October 1, 2011
Seattle Law Review's Second Annual Symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society
What follows is a list of the symposium pieces. You can find the full articles here.
- “Directors as Trustees of the Nation? India’s Corporate Governance and Corporate Social Responsibility Reform Efforts,” by Afra Afsharipour
- “The Problem of Social Income: The Entity View of the Cathedral,” by Yuri Biondi
- “Does Critical Mass Matter? Views From the Boardroom,” by Lissa Lamkin Broome, John M. Conley, and Kimberly D. Krawiec
- “Fiduciaries, Federalization, and Finance Capitalism: Berle’s Ambiguous Legacy and the Collapse of Countervailing Power,” by John W. Cioffi
- “The Twilight of the Berle and Means Corporation,” by Gerald F. Davis
- “Frank H. Knight on the ‘Entrepreneur Function’ in Modern Enterprise,” by Ross B. Emmett
- “Behind Closed Doors: The Influence of Creditors in Business Reorganizations,” by Michelle M. Harner and Jamie Marincic
- “Hurly-Berle—Corporate Governance, Commercial Profits, and Democratic Deficits,” by Allan C. Hutchinson
- “Financial Institutions in Bankruptcy,” by Stephen J. Lubben
- “Of Mises and Min(sky): Libertarian and Liberal Responses to Financial Crises Past and Present,” by Brett H. McDonnell
- “Berle and Veblen: An Intellectual Connection,” by Charles R. T. O’Kelley
- “Is Social Enterprise the New Corporate Social Responsibility?” by Antony Page and Robert A. Katz
- “The Judicial Control of Business: Walton Hamilton, Antitrust, and Chicago,” by Malcolm Rutherford
- “Toward an Organizationally Diverse American Capitalism? Cooperative, Mutual, and Local, State-Owned Enterprise,” by Marc Schneiberg
- “The Cosmetic Independence of Corporate Boards,” by Nicola Faith Sharpe
- “Berle’s Conception of Shareholder Primacy: A Forgotten Perspective For Reconsideration During the Rise of Finance,” by Fenner Stewart Jr.
- “Berle and Social Businesses: A Consideration,” by Celia R. Taylor
- “Chicago’s Shifting Attitude Toward Concentrations of Business Power (1934–1962),” by Robert Van Horn
September 30, 2011
Bank of America: Principles of Government Regulation
Bank of America announced yesterday that it will start charging customers who use their Bank of America debit cards a fee of $5 a month. The New York Times reports that other banks are already testing similar fees. The Dodd-Frank Act restricted the fees that banks may charge merchants for debit-card transactions. Unable to charge merchants more, the banks have turned to the other side of those debit-card transactions, the consumers.
These changes illustrate two principles of government regulation. First, the government cannot legislate costs out of existence. The cost to banks of handling debit card transactions doesn’t go away just because Congress wants it to. And a decision by Congress as to how much debit card transactions should cost doesn’t change the market. If banks can’t charge merchants, they will try to recover from consumers. If the government next limits what banks can charge debit-card consumers, they will try to cover their costs by raising other banking costs. If they can’t do that, bank shareholders will bear the cost.
Second, government regulation often has unintended consequences. I’m pretty sure that whoever came up with the limit on merchant charges didn’t intend for consumers to pay more. But it’s very hard to control how people respond to regulation. It’s like a balloon: squeeze it at one point and it bulges out at another point. And, no matter how hard you try, you can’t legislate to prevent all the possible bulges.
September 29, 2011
CML V, LLC v. Bax: In Defense of (My Read of) DGCL Section 327
A little while back I wrote that section 327 of the Delaware General Corporate Law, as written, excluded the right to a derivative action for anyone but a shareholder. (In CML V v. Bax, the court determined that the Delaware Limited Liability Company Act, 6 Del. C. § 18-1002, does not permit creditor-based derivative actions for LLCs, despite the argument that the LLC Act was meant to track the court's interpretation of the DGCL.) Obviously, the Delaware Supreme Court does not agree with me about section 327, as the Court granted creditors the rights to proceed in a derivative suit where the company is insolvent. N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).
A comment to my prior post also takes issue with my read of section 327. Ht4 says:
You're putting the rabbit in the hat.
This is where your analysis breaks down: "My reading of section 327 is that derivative claims are unambiguously reserved to shareholders." I disagree. 327 applies it restrictions to "derivative suit[s] instituted by a stockholder of a corporation." It does not purport to apply its restrictions to all derivative actions and, therefore, leaves open the possibility of other derivative suits. 18-1002, on the other hand, is written in exclusive language; it applies to ALL derivative actions. It does not leave open the possibility of other proper plaintiffs. That is the crutial difference.
I appreciate the comment, and I guess we'll have to agree to disagree. I concede that ht4's interpretation is plausible, especially in light of current Delaware law. (And, after all, there is a maxim or canon of construction that can help lead to most any conclusion on this.) Still, I think that inherent in section 327 was the assumption that only a shareholder could bring a derivative action. Section 327 explains which shareholders have such a right of action. The failure to mention in the statute any other type of derivative action tells me that no other type was contemplated. Section 327 simply limits the scope of shareholder derivative actions that are permitted.
It is certainly plausible that the drafters intended to allow creditors or even other stakeholders to have a right to a derivative action, but then why not have some mention, or some prerequisite, as provided for shareholder actions in section 327, to allow the suit to proceed? It is hard for me to imagine a legislature contemplating an easier road to a derivative action for someone other than shareholders, and yet that's what is implied (or at least permitted) if section 327 is not exclusive to shareholder actions.
Further, in affirming the right of derivative actions for creditors, the Delaware Supreme Court provided a prerequisite for creditor standing: insolvency (or, arguably, a company close to insolvency). N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). The Court determined that "equitable considerations," and not the DGCL, "give creditors standing to pursue derivative claims against the directors of an insolvent corporation." Id. Thus, the DGCL provides the scope of shareholders who can bring such suits, and equity (via the Court) does the same for creditors. Although this outcome is one reasonable interpretation, it is hardly required.
I'm of a mixed mind about whether creditors should have a right bring a derivative suit against an insolvent corporation or LLC. I am, however, reasonably certain that if there is to be such a right, it should be created via statute. In Delaware, I maintain that, as drafted, neither the DGCL or the LLC Act permit such rights to creditors. Obviously, the Court has spoken, and there is now a body of law that makes the law clear in both instances. But section 327 still looks exclusive to me.
Welcome Back Guest Blogger Anne Tucker
We here at the BLPB are excited to welcome Prof. Anne Tucker back for a month of guest blogging. You can find her full bio here, but an an edited version follows:
Anne Tucker is an Assistant Professor at Georgia State University College of Law. Professor Tucker researches in the areas of corporate law and governance examining questions such as how to balance the authority of the board of directors with appropriate accountability to the shareholders…. Professor Tucker also researches broader policy questions that examine the roles, rights, and responsibilities of corporations within our democratic society. To that end, Professor Tucker has been examining questions of corporate political speech rights as advanced in the January, 2010 Citizens United v. FEC Supreme Court opinion. Her current research frames the fundamental First Amendment debate of the case in the context of traditional corporate law principles to examine the ways in which our law recognizes, restricts, and respects a "corporate voice".
Verret on the Economic Analysis of SEC Rulemaking
J. W. Verret has posted a very interesting outline of an article he is writing on economic analysis of SEC rulemaking. He discusses the proposed article here and here. As I have discussed earlier, when the SEC engages in rulemaking, it has a statutory obligation to consider the effect of its proposed rule on “efficiency, competition, and capital formation.” This requirement, which was added in 1996 by the National Securities Markets Improvement Act, was the basis for the D.C. Circuit’s recent opinion in Business Roundtable v. SEC, striking down the SEC’s proposed proxy access rule.
Verret plans a two-part article. The first part will discuss what he calls the “four pillars” of securities regulation: investor protection, efficiency, competition, and capital formation, the history of the NSMIA requirements, and the logistical problems those requirements create. The second part of the article will try to relate these ideas to various strands of economic theory: public choice, Austrian economics, behavioral economics, and financial economics.
It’s an ambitious undertaking that should be fascinating when he finishes it, but the outline alone is worth reading.
September 28, 2011
Harlow on Corporate Criminal Liability
James Harlow has posted Corporate Criminal Liability for Homicide: A Statutory Framework on SSRN with the following abstract:
Since the nineteenth century, judges, legislators, prosecutors, and academics have grappled with how best to accommodate within the criminal law corporations whose conduct causes the death of others. The result of this debate was a gradual legal evolution towards acceptance of corporate criminal liability for homicide. But, as this Note argues, the underlying legal framework for such liability is ill fitting and largely ineffective. Given the public benefit that would accrue from a clearly defined and potent liability scheme, this Note proposes a model criminal statute that would hold corporations directly liable for homicide. The proposed statute draws upon basic precepts of corporate criminal liability, as well as legislative developments in the United Kingdom and the insights of organizational theory. Ultimately, this Note argues that a statutory scheme would allow prosecutions of corporations for homicide to proceed more accurately, effectively, and fairly.
-- Eric C. Chaffee
Facebook and Learning: Evil or Benign?
Reynol Junco (Lock Haven University - Department of Academic Development and Counselin) and Shelia R. Cotten (University of Alabama at Birmingham - Department of Sociology and Social Work) posted their paper, A Decade of Distraction? How Multitasking Affects Student Outcomes, on SSRN (here). (H/T: Nicholas Economides) The abstract:
The proliferation and ease of access to information and communication technologies (ICTs) such as Facebook, text messaging, and instant messaging has resulted in ICT users being presented with more real-time streaming data than ever before. Unfortunately, this has also resulted in individuals increasingly engaging in multitasking as an information management strategy. The purpose of this study was to examine how college students multitask with ICTs and to determine the impacts of this multitasking on their college GPA. Using web survey data from a large sample of college students at one university (N = 1,839), we found that students reported spending a large amount of time using ICTs on a daily basis. Students reported frequently searching for content not related to courses, using Facebook, emailing, talking on their cell phones, and texting while doing schoolwork. Hierarchical (blocked) linear regression analyses revealed that using Facebook and texting while doing schoolwork were negatively associated with overall college GPA. Conversely, emailing was positively associated with college GPA. Engaging in Facebook use or texting while trying to complete schoolwork may tax students’ capacity for cognitive processing and preclude deeper learning, while emailing may be directly related to learning. Our research indicates that the type and purpose of ICT use matters in terms of the educational impacts of multitasking.
It's not shocking that people who are distracted are less likely to perform well in their courses. It is intriguing, though, that it's not just how much time people spend doing something like Facebook or the fact that students use Facebook that may predict success or failure -- it might be how students use Facebook that matters. The authors explain:
While the finding that using Facebook and texting while doing schoolwork was negatively related to GPA was congruent with previous research on multitasking as well as Mayer and Moreno’s (2003) framework for understanding how multitasking can affect the learning process, the finding that using email while doing schoolwork was not. The distinction between using Facebook or texting and email may lie in the nature of how the technologies are used. Previous research on Facebook use has shown that how Facebook is used is a better predictor of academic outcomes than how much time is spent on the site (Junco, in press). Specifically, Junco (in press) differentiates between using Facebook for activities that involve collecting and sharing information which predicted better academic outcomes than using Facebook for socializing. The social/information gathering or sharing distinction seems to apply for multitasking behaviors as well—clearly, text messaging and use of Facebook are social activities while using email can be considered academic because students tend to use email for communication with their professors and their university and not for communication with friends (Carnevale, 2006; Lenhart, et al., 2005; Salaway, et al., 2007).
It's hard to imagine using Facebook during class would facilitate learning in very many instances, but this is a good reminder that Facebook (and the like) are neither inherently evil nor benign. As is often the case in the law, it depends.
September 27, 2011
Baer on Corporate Criminal Law
Miriam H. Baer has posted Organizational Liability and the Tension between Corporate and Criminal Law on SSRN with the following abstract:
This Essay, written as part of the 2010 Hon. David G. Trager Public Policy Symposium, recasts the corporate criminal liability problem as a tension between corporate and criminal law. On one hand, we would like to use criminal law to exact retribution from corporate entities, express our moral condemnation for the acts that have taken place within and through those entities, and to impose structural reforms that prevent future wrongdoing. Where publicly held corporations are concerned, however, it is difficult to do to impose entity-level criminal liability without also invoking responses from shareholders and innocent employees, who argue quite forcefully that they are not the proper repositories of blame. In response to this critique, some proponents have suggested that shareholders ought to play a greater role in managing the corporation and that criminal liability is valuable insofar as it spurs shareholders to exercise greater oversight over corporate managers. But this question – the role that shareholders ought to play in the management of the publicly held corporation – is not ordinarily the province of criminal law. Rather, it is the preoccupation of corporate law, whose doctrines purposely leave shareholders with relatively little power to run the corporation’s daily affairs. It may be that there is reason to alter this balance of power, but if so, the issue is more appropriately left to the architects of corporate, and not criminal, law.
-- Eric C. Chaffee
Kwoka on the Legal Academy
Margaret B. Kwoka has posted Entering the Law Teaching Market on SSRN with the following abtract:
This essay was prepared for a Pipeline to Law Teaching event organized by the Society of American Law Teachers (SALT). It contains practical tips for going on the academic market.
-- Eric C. Chaffee
Blount and Markel on Dodd-Frank
Justin Robert Blount and Spencer Markel have posted The End of the Internal Compliance World as We Know It, or an Enhancement of the Effectiveness of Securities Law Enforcement? Bounty Hunting Under the Dodd-Frank Act’s Whistleblower Provisions on SSRN with the following abstract:
In the wake of Bernard Madoff’s $65 billion Ponzi scheme and the recent economic crisis stemming largely from loosely regulated subprime lending and mortgage-backed securities, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) on July 21, 2010, signaling loudly and clearly that change is coming to Wall Street. But Wall Street is not the only one receiving a message. Buried deep within the 2,319 pages of the Dodd-Frank Act, companies can find Section 922, the whistleblower provision, which provides a bounty for whistleblowers who report securities violations to the Securities and Exchange Commission.
These bounty provisions and the subsequent rules implementing them have been criticized by many as ineffective and unnecessarily intrusive on established internal compliance programs. In light of these criticisms, this Article analyzes the Dodd-Frank bounty program and its likely effect on corporate internal compliance programs, relying largely upon literature and studies in the areas of behavioral economics, organizational behavior, and business ethics relating to whistleblowing. The authors argue that rather than undermining internal compliance programs, the Dodd-Frank bounty program will serve as a much needed check on poorly administered internal compliance that are not adequately policing fraud and unethical behavior.
-- Eric C. Chaffee
September 26, 2011
Athletic Conference Exit Fees and the Law of Liquidated Damages
Thinking about college football today, and, yes, this does have a business law tie.
Intercollegiate athletic conferences have been plagued lately by a string of defections. The Big 12 alone has lost three members in a little more than a year: Colorado to the Pac 12, Nebraska to the Big Ten, and, most recently, Texas A&M to the Southeastern Conference. Pittsburgh and Syracuse recently announced that they are exiting the Big East conference to join the ACC.
One way to stem such departures is to increase the exit fee a school has to pay when it leaves. The higher the exit fee, the better the deal the new conference has to offer to make a change worthwhile. Shortly before it lured Pitt and Syracuse from the Big East, the ACC reportedly raised its exit fee from between $10-13 million to $20 million. This has led some sports commentators to call on other conferences to increase their fees, to prevent further defections. For example, Kirk Bohls, a writer for the Austin American-Statesman, calls for the Big 12 to hike its exit fees: “Exit fees must be beefed up. Write in language that states the very minute a Big 12 team announces it has accepted an invitation to a new conference, it has to write a check for $20 million to the Big 12. No out clauses, no exceptions.”
It’s important to keep in mind that these exit fees are, in essence, liquidated damages. Conference members pay the exit fee only when they breach their agreement to remain in the conference. Liquidated damages clauses like this are enforceable only if they are genuine attempts to estimate uncertain damages and not if they are penal in nature. That’s why the ACC can’t establish an exit fee of $500 million. No one would consider that a reasonable forecast of the damage the conference would suffer if one of its members left. Courts would treat it as a penalty and strike it down.
That raises two interesting questions:
1. When the conferences set exit fees in the first place, how well are they documenting their status as forecasts of actual damages? Is there a full discussion of the likely damages if a member leaves, or do they just throw out some number they think will keep schools from leaving?
2. Don’t conferences that raise their fees have an even tougher burden, particularly if the original fees were set not too long ago? Presumably, the original fee was a reasonable attempt to approximate damages. If nothing has changed to increase the likely damages, is the increase just a penalty? Without a doubt, the risk that schools will leave conferences has risen in recent weeks, but that’s not the issue. An increase is justified only if the damages when they do leave has increased. That’s much less clear.
Forward-Looking Statements and the Business Judgment Rule
Berkshire Hathaway today announced that the Board of Directors has authorized the company "to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares." (The press release PDF is here; H/T: Bloomburg Businessweek.) The company explains:
In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.
The release, as it should, has its forward-looking statement safe harbor language about the uncertainty of any future performance. I have often wondered if releases such as these should also include a statement of the business judgment rule. That is, the release explains: "If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest." Perhaps added to that should be the statement: "And if we're wrong, the shareholders retaining their interests will have no recourse, because (1) they will have had the opportunity to participate in the repurchase or otherwise sell their shares in the market and (2) the business judgment rule protects such decisions."
Obviosuly, that's the state of the law generally, anyway, but perhaps pointing it out would have some effect on how shareholders view derivative suits down the road. By specifically reminding them of their options at the time of annoucement, it might just reduce later lawsuits predicated on disappointing results when the board of directors is not "correct." Perhaps, but I admit, not likely.
September 25, 2011
Davidoff on Britain’s new takeover rules
Over at DealBook, Steven Davidoff provides some excellent analysis of Britain’s new takeover rules, which went into effect this past Monday. The title of his post sums up his predictions: “British Takeover Rules May Mean Quicker Pace but Fewer Bids.”
If this sort of thing interests you, you’ll definitely want to read the entire post—but I’ll note some of the highlights here. First, Davidoff reports that a wide array of rules were originally considered by the Takeover Panel of Britain, but the most controversial of these (requiring a two-thirds vote, requiring disclosure upon acquisition of 0.5 percent, and disenfranchising shareholders who acquired shares after the offer was announced) were rejected. Second, the rules that were adopted, “set up a nice dichotomy with the American takeover scheme”:
In the United States, targets can agree to large termination fees and provide extensive deal protections to an initial bid. Targets can also adopt a shareholder rights plan, or poison pill, which can prevent a company from acquiring the target. But in Britain none of these devices are allowed.
As mentioned above, Davidoff sees the net result of these new rules being less initial bids (because bidders will be entering the fray subject to more risks), but more competition for targets once bids are launched.
September 25, 2011 in Corporate Governance, Current Affairs, Government and Business, International Business, Investing, Mergers & Acquisitions, Politics, Securities Markets, Securities Regulation | Permalink | Comments (0)