July 23, 2011
D.C. Court Strikes Down Proxy Access
Stephen Bainbridge pulls together some of the blogosphere reaction here. I highlight the following from that post:
Mike Scarcella at The BLT:
The appeals court sided with the business groups’ lawyers, who argued that investors with special interests, including unions and state and local governments, would be likely to put the maximization of shareholder value second to other interests. “By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown.
The opinion is a rather limited indictment of the proxy access proposal, relying on the lack of sufficient justification. The SEC is considering its options. While it might challenge the ruling, I suspect that the agency is more likely to produce a newly justified rule in the near future.
[L]et me briefly lament the D.C. Circuit's vacating of the proxy access rule.... The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them. The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough. It will almost always be possible to do that with any agency rulemaking. Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still. This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences. Talk about judicial activism.
July 22, 2011
Refresher on Partnerships, A North Dakota Example
Last month, the North Dakota Supreme Court decided Zink v. Enzminger Steel, LLC, 2011 ND 122, and the case serves as a good reminder of how partnerships are formed, in large part for what the case doesn't say. The basic facts are summarized as follows:
Enzminger Steel contracted with Doug Zink to supply components for a new grain drying site. This contract lists Zink as the purchaser of Enzminger Steel's materials. Zink and his son, Jeremy Zink, signed this contract. Doug Zink and [Ted] Keller contend, however, that they had formed a partnership for the purposes of constructing and operating this grain drying site. They further allege that it was this partnership, not the Zinks separately, that entered into the contract with Enzminger Steel.
Keller represented himself at the hearing, but the Zinks did not attend because, they said, they did not oppose any of the motions that were to be considered at a hearing scheduled for that purpose. The district court expressed concern with what it suspected was Keller's unauthorized practice of law. Keller reiterated that he and Doug Zink were partners, but said his appearance was only for himself, and not Zink or the claimed partnership.
Because of its questions about Keller's role, the district court
verbally ordered that it would dismiss the action brought by Keller and Doug Zink unless either could prove the existence of a partnership within four days. If documents were produced proving the existence of a partnership, Keller would be joined as a party to the action brought by Enzminger Steel. If these documents were not produced, the court stated the action brought by Zink and Keller would be dismissed and Enzminger Steel would be awarded its attorney's fees because the pleadings were made in bad faith.
Ultimately, when the documents weren't produced to prove the partnership, the district court dismissed the claim and ordered attorney's fee be awarded to Enzminger Steel. The North Dakota Supreme Court reversed, finding that Zink did not have proper notice of the issue, which the district court had raised on its own motion. That all seems about right to me, but the Supreme Court failed to address one other big issue: that the district court seems to have required documents to prove the existence of a partnership.
Under the North Dakota Century Code, 45-13-01, consistent with many such laws, a partnership is defined as follows:
19. "Partnership" means an association of two or more persons to carry on as coowners a business for profit formed under section 45-14-02, predecessor law, or comparable law of another jurisdiction.
20. "Partnership agreement" means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.
Note that a partnership agreement can be written, but it need not be. It can also be oral or implied. As such the district court should have required "evidence" of the partnership, not "documents" proving the partnership existed. I suppose one could argue that the court meant that any evidence needed to be reduced to a document filed with the court, but that's not how I read this. It sounds like the district court was skeptical enough that it wanted some hard proof. The problem is, that simply is not what is needed to prove a partnership in North Dakota.
In 2005, the North Dakota Supreme Court made clear that "a partnership could be created regardless of the parties' subjective intent, making it possible for individuals to inadvertently create a partnership despite their expressed subjective intent not to do so." Ziegler v. Dahl, 691 N.W.2d 271 (N.D. 2005). And, in 1992, the Supreme Court reviewed the dissolution of farming partnership that was created by an oral agreement among three partners, expressly stating, "In this case, there were no written partnership agreements." First Nat. Bank of Belfield v. Candee, 488 N.W.2d 391 (N.D. 1992).
Ultimately, I think the court got this case right, but I always appreciate a little more precison when it comes to the process of creating, and then proving the existance of, partnerships. This Fall, my BA I students will get a very up-to-date reminder of that.
China’s economy will continue its surge for at least the next decade. Precipitation in my city will be 10% above normal next July. The military outlook in Afghanistan is rosy—or bleak, depending on who you consult. Predictions of all sorts abound in today’s media—from the political talking heads proliferating on cable television to our local nightly weather forecaster. Numerous experts tell us, often with little or no doubt, exactly what is going to happen tomorrow, next month, next year, and far into the future. And most of it is crap.
I just finished an excellent book: Future Babble: Why Expert Predictions are Next to Worthless, and You Can Do Better, by Dan Gardner. Everyone who relies on expert analysis (or makes such predictions) should read this book.
Gardner considers the value of expert prediction in the only way one sensibly can—by looking at past predictions and comparing them to what actually happened. Gardner shows how often experts go terribly wrong in predicting the future. Not only does he take names, he goes back to some of those experts to get their views on what went wrong—or whether they think they were wrong.
If Gardner stopped at that point, the book would be mildly amusing, but he does more than just point out past errors. He uses principles of social psychology to explain the problem: why people so smart can be so wrong; why the experts we see in the media tend to be so certain, why we (and the experts themselves) forget experts’ past mistakes and think they’re better than they are; why we don’t learn from our past errors.
Gardner is a journalist with the Ottawa Citizen, not a social scientist, but his grasp of the subject is excellent, and his writing is lively and easy to follow. Well worth reading.
July 21, 2011
Padfield on "The Dodd-Frank Corporation" (UPDATE)
Just in time for the one-year anniversary of Dodd-Frank, I have posted an updated version of my latest piece, "The Dodd-Frank Corporation: More Than a Nexus of Contracts." Here is the abstract:
Corporate theory matters. By way of example, I explain in this Essay how the Citizens United opinion can be read as a decision wherein the competing theories of the corporation played a dispositive role. Furthermore, some of the most important issues confronting courts and legislatures in the foreseeable future will involve questions about the nature of the corporation. In light of this, this Essay argues that the Dodd-Frank Wall Street Reform and Consumer Protection Act serves, in addition to all its other roles, as an important and novel data point in the on-going corporate theory debate. Specifically, I argue Dodd-Frank implicates corporate theory in two ways. First, it reaffirms yet again that corporations remain subject to significant government regulation as a matter of positive law - a fact that constitutes at least somewhat of a nuisance for contractarians. Second, and more importantly, Dodd-Frank’s formal recognition that at least some corporations have literally gotten too big to fail vindicates some of the most important normative assertions of concession theory broadly defined.
July 20, 2011
Are Bookstores and Electricity Generation on a Similar Trajectory?
I happen to think so, but with news that Borders is almost certainly closing its doors, one has to wonder what the future holds for physical bookstores. When I was young, most of the books stores were independents, with some kind of sad stores at shopping malls. Then the shopping mall stores consolidated, got big, and put a lot of the independent books stores out of business.
When I was in Ann Arbor in the late 1980s, Borders was a big, awesome, independent bookstore. I thought it was great. And a few independent books store remain -- the best one I have visited in the last few years is Powell's City of Books. There is something great about wandering the stacks of books and pulling things off the shelf for a look. The same is true for libraries, but the option of buying that great find, right then and there, is something unique.
Perhaps the failure of some of the large chains will create new opportunities for smaller, independent, local stores to regain strength. The assumption that larger scale is inherently good is not necessarily true. This shift is happening in some areas of the electricity generation sector, too. We have been following the Thomas Edison/Samuel Insull model of large central stations for years, with the assumption that bigger is better. And sometimes it is, but not always.
There is some interesting work in the area of microgrids that could help increase reliability while reducing the land used for electricity generation. (If you're interested in such things, I recommend Sara Bronin's article, Curbing Energy Sprawl with Microgrids.) This doesn't mean there won't be large generating facilities, but there will less, and we should not assume bigger is better.
Hopefully, this is a market correction in both areas, and part of a cycle that is responding to other external changes (such as internet booksellers on the books side and better technologies and increased sensitivity to environmental concerns on the electricity side). I'd hate to think it's just that we don't like books that much any more.
July 19, 2011
The New FCPA Professor Blog
In celebration of two years of quality blogging, Mike Koehler has remodeled the FCPA Professor Blog. The new site can be found here. I particularly like the FCPA 101 portion of the blog, which would be very useful for introducing students to this important area of the law.
-- Eric C. Chaffee
July 18, 2011
Roundtable on Teaching Business Associations
There is a fascinating roundtable discussion going on at The Conglomerate blog about what should be taught in the basic Corporations/Business Associations course. I teach a four-hour B.A. course, and it's a struggle each year deciding what to cover and what to omit, especially since I know it's the only business associations/securities course many of my students will take. If you're a legal educator or just interested in what law schools are doing, I strongly suggest you check it out.
Still Figuring Out Twitter in the Financial Sector
The Dealbook reports that the Financial Regulatory Authority (Finra), recently announced the one-year suspension of broker (plus a $10,000 fine) who sent “misrepresentative and unbalanced” messages on Twitter. This case sounds like it had a lot more going on, including the broker failing to disclose a number of significant things to the employer, but it once again points out that we still have a lot to figure out with social media in the financial sector (and most other places, for that matter).
It seems to me that it should be pretty clear that any financial advice obtained via Twitter is going to lack some disclosures. If someone is using a post on Twitter as the only reason to buy or sell a stock, I'm not sure there is a whole lot we can do for that investor. That doesn't mean we don't need some ground rules, but people don't need to freak out, either. It's not Twitter that makes brokers play fast and loose any more than it does politicians. It simply provides quick and accessible evidence, and perhaps we should appreciate that more than we do.
[b]ut so can a letter to an editor in your local newspaper, or a notable call to a radio talk show or causing a scene at a presentation.
You don’t see advice that we ought to cut off mail service, or remove phones from employees’ offices, or stop allowing employees to attend seminars and presentations. Rather, we outline a set of expectations as to what is proper business behavior and what is expected by the employer.
And yet, cutting off access to Twitter is exactly what some have suggested. Such a blanket suggestion ignores the usefulness of this internet tool and is not consistent with the approach that companies use for other, more established forms of communication. (Can you imagine a company now that required letters to be faxed instead of e-mailed?)
Now, perhaps using faxes would have helped protect Congressman Weiner from himself, but I rather doubt it. The same is true for employer and investors.
In the meantime, Finra provides this Guide to the Internet for Registered Representatives. It is not especially clear how one should use social media, and it seems to group a number of social media together in a way that doesn't appreciate the different powers of the varying options, but these are the rules. And even when rules are dumb, if it relates to your livelihood, it's best to follow them.
July 17, 2011
Danner, Kolev, and Most on Legal Scholarship
Richard A. Danner, Kiril Kolev, and have posted Print or Perish? Authors’ Attitudes Toward Electronic-Only Publication of Law Journals on SSRN with the following abstract:
An increasing number of U.S. law journals post at least current issues in freely accessible PDF and (in some cases) HTML formats on their web sites. Yet, perhaps without exception, the journals that make their articles freely available on their websites also continue to publish print issues in the face of declining subscription numbers, and law libraries’ growing disinterest in collecting and preserving journals in print. As universities reduce staff, freeze open positions, eliminate salary increases, and cut library budgets, why have law schools continued to subsidize print publication of journals that are accessible in electronic formats? Among the reasons suggested for this is the possible impact of electronic-only publishing on a journal’s reputation and ability to attract authors. This paper reports on the results of a survey of law journal authors’ attitudes toward electronic-only law journals.
-- Eric C. Chaffee
Kochan on Corporate Social Responsibility
Donald J. Kochan has posted Legal Mechanization of Corporate Social Responsibility Through Alien Tort Statute Litigation: A Response to Professor Branson with Some Supplemental Thoughts on SSRN with the following abstract:
Courts continue to struggle with theories of liability for corporations under the Alien Tort Statute (“ATS”) (a/k/a Alien Tort Claims Act (“ATCA”)). Recent cases like Kiobel (2d Circuit, 2010) and Doe v. Exxon Mobile (DC Circuit, July 2011) have raised issues of whether corporations can be sued at all under the ATS, illustrate that issues about corporate liability under the ATS continue to percolate within the judiciary.
Written in early 2010 and just published in July 2011, this Response essay argues that as Alein Tort Statute jurisprudence “matures” or becomes more sophisticated, the legitimate limits of the law regress. The further expansion within the corporate defendant pool – attempting to pin liability on parent, great grandparent corporations and up to the top – raises the stakes and complexity of ATS litigation. The corporate social responsibility discussion raises three principal issues about how a moral corporation lives its life: how a corporation chooses its self-interest versus the interests of others, when and how it should help others if control decisions may harm the shareholder owners, and how far the corporation must affirmatively go to help right the perceived wrongs in the world in which they operate. Although these questions could be posed simply as ones of policy or morality, with the injection of the ATS into the discussion they become questions that must be answered by examining the dictates and limits of law. Every expansion of liability, whether it is in terms of the persons or entities who may be sued or the nature of claims recognized as creating legal obligations, should be viewed cautiously. In our zeal to “right every wrong”, we should not lose sight of some fundamental principles of corporate law and the limits of the judicial process that are at risk as the ATS liability net widens.
-- Eric C. Chaffee
Bebchuk and Jackson on Securities Regulation
Lucian A. Bebchuk and Robert J. Jackson Jr. have posted The Law and Economics of Blockholder Disclosure on SSRN with the following abstract:
This paper, which is based on our recent submission to the Securities and Exchange Commission, provides a detailed analysis of the policy issues relevant for the Commission’s ongoing examination of changes to its rules under Section 13(d) of the Securities Exchange Act of 1934. These rules, which govern share accumulation and disclosure by blockholders, are the subject of a recent rulemaking petition submitted by Wachtell, Lipton, Rosen and Katz, which proposes that the rules be tightened.
We argue that the Commission should not view the proposed tightening as merely “technical” changes needed to modernize its Section 13(d) rules. In our view, the proposed changes should be examined in the larger context of the beneficial role that outside blockholders play in American corporate governance and the broad set of rules that apply to such blockholders. Our analysis proceeds in five steps
First, we describe the significant empirical evidence indicating that the accumulation and holding of outside blocks in public companies benefits shareholders by making incumbent directors and managers more accountable and thereby reducing agency costs and managerial slack.
Second, we explain that tightening the rules applicable to outside blockholders can be expected to reduce the returns to blockholders and thereby reduce the incidence and size of outside blocks - and, thus, blockholders’ investments in monitoring and engagement, which in turn may result in increased agency costs and managerial slack.
Third, we explain that there is currently no empirical evidence to support the Petition’s assertion that changes in trading technologies and practices have recently led to a significant increase in pre-disclosure accumulations of ownership stakes by outside blockholders.
Fourth, we explain that, since the passage of Section 13, changes in state law—including the introduction of poison pills with low-ownership triggers that impede outside blockholders that are not seeking control - have tilted the playing field against such blockholders.
Finally, we explain that a tightening of the rules cannot be justified on the grounds that such tightening is needed to protect investors from the possibility that outside blockholders will capture a control premium at other shareholders’ expense.
We conclude by recommending that the Commission to pursue a comprehensive examination of the rules governing outside blockholders and the empirical questions raised by our analysis. In the meantime, the Commission should not adopt new rules that tighten restrictions on outside blockholders. Existing research and available empirical evidence provide no basis for concluding that tightening the rules governing outside blockholders would satisfy the requirement that Commission rulemaking protect investors and promote efficiency, and indeed raise concerns that such tightening could harm investors and undermine efficiency.
-- Eric C. Chaffee
Third-Party Litigation Financing
Every once in a while I teach a case where the students find it somewhat odd that the plaintiff would incur all the expense of going to trial given what's at stake for the particular plaintiff. One answer I give is that there are times when third parties will finance litigation that addresses some policy issue they are interested in. The Institute for Legal Reform recently put up a post on the practice, focusing on the human rights litigation involving Chevron. You can find the post here.