October 29, 2011
Live Blogging From the Central States Law Schools Association Annual Meeting
I'm blogging live from the Central States Law Schools Association Annual Meeting being held at the University of Toledo School of Law (we're currently on break for lunch). You can find the schedule of panelists here. So far I've attended the "Economics, Markets, & Wealth" panel, and the "Tax Law" panel. Of the papers presented as part of the EMW panel, I was able to find Dustin Buehler's "Economic Evolution, Jurisdictional Revolution" on SSRN. Here's the abstract:
In June 2011, the Supreme Court issued its first personal jurisdiction decision in two decades. In J. McIntyre Machinery, Ltd. v. Nicastro, the Court considered whether the placement of a product in the "stream of commerce" subjects a nonresident manufacturer to personal jurisdiction in states where the product is distributed. The Court issued a fractured opinion with no majority rule, with some justices expressing reluctance to "refashion basic jurisdictional rules" without additional information on "modern-day consequences." This Article explores the consequences of these rules by providing the first law-and-economics analysis of personal jurisdiction. A descriptive analysis initially demonstrates that jurisdictional rules significantly misalign litigation incentives. Unclear and restrictive personal jurisdiction rules increase the likelihood of procedural disputes, inflate litigation costs, and decrease the expected benefit of suit, making it less likely that plaintiffs will file lawsuits. This in turn skewers substantive law incentives - because jurisdictional rules make litigation less likely, many injurers escape liability and are inadequately deterred from engaging in wrongful conduct. Drawing on this descriptive analysis, the Article proceeds to a normative analysis of the stream of commerce theory. It argues that a broad version of the stream of commerce doctrine best aligns procedural and substantive law incentives, while protecting fundamental due process rights. Ultimately, this Article concludes that it is time for a procedural revolution: the Supreme Court should allow expansive personal jurisdiction over nonresident manufacturers in products liability cases.
October 28, 2011
Tulane Study Says SEC Estimate of Cost of Conflict Mineral Rules is 100x Too Low
Here's a follow-up on yesterday's post concerning the SEC's proposed conflict mineral rules.
The SEC estimated that the cost to implement the new requirements would be just over $70 million. As I indicated yesterday, the SBA's Office of Advocacy disputes the SEC's cost estimates. Now, a study out of Tulane University claims that the actual cost will be $7.93 billion, more than 100 times the SEC's estimate. The study is available here. I haven't reviewed the Tulane study carefully but, as I said yesterday, none of this bodes well for the SEC if it adopts the rule and it is challenged in the D.C. Circuit.
October 27, 2011
Wall Street Speaks
A friend sent me the "We are Wall Street" email that's apparently been going viral. Here's a taste:
Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.
You can read the full letter here. My friend thought I'd hate it, but I think it's terrific. The issue of whether capitalism is indeed the least worst system (or, perhaps more importantly, how to best leverage capitalism so as to lift the most ships and provide some floor of subsistence to distinguish us from barbarians, while at the same time incentivizing the "frontrunners" maximally) is a complicated one. I am not inclined to dismiss the Occupy protesters because I believe they represent a meaningful discontentment with what many perceive to be a corrupt system rigged to benefit the few at the expense of the many. At the same time, I'm not going to dismiss the ideas represented in this letter either because I believe there is a great deal of truth represented therein as well.
SBA Office of Advocacy Criticizes SEC Conflict Minerals Rulemaking
Here's something that doesn't happen every day: one federal government agency arguing that another federal goverment agency isn't complying with the law.
Last December, the SEC proposed rules to implement section 1502 of the Dodd-Frank Act. Section 1502 adds a new subsection 13(p) to the Securities Exchange Act; that section requires the SEC to adopt regulations requiring disclosure about so-called "conflict minerals" originating in the Democratic Republic of the Congo or adjoining countries. The Commission has yet to take action on the proposed rules.
On Tuesday, the Office of Advocacy of the Small Business Administration submitted this letter arguing that the proposed rule fails to comply with the Regulatory Flexibility Act. The Regulatory Flexibility Act requires proposed rules to include an initial regulatory flexibility analysis that includes, among other things: (1) a description and the estimated number of regulated small entities, and (2) a description and an estimate of the compliance requirements, broken down by different categories of small entities, if there will be any differential effects. The Office of Advocacy contends that the SEC has significantly underestimated both the cost of the proposed rule and the number of small businesses that will be affected. The SEC's proposal indicated that compliance costs "are likely insignificant," but the Office of Advocacy's letter quotes small business sources claiming that median compliance costs could be $65,000 or $170,000.
Administrative agencies often underestimate the cost of their proposed rules, but the SEC is still stinging from its recent loss in the Business Roundtable case. In that case, the D.C. Circuit held that the SEC’s adoption of its proxy access rule violated the Administrative Procedure Act because the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters." That decision follows on the heels of several other recent losses in the D.C. Circuit, some of which were also based on the SEC's failure to adequately consider the cost of its rules.
If the conflict minerals rule is challenged, it certainly won't help the SEC's case to have another federal agency arguing the plaintiff's case.
October 26, 2011
WVU Fracking Conference: Drilling Down on Regulatory Challenges
Early tomorrow morning, I head east for an event at the West Virginia College of Law's Center for Energy and Sustainable Development. The event announcement:
Drilling Down on Regulatory Challenges: Balancing Preservation and Profitability in the Development of Shale Gas Resources promises an unbiased and informative exploration of key topics that face the public, industry and policy makers across the nation regarding the responsible and practical regulation of shale gas production.
The event has a lot of good speakers, plus me. I will talking about the hydraulic fracturing experience in North Dakota. My talk is titled, The Environment and the Economy: Hydraulic Fracturing as the Intersection of Sustainability.
Here are the topics to be covered:
Perspective of State Regulators in the Marcellus Region, including representatives from environmental protection agencies in New York, West Virginia, Pennsylvania and Ohio
Experience from Other Shale Regions, such as Barnett and Haynesville Shale
A Model Regulatory Framework for Hydraulic Fracturing, which is being developed by representatives from industry and environmental organizations.
Perspectives of Industry and Other Stakeholders, including representatives from industry, environmental organizations, community and public interest groups.
Local Regulation of Hydraulic Fracturing. Do local governments have a role in regulating hydraulic fracturing?.
The Economic Benefits of Hydraulic Fracturing, which will examine the economic benefits to a region and local communities associated with the development of shale gas resources
Points of view from across the spectrum will be shared by industry experts, regulators, policy makers, representatives of environmental groups, and concerned citizens in a thoughtful and inclusive discussion.
A reception, featuring U.S. Senator Joe Manchin, will be held Thursday evening, October 27, 2011 as part of the scheduled activities.
I'm looking forward to comparing notes with others close to the most recent energy boom. It should be fun.
Bloomberg just blew my mind
I am blogging from Bloomberg Law training with my faculty. Our law school has recently upgraded from the in-library terminal to individual Bloomberg Law accounts/access. As someone who teaches and writes in the business law area, the potential to integrate current events, legal issues, and financial information through a single database is pretty darn exciting. To my eye it is like a traditional legal database, but one that is tailored to business law issues with embedded links to company financials, related dockets, sample transactional documents, and related news stories. I will absolutely be using this as a resource in class. As I think through how, I will share. For now, though please let me know if you have used Bloomberg Law in class or have thoughts on how to do it. The possibilities seem limited only by creativity.
Without any tailoring, see how basic business law information is organized as a default on the website!
News Search Image #1
Transactional Document/Resource Guide Image #3
Company Market Search Image #4
Anyone else excited about these possibilities?
October 25, 2011
Hovenkamp on Mergers
Herbert J. Hovenkamp has posted Markets in Merger Analysis on SSRN with the following abstract:
Antitrust merger policy suffers from a disconnect between its articulated concerns and the methodologies it employs. The Supreme Court has largely abandoned the field of horizontal merger analysis, leaving us with ancient decisions that have never been overruled but whose fundamental approach has been ignored or discredited. As a result the case law reflects the structuralism of a bygone era, focusing on industrial concentration and market shares, largely to the exclusion of other measures of competitive harm, including price increases. Only within the last generation has econometrics developed useful techniques for estimating the price impact of specific mergers in differentiated markets – so called “unilateral effects” analysis.
In Brown Shoe the Supreme Court equated the newly amended merger law’s phrases “line of commerce” and “section of the country” with relevant product and geographic markets. When it drafted those phrases, however, Congress almost certainly did not have technical definitions of relevant markets in mind. “Line of commerce” was commonly used to describe a particular “line” of business, such as clothing or groceries. A “line” could include complements as well as substitutes. The phrase “section of the country” was intended to create jurisdictional limits. Mainly, Congress wanted to make sure that the Clayton Act’s reach would be limited to mergers whose impact was felt in the United States rather than abroad.
While Brown Shoe required definition of a relevant market, its rationale was fundamentally at odds with the rationale for market definition in horizontal merger cases today. The Court was not thinking of a relevant market as a grouping of sales capable of being monopolized or cartelized. The perceived injury in Brown Shoe was not that the merger threatened higher prices from increased concentration in the shoe market – thus benefitting rivals but harming customers. Rather, the concern was that post-merger Brown Shoe would acquire a competitive advantage over its competitors. Indeed, Brown Shoe was a “unilateral effects” case in the sense that its concern was not with market wide collusion, but rather with the likelihood that the post-merger firm would be able to undersell other firms within the same market.
Viewed in historical perspective, Brown Shoe should serve to give antitrust policy makers far greater latitude to develop merger assessment methodologies that are not wed to traditional market definition concepts. Not only do they serve us poorly today, they are not what the Supreme Court had in mind in the first place.
-- Eric C. Chaffee
Murray on Subsidiaries
J. Haskell Murray has posted ‘Latchkey Corporations’: Fiduciary Duties in Wholly Owned, Financially Troubled Subsidiaries on SSRN with the following abstract:
The current state of the law fails to provide clear guidance to directors of wholly owned, financially troubled ("WOFT") subsidiaries regarding to whom their fiduciary duties run. Directors of solvent wholly owned subsidiaries can act in the best interests of their parent corporation with little fear of liability because the parent corporation is the only party that can sue derivatively on behalf of the subsidiary corporation and is also the subsidiary's only shareholder. However, when a subsidiary corporation becomes insolvent, or in some jurisdictions merely becomes financially troubled, most courts grant the creditors of the subsidiary corporation standing to sue derivatively on behalf of the subsidiary for breaches of fiduciary duty. This grant of standing to creditors traps directors of WOFT subsidiaries between the proverbial Scylla and Charybdis. If directors of a subsidiary favor their parent corporation, the directors will risk facing a fiduciary duty lawsuit from the creditors. On the other hand, favoring creditor interests could open directors of a subsidiary to fiduciary duty-based lawsuits from the parent corporation or lead to prompt removal of the directors by the parent corporation.
Outside of the wholly owned subsidiary context, this conflict between corporate stakeholders is of little practical importance, as directorial decisions are largely protected by the business judgment rule and exculpatory charter provisions. In the wholly owned subsidiary context, however, current law will often classify directors of WOFT subsidiaries as "interested directors" when dealing with their parent corporations. This classification strips directors of WOFT subsidiaries of their legal protections and leaves them vulnerable to creditor claims based on breaches of the fiduciary duty of loyalty. Accordingly, the current law encourages directors of WOFT subsidiaries to favor creditors. If directors of WOFT subsidiaries do begin to favor creditors and begin to challenge the instructions of their parent corporations, administrative costs will increase and wealth creation will decrease. Ultimately, owners of parent corporations may choose more flexible entity forms, such as limited liability companies, where the bounds of fiduciary duties can be better controlled.
This Article argues that fiduciary duty law should not punish directors when they choose one of the subsidiary's legitimate constituencies, such as its parent corporation, over another constituency, such as its creditors. As a solution to theoretical and practical problems stemming from potential fiduciary duty lawsuits by creditors against directors of WOFT subsidiaries, this Article proposes extending business judgment rule or statutory protections to cover directors of WOFT subsidiaries who, in good faith, favor their parent corporations.
-- Eric C. Chaffee
October 24, 2011
Are We Maximizing the Benefit of Our Securities Regulation Dollars?
The SEC, like every other government regulator, has limited funds. Its challenge is to use its limited budget to achieve the biggest bang for the buck. Or, to move the analysis one step back in time, Congress faces the same challenge in enacting the laws in the first place. The goal in either case should be to allocate those limited regulatory dollars to maximize the net benefit of the regulation.
Lately, I have been thinking about the regulatory tradeoffs our federal system of securities regulation makes. In particular, I have been wondering if we might be better off worrying less about the registration of securities offerings, the purview of the Securities Act of 1933, and more about fraud and industry regulation, the purview of the Securities Exchange Act of 1934.
The question is how to allocate regulation at the margin, but here’s a more extreme thought experiment: what would happen if we junked the Securities Act entirely and devoted all those dollars to antifraud enforcement?
This reallocation wouldn’t eliminate mandatory disclosure requirements. Public companies would still have to file the periodic disclosure required by the Exchange Act. And, as a practical matter, even non-public companies would have to release some information to investors on a voluntary basis or no one would buy their securities.
By itself, the elimination of Securities Act registration requirements would probably result in additional fraud, particularly by first-time issuers. But the enhanced enforcement activities made possible by the resulting reallocation of regulatory dollars would presumably reduce the amount of fraud. The net result is indeterminate.
This reallocation would also redistribute the regulatory costs incurred by businesses. The cost to all companies, honest and dishonest, of offering securities would decrease because of the elimination of the registration requirement. But increased antifraud enforcement would impose increased costs on those engaged in fraud. The net effect on the cost side would be a reallocation of costs from honest companies to dishonest companies.
Notice that this is not an argument about whether Securities Act registration is beneficial. In a world of limited regulatory dollars, one could believe that the Securities Act registration requirement is beneficial and still argue for its elimination if other ways of using the money are even more beneficial.
Decision Fatigue: An Attorney's (And Law Prof's) Occupational Hazard
This New York Times report asks, Do You Suffer From Decision Fatigue?:
The mental work of ruling on case after case, whatever the individual merits, wore [judges] down. This sort of decision fatigue can make quarterbacks prone to dubious choices late in the game and C.F.O.’s prone to disastrous dalliances late in the evening. It routinely warps the judgment of everyone, executive and nonexecutive, rich and poor — in fact, it can take a special toll on the poor. Yet few people are even aware of it, and researchers are only beginning to understand why it happens and how to counteract it.
Decision fatigue helps explain why ordinarily sensible people get angry at colleagues and families, splurge on clothes, buy junk food at the supermarket and can’t resist the dealer’s offer to rustproof their new car. No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy. The more choices you make throughout the day, the harder each one becomes for your brain, and eventually it looks for shortcuts, usually in either of two very different ways. One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. (Sure, tweet that photo! What could go wrong?) The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice. Ducking a decision often creates bigger problems in the long run, but for the moment, it eases the mental strain. You start to resist any change, any potentially risky move — like releasing a prisoner who might commit a crime. So the fatigued judge on a parole board takes the easy way out, and the prisoner keeps doing time.
This is something to keep in mind in every facet of being an attorney, and being a law professor, too. I didn't necessarily know what to call it, but I know that over time there is a diminishing return to my continued work. It's why I grade exam questions in a different order, and it's why I try not to grade late into the night. I try to make sure that some portion of each student's work is viewed in a favorable time slot, to help ensure as equitable a review as possible.
Of course, it's impossible to avoid decision fatigue if you're trying to work at a high rate and a strong output. That's just the way it is. But we can try to structure our days to be more productive. The close of the article explains it well:
“Even the wisest people won’t make good choices when they’re not rested and their glucose is low,” Baumeister points out. That’s why the truly wise don’t restructure the company at 4 p.m. They don’t make major commitments during the cocktail hour. And if a decision must be made late in the day, they know not to do it on an empty stomach. “The best decision makers,” Baumeister says, “are the ones who know when not to trust themselves.”
October 23, 2011
More Readings on Capitalism
Steve recently put up a helpful list of "Readings on Capitalism." Since I am agnostic when it comes to the assertion that capitalism is the least worst system possible, and because I believe that even if we all agreed on that point we'd still have much to debate about as to the details, I asked Frank Pasquale and Kent Greenfield for a quick list of books identifying some of the shortcomings of capitalism. Here it is:
- 23 Things They Don't Tell You About Capitalism (Pasquale: "Ha-Joon Chang's LSE and RSA podcasts are on iTunes; highly recommended")
- The Fifteen Biggest Lies about the Economy: And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America
- The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression
- Wall Street at War: The Secret Struggle for the Global Economy (Pasquale: "particularly valuable as a testament to the ways in which finance capital has undermined productive enterprise")