January 07, 2012
Slightly Delayed "Live-Blogging" From the AALS
Over at the Glom, Gordon Smith recounts some of the discussion from the recent Business Associations Section meeting at the AALS Annual Meeting this past Thursday. Like Gordon, I was particularly struck by the remarks of Delaware Chancery Court Vice Chancellor J. Travis Laster on the issue of Say-on-Pay. Here is some of Gordon's summary (you can find his entire post here):
[I]s there room for a Delaware claim on executive compensation in the wake of Say on Pay? Teasing the assembled law professors, Vice Chancellor Laster suggested that the Delaware courts could decide to review pay decisions with a form of enhanced scrutiny (because that standard of review applies to situations involving structural bias), but he rightly observed that such a move would be comparable to Smith v. Van Gorkom in 1985…. The more likely path to a claim is one already being pursued by a number of plaintiffs lawyers, namely, going after a board of directors for waste of the corporate assets…. If you couple such a claim with a bad vote on Say on Pay, you might have something.
One of the other things that struck me from Vice Chancellor Laster's remarks was his statement (according to my notes) that the Delaware judiciary is very aware of the "Zeitgeist." This means that while subjecting compensation decisions to enhanced scrutiny may constitute a "thermonuclear explosion" in corporate law, Delaware may nonetheless get there if the threat of further federalization of corporate law in this area becomes great enough.
For those of you not familiar with Vice Chancellor Laster, here is a short video wherein he mentions that his preferred theory of the corporation is "utilitarian":
January 04, 2012
The First Amendment Versus Corporate Law
The headline reads: Montana High Court Says 'Citizens United' Does Not Apply In Big Sky State. I have not had a chance to read the entire 80-page decision, but I did want to share some thoughts that struck me when I read the headline--acknowledging that they may not be relevant to the particular dispute itself.
I have written here and here about my belief that Citizens United is more about corporate theory than the espoused First Amendment rights of listeners. If nothing else, even if one gives great weight to the rights of listeners it seems difficult (if not impossible) to decide whether corporations fit within the narrow class of cases allowing for identity-based restrictions under the First Amendment without resolving the fervent corporate theory debate the majority and dissent in Citizens United engage in (all while claiming corporate theory is irrelevant). In trying to unravel the mystery of this apparent inconsistency, I have noted that one explanation is the problems created by admitting corporate theory is dispositive--one of which is that this acknowledgement raises the very serious specter of these questions being more about state corporate law than First Amendment rights. To that end, this quote from the [reluctant] dissent in the Montana case seems relevant: "Corporations are artificial creatures of law. As such, they should enjoy only those powers—not constitutional rights, but legislatively-conferred powers—that are concomitant with their legitimate function, that being limited liability investment vehicles for business."
January 03, 2012
A Ribstein Legacy: Politics, Scholarship, and the Value of Discourse
Last month, there was something of a squabble with Professors Ribstein, Romano, and Bainbridge on one side and Professor Coffee on the other. The squabble highlighted some differences in views among some of the truly elite business law scholars -- mostly about the value of securities regulation and how Professor Coffee characterized the views of the others -- which I found interesting because I agree with all of them about some significant portion of business law. The squabble had scholarly, as well as political, overtones. A summary of the difference of opinion is here and the conclusion is here and here.
The passing of Larry Ribstein has caused me to reflect on what his scholarship meant to me as a developing business law professor. I agree with most of Ribstein's writing about LLCs and corporate obligations, and this agreement represents an evolution in my way of thinking about entity governance and operations. What is particularly appealing to me about this is that, from his blog posts, I get that sense that Professor Ribstein and I were not necessarily on the same page politically. Nonetheless, even when I disagreed with what seemed to be the motivations for his thinking, I usually thought his analysis was right.
His writing on LLCs and "uncorporations" had a particularly profound impact on how I view business entities because he helped (and perhaps caused) me to think about the value in multiple options among enitities. He explained how the LLCs and corporations are different in their respective histories and how those histories should inform the law's view of each entity. In his book, Rise of the Uncorporation he explains, at page 6:
Uncorporations are characterized by their reliance on contracts. This is an aspect of uncorporations’ partnership heritage, as partnerships are contracts among the owners. . . . In contrast, corporate law is mainly couched in mandatory terms. . . . [T]he corporation’s special regulatory nature emerged from its historical roots. The corporation initially was a vehicle for government enterprises, monopolies, or franchises.
See more of his thoughts on this here. It was, in part, Professor Ribstein's writings that spurred me to write the short piece, LLCs and Corporations: A Fork in the Road in Delaware? (Harvard Business Law Review Online).
As I think about it, through their books, articles, and blogging, Professors Ribstein and Bainbridge have probably had more of an influence on my views of corporations and LLCs than anyone, even though I tend to disagree on any number of political issues. I suspect part of it is that I like to be engaged by people with different views, and I want them to have the chance to change my view. If I'm not questioning my rationale, I'm not learning. Changing my mind doesn't happen that often, but it does happen. In turn, I hope to be given the same opportunity to influence others from time to time.
This is just one more small reason, among many large ones, why Larry Ribstein will be missed.
December 29, 2011
15% Contingency Fee Award Spurs Discussion
The Wall Street Journal Law Blog discusses the $300 million plaintiffs’ attorneys’ fees awarded by a Delaware court in the Southern Peru Copper Corporation Shareholder Derivative Litigation here. (Our own Josh Fershee previously commented on the merits of this case here.) Stephen Bainbridge noted a few days ago that “there are a lot of folks in Delaware who are happily expecting this decision to encourage plaintiffs to come back to Delaware.” He quotes Jonathan Macey and Geoffrey Miller as explaining that “in Delaware well-intentioned judges can be expected to devise legal rules requiring that Delaware lawyers be consulted when important decisions are to be made. Moreover, if Delaware judges believe that the state judicial system well serves Delaware corporations, they will be more likely to approve rules that stimulate litigation in the Delaware courts.” But the Macey and Miller quote that caught my attention was this one: “The members of the Delaware Supreme Court are drawn predominantly from firms that represent corporations registered in Delaware.” Just for the fun of it I decided to search for this quote in other law reviews on Westlaw. Here’s what I found:
1. The inability of any province to fashion a provincial jurisprudence is also a function of the manner in which judges are appointed. In Delaware, as in other states, judges are state appointees. This ensures that the state can choose judges who will be sympathetic to corporate managers. As Macey & Miller (1986, p. 502) observe, “[t]he members of the Delaware Supreme Court are drawn predominantly from firms that represent corporations registered in Delaware. The bar and the judiciary are tied together through an intricate web of personal and professional contacts.” As a result, Delaware “judges are specialized in resolving corporate law disputes and as a consequence, the state can offer firms access to a system of corporate law rules that is stable, predictable and sophisticated relative to that of other states” (Macey & Miller, 1986, p. 500). Moreover, because judicial appointments are a state matter, the state can decline to renew the appointment of a judge who does not decide cases in a manner suitably sympathetic to corporate concerns. Douglas J. Cumming & Jeffrey G. MacIntosh, The Role of Interjurisdictional Competition in Shaping Canadian Corporate Law, 20 Int'l Rev. L. & Econ. 141, 157 (2000).
2. Although judges obviously are more isolated from interest group influences than legislators, Delaware's justices are likely to reflect the interests of the corporate bar. The most obvious source of sympathy is the judicial selection process. As described earlier, the Delaware bar plays a central role in selecting justices, and it can be expected to recommend individuals who have a natural affinity to the corporate bar. This natural inclination is amply borne out by even a cursory look at who is ordinarily selected to sit on the supreme court. Nearly all of the justices, both currently and as a historical matter, were members of the Delaware bar before donning judicial robes. David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 Va. L. Rev. 127, 158 (1997) (quoting Macey & Miller in accompanying footnote).
Not exactly ringing endorsements of objectivity.
December 26, 2011
The Ribstein Model
The passing of Larry Ribstein caught everyone off guard, and I'm not sure I have much to add. Nonetheless, the sense of loss I feel in his learning of his passing compels me to write something. So here it is:
Even without meeting him, Professor Ribstein taught me how I can be a better scholar. If he had something to say, he wrote an article or a blog post about it (usually both, it appears). He wrote with others, assisted countless more in their efforts, and still found time to seek out new opportunities. And he worked to ensure that his efforts were understood in context, not just cited.
Earlier this year, Professor Ribstein wrote an amicus brief in Roni v. Afra, a New York case regarding fiduciary duties in LLCs. In the brief he responded to criticisms that he was an "extremist." He wrote:
Instead of citing cases and authorities relevant to my arguments, including my distinction between LLCs and corporations, Respondents attack my reputation by falsely labeling me as an extremist (p. 26 n.25). My national reputation discussed above should amply refute this characterization. In any event Respondents' culling of thousands of blog posts and hundreds of articles produces three pieces of evidence that are not only irrelevant to the issues in this case but do not support Respondents' characterization of my positions. One cited post takes a position on market efficiency supported by mainstream finance experts, another aligns with the position of a majority of the U.S Supreme Court, and the only article cited is completely mischaracterized in a way that suggests that Appellant was misled by its ironic title and did not actually read it.
I did not know Professor Ribstein, but I loved reading his work in books, articles, and blogs. He was deliberate, careful, and specific, and he said what he thought. This amicus brief was no different. He analyzed the issues, explained his reasoning, and confronted what needed to be confronted. He wasn't afraid to say when he disagreed, but he didn't look for more conflict than was necessary. He understood the difference between argument and arguing.
The loss of his scholarly impact pales in comparison to the loss his friends and family are experiencing, and I share my deepest condolences. By all accounts I have seen, his was a life well-lived, scholarly and personally, and not necessarily in that order. He will be missed, and I'm glad to have been a contemporary, even if it was not for long enough.
December 25, 2011
The Inspiring Kindness of Larry Ribstein
If you haven't heard, Larry Ribstein passed away unexpectedly yesterday. The outpouring of condolences reflects his immense stature in the academy. As a relatively young scholar with overlapping interests, my own interactions with him were limited but nonetheless significant to me. What I remember most is that he never allowed whatever ideological differences we may have had to stop him from taking the time to respond to my queries. In fact, he even thanked me in one of his recent papers, and I can only attribute that to pure kindness--a little pat of encouragement--because I seriously doubt I could have added much of anything to his writing in light of his expertise and the brilliant scholars he clearly had close relationships with. Thus, while there is obviously much in terms of scholarship that Larry is worth remembering for, what I will primarily remember him for is his inspiring kindness.
PS--I think it is worth adding here, particularly in light of the recent civility tiff, that this willingness to spend time helping a young scholar regardless of ideology is something that I have witnessed emanating from a number of respected scholars throughout the academy (Stephen Bainbridge, in particular, comes to mind--but there are numerous others), and it is something that makes me feel very hopeful about our profession, and very grateful and proud to be a part of it.
December 24, 2011
Davidoff on "how globalization increasingly allows companies to avoid United States taxes and regulation."
Over at DealBook, Steven Davidoff has posted "The Benefits of Incorporating Abroad in an Age of Globalization." Davidoff uses Michael Kors Holdings as a case study demonstrating how companies are incentized to incorporate abroad in order to take advantage of tax savings, decreased regulatory burdens, and a decreased threat of shareholder litigation. He notes further that this is not an isolated case, as "[p]rivate equity firms have been buying American companies with significant foreign operations and reorganizing them as foreign corporations." To the extent that this creates problems for the U.S., he suggests that "[p]erhaps it is time for the United States to adopt a tax system more in line with the rest of the world." What I found more interesting, however, was his suggestion that "American investors may be investing in Kors and other companies incorporated outside the United States without appreciating that they are not subject to the same United States laws that other publicly traded companies are." This seems to me to be the crux of the debate about whether corporate regulation generally follows a race to the bottom or the top. The greater the likelihood that signifcant portions of the investing community do not properly value the jurisdiction of incorporation, the greater the likelihood that the race is to the bottom rather than the top.
December 24, 2011 in Corporate Governance, Current Affairs, Government and Business, International Business, Investing, Mergers & Acquisitions, Musings, Politics, Securities Markets, Securities Regulation | Permalink | Comments (0)
December 22, 2011
Sticks and stones may break my bones ....
In case you've missed the name-calling drama playing out in the legal scholar blogosphere, here's a recap:
1. Stephen Bainbridge takes issue with John Coffee calling him (and Larry Ribstein & Roberta Romano) names (here).
2. My first reaction to this was that it was somewhat of an odd response, given how many times Bainbridge has seen fit to call people idiots and other names on his blog. Matt Bodie beat me to the punch, however, here.
3. Bainbridge responds by claiming it's okay to call people names in blog posts (here).
Personally, I'm unclear as to how a lack of civility is ever really defensible. Bainbridge quotes Brian Leiter as saying (here):
Some philosophers with Kantian intuitions think that civility is always a general requirement of respect for persons, an intuition that I do not share, and for which I can not think of any compelling arguments, and many objectionable counter-examples, like those in the text: treating Nazis in Weimar with civility seems to me a moral failing on the part of their opponents, not a requirement of respect. Such a demanding conception of civility would also be incompatible with derisive polemics (think H.L. Mencken), which often play an important role in political and social life.
My answer is simply that the moral failing in the Weimar case would be to not hold the Nazis accountable. Using their behavior as an excuse to act in an uncivilized manner yourself strikes me as simply another form of moral failing. And saying that derisive polemics have worked in the past is not the same thing as saying that they represent the best way to get things done. That's sort of like saying we shouldn't strive to keep our anger in check because it can sometimes serve as a proxy for clarity.
We are currently struggling as a nation with competing ideologies that sometimes make it seem like we might be stuck in standoff mode for much longer than is good for anyone. A lack of civility has been blamed for inflaming this standoff, and I believe we have a responsibility as law professors to not place our stamp of approval on that type of behavior--in our scholarship or our blogging. Of course, even those of us who agree with this ideal will frequently fall short (particularly in blog posts and during live presentations) because we are ultimately all human and therefore, I believe, all greatly flawed by definition. Nonetheless, I believe civility is a goal worth striving for in all our affairs.
ADDENDUM (12/22): In re-reading my post, I realized that I left out what I hope would be obvious but may nonetheless be better stated affirmatively: If sacrificing civility could be shown to be somehow necessary in order to stop the Nazis, then I agree it would be a moral failing to cling to civility. However, I consider this to be a false dichotomy and believe that it is possible to effectively oppose evil without sacrificing civilized behavior. Obviously, much of this turns on one's definition of civilized behavior. However, I think it is fair to say that one need not spit on someone or insult them in order to, for example, justifiably lock them up or even kill them in self-defense. I realize I've now drifted far afield of the issue regarding civility in scholarship versus blogging, but re-reading my post just left such a bad taste in my mouth that I felt compelled to clear up any confusion I may have created. I also acknowledge that I may yet be convinced that there are indeed situations where a choice must be made between civility and justice, but I'll leave that for another day.
December 17, 2011
More Citigroup Settlement Musings
I'm continuing my email interview with a journalist regarding Judge Rakoff's Citigroup settlement decision (see my prior post on this here), and among other things I was asked whether I was surprised by the SEC's decision to appeal the ruling. Here is part of my response:
I was not surprised by the appeal, but it does set up an interesting conflict. On the one hand, the SEC is likely correct that requiring an admission of facts in order for a settlement to be approved in these types of cases is unprecedented. On the other hand, Judge Rakoff seems to be stating an obvious truth when he asserts that he cannot carry out his duty of determining whether the settlement is "fair, reasonable, adequate, and in the public interest" without some facts upon which to render this decision. I think the following quote from Judge Rakoff's opinion is right on point:
"Here, the S.E.C.'s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact…. The S.E.C., by contrast, took the position that, because Citigroup did not expressly deny the allegations, the Court, and the public, somehow knew the truth of the allegations. This is wrong as a matter of law and unpersuasive as a matter of fact."
I think the Second Circuit will feel a great deal of pressure to overturn Judge Rakoff's decision, but it will be interesting to see how it resolves this issue if in fact it does reverse.
12/18 UPDATE: Prof. Bainbridge is surprised by the appeal.
December 16, 2011
A Note to the SEC: Don't Just Take Some Case and Hope
On Dec. 14, 2011, a reporter for ProPublica, Jesse Eisenger, wrote the following article for New York Times Dealbook: In Hunt for Securities Fraud, a Timid S.E.C. Misses the Big Game. In it, he argues:
Does the Securities and Exchange Commission suffer from trialphobia?
Ever since Judge Jed S. Rakoff rejected the S.E.C.’s settlement with Citigroup over a malignant mortgage securities deal, the agency has been defending its policy to settle securities fraud cases. But the public wants a “Law & Order” moment, and who can blame them?
. . . .
But so far, there’s been no civil trial in a major case directly related to the biggest economic fiasco of our time: the financial crisis.
Two days later, the Dealbook, from authors Azam Ahmed and Ben Protess, provides this: S.E.C. Sues 6 Former Top Fannie and Freddie Executives, which reports that the SEC seems to have answered Mr. Eisenger's call:
The Securities and Exchange Commission has brought civil actions against six former top executives at the mortgage giants Fannie Mae and Freddie Mac, saying that the executives did not adequately disclose their firms’ exposure to risky mortgages in the run-up to the financial crisis.
The case is one of the most significant federal actions taken against top executives at the center of the housing bust and ensuing financial crisis.
Obviously, this case would have been in works long before last Wednesday, so the timing is something of a coincidence, and it's not as though Mr. Eisenger is the first person to question where the SEC is on this. But I sure hope that this case is proceeding because the SEC thinks it's proper to move forward, and not because they think they need to bring a case, any case, forward.
I bristle at the idea that an agency, law enforcement or regulatory, would purse a case simply because "the public wants a 'Law & Order' moment." I know, of course, that many prosecutors seek cases primarily to raise their profile and send a message, but that doesn't mean it's right. I undertand what he's saying, but I don't care for Mr. Eisenger's recommended use of authority. He explains:
To overcome its greatest fear, the S.E.C needs to realize that it can win even if it loses. A trial against a big bank could be helpful regardless of the outcome. It would generate public interest. It would put a face on complex transactions that often are known only by abbreviations or acronyms. Litigation would cost the bank money, too. And it could cast the way Wall Street does business in such an unflattering light that even if the bank won, it might bring about better behavior.
A trial would show boldness. And when the S.E.C. found itself at the negotiating table again, it would feel a new respect.
You don't earn respect by being a bully, by making people jump through hoops, or by making them expend resources just because you can. You may earn fear and you will almost certainly earn disdain, but that's not the same thing.
I agree that the SEC shouldn't seek only cases it can win or settle. In fact, I think a lot of relatively "little guys" are getting forced into SEC fines and settlements right now, not because they necessarily did something wrong, but because they can't afford the fight. The SEC gets to report the settlements, which go down as wins over "corruption and fraud."
And I think there may be value in pursuing some of the big guys for fraud because some of them probably committed fraud. But you need to facts before you go hauling people into court. I'm all for pursuing fraud vigorously, but I'm not willing to let any regulator decide to mess with people's lives just because the public thinks someone needs to pay. Law enforcement and regulation only work if the right people pay for the wrongs they committed. So, SEC, don't just take some case and hope for it. Put together the right case, and then go for it.
December 12, 2011
A Reason People Hate Corporate Lawyers or Why the Packers Should Be an LLC
On Friday, I asked whether the sale of Green Bay Packers stock should be considered a security. A few people asked whether I really think the Packers stock could be a security. The answer, under Wisconsin law, is almost certainly no, especially given that that Green Bay Packers, Inc., "is organized as a Wisconsin nonprofit stock corporation." And that's probably the case for almost any other state, too, and under federal law.
But just because the outcome is pretty clear, it doesn't mean that there aren't policy implications that are worth thinking about. I think the biggest one is this: lawyers and business people should say what they mean. Mixing marketing and corporate law is not always a good idea. I find it more than a little silly that the cover of the Packers offering documents says:
Green Bay Packers, Inc.
Common Stock Offering Document
COMMON STOCK DOES NOT CONSTITUTE AN INVESTMENT IN “STOCK” IN THE COMMON SENSE OF THE TERM. PURCHASERS SHOULD NOT PURCHASE COMMON STOCK WITH THE PURPOSE OF MAKING A PROFIT.
So, you see, the word stock without quotes is different than stock with quotes. In my view, you shouldn't call something stock if it's not stock, even if you can under securities laws. There's no doubt that the Landreth court, interpreting Forman, said that stock is not a security just because the company said it issued stock:
[I]n Forman we eschewed a "literal" approach that would invoke the [Securities] Acts' coverage simply because the instrument carried the label "stock." Forman does not, however, eliminate the Court's ability to hold that an instrument is covered when its characteristics bear out the label.
Now, before these cases, one could argue that something labeled "stock" is always a security, as per § 2(1) of the 1933 Act:
"The term `security' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, . . . investment contract, voting-trust certificate,. . . or, in general, any interest or instrument commonly known as a `security.' " 15 U. S. C. § 77b(1).
In Landreth, the court cited Louis Loss, Fundamentals of Securities Regulation 211-212 (1983), providing the following excerpt:
It is one thing to say that the typical cooperative apartment dweller has bought a home, not a security; or that not every installment purchase `note' is a security; or that a person who charges a restaurant meal by signing his credit card slip is not selling a security even though his signature is an `evidence of indebtedness.' But stock (except for the residential wrinkle) is so quintessentially a security as to foreclose further analysis."
And, in fact, before Landreth, SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943) indicated that notes or bonds could possibly be deemed securities "by proving [only] the document itself." The Forman court said that interpretation was dictum as to stock, and the Landreth confirmed that was not true for stock (leaving that question as to notes and bonds "until another day"). Thus, the Supreme Court said, we must look to the economic realities to determine whether stock is a security.
Which bring me back to this: If the Packers are really just selling a $250 (plus handling) certificate (suitable for framing), they shouldn't call it stock. And they shouldn't start their offering letter: "Dear Future Owner of the World Champion Green Bay Packers." It should say: "Dear Future Owner of a Certificate saying 'World Champion Green Bay Packers.'"
In my view, the Packers are using the sense of ownership to secure investors and people who have a connection with the team. I think that's fine; I actually rather like the idea. But I don't like the idea that they can use the term stock, the sense of ownership, provide voting rights and the opportunity to attend Annual Meetings, restrict gifting or sales, and then disclaim that what they are selling is a security simply because the primary upside is that past purchases helped "ensure the team survived and remained in Green Bay" and the new purchases will fund an "expansion [that] has been designed to keep the crowd noise in the stadium and maximize our home-field advantage."
So, I admit my argument is largely academic (a luxury I have), but I do think there is value in not allowing people to muddy the waters. Suppose, for the sake of argument, the Packers committed a massive fraud and used the money to invest in Greek debt. The debt tanks, the Packers can't have a stadium upgrade, and the home field advantage begins to fade. The team suffers, and shareholders sue under 10b-5. The court says, nope, you didn't buy a security because you only had voting rights, without ecomomic rights. The court would probably be right under Landreth (notice my continuing, apparently unavoidable, hedge). And it would be reasonable under the actual terms of the offering document, if you read it. But it would still make a bunch of lawyers and judges look like jerks.
To me, this would all be better done as an LLC, with a granting of an owership unit clearly defining the terms. Then it's plainly (or should be) contractual, and it's not stock, and we have very little problem with confusion with traditional stock or other securities. Frankly, isn't that confusion the main reason the Packers are calling it stock? I think so. This is just one more reason we should start respecting and using the LLC for creative entities, and leave the off-the-rack stuff for corporations.
[Update: Professor Bainbridge wanted an answer to the real question of whether Packers stock is a security. My answer is that I don't think a federal court would find this to be a security, especially with the appropriate disclaimers that have been made. But I reserve my right to think they should. In the interest of full disclosure, I am a life-long Lions fan.]
December 06, 2011
From Street Activism to Shareholder Activism
The Occupy protests over the last few months have gotten me thinking about methodology lately. Suppose someone has a criticism, legitimate or not, against a corporation. (At this point, I don’t mean to challenge the rationales behind the protests.) Certainly, there are some practical advantages to drawing up a sign and simply camping. Anyone can do it: it imposes minimal effort costs on the participant and minimal political costs in that two participants can agree to disagree while together contributing to and benefitting from the overall effect of a mass movement (e.g., public visibility, occupying enough physical space to impede infrastructure). And acting in a cohesive group provides morale benefits in the form of camaraderie and social reinforcement. But what is puzzling is not so much the strategies in the arsenal as much as the one strategy palpably missing from it. Why haven’t more protesters turned to shareholder activism?
Take, for example, the use of SEC Rule 14a-8 (shareholder proposals). Though limited to 500 words and one submission per year, these proposals enable relatively small-time investors to campaign in annual meetings and distribute literature to all the stakeholders, on the company’s dime, about issues “significantly related” to a company’s business. And members of the 99% can participate even if they do not have the investment capital of a pension plan or a social-responsibility fund: at the relatively low price of $2,000.
If the purpose of protest is to bring the message to a forum where it will be heard by the decisionmakers, this method potentially generates a lot of bang for one’s buck. If the purpose is to gain bargaining power, a lawsuit after a no-action letter will create more headaches for a company than physical occupation of property. If the purpose is to gain media attention for one’s demands, this method provides an additional means of attracting such attention and specifically using it to apply public relations pressure against a targeted corporation, when coupled with a visible movement.
Granted, requests to circulate shareholder proposals in proxy statements often, in themselves, entail a legal battle, and proposals are rarely successful when put to a vote. Although Rule 14a-8 no longer expressly prohibits social or political proposals, it would take some careful thought to frame the proposal in such a way to convince the SEC that the proposal isn’t about a pet cause and that it has some relevance to the business of the company, without crossing the line into becoming a management function. And some topics would be more suitable as proposal subject matter than others. (For example, resolutions calling for corporate transparency, investigations into the benefits of certain compensation structures, or recommendations on the desirability of certain company policies might have greater success than standalone proposals exhorting the corporation to embrace certain moral principles.) But even if a proposal loses at the lawsuit stage or garners only a small percentage of the votes, the point, for protestors, isn’t necessarily to win, but to acquire a loudspeaker and a bargaining chip. Cf. D.A. Jeremy Telman, Is the Quest for Corporate Responsibility a Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd., 44 Akron L. Rev. 479 (2011), http://www.uakron.edu/dotAsset/1849639.pdf. That article gives an interesting account of aftereffects that favor the activist shareholder, even if the proposal never reaches a vote or the vote fails, including the fact that, often, proposals are withdrawn as moot because the company adopts them sans vote. (Another interesting example of well-organized shareholder activism: http://www.csjsl.org/news/nuns-who-wont-stop-nudging-shareholder-activism.php.)
To be clear, I am not saying that shareholder meetings are hotbeds of democratic process and dialogue. Most shareholders are passive, most professionally managed funds won’t poll their constituents about their preferences, and most institutional investors have a fiduciary duty to their members to focus narrowly on profit maximization, even if incidentally a majority of their members, if asked, would rather not invest in certain weapon production or oil exploration in a politically unstable country. But at least some differences of opinion between management and an activist investor may come from information asymmetry: some suggestions are desirable to both, but the management does not know to pursue it until someone speaks up. Or, even if the management is only thinking of cold hard profit, the undesirability of a highly publicized campaign airing out the company’s dirty laundry may persuade it to make concessions and to correctly value the reputational risk of not compromising with some of the more reasonable, socially favored demands.
And though a proposal loses, it may confer other benefits too. For example, if uniform demands are made to several major companies in an industry regarding executive compensation, it may create a norm (if enough companies pledge to meet the demands) or articulate a standard (even if the demands are not met). Just as marketers use product differentiation to educate consumers about the differences between Company A and B, communicating expectations has inherent value in creating a tangible point of differentiation. (For example, I might not know to buy a car with a certain airbag configuration as opposed to another, but if someone simplifies the analysis and tells me that expensive Car A meets 2012 safety standards while cheap Car B does not, I will buy Car A over B.) Reputational risk increases when norms are clearly communicated.
Certainly, such a world would come with costs. A well-executed campaign and lawsuit would require a company to respond by redirecting profits into counterattacking, and critics may observe that a relatively small but active stakeholder may exercise undue influence over a company, at the expense of the passive majority of stakeholders that have no agenda other than profit. It’s possible that an ill-advised but popular idea might pressure a board into following a bad course of action. Decisionmakers will still have to weigh the costs, benefits, and risks of alternatives, even though a successful campaign may cause it to rethink the weight it gives to principles it undervalued before, or the company’s long-term relationships with employees, consumers, and communities. A protestor, similarly, may have to come to terms with the fact that many investors, even those not part of the 1%, do not share his views. But protestor participation as shareholders may create a better forum for dialogue between the two sides.
And there are obstacles. The average protestor knows more about political activism than shareholder activism, whether navigating Rule 14a-8 or engaging a proxy services firm. And some protestors may find participation in the capital market, itself, distasteful. (After all, one is contributing to the demand for a particular company’s stock, not because the company is worthy of approval, but simply because the company is influential.) In order to have any impact, this brand of activism may require some like-minded protestors to agree on certain modest priorities, to pool resources, and to coordinate closely with a larger campaign designed to amplify the private dialogue between shareholder and management into a public one.
But whether because of distrust in the market system itself or lack of leadership, expertise, and consensus, it does not appear that protestors are supplementing their methods with any serious attempts at shareholder activism. Using the power of numbers, Occupy protestors have garnered media attention, sparked public dialogue, and even shut down facilities. But, despite symbolically occupying ground near financial institutions and centers of commerce, there does not appear to be much dialogue with (or pressure against) the perceived adversary---the corporations themselves, and the people who run or own them.
Cohen on Academic Writing
Glenn Cohen has an interesting post over at PrawsBlawg on the writing process. I especially like this piece of advice:
Many flock to legal academia away from a more rigid job in the legal world, but there is something to be said for rigidity and not waiting for the muse to whisper in your ear. I try to treat legal writing as a job, come in at 9, leave at 5 on most days and work consistently throughout. This helps me be both productive and sane, but perhaps I am an aardvark in this respect.
I often talk to productive scholars about what makes them productive, and they almost invariable say that treating writing like a job is the key to their success.
-- Eric C. Chaffee
December 03, 2011
Judge Rakoff and the Citigroup Settlement Rejection
A journalist asked me some questions via email regarding Judge Rakoff's rejection of the Citigroup settlement. (DealBook has the opinion, as well as an overview, here.) Here are a couple of my responses:
I believe Judge Rakoff’s obvious frustration with the SEC practice of routinely entering into these sorts of agreements where the other side neither admits nor denies any wrongdoing is part of a growing trend. One might even go so far as to see a connection to the Occupy Movement, which at least in part seems to be protesting a perceived “crony capitalism” wherein government regulates big business by way of wink-and-nod processes that leave both sides happy and the average citizen worse off. (I’m not alone in making this connection. Jonathan Macey had this to say at Politico (HT: Bainbridge): “The victory that Rakoff gave to the Occupy Wall Street movement Monday came from the federal courthouse — not far from Zucotti Park, the lower Manhattan headquarters of OWS.”; “Adopting the language of the Occupy Wall Street movement, Rakoff ruled that if judges do not have enough information on which to base their decisions, then the deployment of judicial power ‘serves no lawful or moral purpose and is simply an engine of oppression.’”)
I am somewhat ambivalent about the decision. On the one hand, I recognize that there are good reasons for entering into these types of settlements. Defendants like Citigroup have strong incentives to settle without admitting any wrongdoing in order to avoid those admissions being used against them in later private proceedings. Meanwhile, the SEC has strong incentives to settle because of the costs and risks inherent in litigation. On the other hand, while the agreements appear to make sense for the SEC and the defendants, it is much less clear whether they make sense for shareholders and the public. The SEC suggests that there would be much less money available to return to investors if its power to enter into these sorts of agreements were to be curtailed. One may question, however, whether the routine use of these agreements does not in some way foster more injury to investors and the public in the long run, since there is at least some message being sent to the alleged wrongdoers in these cases that they will avoid any meaningful personal penalty for similar conduct in the future. One particular issue that I think needs to be examined more closely is the public’s perception of these settlements. I have heard the SEC defend its practices in these cases by saying they support investor confidence. I’m not so sure about that, and if the SEC is making decisions based at least in part on that presumption it is something that should be empirically tested. Personally, I think the public has grown more and more suspicious of these deals—so I find that particular justification to carry little weight, if it doesn’t in fact cut the other way.
December 02, 2011
The Rise of Small Firms
In an article posted on Monday, Debra Cassens Weiss of the ABA Journal reports that an increasing number of associates at big firms are leaving their jobs to start their own practices. This article evidence at least two things. First, the need for practical skills training is increasing even at the upper eschelons of the legal academy. Second, all law schools should be offering at least one course in law practice management. Put another way, law schools need to be preparing graduates to "hit the ground running" at the beginning of their careers.
-- Eric C. Chaffee
December 01, 2011
Proposed Facebook Settlement
A copy of the Federal Trade Commission's proposed settlement with Facebook, Inc. can be found here. Under the terms of the agreement, Facebook is required to refrain from misrepresenting its privacy practices, to notify users when their data is disclosed to third parties, to increase security of user information, and to implement a privacy program. I'm guessing that George Orwell never thought that Big Brother would be a twenty-something college dropout. The news coverage of the settlement does evidence the metoric rise of Facebook and social networking in general.
--Eric C. Chaffee
It's a Wonderful Life--But Not a Very Realistic One
It's holiday season, and time once again to watch one of my all-time favorite movies, It's a Wonderful Life. But, as much as I like the movie, I have to admit it's not very realistic. I'm not talking about the angel part; I mean the legal part.
The bank examiner discovers that George Bailey's building and loan is $6,000 short, and Mr. Potter swears out a warrant on George for bank fraud. But George's friends collect enough money to make up the shortfall, the warrant is torn up, the bank examiner is satisfied, and everyone lives happily ever after.
Seriously, in what alternative universe is bank fraud excused if one's friends are able to come up with enough money to replace what you lost? It may make good theater, but it's ridiculous white collar criminal law.
I love the film and watch it every year, but, with all due respect to Frank Capra and the film's writers: Bah! Humbug!
November 26, 2011
Pizza is a vegetable. Really?By now you've probably heard about Pizzagate--what some have described as: "Congress puts the food lobby above child nutrition." Here's Kermit's take (30-second ad up front):
November 24, 2011
Happy Thanksgiving to all our U.S. readers. May you and your loved ones have a wonderful holiday weekend.
Holidays like this remind us of what’s really important in life. Business law can wait until tomorrow (except for those practicing lawyers stuck with something that can’t wait until Friday, who have my sympathies).
November 20, 2011
I'm facing internet connectivity issues today. Rather than continue to try and craft my assigned Sunday post, which might result in my ultimately throwing my desktop out the window, I just thought I'd tell you all what the problem was. Somehow, I imagine everyone will be able to empathize in at least some way.