To that I can only say amen. After a hiatus from student-edited law reviews, I have finally returned. But I agree that there has to be a better way. (Special irony points to the first commenter to notice who has an article listed in the Minn. symposium above.)
By the way, why are mainstream courses like tax and business associations considered “specialty” topics, unlike the constitutional law and jurisprudence articles that seem to fascinate law review editors so much?
Teaching Rand in Law School
A while back I got into a debate with Roger Donway of the Atlas Society's Business Rights Center, which led to some offline discussions and an attempt to get an associate of Donway's, William Thomas, to come to Akron to give a presentation on Ayn Rand's Objectivism. We were never able to make the presentation happen, but I continue to believe that there is value to exposing law students to Objectivism because I believe Rand's philosophy continues to animate much more of our regulatory policy-making than is openly acknowledged. That is not to say there aren't "out-of-the-closet" Randians in positions of power--Alan Greenspan likely being the most prominent recent example--but many more who personally adhere to the philosophy likely prefer to keep that belief quiet because of the drubbing Objectivism has taken in many philosophical circles (for some examples, go here and here).
Thus it was with some interest that I read Michael Sean Winters's recent post on the letters exchanged between House Budget Chairman Congressman Paul Ryan and New York Archbishop Timothy Dolan (HT: Stephen Bainbridge). Writes Winters:
The second thing to note is the irony of seeing Ryan invoking Catholic social thought so forcefully. This is the same congressman who said he was inspired to go into politics by reading Ayn Rand, and who instructs his congressional staff to read Rand’s works if they want to understand his mind.
The irony might be summed up with: "[I]t is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God." Matt. 19:24.
Huffington Post Lawsuit: Breached Joint Venture?
In a boon for Business Org. teachers, we have yet another example of a high-profile lawsuit alleging a breached business "partnership" (joint venture technically). The latest example involves the Huffington Post's founders Arianna Huffington and Kenneth Lerer who are named as defendants in a lawsuit brought by Peter Daou, a media consultant for the presidential campaigns of John Kerry and Hillary Clinton, and James Boyce, a former Kerry adviser. Daou and Boyce claim that six years ago they entered into a hand-shake agreement with Huffington and Lerer to form a joint venture internet site to fund raise and promote a democratic agenda utilizing citizen journalists.
The Complaint (Download Huffington Complaint) alleges that after a series of meetings culminating in December, 2004, the four parties had a detailed business plan that included estimated financial contributions, role of each party, allocation of expenses, and strategy for the website.
A New York State Court Judge ruled from the bench on Tuesday denying Defendants' Motion to Dismiss and letting the case proceed to discovery. The test to establish a joint venture under New York law is whether the is an agreement manifests "the intent of the parties to be associated as joint venturers, a contribution by the coventurers to the joint undertaking (i.e., a combination of property, financial resources, effort, skill or knowledge), some degree of joint proprietorship and control over the enterprise; and a provision for the sharing of profits and losses." (Kaufman v. Torkan, 51 A.D.3d 977, 979 (2d. 2008). “The ultimate inquiry is whether the parties have so joined their property, interests, skills and risks that for the purpose of the particular adventure their respective contributions have become as one and the commingled property and interests of the parties have thereby been made subject to each of the associates on the trust and inducement that each would act for their joint benefit." Matter of Steinbeck v. Gerosa, 4 N.Y.2d 302, 317 (1958). This specific allegations in the complaint, combined with the high standard on motions to dismiss, where the allegations in the complaint are taken as true, allowed this case to proceed to the next stage of litigation.
This is clearly going to be an interesting case to watch, and perhaps another good teaching tool for those of us tasked with convincing students of the important of understanding the rules and consequences of "default" entity forms like partnerships and joint ventures.
May 25, 2011
Bob Dylan Turns 70: Answer Still Blowing in the Wind
So yesterday was Bob Dylan's birthday, and he turned 70 years old. University of Tennessee College of Law professor Alex B. Long's paper, The Freewheelin' Judiciary: A Bob Dylan Anthology, looks at how the courts have used Dylan's lyrics over the years. In honor of Dylan's birthday, I offer the following business law-related excerpt from Professor Long's paper:
One of the more interesting [Dylan quotes] comes from McKesson Corp. v. Islamic Republic of Iran [520 F. Supp. 2d 38 (D.D.C. 2007)].
There, the court used the weatherman metaphor to signify the idea that some future events are so likely to occur that they do not require an expert to predict. In the case, a corporation (McKesson) was suing Iran for failing to distribute dividends the corporation was owed. The corporation made at least three failed attempts to obtain payment.
In this Court's judgment, the only reasonable conclusion that can be drawn about Iran's intentions from these three unsuccessful attempts by McKesson is that nothing McKesson would, or could, do would result in the payment of their dividends. To put it in 1960's vernacular: “you don't need a weatherman to know which way the wind blows.” FN16
FN16. B. Dylan, Subterranean Homesick Blues, on BRINGING IT ALL BACK HOME (Columbia Records 1965).
May 24, 2011
Oppenheimer Securities Class Action Settlement
The D & O Diary is reporting that two of the three consolidated class actions against the various Oppenheimer Funds have reached a settlement of $100M. The proposed settlements, awaiting final approval by the court, can be found here ( Download Opp. settlement 1) and here ( Download Opp. Bond Fund Settlement). The class actions being settled were brought by investors who purchased shares of Oppenheimer with offering documents that allegedly contained misrepresentations. The investors alleged that the Funds, dispite representation otherwise, engaged in risky investments such as mortgage-backed securities, credit-default swaps and total-return swaps. When the financial crisis hit, these Funds later lost a substantial part of their net asset value,and investors sued under theories of securities fraud.
May 23, 2011
The SEC's "Bad Actor" Quandary
On Wednesday, May 25, the SEC is meeting to consider whether to propose amendments to Regulation D that would disqualify “bad actors” from using the Rule 506 exemption from the registration requirements of the Securities Act. This isn’t surprising news; section 926 of the Dodd-Frank Act requires the SEC to issue these rules.
Disqualifications like this aren’t new. Rule 262 of Regulation A disqualifies certain wrongdoers from using the Regulation A exemption and the Rule 505 exemption in Regulation D incorporates those Rule 262 bad actor disqualifications. But there’s a hitch in extending those disqualifications to Rule 506 that I don’t think either Congress or the SEC has thought through.
The two rules that already incorporate bad actor restrictions were adopted pursuant to the SEC’s rulemaking authority in section 3(b) of the Securities Act. Section 3(b) authorizes the SEC to exempt offerings if the offering amount does not exceed $5 million, “subject to such terms and conditions as may be prescribed” by the SEC. If an offering falls within the “bad actor” rules, it doesn’t meet the terms and conditions prescribed by the SEC and no exemption is available. End of story.
The analysis isn’t that simple for Rule 506. Rule 506 is a “safe harbor” for the statutory exemption in section 4(2) of the Securities Act, which exempts “transactions by an issuer not involving any public offering.” Rule 506 doesn’t create a new exemption, but merely assures issuers that “[o]ffers and sales of securities by an issuer that satisfy the conditions in . . . [Rule 506] . . . shall be deemed to be transactions not involving any public offering within the meaning of section 4(2) of the Act.” In other words, if you meet the conditions specified in Rule 506, you have met the conditions of section 4(2) and have the section 4(2) exemption. But Rule 506 is just a safe harbor; a company that doesn't meet all the conditions of Rule 506 is still free to argue that its offering falls within the outer bounds of section 4(2).
The problem for the SEC is that neither section 4(2) nor the case law interpreting section 4(2) say anything about disqualifying bad actors. Why does that matter? Consider what happens after the SEC amends Rule 506 to disqualify bad actors.
Assume that Acme Corporation, which is now ineligible to use Rule 506 because of a prior securities conviction, sells securities in an offering meeting every other requirement of Rule 506. Because of the bad actor disqualification, the Rule 506 safe harbor isn’t available. But Section 4(2) has never had a bad actor disqualification, and Dodd-Frank didn’t amend section 4(2) in any way. Acme still may use the section 4(2) exemption.
The case law interpreting the section 4(2) exemption is notoriously uncertain, but the SEC has been telling us for years that anyone who complies with Rule 506, bad actor or not, comes within the uncertain boundaries of section 4(2). Unless the SEC was wrong all those years, Acme’s compliance with all the other requirements of Rule 506 should qualify it for the section 4(2) exemption. To show otherwise, the SEC will have to argue, in essence, that its own interpretation of section 4(2) is incorrect.
Of course, Congress could have avoided this quandary by extending the bad actor restriction to section 4(2) itself, but Congress didn’t do that. Now, the SEC has to live with the consequences.
Amended In re Sauer-Danfoss complaint warrants attorneys’ fee award for supplemental disclosure
The plaintiff shareholders of Sauer-Danfoss Inc. filed suit hours after Danfoss A/S, the Company's controlling stockholder, announced a plan to launch a tender offer for the Sauer-Danfoss minority shares. After settlement talks contemplating a disclosure-only settlement broke down, the plaintiffs amended their complaint to assert that the defendants Schedule 14D-9 failed to disclose certain material information. Danfoss and Sauer- Danfoss voluntarily disclosed information mooting those disclosure claims and Danfoss later withdrew its tender offer, mooting the litigation. Plaintiffs' law firms nevertheless sought $750,000 in fees resulting from the corporate benefit conferred by the supplemental disclosures. Vice Chancellor Laster of the Delaware Chancery Court looked to the amended complaint to establish that the claims were “meritorious when filed” and awarded a fee of $75,000 because of the material benefit conferred by one of the twelve supplemental disclosures.
I was unfamiliar with the case law analysis for supplemental disclosures and found the discussion in the opinion interesting. The full opinion is available for download here (Download In re Sauer-Danfoss). A few highlights of the opinion and my brief summary continues below:
When a plaintiff pursues a cause of action relating to the internal affairs of a Delaware corporation and generates benefits for the corporation or its stockholders, Delaware law calls for the plaintiff to receive an award of attorneys’ fees and expenses determined based on the factors set forth in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). If the defendants take action to moot the dispute, plaintiffs can still seek an award. Drawing from United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997), to obtain a fee in a mooted case, the plaintiff must show that:
(1) the suit was meritorious when filed;
(2) the action producing benefit to the corporation was taken by the defendants before a judicial resolution was achieved; and
(3) the resulting corporate benefit was causally related to the lawsuit.
Plaintiffs challenged the Schedule TO disclosure relating to the Tender Offer price. The disclosure regarding the tender price stated:
"$13.25 per share is greater than . . . the 52 week high closing price of [Sauer-Danfoss common stock] of $12.70 on January 20, 2010, which occurred following [Danfoss’s] announcement that it intended to make the [Tender Offer]. Prior to that announcement, the 52 week high closing price was $9.75."
Plaintiffs' Amended Complaint alleged that the statement did not define the 52-week period for which the $9.75 price was calculated and provided inaccurate pricing information because "prior to January 20, 2010, the 52-week high closing price was $12.49 on January 19, 2010."
In response, Danfoss disclosed the following:
"The Offer Price of $13.25 per Share is greater than the 52 week high closing price of the Shares of $12.70 on January 20, 2010, for the period ending March 8, 2010, which occurred following our December 18, 2009 notification to the Board that we intended to make the Offer. Prior to that notification, the 52 week high closing price was $9.90 on January 6, 2009."
The Court concluded that the supplemental disclosure established the accurate end date for the 52-week period calculations. The Court characterized the Schedule TO’s reference to $9.75 as "a careless mistake", but concluded that the corrective disclosure provided a compensable benefit. The $75,000 in fees was calculated in reference to this disclosure.
Shareholder Perspective on Hostile Takeover Numbers
The New York Times Dealbook provides a brief excerpt from an article at efinancialnews.com (registration, which I have yet to do, for a free trial is required to access the full article):
JPMorgan Chase successfully defended clients against hostile takeover approaches 64.4 percent of the time — the best among the top advisory banks, according to an analysis by Financial News. Morgan Stanley, meanwhile, got clients it advised 15.9 percent more in price when hostile takeovers were successful, another best, according to the analysis.
First thought: How many companies that hire JPMorgan Chase would be better off if the takeover were successful? That's obviously not JPMorgan's problem, but it is a potential concern for shareholders.
Second thought: As a shareholder, based on this report, which firm would I rather see my board hire? Pretty clear for most of us, I suspect: Morgan Stanley. Most of the time, I'd rather see 15.9% more for my shares in a takeover than see my company's management team stay the course. Not always, I suppose. But almost.
May 22, 2011
Kinney on For-Profit Health Care
Eleanor D. Kinney has posted For-Profit Enterprises in Health Care: Can it Contribute to Health Reform? on SSRN with the following abstract:
Since the demise of the last major health reform initiative in 1994, health coverage for the American people has deteriorated. Private insurance costs have risen, and coverage under private insurance became less comprehensive, with higher deductibles and copayments. Many new treatments for serious diseases have become more and more unaffordable, even for those with health insurance coverage. Public programs have picked up some slack. But gaps remain and many are uninsured. The elephant in the room when it comes to healthcare is its cost. This article analyzes how and why the cost of healthcare services grew in the way they did from the 1930s until today. This article proposes that the inflation in healthcare costs in the United States is due to both factors common to other countries and unique to the United States. The common factors are: (1) advances in medical science and associated technology and pharmaceutical products; and (2) the advent of widespread health insurance coverage. The factor unique to the United States is the degree to which healthcare is produced, financed and delivered through for-profit enterprise. This article analyzes the characteristics and behavior of the major players in the healthcare sector – physicians, hospitals, health insurers and medical product manufacturers – and assesses what characteristics and behavior might be undesirable in a publically-subsidized sector of the national economy. Resolving these issues becomes increasingly important as the nation moves toward health reform and mandated insurance coverage imposing involuntary financial obligations on patients, employees and employers.
-Eric C. Chaffee
Du Toit & Pienaar on “Corporate Identity as Foundation of the Criminal Liability of Legal Persons”
Pieter Du Toit and Gerrit Pienaar have posted a paper on SSRN entitled, "Corporate Identity as Foundation of the Criminal Liability of Legal Persons (1): Theoretical Principles." Here is the abstract:
The different models for the criminal liability of juristic persons reveal a tension between individualist and realistic approaches. For individualists a corporation is the product of a union of individuals. This means that a juristic person can only be held criminally responsible if the conduct and fault of an individual involved in the entity are attributed to the juristic person. For realists a corporate entity has an existence independent of its individual members. The juristic person is blameworthy because its corporate identity or corporate ethos encouraged the criminal conduct. A study of organisational theory reveals that corporate crime may not necessarily be traced to the fault of specific individuals. Corporate criminality often is the result of complex decisions on different levels of the corporate hierarchy and furthermore is encouraged by the manner in which the organisation is structured. Prominent scholars such as the American philosopher Peter A French and the Australian Brent Fisse rejected an individualist approach and attempted to develop models of corporate fault based on the corporate identity idea. The failure of a corporation to take preventative or corrective measures in reaction to corporate criminal conduct is regarded as the basis for corporate fault by these authors. French calls this the "principle of responsive adjustment" whilst Fisse names it the concept of "reactive fault." A more sophisticated model (the "corporate ethos" model), which is also more reconcilable with the basic notions of criminal law, was developed by the American legal scholar Pamela Bucy.
A corporation will be held criminally responsible if its corporate ethos has encouraged the criminal conduct. The corporate ethos can be established with reference to numerous factors such as the corporate hierarchy, corporate goals, the existing monitoring and compliance systems and the question whether employees are rewarded or indemnified for inappropriate behavior.