Business Law Prof Blog

Poker and the Debt Crisis

Poker News reports:

Senate Majority Leader Harry Reid reportedly told the Las Vegas Review-Journal that Internet poker legislation "will get done." … The joint select committee on deficit reduction has been tasked with finding at least $1.5 trillion in debt savings over the next 10 years. Licensing and regulating Internet poker is a way the committee could identify billions of dollars with little effort.

Perhaps that will stop the exodus of poker pros.

SJP

Homer Simpson, Darryl Strawberry and Keating v. Motorola

A former student e-shared with me the news report about the Keating v. Motorola Mobility Holdings class-action suit, which claims that Motorola and its board violated fiduciary duties by entering into a merger agreement with Google.  (The case is John Keating v Motorola Mobility Holdings Inc., et al., Circuit Court of Cook County, No. 28854; the complaint is available via Westlaw.) 

The suit alleges:

The offered consideration does not compensate shareholders for the Company's intrinsic value and stand-alone alternatives going forward, not does it compensate shareholders for the Company's value as a strategic asset for Google.  

All in all, after a quick look at the complaint, these are my first thoughts: (1) Mr. Keating trusts his judgment over the board of directors, (2) Mr. Keating does not care for Carl Icahn, and (3) the case seems premature.  In addition to sending me the article, my former student asked, is there any likeihood this suit will succeed?  As I thought about my response, I remembered an old Simpsons episode, which leads to my Darryl Strawberry reference.  Simpsons fans will recall the episode when Darryl Strawberry and other Major League Players came in as ringers for the Springfield Nuclear Power Plant softball team's championship game. Homer Simpson played right field, and when Strawberry joined the team, this exchange followed:

Homer Simpson: You're Darryl Strawberry! 
Darryl Strawberry: Yes. 
Homer Simpson: You play right field. 
Darryl Strawberry: Yes. 
Homer Simpson: I play right field too. 
Darryl Strawberry: So? 
Homer Simpson: Well, are you better than me? 
Darryl Strawberry: Well, I've never met you, but... yes. 

As I took a glance at the complaint, my response followed something like this:

Former Student: Shareholders sued Motorola for agreeing to merge with Google.
Me: Yes. 
Former Student: The Motorola shareholders haven't had their vote yet, either, right? 
Me: Yes. 
Former Student: The complaint seems to allege a violation of Revlon duties, but those don't apply to all negotiated acquitions, right? 
Me: Correct. 
Former Student: So, is there any chance of success? 
Me: Well, I've haven't seen any of the evidence, and I don't know a lot of the specifics, but... no.

--JPF

Hillman and Weidner on Partnership Law

Robert W. Hillman and Donald J. Weidner have posted Partners Without Partners: The Legal Status of Single Person Partnerships on SSRN with the following asbtract:

Is it possible to have a partnership consisting of one person, a partner without a partner? The question will arise when all but one of the members leaves a partnership. The Revised Uniform Partnership Act (RUPA) attempts to give greater stability to partnerships by narrowing the circumstances under which dissolutions occur, but it also fails to address the fundamental and important question of whether a partnership may be continued by a sole surviving partner.

In this article, we explore the issues raised by a single person partnership. In particular, we address the central issue of whether the departure of the penultimate partner from a term partnership triggers a winding up of the business or whether the statutory buyout is called into play. We have structured much of the discussion as a dialog between the authors. This allows us both to focus on the precise issues under RUPA presented by a single person partnership and to probe the competing arguments on whether such a partnership may exist. Although we have differing views on whether a single person partnership is possible under RUPA, we conclude on common ground that the buyout is appropriate. We also unite in a call for statutory clarification.

-- Eric C. Chaffee

How long can the Supreme Court continue to avoid adopting a theory of the corporation?

While I have argued elsewhere (specifically, here and here) that the Supreme Court did in fact rely on a particular theory of the corporation to decide Citizens United, it failed to do so expressly and has been frustratingly inconsistent in doing so in the bulk of its cases dealing with corporations.  I am certainly not alone in seeing this as a problem (see Bainbridge on this point here), and we get more of the same from Daniel Greenwood in his latest piece, "FCC v. AT&T: The Idolatry of Corporations and Impersonal Privacy."  Writes Greenwood:

Our Constitution and our political debate often divide the world into two categories: state and citizen, public and private, collective and individual. Do the multinational publicly traded corporations belong on the individual, private side of this great liberal divide? … The Court’s opinion [in FCC v AT&T] is silent on this basic issue. Only a strong theory of corporate rights could lead a native English speaker to conclude, as the Third Circuit did, that a statute should be interpreted to mean the opposite of what its words ordinarily mean. The Supreme Court’s purely linguistic analysis, as arid as any Lochner-era formalist opinion, demonstrates its ability to use the dictionary, but fails to address the underlying legal issues. More disturbingly, it hides behind its formalism to avoid making even the slightest attempt to explain how this decision can be consistent with its many decisions that, like the Third Circuit opinion, invent corporate rights with no deference to plain meaning. Why is ordinary meaning important here, but irrelevant when corporations assert constitutional rights that the text grants only to human beings?

The entire piece is well worth a read.

SJP

Chen on Modern Disaster Theory

Jim Chen has posted Modern Disaster Theory: Evaluating Disaster Law as a Portfolio of Legal Rules, available on SSRN here.  The abstract is as follows:  

Disaster law consists of a portfolio of legal rules for dealing with catastrophic risks. This essay takes preliminary steps toward modeling that metaphor in quantitative terms made familiar through modern portfolio theory. Modern disaster theory, by analogy to the foundational model of corporate finance, treats disaster law as the best portfolio of legal rules. Optimal legal preparedness for disaster consists of identifying, adopting, and maintaining that portfolio of rules at the frontier of efficient governance.

Part I of this essay defines disaster and disaster law. In an effort to develop an analytically rigorous basis for modeling and evaluating disaster law, Part II expounds the principles of modern portfolio theory, a framework for assessing financial returns according to risk. Part III outlines the principles of modern disaster theory as the legal analogue of modern portfolio theory as a branch of finance. Part IV conducts an exercise in applied modern disaster theory. It evaluates legal tools for compensating disaster victims ex post and spreading catastrophic risk ex ante according to the terms of modern disaster theory’s catastrophic preparedness asset model. Part V concludes that modern disaster theory, through the use of sophisticated quantitative methods analogous to those used in financial analysis, promises to place disaster law and policy at the efficient frontier of legal preparedness.

This is an interesting read.  Dean Chen concedes that using modern portfolio theory has its flaws. He also notes that "behavioral biases in the perception of risk, by policymakers and by members of the public, severely distort legal responses to disasters."  There is no doubt that is true, and it's true with legal responses, and it's true in planning for disasters, as well. (For more on that, see, in a bit of shameless self-promotion, here.)  Still, he proceeds with his analysis, and concludes:

My survey of risk management techniques in disaster law — from private insurance to public subsidies, the involvement of government as ultimate reinsurer, and the promise of enhancing catastrophic preparedness through private capital markets — shows how disaster law represents a single, theoretically coherent exercise in societal risk management.

. . . . A diversified disaster law portfolio — namely the optimal mixture of policy instruments for reducing environmental hazard and human susceptibility and for enhancing social resilience and capacity — represents the efficient frontier of legal preparedness in times of disaster.

I'm working my way back through it more closely, but I found it a throught-provoking piece, and I recommend taking a look. 

--JPF

Choosing Social Responsibility As Good Business

North Dakota has benefitted greatly from the most recent oil boom in the western part of the state.  And the state's finances, as well as many of the state's citizens' finances, are in good shape.  That doesn't mean that that everyone is benefiting.  As this report (with video) explains, McKenzie County has the fifth highest average wage rate in the state, but a poverty rate higher than the state average.  

I'm someone who supports the energy industry in many ways, and I believe that there are times when the government creates many kinds of unnecessary hurdles to production and exploration.  By the same token, energy companies create the kind of climate that leads to knee-jerk responses that impede program.  (See, e.g., BP in the Gulf of Mexico).  While the knee-jerk responses aren't always productive, some sort of response is often necessitated by events.  

In western North Dakota and other parts of the country where energy extraction is in high gear, energy companies would be well served to keep their eyes on the circumstances around them.  Taking the time to ensure operations are as safe as possible, for both people and the environment, is one good start. Paying attention to what is happening in the communities is which they work is another. 

This is not me saying that the government should somehow mandate that corporations certain kinds of social responsibility.  This is me saying that investments in communities are often investments in the companies working in those communities.  Perhaps it is my public relations background, but in my experience, businesses that have good relationships with their customers and communities are in much better position to whether the storm when inevitable mistakes happen.  Plus, you can avoid headlines like this. 

--JPF

Solomon and Minnes on the Global Financial Crisis

Dov Solomon and Odelia Minnes have posted Non-Recourse, No Down Payment and the Mortgage Meltdown: Lessons from Undercapitalization on SSRN with the following abstract:

The recent global financial crisis, sparked by developments in the American mortgage market, provides a timely opportunity for a thorough analysis of the standard model for financing home purchases. The United States residential mortgage market has two prominent aspects: first, a significant part of mortgages are de facto non-recourse loans that allow the borrower to limit his liability solely to the collateral securing the loan; second, residential mortgages confer the aforementioned advantage on borrowers while requiring merely a minimal down payment, or no down payment at all. This article examines the implications of each of these aspects, as well as the interplay between them. The findings of this examination lead to the novel insight that a non-recourse mortgage with no initial down payment resembles the case of corporate undercapitalization. Utilizing legal analysis and remedies applied in the case of corporate undercapitalization lends insight into creating mortgage arrangements that properly balance the competing interests of the various players in the home ownership credit market.

-- Eric C. Chaffee

Congratulations, You're a Lawyer!

Should every law school admissions brochure include this picture?  The full WSJ story that the picture accompanied, entitled "Cut the Law Firms, Keep the Lawyers," can be found here.

SJP