Wednesday, December 14, 2016
UC Irvine law professor, David Min, has a new article titled, Corporate Political Activity and Non-Shareholder Agency Costs, in theYale Journal on Regulation. Professor Min examines corporate constitutional law in recent examples such as Citizens United, through the lens of nonshareholder dissenters.
The courts have never considered the problem of dissenting nonshareholders in assessing regulatory restrictions on corporate political activity. This Article argues that they should. It is the first to explore the potential agency costs that corporate political activity creates for nonshareholders, and in so doing, it lays out two main arguments. First, these agency costs may be significant, as I illustrate through several case studies. Second, neither corporate law nor private ordering provides solutions to this agency problem. Indeed, because the theoretical arguments for shareholder primacy in corporate law are largely inapplicable for corporate political activity, corporate law may actually serve to exacerbate the agency problems that such activity creates for non-shareholders. Private ordering, which could take the form of contractual covenants restricting corporate political activity, also seems unlikely to solve this problem, due to the large economic frictions facing such covenants. These findings have potentially significant ramifications for the Court’s corporate political speech jurisprudence, particularly as laid out in Bellotti and Citizens United. One logical conclusion is that these decisions, regardless of their constitutional merit, make for very bad public policy, insofar as they preempt much-needed regulatory solutions for reducing non-shareholder agency costs, and thus may have the effect of inhibiting efficient corporate ordering and capital formation. Another outgrowth of this analysis is that nonshareholder agency costs may provide an important rationale for government regulation of corporate political activity.
In examining corporate political activity, Professor Min, expertly blends and connects agency theory to corporate theories of the firm. He rebuts traditional arguments against nonshareholder constituents such as residual interest holders (shareholders), the role of private ordering and provides 3 detailed case studies illustrating the costs of CPA on nonshareholder constituents. Among the proposals and options explored to mitigate these agency costs, Professor Min suggests that the existence of agency costs to nonshareholders--an area heretofore unexamined in corporate law--could justify a regulatory intervention.
Thursday, September 22, 2016
Lately, I’ve been researching the twelve nation Trans-Pacific Partnership Treaty (“TPP”) because I am looking at investor-state dispute settlements (ISDS) in my work in progress proposing a model bilateral investment treaty between the U.S. and Cuba.
The TPP, which both Trump and Clinton oppose, has the support of U.S. business. Although President Obama has pushed the treaty as part of his legacy, just this morning, Vice-President Biden added his pessimistic views about its passage. More interestingly, over 220 law and economics academics, led by Harvard’s Laurence Tribe, have come out publicly to oppose TPP, stating:
ISDS grants foreign corporations and investors a special legal privilege: the right to initiate dispute settlement proceedings against a government for actions that allegedly violate loosely defined investor rights to seek damages from taxpayers for the corporation’s lost profits. Essentially, corporations and investors use ISDS to challenge government policies, actions, or decisions that they allege reduce the value of their investments... Through ISDS, the federal government gives foreign investors – and foreign investors alone – the ability to bypass th[e] robust, nuanced, and democratically responsive legal framework. Foreign investors are able to frame questions of domestic constitutional and administrative law as treaty claims, and take those claims to a panel of private international arbitrators, circumventing local, state or federal domestic administrative bodies and courts. Freed from fundamental rules of domestic procedural and substantive law that would have otherwise governed their lawsuits against the government, foreign corporations can succeed in lawsuits before ISDS tribunals even when domestic law would have clearly led to the rejection of those companies’ claims. Corporations are even able to re-litigate cases they have already lost in domestic courts. It is ISDS arbitrators, not domestic courts, who are ultimately able to determine the bounds of proper administrative, legislative, and judicial conduct… This system undermines the important roles of our domestic and democratic institutions, threatens domestic sovereignty, and weakens the rule of law.
Senator Warren, who also opposes TPP has argued, "“ISDS allows a small group of ultra-rich investors to extract billions of dollars from taxpayers while they undermine financial, environmental and public health rules across the world.” I look forward to the upcoming debates to see whether either Trump, who has labeled the proposal the “rape of our country,” or Clinton, who previously supported the deal, will cite the academics' letter as additional reason to oppose TPP.
Wednesday, September 21, 2016
The enticing facts of insider trading have me writing about the topic again (see an earlier post here) as the US Supreme Court prepares to hear oral argument in Salman v. US on October 5th. In Salman, the Supreme Court is asked to draw some careful lines in the questions: what benefit counts and how to prove such a benefit under Dirks v. SEC.
Recall that in Dirks, the Supreme Court focused the test on whether an insider benefitted—either by trading or by tipping in exchange for a benefit from the person to whom she tipped material nonpublic information. After Dirks, the 10b inquiry is whether the insider breached a duty by conveying the information for the insider’s personal benefit, and whether the tippee knows or at least should know of the breach. The Court explained that even in a case against a tippee who trades "Absent some personal gain [by the insider], there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach [by the tippee]."
The Salman case highlights a circuit split: the Second Circuit case United States v. Newman and the Ninth Circuit's ruling in Salman. In Salman, the question is whether prosecutors had to prove that the brother-in-law, Maher Kara, disclosed nonpublic securities information in exchange for a personal benefit. Is it enough that the insider and the tippee shared a close family relationship or must there be direct evidence as required in Newman?
The Ninth Circuit framed the benefit requirement inquiry, established in Dirks, as a gift of confidential information to a trading relative or a friend. The prosecution offered direct evidence of nonpublic information as a gift. The Ninth Circuit, and the Government, relied upon this passage in Dirks:
There may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.
The Second Circuit read the Dirks benefit test more narrowly, saying it required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”
So what is the right answer? The Government lamented the Newman decision as "dramatically limit[ing] the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading.” Whereas others (see here) have criticized the Government's position in Newman and the subsequent basis of the Salman ruling as reviving the “parity of information” standard rejected by Supreme Court in both Chiarella and Dirks. Focusing on friendship and defining it broadly weakens the benefit test advanced in Dirks.
As someone who teaches insider trading and has followed the fascinating case facts for years, I am looking forward to oral argument and see the next step in the evolution of insider trading. Co-blogger Ann Lipton tee'd up the Salman case in her post earlier this week with her usual whit and charm.
Wednesday, September 14, 2016
Last spring, in the wake of Justice Scalia's passing, I blogged about Justice Scalia's final business law case: Americold Realty Trust v. ConAgra Ltd. The oral argument signaled that the Court's preference for a formalistic, bright line test that asked whether the entity involved was an unincorporated entity, in which case the citizenship of its members controlled the question of diversity, or whether it was formed as an corporation, in which a different test would apply. The Supreme Court issued its unanimous (8-0) opinion in March, 2016 holding that the citizenship of an unincorporated entity depends on the citizenship of all of its members. Because Americold was organized as a real estate investment trust under Maryland law, its shareholders are its members and determine (in this case, preclude) diversity jurisdiction.
S.I. Strong, the Manley O. Hudson Professor of Law at the University of Missouri, has a forthcoming article, Congress and Commercial Trusts: Dealing with Diversity Jurisdiction Post-Americold, forthcoming in Florida Law Review. The article addresses the corporate constitutional jurisprudential questions of how can and should the Supreme Court treat business entities. What is the appropriate role of substance and form in business law? Her article offers a decisive reply:
Commercial trusts are one of the United States’ most important types of business organizations, holding trillions of dollars of assets and operating nationally and internationally as a “mirror image” of the corporation. However, commercial trusts remain underappreciated and undertheorized in comparison to corporations, often as a result of the mistaken perception that commercial trusts are analogous to traditional intergenerational trusts or that corporations reflect the primary or paradigmatic form of business association.
The treatment of commercial trusts reached its nadir in early 2016, when the U.S. Supreme Court held in Americold Realty Trust v. ConAgra Foods, Inc. that the citizenship of a commercial trust should be equated with that of its shareholder-beneficiaries for purposes of diversity jurisdiction. Unfortunately, the sheer number of shareholder-beneficiaries in most commercial trusts (often amounting to hundreds if not thousands of individuals) typically precludes the parties’ ability to establish complete diversity and thus eliminates the possibility of federal jurisdiction over most commercial trust disputes. As a result, virtually all commercial trust disputes will now be heard in state court, despite their complexity, their impact on matters of national public policy and their effect on the domestic and global economies.
Americold will also result in differential treatment of commercial trusts and corporations for purposes of federal jurisdiction, even though courts and commentators have long recognized the functional equivalence of the two types of business associations. Furthermore, as this research shows, there is no theoretical justification for this type of unequal treatment.
This Article therefore suggests, as a normative proposition, that Congress override Americold and provide commercial trusts with access to federal courts in a manner similar to that enjoyed by corporations. This recommendation is the result of a rigorous interdisciplinary analysis of both the jurisprudential and practical problems created by Americold as a matter of trust law, procedural law and the law of incorporated and unincorporated business associations. The Article identifies two possible Congressional responses to Americold, one involving reliance on minimal diversity, as in cases falling under 28 U.S.C. §§1332(d) and 1369, and the other involving a statutory definition of the citizenship of commercial trusts similar to that used for corporations under 28 U.S.C. §1332(c). In so doing, this Article hopes to place commercial trusts and corporations on an equal footing and avoid the numerous negative externalities generated by the Supreme Court’s decision in Americold.
A special thanks to Professor Strong who read the blog's coverage of Americold and shared her scholarship with me.
Tuesday, March 22, 2016
Legal commentators and the media have been abuzz with news of President Obama's nomination of Judge Merrick Garland to the Supreme Court. If there was ever reason to be abuzz, in the world of legal news, this is it. Try to find a summary of Judge Garland's record in dealing with business law issues, however, and you are met with a silent, dark internet. Aside from mentions of Judge Garland having taught anti-trust at Harvard there is little discussion of his business jurisprudence. The D.C. Circuit court hears an administratively heavy caseload, but Judge Garland has been on the bench for nearly 20 years! I set out to uncover his business law barometer. My initial searches produced 19 opinions that he authored on business law matters, which are mostly securities cases but also include a piercing the corporate veil and contracts claims among others. While I am no online search wizard and am positive that I have missed some relevant cases, this is what I produced after such wide-net casting as "business law", "corporations", "partnership", "board of directors", "shareholders" etc. You get the idea, I ran several undeniably broad searches. The initial case list is provided below, and was generated (along with annotations) through WestLaw. Please comment if you have relevant cases to add. I may add commentary on the cases in a future post if there is interest... (and time).
Securities Law Cases
- Horning v. S.E.C., 570 F.3d 337 (D.C. Cir. 2009)
SECURITIES REGULATION - Brokers and Dealers. Mid-trial correction of sanction the SEC sought did not deprive broker-dealer firm’s former director of due process.
- Graham v. S.E.C., 222 F.3d 994 (D.C. Cir. 2000)
SECURITIES REGULATION - Fraud. Registered representative aided and abetted customer’s fraud.
- Katz v. S.E.C., 647 F.3d 1156 (D.C. Cir. 2011)
SECURITIES REGULATION - Brokers and Dealers. Former registered representation made unsuitable investment recommendations for her customers.
Friday, February 19, 2016
I haven't seen his name on any of the short lists to replace Justice Scalia, but I would love to see the current Chief Justice of the Delaware Supreme Court, Leo Strine, get the nomination.
The benefits of nominating Chief Justice Strine include:
- Promise of an entertaining nomination process. With all that he has said and written, there would be a lot of fodder, but he would be sure to hold his own.
- A nominee whose wit and writing style could rival Justice Scalia's.
- Diversity. Chief Justice Strine went to Penn for law school, not Harvard or Yale. (Granted, he does teach at Harvard).
- Serious corporate law knowledge, and, at least on this blog, we know the Supreme Court of the United States needs help in this area.
- Extremely bright, curious, and widely read. He likely has knowledge of and an opinion on most areas of law, well outside of just corporate law.
Anyway, I am sure President Obama will go with a more conventional pick, but I do hope to see a Supreme Court justice with corporate law expertise on the court eventually.
Wednesday, February 17, 2016
Justice Scalia’s sudden passing has generated a tidal wave of media and academic attention on the future of the Supreme Court. As a corporate law scholar, I have to admit to a tinge of jealousy to be seemingly outside of this controversy, the hand wringing, and the political equivalent of Dungeons and Dragons that has ensued as people examine the various maneuverers available to our elected politicians and those vying-to be elected.
My solution? I searched for pending corporate cases hanging in the balance of the new, and indeterminate, vacancy on the Supreme Court. I wanted to know if there were any cases pending that would likely be decided differently in a post-Scalia court, or at least hang in a 4-4 split and thus uphold the lower court ruling. There isn’t a big juicy corporate law case pending, or at least one that I readily identified.
Not to be deterred, however, there is a case worth highlighting. Americold Realty Trust v. ConAgra Foods, Inc., was argued on January 19th before the Supreme Court (transcript available here). The issue before the Supreme Court in Americold was how to establish the citizenship of a real estate trust for purposes of diversity citizenship. Is the trust's citizenship dependent upon the citizenship of the controlling trustees (as argued by Americold)? Or is it dependent upon the citizenship of the trust beneficiaries (argued by ConAgra Foods), or some combination? Locating citizenship with trustees narrows the potential states and ensures diversity citizenship whereas citizenship with the beneficiaries, of which there are thousands, implicates most states and thus frustrates federal jurisdiction.
At the heart of the oral argument was the 1990 ruling Carden v. Arkoma Associates, which established a bright line between the citizenship of corporations (located in the state of incorporation) and the citizenship of all other artificial business entities (located in the states of the beneficial owners of the business).
In Carden, the Supreme Court wrote:
In 1958 it revised the rule established in Letson, providing that a corporation shall be deemed a citizen not only of its State of incorporation but also "of the State where it has its principal place of business." 28 U.S.C. 1332(c). No provision was made for the treatment of artificial entities other than corporations, although the existence of many new, post-Letson forms of commercial enterprises, including at least the sort of joint stock company ..., the sort of limited partnership association ..., and the sort of Massachusetts business trust ... We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress; we adhere to that decision.
Drawing on the Carden precedent, the question became whether the REIT as issue in Americold was organized as a traditional corporation or not.
Ronald Mann writing for the SCOTUS Blog summarized Justice Scalia’s role in oral argument on this issue with the following:
Justice Antonin Scalia early on asked, “[w]ho owns these assets under Maryland law? Is it . . . this new corporation-type entity? That’s the entity that can sue.” That conclusion led him to dismiss out of hand Americold’s contention that the citizenship of the trust managers should be decisive: “[T]he trustees are sort of in the position of managers, just as though you hired a CEO.”
Scalia's skepticism about the REIT functioning like a corporation was shared by the other Justices despite the fact that modern REITs, in many ways, resemble corporations more so than other unincorporated business entities. REITs have dispersed and diffused shareholders, often with shares traded on public exchanges. This position was articulated by an amicus brief filed by National Association of Real Estate Investment Trusts (NAREIT). The Justices however signaled a truly formalistic approach asking if the entity was indeed formed as a corporation (not did it function as one or was it capitalized as one). Only if so would the state of incorporation rule prevail.
A Justice Scalia-influenced Supreme Court's last word on corporate jurisprudence may very likely be one of pure form over substance. Merely asking which entity form was used without looking at the distinguishing features of a corporation and the justifications for why corporations were treated differently beginning in 1958 produces a corporate law legacy of flimsy jurisprudence. Failing to take into account the market realities and relying upon strict categorical distinctions without reference to function would create a bright line, but not necessarily a bright result.
Tuesday, January 5, 2016
On Saturday, January 9, 2016, I will be spending the day at the AALS Section on Socio-Economics Annual Meeting at the Sheraton New York Times Square Hotel. Among other things, I will be part of a panel discussion from 9:50 - 10:50 AM, Death of the Firm: Vulnerabilities and the Changing Structure of Employment. My co-panelists will be June Carbone and Katherine Stone (I am very tempted to give up my 15 minutes and just sit back and listen to these two great scholars, but please don't use the comments section to encourage me to do that). As I understand it, the gist of the discussion will be that while firms once supported a significant part of the safety net that provided employee health and retirement benefits, they have recently abdicated more and more of these responsibilities. At the same time, however, what may be described as subsidies granted by the state to firms -- particularly corporations -- as part of a social contract whereby these firms provided the aforementioned benefits, have not been correspondingly reduced. In fact, the rights of corporations have been expanded by, for example, cases like Citizens United and Hobby Lobby -- suggesting a possible windfall for the minority of individuals best positioned to reap the benefits of corporate growth and insulation. Obviously, competing interpretations of the relevant history abound. Regardless, please stop by if you have the opportunity. Continuing to beat a favorite drum of mine (see here, here, and here), I will be applying the lens of corporate personality theory to the foregoing issue and arguing that corporate personality theory has a role to play both in understanding how we got here and how best to move forward. Additional details, including the entire day’s program, can be found here.
On Monday, January 11, 2016, I will also be participating in the Society of Socio-Economists Annual Meeting, also at the Sheraton. Program details are available here. Again, please stop by if you have the opportunity.
January 5, 2016 in Business Associations, Conferences, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Financial Markets, Law and Economics, Shareholders, Stefan J. Padfield | Permalink | Comments (0)
Thursday, October 29, 2015
Kent Greenfield, Professor of Law and Dean’s Research Scholar at Boston College Law School, recently posted a provocative piece on the CLS Blue Sky Blog (here) in which he argues, among other things, that progressives have “flipped” from supporting “corporate citizenship” pre-Citizens United, to supporting “shareholder primacy” post-Citizens United. (Kent has stressed to me that he does not believe this characterization extends to progressive corporate law scholars.) The piece is short, so I recommend you go read it before continuing on to my comments below, because I will simply be taking some short excerpts from his post and providing some responses, which will likely benefit from the reader having reviewed Kent’s post first. As just one disclaimer, Kent’s post is based on his article, “Corporate Citizenship: Goal or Fear?” – and I have not yet read that paper. Also, I consider the following to be very much an in-progress, thinking-out-loud type of project, and thus welcome all comments.
1. In 2010, the Supreme Court decided Citizens United v Federal Election Commission, ruling that corporations had a First Amendment right to spend money from general treasury funds in support of political candidates. Though seen as victory for political conservatives, the decision was in some ways based on a progressive view of the corporation. In the Court’s reasoning, corporations act as “associations of citizens” with rights of free speech.
Kent argues that the historical divide between progressives and conservatives can be viewed as one of “shareholder primacy” versus “corporate citizenship,” with progressives advocating for corporate citizenship while conservatives advance the cause of shareholder primacy. A couple of caveats are in order here. First, we must distinguish “shareholder primacy” as an assertion that shareholders should have the dominant (or at least more) controlling power within the corporation, from “shareholder wealth maximization,” which posits that the goal of corporate control is shareholder wealth maximization, independent of where the decision-making power resides. Second, we should keep in mind the competing corporate personality theories: aggregate theory, artificial entity (concession) theory, and real entity theory. I have argued in the past (see, e.g., here) that both aggregate theory and real entity theory tend to view the corporation as more private than public, with aggregate theory equating the relevant “association of citizens” with shareholders, while real entity theory looks to the board of directors – in either case positing a group of natural persons who can assert constitutional rights against government regulation. Artificial entity theory, on the other hand, views corporations as more public, at least in part because it is essentially impossible to mimic the corporate form solely through private contracting, and thus the state is entitled to more leeway in regulating corporations than natural persons acting in their purely private capacity. In light of all this, it may be better to view progressives as opposing shareholder wealth maximization as the sole goal of corporate governance, while being flexible as to the means used to achieve that end – be it shareholder primacy, director primacy, or “state primacy.” (I am not suggesting that a shift to shareholder primacy as the favored means of achieving the ends of progressive corporate governance is insignificant. Rather, I argue merely that a shift in means is less dramatic than a shift in ends, and thus less appropriately characterized as an ideological flip.) To the extent Citizens United is viewed as having merely strengthened the associational, private view of corporations without challenging the shareholder wealth maximization norm – it is hard to view it as advancing a progressive view of the corporation. In fact, it arguably stands simply as an opinion that gives more political power to corporations to pursue shareholder wealth maximization (or for managers to use shareholder wealth maximization as a justification for self-dealing) at the expense of other stakeholder concerns.
2. The biggest impediment to using the Citizens United moment to change corporate governance for the better is the progressive left.
In light of my comments above, I think there is a stronger argument to be made that the biggest impediment to changing corporate governance for the better is the continuing identification of corporations as purely private entities. It has been said that the greatest trick the devil played was convincing the world he didn’t exist. In this context, we might say the greatest trick played on progressives was convincing them their only viable choices are contractarian.
3. Justice John Paul Stevens’s dissent in Citizens United …. (perhaps unwittingly) bolsters shareholder supremacy by arguing that corporate speech should be limited in order to protect shareholders’ investments.
It may be better to view this part of Justice Stevens’s dissent as challenging the majority’s view that opening the corporate political contribution floodgates is not problematic because “corporate democracy” will address any problems. Meanwhile, Justice Stevens quotes Dartmouth College approvingly, and states that “corporations have been ‘effectively delegated responsibility for ensuring society's economic welfare,’” both of which place him squarely in the concession theory camp – despite his protestations to the contrary.
4. The irony runs the other way as well. In the 2014 Hobby Lobby case, the Court granted corporations the statutory right under the Religious Freedom Restoration Act to object to otherwise applicable regulations on religious grounds. Writing for the Court, Justice Samuel Alito recognized that corporations need not maximize the bottom line ….
Go here for my take on whether Hobby Lobby changed anything in terms of the ability of those who control corporations to pursue “socially responsible” ends. It is worth noting that a corporation’s ability to pursue “socially responsible” ends as part of an overall shareholder-wealth-maximizing strategy in light of the business judgement rule is not necessarily the same thing as concluding corporations will pursue some optimal level of “corporate citizenship,” which may rather require recognizing state power to require such activity or prohibit related harmful activity.
5. The world is flipped. Progressives are championing shareholder rights. Conservatives are planting their ideological flag on the summit of corporate citizenship.
As noted above, to the extent one views progressives as seeking more corporate social responsibility, and being willing to consider alternative methods to that end – be it shareholder primacy, director primacy, or state primacy – I do not see a significant flip here. Meanwhile, to the extent conservatives can be viewed as having supported shareholder wealth maximization as the optimal, but not sole, means to the end of lifting all ships via a rising tide, in addition to being consistently united against government regulation, there is also arguably nothing here that constitutes a significant “flip.”
Of course, generalities like “progressive” and “conservative” typically suffer from significant amounts of imprecision, and it may be that the “flip” characterization is more or less appropriate given the strand of progressive or conservative one is considering.
Wednesday, October 21, 2015
Home court advantage alleged in SEC securities cases brought before administrative judges rather than a jury. Read this recent thought provoking article in the NYT DealB%k, A Jury Not the SEC, by Suja A. Thomas, a Univ. of Illinois law professor, and Mark Cuban, billionaire investor.
After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges
Thomas and Cuban refute the argument that after the financial crisis securities issues are considered public rights questions and can constitutionally be transferred to an administrative judge.
Despite the persistence of this public rights doctrine, there is no constitutional authority for it. First, Article I does not give Congress any authority to determine who decides civil cases. Second, the Seventh Amendment itself tells us who should decide these cases. Under it, juries decide money issues and federal judges decide other matters.
Thursday, July 16, 2015
Love him or hate him, you can’t deny that President Obama has had an impact on this country. Tomorrow, I will be a panelist on the local public affairs show for the PBS affiliate to talk about the President’s accomplishments and/or failings. The producer asked the panelists to consider this article as a jumping off point. One of the panelists worked for the Obama campaign and another worked for Jeb Bush. Both are practicing lawyers. The other panelist is an educator and sustainability expert. And then there’s me.
I’ve been struggling all week with how to articulate my views because there’s a lot to discuss about this “lame duck” president. Full disclosure—I went to law school with Barack Obama. I was class of ’92 and he was class of ’91 but we weren’t close friends. I was too busy doing sit-ins outside of the dean’s house as a radical protester railing against the lack of women and minority faculty members. Barack Obama did his part for the movement to support departing Professor Derrick Bell by speaking (at minute 6:31) at one of the protests. I remember thinking then and during other times when Barack spoke publicly that he would run for higher office. At the time a black man being elected to the president of the Harvard Law Review actually made national news. I, like many students of all races, really respected that accomplishment particularly in light of the significant racial tensions on campus during our tenure.
During my stint in corporate America, I was responsible for our company’s political action committee. I still get more literature from Republican candidates than from any other due to my attendance at so many fundraisers. I met with members of Congress and the SEC on more than one occasion to discuss how a given piece of legislation could affect my company and our thousands of business customers. My background gives me what I hope will be a more balanced set of talking points than some of the other panelists. In addition to my thoughts about civil rights, gay marriage, gun control, immigration reform, Guantanamo, etc., I will be thinking of the following business-related points for tomorrow’s show:
1) Was the trade deal good or bad for American workers, businesses and/or those in the affected countries? A number of people have had concerns about human rights and IP issues that weren’t widely discussed in the popular press.
2) Dodd-Frank turns five next week. What did it accomplish? Did it go too far in some ways and not far enough in others? Lawmakers announced today that they are working on some fixes. Meanwhile, much of the bill hasn’t even been implemented yet. Will we face another financial crisis before the ink is dried on the final piece of implementing legislation? Should more people have gone to jail as a result of the last two financial crises?
3) Did the President waste his political capital by starting off with health care reform instead of focusing on jobs and infrastructure?
4) Did the President’s early rhetoric against the business community make it more difficult for him to get things done?
5) How will the changes in minimum wage for federal contractors and the proposed changes to the white collar exemptions under the FLSA affect job growth? Will relief in income inequality mean more consumers for the housing, auto and consumer goods markets? Or has too little been done?
6) Has the President done enough or too much as it relates to climate change? The business groups and environmentalists have very differing views on scope and constitutionality.
7) What will the lifting of sanctions on Cuba and Iran mean for business? Both countries were sworn mortal enemies and may now become trading partners unless Congress stands in the way.
8) Do we have the right people looking after the financial system? Is there too much regulatory capture? Has the President tried to change it or has he perpetuated the status quo?
9) What kind of Supreme Court nominee will he pick if he has the chance? The Roberts court has been helpful to him thus far. If he gets a pick it could affect business cases for a generation.
10) Although many complain that he has overused his executive order authority, is there more that he should do?
I don’t know if I will have answers to these questions by tomorrow but I certainly have a lot to think about before I go on air. If you have any thoughts before 8:30 am, please post below or feel free to email me privately at email@example.com.
July 16, 2015 in Constitutional Law, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Business, Marcia Narine Weldon, Securities Regulation, Television, White Collar Crime | Permalink | Comments (0)
Tuesday, July 14, 2015
CALL FOR PAPERS: A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family (October 16-17, 2015 in Atlanta, GA)
UPDATE: The deadline for submissions has been extended to July 21.
[The following is a copy of the official workshop announcement. I have moved the "Guiding Questions" to the top to highlight the business law aspects. Registration and submission details can be found after the break.]
A Vulnerability and the Human Condition Initiative Workshop at Emory Law
This workshop will use vulnerability theory to explore the implications of the changing structure of employment and business organizations in the new information age. In considering these changes, we ask:
• What kind of legal subject is the business organization?
• Are there relevant distinctions among business and corporate forms in regard to understanding both vulnerability and resilience?
• What, if any, should be the role of international and transnational organizations in a neoliberal era? What is their role in building both human and institutional resilience?
• Is corporate philanthropy an adequate response to the retraction of state regulation? What forms of resilience should be regulated and which should be left to the 'free market'?
• How might a conception of the vulnerable subject help our analysis of the changing nature of the firm? What relationships does it bring into relief?
• How have discussions about market vulnerability shifted over time?
• What forms of resilience are available for institutions to respond to new economic realities?
• How are business organizations vulnerable? How does this differ from the family?
• How does the changing structure of employment and business organization affect possibilities for transformation and reform of the family?
• What role should the responsive state take in directing shifting flows of capital and care?
• How does the changing relationship between employment and the family, and particularly the disappearance of the "sole breadwinner," affect our understanding of the family and its role in caretaking and dependency?
• How does the Supreme Court's willingness to assign rights to corporate persons (Citizen's United, Hobby Lobby), affect workers, customers and communities? The relationship between public and private arenas?
• Will Airbnb and Uber be the new model for the employment relationships of the future?
July 14, 2015 in Business Associations, Call for Papers, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law and Economics, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, July 1, 2015
Last week Kent Greenfield and Adam Winkler published "The U.S. Supreme Court's Cultivation of Corporate Personhood," in the Atlantic discussing two recent Supreme Court opinions. Greenfield and Winkler covered the ruling in Horne v. Department of Agriculture where the Court held "a federal program requiring raisin growers to set aside a percentage of their crops for government redistribution was an unconstitutional 'taking' under the Fifth Amendment." The second case addressed was Los Angeles v. Patel where the Court extended Fourth Amendment privacy protections "invalidating a city ordinance (similar to laws around the country) allowing police to search [hotel] guest registries without a warrant."
While they distinguish certain rights, like political speech, that are "more appropriate for people than for corporations," Greenfield and Winkler acknowledge that some constitutional protections should be extended to corporations.
"A corporate right to be free from government takings, for example, makes sense both as a matter of constitutional law and of economics. Government overreach is problematic whether the raisin grower is a family farm or a business corporation. And corporations left exposed to government expropriation would find investors reluctant to take that risk, undermining the basic social purpose of the corporation, to make money."
Friday, May 8, 2015
Thanks to faithful BLPB reader Scott Killingsworth for the tip about this new article appearing in the New Yorker detailing the scholarship and advocacy of renowned Harvard constitutional law professor Laurence Tribe. The article raises questions about conflicts of interest between scholarship and advocacy.
[I]t would also be foolish to ignore the inherent tension in searching for truth while also working for paying clients. The scholar-warrior may lapse into a far more contemptible figure: the scholar for hire, who sells his name and his title for cash. A subtler danger comes from the well-known and nearly unavoidable tendency lawyers have of identifying with their clients.
The article also highlights his role in the current debate on corporate constitutional rights.
Tribe has taken a strong view of individual rights; his view of corporate rights is similar, and in this capacity he has at times advanced constitutional arguments that might invalidate great parts of the administrative state, in a manner recalling the Supreme Court’s jurisprudence of the nineteen-twenties and thirties. In that sense, the current condemnation of Tribe can be seen as part of a larger progressive backlash against the use of the Bill of Rights to serve corporate interests.
This short article is absolutely worth making your Friday procrastination list or your weekend "catch-up" reading list.
Monday, October 27, 2014
A few weeks ago, I suggested the book Is Administrative Law Unlawful, by Philip Hamburger. I have now finished reading the book. It’s a tough read but, if you’re interested in constitutional history as it relates to administrative law, I strongly recommend it.
I was especially struck by the following argument about the connection between popular sovereignty and the growth of administrative rule:
The growth of administrative power in America has followed the expansion of suffrage—an expansion that increasingly has opened up voting to all the people. It therefore is necessary to consider whether there is a connection.
It would appear that the new, cosmopolitan, or knowledge class embraced popular suffrage with a profound caveat. They tended to favor popular participation in voting, but they also tended to support the removal of much legislative power from legislatures. The almost paradoxical result has been to agonize over voting rights while blithely shifting legislative power to unelected administrators.
. . . Throughout the nineteenth and twentieth centuries, reformers struggled for the people to have equal representation and thus to enjoy the power to govern themselves. The reformers told themselves that, if only the people had power, reasonable and righteous government would prevail. When the people gradually acquired this power, however, the results were disappointing for the knowledge class. The members of this class had established their status, influence, and sense of self-worth through their assiduous pursuit of rationality and specialized knowledge, and they were troubled that popularly elected legislatures did not operate in line with the qualities they so admired in themselves. . . . Administrative power . . . was one of the avenues for power by and on behalf of a class that understood authority not merely in terms of the equal rights of all the people, but more deeply in terms of their own rationality and specialized knowledge.
Democracies often make stupid choices. But I will take democracy over technocracy any day. Bureaucrats also make stupid choices, and bureaucrats are much less likely than democratic majorities to admit their mistakes and move on.
Wednesday, October 22, 2014
Corporate Law Professors Comment on Proposed HHS Definition of "Eligible Organization" for Hobby Lobby Accommodation
In response to the Department of Health and Human Services' Proposed Regulation and Request for Comments regarding the definition of "eligible organization" (see earlier post here) at least two groups of law professors have weighed in on the issue.
The first comment letter, available here, was submitted by the U.C. Berkeley corporate law professors and encourages the Department to adopt a definition based upon the veil piercing theory. "We ... propose that for purposes of defining an “[W]e ... suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego." The comments argue that utilizing the veil-piercing theory avoids the consequences of a setting an arbitrary number of shareholders thus creating a rule that would be "seriously under-and-over-inclusive, capturing corporations that meet the numerical test but for which shareholders are not the alter egos of the corporation, as well as failing to capture corporations with a relatively large number of shareholders that are all united in their interests and are alter egos of one another."
The second comment letter on which I worked and was joined by some editors of this blog as signatories, is available here. This comment letter, signed by 43 corporate law professors, was produced through the coordinating efforts of the The Public Rights / Private Conscience Project at Columbia Law School headed by Katherine Franke, and the project's executive director, Kara Loewentheil. This letter too encourages the HHS to adopt an approach that requires an "identity of interests." These comments suggest a blueprint for establishing an identity of interest, namely a focus on "entities (1) with a limited number of equity holders/owners, (2) that demonstrate religious commitment, and (3) submit evidence of unanimous consent of equity holders to seek an accommodation on an annual basis." The comments provide additional criteria under each of these three elements to operationalize the holding in Hobby Lobby.
Tuesday, October 7, 2014
Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that
Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.
Senator Raskin further notes that the Congress doesn't appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures. In response, the senator has a proposal:
Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.
Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.
Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue "an internal governance issue, which is a state-level issue." (Please click below to read more.)
Sunday, September 14, 2014
This coming Tuesday, I am scheduled to provide a brief overview of the corporate law/theory aspects of Hobby Lobby as part of the University of Akron’s Supreme Court Roundup. What follows are the seven key quotes from the opinion that I plan to focus on (time permitting) in order to highlight what I see as the key relevant issues raised by the opinion. Comments are appreciated.
Issue 1: Did corporate theory play a role in Hobby Lobby?
While I believe the majority made a pitch for applying a pragmatic, anti-theoretical approach (“When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of … people.” Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2768 (2014)), the following quote strikes me as conveying an underlying aggregate view of corporations:
In holding that Conestoga, as a “secular, for-profit corporation,” lacks RFRA protection, the Third Circuit wrote as follows: “General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors.” 724 F.3d, at 385 (emphasis added). All of this is true—but quite beside the point. Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.
134 S. Ct. at 2768.
September 14, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (2)
Friday, September 12, 2014
In 2007, J. W. Verret (George Mason) and then Chief Justice Myron Steele authored an article entitled Delaware's Guidance: Ensuring Equity for the Modern Witenagemot, which discussed "some of the extrajudicial activities in which members of the Delaware judiciary engage to minimize the systemic indeterminacy resulting from the resolution of economic disputes by a court of equity."
One of these extrajudicial activities is authoring or co-authoring law review articles. In this post, I am not going to weigh in on whether Delaware judges should be authoring law review articles, but rather, I simply note that there are two recent law review articles and one recent book chapter by Delaware judges that warrant our attention.
John Maynard Keynes is said to have observed, "When the facts change, I change my mind. What do you do, sir?" In Delaware's Choice, Professor Subramanian argues that the facts underlying the constitutionality of Section 203 have changed. Assuming his facts are correct, and the Professor says that no one has challenged his account to date, then they have implications for more than Section 203. They potentially extend to Delaware's jurisprudence regarding a board's ability to maintain a stockholder rights plan, which becomes a preclusive defense if a bidder cannot wage a proxy contest for control of the target board with a realistic possibility of success. Professor Subramanian's facts may call for rethinking not only the constitutionality of Section 203, but also the extent of a board's ability to maintain a rights plan.
One important aspect of Citizens United has been overlooked: the tension between the conservative majority’s view of for-profit corporations, and the theory of for-profit corporations embraced by conservative thinkers. This article explores the tension between these conservative schools of thought and shows that Citizens United may unwittingly strengthen the arguments of conservative corporate theory’s principal rival.
Citizens United posits that stockholders of for-profit corporations can constrain corporate political spending and that corporations can legitimately engage in political spending. Conservative corporate theory is premised on the contrary assumptions that stockholders are poorly-positioned to monitor corporate managers for even their fidelity to a profit maximization principle, and that corporate managers have no legitimate ability to reconcile stockholders’ diverse political views. Because stockholders invest in for-profit corporations for financial gain, and not to express political or moral values, conservative corporate theory argues that corporate managers should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching. Conservative corporate theory’s recognition that corporations lack legitimacy in this area has been strengthened by market developments that Citizens United slighted: that most humans invest in the equity markets through mutual funds under section 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process.
Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.
One frequently cited distinction between alternative entities — such as limited liability companies and limited partnerships — and their corporate counterparts is the greater contractual freedom accorded alternative entities. Consistent with this vision, discussions of alternative entities tend to conjure up images of arms-length bargaining similar to what occurs between sophisticated parties negotiating a commercial agreement, such as a joint venture, with the parties successfully tailoring the contract to the unique features of their relationship.
As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound. Based on the cases we have decided and our reading of many other cases decided by our judicial colleagues, we do not discern evidence of arms-length bargaining between sponsors and investors in the governing instruments of alternative entities. Furthermore, it seems that when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps. A lack of standardization prevails in the alternative entity arena, imposing material transaction costs on investors with corresponding effects for the cost of capital borne by sponsors, without generating offsetting benefits. Because contractual drafting is a difficult task, it is also not clear that even alternative entity managers are always well served by situational deviations from predictable defaults.
In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities. In this chapter, we propose a framework that would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations: (i) the elimination of double taxation at the entity level and (ii) the ability to contract out of the corporate opportunity doctrine. For managers, this framework would provide more predictable rules of governance and a more reliable roadmap to fulfilling their duties in conflict-of-interest situations. The result arguably would be both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors.
Monday, September 1, 2014
On Friday, Bill Haslam, the Governor of the State of Tennessee, spoke at a session sponsored by the C. Warren Neel Corporate Governance Center on The University of Tennessee's Knoxville campus. He is our former city mayor and a hometown favorite for many. I always enjoy his talks.
His talk on Friday focused on how Tennessee is attracting businesses and jobs and how education--including higher education--plays a role. But before he honed in on that topic, he asked an intriguing, albeit basic, question that operates on theoretical, political, and practical planes. That question: How is government similar to and different from private enterprise? He wanted audience participation. I waited to see how everyone would react. He got lots of good answers that cut across economics, management, finance, and governance.
Provocatively (at least for me), he characterized his gubernatorial role as akin to the role of a chief executive officer in a corporation. He has served as a corporate manager (president of his family's firm and the CEO of a division of another firm), and his vision of the state gubernatorial role is clearly framed by that experience. He actually called the legislature his "board of directors" in his role as governor.
Well, after that analogy, I just had to contribute to the discussion with a comment. I endorsed the governor's view of his position, but I also noted that the executive, as the head of a separate branch of a government of three branches, has power independent of the power afforded to the legislature. That is when things got interesting, at least for me.