July 16, 2011
AALS Section on Business Associations Call for Papers
From Hillary Sale:
The AALS Section on Business Associations will meet during the AALS Annual Meeting in Washington, D.C., from 2.00-5.00 pm on January 5, 2012.
The topic for this year’s session is: The “New” Corporate Governance.
At least one panelist will be chosen on the basis of submissions made in response to this Call for Papers. The topic is intended to be broad, to encourage submissions that deal with the state and federal “corporate law” systems, questions about Dodd-Frank and its governance role, as well as international corporate and business topics. The Executive Committee welcomes submissions on a broad range of issues related to this year’s topic, including empirical and theoretical perspectives. The Committee specifically encourages submissions from junior scholars.
If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, preferably by e-mail, before Wednesday, July 20, 2011. In addition to the summary, you also may submit a complete draft of your paper. Direct your submission to:
Professor Hillary Sale, Washington University School of Law, One Brookings Drive, Campus Box 1120, St. Louis, MO 63130, email@example.com
July 15, 2011
The Future of Scholarship: Self-Published and Digital?
Steve Bainbridge is trying an interesting experiment in legal publishing. Steve has just completed a guide to the auction duty of directors under Revlon. But instead of following one of the traditional routes—publishing it as a law review article or as a book through one of the legal publishers, Steve is self-publishing. The book, Directors as Auctioneers: A Concise Guide to Revlon-Land, is available as a Kindle book from Amazon for $9.99.
Steve certainly doesn’t need to self-publish. His list of publications shames me. He’s in double figures in books and has published literally dozens of articles, many in top-20 law reviews. I’m sure he would have had no trouble finding a print outlet for this book.
In some ways, that makes this a less effective experiment than it might otherwise be. As Steve concedes, he already has a brand name, a reputation for quality. He doesn’t need an Oxford label or top-20 law review placement to attract people to his writing. The real experiment would be if someone like me tried this. But Steve's experiment is worth watching—and, since Amazon ranks e-book sales, we can all see for ourselves how successful Steve is. (After one day, he’s sitting at # 18,053.)
I’m strongly in favor of e-publishing, and I think e-publication will eventually supplant more traditional academic outlets, including law reviews. I don’t foresee a future where many of us will be able to charge for our articles, but I do foresee a future where those articles will be exclusively digital, and probably published without the intervention of student editors. A major hold-up right now is the e-reader; improvements are needed before doing all our academic reading on Kindles. I don’t like the Kindle reader interface and that may keep me from reading Steve’s new book, but I’m wishing Steve luck. I hope he succeeds.
Splitting Oil Companies Could Be A Good Thing for Investors and Business
ConocoPhillips recently announced that it would be splitting its company into two separate entities, one that explores for and produces oil, and another that refines the oil. Back in January, Marathon Oil announced a similar move. Marathon's spin-off, Marathon Petroleum Corp., which is the refining company, starting trading July 1 of this year.
In this recent era of consolidation, the separation of these operations into separate companies could be a good thing. The executives of these entities will now have a more focused business model, and the concerns of each part of the business are now less likely to compete. I will be particularly interested to see how the new refining entities operate. Obviously, as independent, publicly traded companies, the refining entities may have interests in working with other oil producers. This could create some real opportunities for synergies, geographically and otherwise, that were less likely to occur under the old model.
I'm also curious just how independent the new entities will look and act out of the gate.
July 14, 2011
Jay Brown: Corporate Liability for Human Rights Violations Heading to Supreme Court?
The D.C. Circuit's recent decision holding corporations could be sued for human rights violations under the Alien Tort Statute has received quite a bit of attention recently. Here's some of Jay Brown's take (you can read his entire post here):
The Alien Tort Statute allows suits to be brought in US courts for violations "of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. The statute has sometimes been used against US companies for allegedly aiding and abetting human rights violations by foreign governments.... [However, there] is a serious split among the circuits.... [Were the Supreme Court to address the split, it would provide] another opportunity, much like Morrison, for the conservative majority to potentially cut back on the use of US courts by foreign nationals, despite the existence of a statute that expressly provides the authority.
New Crowd-Funding Article
I have blogged from time to time on the application of the federal securities laws to crowd-funding. See here and here. Joan Heminway and Shelden Hoffman have posted on SSRN a new draft on crowd-funding, Proceed at Your Peril: Crowdfunding and the Securities Act of 1933. I haven't read it yet; I want to complete my own rough draft on crowd-funding before I incorporate their views. But here's the abstract, for readers interested in the issue:
A promising Web-based funding model for small business firms has emerged over the past few years. Crowdfunding (as this model has come to be known) actually includes a variety of business models, all of which use the Internet to fund business ventures by connecting promoters of businesses or projects needing funding with potential funders. Most of these funders are not professional investors; instead, they are just members of the Internet “crowd” that like the business idea of a particular entrepreneur and want to help him or her out with a nominal amount of funding—even $10.
Some (but not all) manifestations of crowdfunding result in the offer and sale of interests that are securities under the Securities Act of 1933, as amended. Offers and sales of securities that are neither registered nor exempt from registration violate the Securities Act. The high cost of registration is prohibitive for small businesses that might benefit from crowdfunding. Accordingly, if crowdfunding is to achieve its optimal benefit (or even just survive or thrive), there must be some intervention. This dilemma has caught the attention of many, including the U.S. Securities and Exchange Commission (SEC).
This article first shows how crowdfunding interests may be securities under the Securities Act and describes key legal effects of that security status—including the requirement of registration (absent an exemption). The article then explains why the offer and sale of crowdfunding interests under certain conditions should not require registration and offers the principles, process, and substantive parameters of a possible solution in the form of a new registration exemption adopted by the SEC under Section 3(b) of the Securities Act.
Note: The article references a chart we have prepared that identifies and describes a number of crowdfunding Web sites. That chart is not posted with the article. It (or an updated version) may be obtained from either author.
July 13, 2011
Do North Dakota's Corporations Exist if the State Doesn't Exist?
Interesting news today that North Dakota may not actually be a proper state. It seems that the state's constitution lacks a requirement that the state's executive officers uphold the U.S. Constitution, thus violating Article VI.
If the state is not really a state, then would that mean that corporations under "state" law are not really formed either? Would the fictional corporate person suddenly become a fictional, fictional person? Heady stuff.
Add to this the fact that most of the state is violating North Dakota law by reporting that the flooding in Minot (the western part of the state) is caused by the Souris River, using the French (and Canadian) name, rather than the English (and state-mandated) name, the Mouse River.
Even if most people are getting name of the river that is causing the flooding wrong, the flooding is very, very real. Please help if you can. Here are a couple places: http://minotfloodshirts.myminto.com/ and http://minotredcross.org/.
July 12, 2011
Coates on Mergers and Acquisitions
John C. Coates, IV has The Powerful and Pervasive Effects of Ownership on M&A posted on SSRN with the following abstract:
Ownership dispersion is a first-order determinant of M&A practices. Firms with dispersed ownership are more salient, and tend to be larger, but dispersion varies significantly among even large US businesses, and affects M&A deal size, duration, techniques, contract terms, and outcomes. These effects arise directly from the economics of dispersion, but also from interactions between economics and law. Dispersion creates transaction costs and heterogeneous beliefs and preferences that have straightforward effects on M&A deal size, techniques, and some contract terms. But dispersion also has less intuitive, indirect, and important effects as mediated through laws that among other things compensate for agency costs and collective action problems. Each key body of law for M&A – contract law, corporate law, securities law, and antitrust law– is shaped in practice by ownership of target firms. These effects are tested in 20 hypotheses on how ownership dispersion affects M&A, with comprehensive M&A data from the 1990s and 2000s, and a new detailed hand-coded matched sample of 120 recent public and private target M&A contracts. The data show the importance of ownership to M&A deal structure, choice of consideration, bid duration, completion rates, risk-allocation, and dispute resolution. Appreciation of how pervasive and powerful the effects of ownership are on M&A should improve contracting and has implications for investment bankers, boards, courts, and researchers in choosing comparable transactions for valuation, benchmarking, doctrinal analogies, drafting models, teaching M&A in business and law schools, and econometric modeling of M&A.
-- Eric C. Chaffee
Rider on Law Firms
Christopher I. Rider has posted Networks, Hiring, and Inter-Organizational Mobility: Evidence from Law Firm Dissolutions on SSRN with the following abstract:
Social networks are widely believed to facilitate the matching of individual job candidates and employing organizations. Causal effects of various network contacts on hiring and attainment are unclear, though, because networks probably influence both the likelihood that an individual changes employers and the quality of the position they attain. Leveraging the unexpected dissolutions of six U.S. law firms as an exogenous shock to mobility, this study examines how prior education and employment networks structure individuals’ inter-organizational mobility opportunities and chances of attaining greater intraprofessional status. Specifically, I investigate how law school alumni and co-worker networks influence the matching of individuals to employers. Analyses of 1,426 lawyers’ transitions to subsequent employers demonstrate that both alumni and co-worker contacts influence organizational hiring but that individual status attainment is aided more by co-workers than by alumni. Implications for studies of networks and inequality are discussed.
-- Eric C. Chaffee
July 11, 2011
A Thought on Say on Pay
As my colleague Steve Bradford noted, the SEC say-on-pay rule led to a 98.5% approval of executive compensation packages. Steve Bainbridge answered Steve Bradford's question, "Is the 98.5% approval rate a strong argument against requiring companies to go through this exercise?," with "a resounding YES."
In addition to providing for the shareholder advisory vote on pay, the SEC rules also require shareholders (also in an advisory capacity) to vote on how often executive pay will be submitted to the shareholders for consideration.
Personally, I think this second vote has the idea right. That is, there was a better rule that would provide shareholders options, without unduly wasting company and shareholder time: the SEC should have simply required that companies subject to the rule ask their shareholders if they want an advisory vote on executive pay. If the shareholders want it, then great. If not, then the company doesn't have to deal with a regular process its shareholders don't want.
I know a lot of people hate the entire concept, and that's reasonable, too. But I think the SEC does add value from time to time, so I'm okay with some proposed rules to help shareholders particpate more in the process to the extent they are willing. I just think that in some cases, it makes sense to ask shareholders what they want, rather than telling them.
Mandatory Staggered Boards in Oklahoma
Today’s Wall Street Journal has an interesting article about a new addition to the Oklahoma general corporation law, added last year at the behest of Chesapeake Energy Corp. The new law requires (yes, requires) that public corporations incorporated in Oklahoma have staggered boards. (A staggered board, for those of you not up on corporate law, is one where directors serve two or three year terms and only a portion of the board is elected each year.) Chesapeake was under pressure from some of its shareholders to require annual election of directors; this was apparently its response.
The provision was added to a long bill that adopted a new uniform partnership act, and it apparently caught other Oklahoma companies by surprise. According to the Journal, Oneok Inc., Oklahoma’s biggest public company by sales, recently called the governor to complain. Another corporation, OGE Energy, just switched to annual elections last year; it will now have to go back to a staggered board.
Here’s the full text of the new Oklahoma provision:
2. a. Any domestic corporation with both:
(1) a class of voting stock listed or traded on a national securities exchange or registered under Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78a et seq., as amended, and
(2) one thousand (1,000) or more shareholders of record,
shall have a board of directors that is divided into two or three classes, as set forth in the certificate of incorporation or bylaws of such corporation, the term of office of each such class to expire as provided in paragraph 1 of this subsection. If such a domestic corporation does not have a certificate of incorporation or bylaw dividing its board of directors pursuant to this paragraph, the board shall automatically be divided into three classes consisting of a number of directors as nearly equal in number as possible, with the directors of such corporation placed sequentially one at a time into each class beginning with the first class, alphabetically by last name.
People have debated the merits of staggered boards for some time now, but I don’t think that’s the most important issue here. The real issue is whether a state legislature should mandate a single rule for all businesses or let the owners of those businesses decide for themselves. I don’t think the government should intervene in either direction. It will be interesting to see how the proponents of mandatory annual elections will react to this one; they certainly can’t argue with a straight face that the state government should not intervene.
July 10, 2011
Robins on Corporate Governance
Martin B. Robins has posted Pay Board Composition Personal Behavior ≠ Corporate Governance: In Search of Conceptual Change on SSRN with the following abstract:
While seemingly everyone agrees that our economy requires substantial improvement in corporate governance in order to avoid a reprise of our recent financial collapse and Great Recession, this is not prompting legislative or private actions which actually facilitate an improvement in decision-making and outcomes of corporate action. Too many “solutions” pertain only to management compensation and board of director composition. Indeed, too many observers, including Nobel Prize winning economist Joseph Stiglitz, equate the two, causing their suggestions to lose impact.
While Congress expressly sought to improve governance in 2010 when it enacted the Dodd-Frank law to improve regulation of the financial sector, its specific provisions largely missed the mark and perpetuated the status quo of governance law addressing many things other than genuine governance, in large part because of their emphasis on procedural matters. A case can be made for the status quo in the context of “ordinary” firms which do not present systemic exposure to the same extent as the large financial firms which led us into the Great Recession, especially in light of the need to minimize the effect on entrepreneurial risk taking. However, a different set of considerations comes into play with other firms the actions of which have such pronounced external implications.
The actions taken in response to Dodd-Frank by the SEC and private actors have had little to do with better strategic decision-making by anyone, and much to do with peripheral and/or procedural matters. They corroborate the assessment that governance law needs fundamental reorientation to cause it to be an instrument facilitating better outcomes than what we have seen all too frequently from our most systemically important firms. Such actions are even less effective than was hoped in light of the strong process orientation of the pre-Dodd-Frank corporate law environment.
This article is a discussion of how Dodd-Frank and its predecessor law are improperly focused and the conceptual changes which are needed. In particular, it calls for a reversal of the pro-director presumption of the business judgment rule for systemically important firms where poor decisions can impose societal costs, where defined adverse events have occurred. In order to minimize the burden on business and underscore what is important, such change would be coupled with a drastic relaxation of requirements around management/director compensation and its disclosure.
In support of he new standard, in addition to discussing problematic elements of current legal doctrine, this article also incorporates very recent commentary on the causes of the Great Recession and discussion of very recent actions of specific companies as illustrations of what the author considers appropriate and inappropriate focus.
-- Eric C. Chaffee
Verdier on Transnational Financial Regulation
Pierre-Hugues Verdier has posted U.S. Implementation of Basel II: Lessons for Informal International Law-Making on SSRN with the following abstract:
This paper examines the highly contentious and protracted implementation of the Basel II accord on bank capital adequacy in the United States. As a formal matter, this process should have been simple, as banking regulators already had the relevant authority under existing legislation. This form of transgovernmental standard-setting has long been regarded with suspicion due to concerns that it compromises democratic legitimacy and accountability. The U.S. implementation of Basel II, however, poses challenges for this critique. Over several years, deep divisions emerged among banks and regulators, numerous Congressional hearings were held, regulators faced hostile questioning and severe criticism, and the Accord suffered long delays and substantial modifications. Based on this experience, the paper argues that robust domestic implementation processes advance certain forms of accountability, such as legislative control over regulators and responsiveness to affected domestic constituencies, at the exclusion, and perhaps the detriment, of others, such as accountability to banks, firms and consumers in other countries. The accountability benefits must also be balanced against the resulting costs and delays and the risk of compromising the uniformity and effectiveness of the standards.
This paper was prepared for the Hague Institute of International Law’s project, “Informal International Law-Making: Mapping the Action and Testing Concepts of Accountability and Effectiveness.”
-- Eric C. Chaffee
Pasquale on the Perils of Debt Brinksmanship
Over at Concurring Opinions, Frank Pasquale has put up an interesting post on Public Finance and National Security. Here's some of what caught my eye:
When the US went to war in Afghanistan and Iraq, it did not raise taxes to cover the enormous expenses involved (including spending on military services and hardware). Rather, it borrowed hundreds of billions of dollars, much of it from abroad. The borrowing has increased as conflict drags on, and as financial crises devastated tax receipts…. The financial crisis of 2008 marked a sudden lack of faith in the creditworthiness of many Western banks, including leading US-based ones. In order to maintain global confidence in the increasingly fragile and interconnected financial institutions that enable US borrowing, the US government has repeatedly “backstopped” private entities (or stepped in to alter markets) when their potential failure threatened to undermine investor confidence…. [However, as] long as the US appears capable of making political decisions to cut spending and raise taxes adequately to cover its debts, it does not appear to be in anyone’s national interest to spark a disorderly sell-off of Treasuries…. [But the] U.S. has recently proven itself incapable of achieving normal OECD-level taxation of its wealthy, in either good times or bad. A culture of tax-avoidance among America’s wealthy is approaching Greek levels…. As creditor nations watch the spectacle of a Republican party elected on deficit-cutting rhetoric immediately turn to budget-busting tax cuts, they are doubting the political seriousness of the US about repaying its debts.
Say on Pay-My View
In my post on Friday on say-on-pay, I asked, "Is the 98.5% approval rate a strong argument against requiring companies to go through this exercise? Or should we focus on the small number of companies where shareholders voted against management?" Steve Bainbridge responds with a resounding vote against say-on-pay.
Just for the record, I am also opposed to say-on-pay. I'm just not sure the voting results are going to sway many people one way or the other. Those who support say-on-pay are going to say that the positive results at a few companies justify the cost imposed on all companies. Those opposed are going to say the overall cost isn't worth the few positive results, especially since those positive votes are non-binding. In any event, many proponents of say-on-pay seem to be motivated more by generalized notions of democracy drawn from the political sphere than by any weighing of the economic costs and benefits.