Wednesday, November 12, 2014

Freeze-Out Mergers in Delaware after Kahn v. M&F Worldwide

We are covering freeze out mergers in my corporations class this week, which is great fun (and I even think a few students would agree with me on this).  Thinking about these issues reminded me that I needed to get comfortable with a spring 2014 Delaware Supreme Court opinion in Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014), which applies the business judgment rule (rather than the entire fairness standard) to review these transactions if certain conditions are met.  The holding is summarized below: 

[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
Kahn at 645.
This case is a great end-of-semester recap on some important themes.  It reviews the role of special committees (something that students can have difficulty conceptualizing outside of the context of derivative suits where they first learn them) as well as summarizes and applies the independence analysis of directors.
To show that a director is not independent, a plaintiff must demonstrate that the director is beholden” to the controlling party or so under [the controller's] influence that [the director's] discretion would be sterilized.. . .The inquiry must be whether, applying a subjective standard, those ties were material, in the sense that the alleged ties could have affected the impartiality of the individual director.
Kahn at 648-649.

The opinion also recaps the duty of care, proxy statements, the cleansing votes of a majority of minority shareholders, as well as provides a useful (and detailed) discussion of arm's length transactions.  In describing the motivations behind deal protections and terms, the court sets up its analysis by analogy to a teenager. The court says that the dual protections considered in this case are good for shareholders, but that without the incentive of the business judgment rule, parties won't agree to them.  
Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the moves--i.e., complete one of the assignments--leaving her parents and siblings to endure her stressful last-minute scramble to finish the other Sunday night. 
This case will likely be added to casebooks, if it isn't already in your supplement.  For further reading, see Barnard Sharfman's case commentary, Kahn v. M&F Worldwide Corporation: A Small but Significant Step Forward in the War against Frivolous Shareholder Lawsuits, appearing in the Journal of Corporation Law.  In this commentary, Sharfman laments that
"Because entire fairness makes it almost impossible for defendants to get the case dismissed prior to trial,  it has made it extremely tempting for plaintiffs’ attorneys, in order to earn attorney’s fees, to automatically file a class action lawsuit in a freeze-out merger without regard to the merits."

The ruling in Kahn changes the defense landscape facilitating defendants' "ability to seek dismissal of the suit prior to trial, thereby 

reducing, at least in theory, the pressure on defendants to automatically seek a settlement even if the suit is without merit."


-Anne Tucker


November 12, 2014 | Permalink | Comments (0)

Tuesday, November 11, 2014

Better Teaching Idea: Try to Notice When the Wind Is at Your Back

About four years ago, despite decades of actively avoiding the idea, I started running. I am no Forrest Gump, but I run 3.5 miles on a reasonably regular basis– usually four or five times a week, sometimes more, and rarely less.   My primary running locations, North Dakota and then along the Monongahela River in West Virginia, are both quite windy.  The North Dakota winds so are significant, that they can mimic hills, which is what allowed cyclist Andy Hampsten to train for hills in “one of the flattest areas in the world.” 

I do a lot of out-and-back runs – out 1.75 miles and back along the same route.  During such runs, I often notice a similar phenomenon: I may not have any idea it’s windy if the wind is at my back when I start running.  When I get to my turnaround, though, I find a stiff wind in my face. This happens enough that I should probably figure out it is windy before I get to the turnaround, especially since it can lead to a faster pace on the way out, but I still rarely notice.  I just think I’m having a good pace day.

In contrast, it’s pretty hard to miss when the wind is in your face.  Everything feels hard. Everything feels sluggish and slow.  And it feels like, all of a sudden, you have barriers in your way. 

During these runs, it often makes me think about how many other places (in the figurative sense) this happens.  We all have our challenges, and we often have much to overcome.  But some have more challenges than others.  Because our individual challenges are real, it can be easy to miss that we may have fewer challenges than other people have.  

The things that are barriers to our goals are sometimes obvious to us. For example, as those in the current job hunt for a law professorship likely know, a lack of a top-14 law degree can be a significant limit on the number of options one might have entering the legal academy.  It certainly felt like a barrier to certain jobs when I was on the market, anyway. 

Because of that, it would be easy to discount other benefits I have because of who I am. I grew up in a safe neighborhood with good schools.  I am a white male, which means people have expectations for me that are different than others.  There is a level of presumed competence.  And, comparatively, presumed authority and ability.  If there's no more text visible, please click below to read the whole post. 

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November 11, 2014 in Ethics, Joshua P. Fershee, Law School, Teaching | Permalink | Comments (2)

Monday, November 10, 2014

Nightmare in Law Review Land . . . .

As some of you know, I have been a defender (although perhaps not a staunch one) of student-edited law reviews as a good learning experience for students.  I have worked with students in ways that I really have enjoyed over the years.  I also have had some lousy experiences.  But even I admit that between the overwhelmingly negative blog commentary  (to which I now add), including posts here and here by Steve Bradford here on the BLPB, and the experiences I relate here, I am having trouble sustaining my support for student-edited journals . . . .

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November 10, 2014 in C. Steven Bradford, Joan Heminway, Law School | Permalink | Comments (10)

Call for Crowdfunding Papers - Pisa, Italy - June 23-26, 2015

Received Saturday (edited slightly for publication here):

Dear Colleague,

Please consider submitting your work to the Track "Crowdfunding: a democratic way for financing innovative projects" @ the RnD Management Conference 2015.

The RnD Management Conference 2015 will be held in June 23-26 at Sant’Anna School of Advanced Studies in Pisa.

You can find more information on the Conference Track and on the submission process at the following link:

I warmly apologize for cross-posting.

Best regards,

Cristina Rossi Lamastra, PhD

Associate Professor at Politecnico di Milano School of Management

Phone: 0039 0223993972

Fax: 0039 0323992710

Skype: crossi73

Web page:[id]=52

November 10, 2014 in Call for Papers, Conferences, Corporate Finance, Entrepreneurship, Joan Heminway | Permalink | Comments (0)

Fighting the SEC: The Obus Case

What’s it like to fight the SEC? For 13 years? The defense attorneys in SEC v. Obus, an insider trading case that the SEC lost last spring, try to answer that question in the latest edition of The Review of Securities & Commodities Regulation. (SEC v. Obus: A Case Study on Taking the Government to Trial and Winning, 47 REV. SEC. & COMMOD. REG. 247 (Nov. 5, 2014). (If the case name is familiar to you, it’s probably because in 2012 the Second Circuit issued an important opinion in the case addressing the misappropriation theory of insider trading.)

The article provides a great insider’s view of the case, including suggestions for attorneys fighting SEC actions. The authors’  criticism of the procedures when Obus was required to testify under oath at the SEC is priceless. Obus was not told whether he was a target of the investigation. He was not allowed to review documents to refresh his recollection. His attorneys were not allowed to object to questions (although they apparently did anyway). They were told not to take notes and they were not allowed to review the transcript for errors. Home court advantage and all that, I guess.

If you don’t get the Review, it makes some of its articles available online here. The Obus article is not yet available (the latest article posted is from the October 15 issue), so you might want to check back later.

November 10, 2014 | Permalink | Comments (0)

Sunday, November 9, 2014

USC-Upstate, Southern Miss, and Truman State Positions

I have updated my list of legal studies professor openings with USC-Upstate, University of Southern Mississippi, and Truman State University. 

Details about those positions are available after the break.

Continue reading

November 9, 2014 in Business School, Haskell Murray, Jobs | Permalink | Comments (0)

ICYMI: Tweets From the Week (Nov. 9, 2014)

November 9, 2014 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 8, 2014

It's About Civil Procedure

On Tuesday, in my Financial Crisis seminar, we discussed the types of securities claims that have been filed by investors in mortgage-backed securities.  I opened by telling my students that one of the critical takeaway points is the importance of civil procedure.  The substance of the law matters, sure, but (as I posted when discussing class action standing), cases are won and lost on procedural grounds.

Case in point: Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, which was argued before the Supreme Court on Monday.  (Transcript here.)  Omnicare concerns the question of opinion-falsity in the context of claims under Section 11 of the Securities Act of 1933. 

Section 11 of the Securities Act imposes strict liability on issuers who include false statements of material fact in registration statements.  In a case called Virginia Bankshares, Inc. v. Sandberg, the Supreme Court held that even expressions of opinion may count as “material facts” for the purposes of the securities laws – such as, for example, a proxy statement that recommends a merger as “fair” to shareholders.  In Omnicare, the Supreme Court will decide what, exactly, it means for a statement of opinion to be false. Essentially, the dispute is about whether a statement of opinion is only false if it is subjectively disbelieved by the speaker (i.e., if the speaker claims a price is “fair” while secretly believing the price is not fair) or whether a statement of opinion can be false even if the speaker believes it to be true, but the opinion lacks a basis in fact (i.e., the speaker genuinely believes the price to be fair, but has not made any investigation into fairness and so the opinion lacks a factual basis).

Joan Heminway posted about the case here, and I also had a rundown on the issues here (where I argued, at the cert stage, that the issue was not yet ripe for Supreme Court consideration).

Monday's oral argument had a lot of back and forth about specific states of mind and various types of implied representations.  After all, when you issue an opinion in the context of a securities offering, isn’t there an implied factual representation that you have a basis for that opinion, that’s independent of the speaker’s state of mind?  On the other hand, if a statement does lack a factual basis, isn’t that strong evidence of subjective disbelief? 

And while all of these are interesting existential questions, the really important issue – and what oral argument touched upon – is pleading.

The question of opinion-falsity tends to come up in three different types of private claims under the securities laws.

First, it comes up in the context of Section 11, which imposes strict liability for false statements in registration statements. 

Second, it comes up in the context of Section 14, which imposes liability for false statements in proxy statements.  Most circuits have held that Section 14 liability is rooted in negligence.

Third, it comes up in the context of Section 10(b), which imposes liability for intentionally or recklessly false statements in connection with securities transactions.

Because Section 10(b) requires a showing of scienter, the issues in Omnicare are largely rendered moot for claims under that statute – the plaintiff will have to show intentional or reckless behavior anyway, so “subjective disbelief” gets folded into the scienter inquiry.

Where the “subjective disbelief” issue really makes a difference, therefore, is in the context of Section 11 and Section 14.

Section 14 claims are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act.  That statute requires that plaintiffs plead, with particularity, facts creating a “strong inference” that the defendant acted with the required state of mind.  Some courts have held that negligence is not a state of mind, so this provision does not apply; even if it is, it's often not a difficult one to plead, even under the PSLRA.

Section 11 claims are not subject to heightened pleading under the PSLRA – they are subject to ordinary standards under the Federal Rules.  Normally, because Section 11 is a strict liability statute, plaintiffs need only plead claims in accordance with Rule 8.  But most circuits agree that when a Section 11 claim “sounds in fraud” – when the plaintiffs seem to be claiming that defendants’ actions were intentional or reckless – then Section 11 claims will be subject to Rule 9(b) pleading standards.  And though there’s a circuit split on the issue, many courts would agree that Rule 9(b) also requires that plaintiffs plead facts giving rise to a “strong inference” of fraud.

If “subjective disbelief” is required to show opinion-falsity, courts are likely to treat that as the equivalent of fraudulent intent, and require heightened pleading for Section 11 and Section 14 claims.

Moreover, for securities claims, all discovery is stayed pending the resolution of a motion to dismiss.  That means that the plaintiffs must not only plead fraudulent intent in great detail, but they must also do so without discovery.

The upshot of all of this is that one of the most significant aspects of Omnicare isn't what it means for an opinion to be false, and it isn't the duties imposed on issuers of securities – it’s whether plaintiffs bringing claims under Section 11 and Section 14 are going to be subject to heightened pleading requirements.  This is especially true because the boundaries between what counts as “opinion” and what counts as “fact” are very fuzzy – a point that was made in oral argument.  After all, as I previously posted, the Second Circuit believes that even financial statements are only “opinions.”  If just about anything can be considered an opinion, a requirement that opinions be "subjectively disbelieved" will functionally raise the pleading standards for Section 11 and Section 14 claims across the board.

(Now, the Second Circuit also tried to stake out an odd middle ground, holding both that opinion statements must be “subjectively disbelieved” to be false, and that this “subjective disbelief” is something other than fraudulent intent.  That holding has caused much confusion in the district courts, and it’s difficult to imagine a similar holding coming out of the Omnicare case; and even if Omnicare dodges that point, if the Court holds that "subjective disbelief" is required, the Second Circuit's view is going to come under considerable pressure.)

In other words, the sleeper issue in this case isn't the substance of the law - it's procedure.

November 8, 2014 in Ann Lipton | Permalink | Comments (2)

Friday, November 7, 2014

A Few Law Listservs

 I subscribe to a few helpful law-related listservs:

All of these listservs provide useful information, through the helpful e-mails from the participants. Especially for those of us at business schools, where we do not have many legally trained colleagues, access to the collective wisdom of those on the listserv is invaluable. Occasionally, however, the listservs produce an avalanche of uninteresting e-mails. The LLC listserv allows the option of getting a single weekly digest of the discussion, which I prefer, though the Yahoo! formatting of the digest is unattractive and cumbersome.

What law-related listservs do you enjoy? Any thoughts on the best (free) platform for listservs?

November 7, 2014 in Business School, Haskell Murray, Law School, LLCs, Negotiation | Permalink | Comments (0)

Thursday, November 6, 2014

Why is Steve Bainbridge So Angry?

I have previously blogged about Institutional Shareholder Services’ policy survey and noted that a number of business groups, including the Chamber of Commerce, had significant concerns. In case you haven’t read Steve Bainbridge’s posts on the matter, he’s not a fan either. 

Calling the ISS consultation period “a decision in search of a process,” the Chamber released its comment letter to ISS last week, and it cited Bainbridge's comment letter liberally. Some quotable quotes from the Chamber include:

Under ISS’ revised policy, according to the Consultation, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.” Of course, there is no delineation of what these “other positive or negative aspects” may be, how they would be weighted, or how they would be applied. This leaves public companies as well as ISS’ clients at sea as to what prompted a determination that previously would have seen ISS oppose more of these proposals. This is a change that would, if enacted, fly in the face of explicit SEC Staff Guidance on the obligations to verify the accuracy and current nature of information utilized in formulating voting recommendations.

The proposed new policy—as yet undefined and undisclosed—is also lacking in any foundation of empirical support… Indeed, a number of studies confirm that there is no empirical support for or against the proposition ISS seems eager to adopt.

[Regarding equity plan scorecards] there is no clear indication on the part of ISS as to what weight it will assign to each category of assessment—cost of plan, plan features, and company grant practices…  this approach benefits ISS (and in particular its’ consulting operations), but does nothing to advance either corporate or shareholder interests or benefits. The Consultation also makes clear that, for all ISS’ purported interest in creating a more “nuanced” approach, in fact the proposed policy fosters a one-size-fits-all system that fails to take into account the different unique needs of companies and their investors.

Proxy votes cast in reliance on proxy voting policies based upon this Consultation cannot—by definition—be reasonably designed to further shareholder values.

ISS had a number of other recommendations but they didn’t raise the ire of Bainbridge and the Chamber. For the record, Steve is angry about the independent chair shareholder proposals, but please read his well-documented posts and judge for yourself whether ISS missed the mark. The ISS’ 2015 US Proxy Voting Guidelines were released today. Personally, I plan to raise some of the Guidelines discussing fee-shifting bylaws and exclusive venue provisions in both my Civil Procedure and Business Associations classes.

Let’s see how the Guidelines affect the next proxy season—the recommendations from the two-week comment period go into effect in February. 

November 6, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)

Wednesday, November 5, 2014

Fiduciary Status of Plan Advisors

Bear with me while I connect a loose thread between my research interests and the BLPB readership's broader interests and talk about the legal status of plan advisors to investment accounts (think 401k).  More so than with a traditional benefits plan (think pension) fiduciaries and their corresponding duties raise difficult questions in the context of self-directed retirement accounts (again, think 401k). Standing  between employee/beneficiary and the investment assets are a myriad of third parties servicing the plan-- like the employer sponsor, the plan administrator, the record keeper, the plan advisor, the organizational machines of the individual funds listed in the plans.  Each of these parties touch the assets in some way and effect the outcome of the investment at least in some respect.  Not all of these third parties, however, are fiduciaries under ERISA and even those that are, often owe diluted fiduciary duties to beneficiaries due to the "self-direction" that you and I exercise over our retirement accounts by allocating between stocks and bonds or target date funds when we were hired, or annually for those of us that actively monitor our accounts.  (For those ERISA folks out there, forgive this over simplification).

A big legal issue in the world of ERISA and mutual funds (because the two overlap in the context of retirement investing) is liability for fees charged to these accounts. The 2010 Supreme Court case in Jones v. Harris and the pending case Tibble v. Edison Int'l illustrate how big and unsettled these questions are.  

Fees matter because they affect your total return on your investment, and more so than a fund's past performance, serve as a predictor of how your future investment will fare.  Fiduciary status matters because it helps answer who, if anyone, is response for the fees charged to investors, particularly in the 401k context. 

For service providers to plan, their fiduciary status turns on the functional fiduciary test (as opposed to the named fiduciary like would be the case with the employer sponsor) under ERISA 3(21)(A).  This fact-intensive test requires the service provider have discretionary authority or control over the management of the assets or discretionary responsibility over the administration AND, as the recent cases have played out that the service provider actually exercise that discretion. 

Mass Mutual and ING were recently found to be functional fiduciaries, whereas Morgan Stanley and American United Life Insurance were not (see this summary of recent fee litigation cases).  While it isn't clear where the legal doctrine will eventually be settled, it is safe to say that this is a big issue in the investment and consumer advocacy circles.  A tremendous pool of capital stands to be effected, one way or another by the outcome of this debate.

In the meantime, Mass Mutual settled it's excessive fee litigation lawsuit on Friday, October 31st. As a part of the settlement, Mass Mutual agreed to change several business practices for plan sponsors including greater transparency about the actual expense ratio charged, the different class of investment shares, and fee sharaing arrangements. (See the "Changes to Defendants' Practices and Revisions to the Contracting and Disclosure Documents" section of the settlement agreement begining on page 24).  These settlement terms get to the heart of the fee transaparancy/competition debate in the mutual fund arena (the Seventh Circuit opinon/dissent in Jones is a great recap of this debate).  

Aside from how this may affect your personal retirement account or intersect with your interests in mutual funds, because of the amount of capital in these accounts, the evolving law regarding fees, fiduciaries and duties owed to retirement investors will also impact public operating companies. In other words, this is an area of the law to watch--some exciting stuff is on the horizon.

-Anne Tucker

November 5, 2014 | Permalink | Comments (0)

Tuesday, November 4, 2014

Election Impact: Capital Allocation, Corporate Investments, and Stock Prices

Back in 2010, Art Durnev published a short paper, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices, available here.  The article studies the interaction between national elections and corporate investment.  Today is not a national election -- we get two more years before we have to choose our next president -- but it's still seems like an apt day to think about the role of elections on corporate activity.

The most interesting part of the article, to me anyway, is the test of the relationship between political uncertainty and firm performance. As the article explains, 

If prices reflect future profitability of investment projects, investment-to-price sensitivity can be interpreted as a measure of the quality of capital allocation. This is because if capital is  allocated efficiently, capital is withdrawn from sectors with poor prospects and invested in profitable sectors. Thus, if political uncertainty reduces investment efficiency, firm performance is likely to suffer. Consistent with this argument, we show that firms that experience a drop in investment-to-price sensitivity during election years perform worse over the two years following elections.

The conclusion: this signifies that political uncertainty significantly impacts real economic outcomes.  Therefore, "political uncertainty can deteriorate company performance because of inferior capital allocation."

So, it's election day.  Please vote, regardless of your views.  Voting is a right, a privilege, and duty. And if you're in charge of a firm's investment decisions, consider this study.  As we approach the next national election, you might want to be wary of dropping your investment-to-price sensitivity leading up to the next election.  If you do, odds are your firm will do worse in the two years following the election. 

And, while we're talking presidential politics, here's another study worth considering: Effects of Election Results on Stock Price Performance: Evidence from 1980 to 2008.  Here's the abstract (and, please, go vote!):

We analyze whether the results of the 1980 to 2008 U.S. presidential elections influence the stock market performance of eight industries and we examine factors that are expected to affect firms’ stock returns around these elections. Our empirical analysis reflects firms’ exposure to government policies in two ways. First, to determine whether investors presume any Democratic or Republican favoritism towards or biases against certain industries we perform an event study for each of the eight industries around the eight elections. Second, we include the firms’ marginal tax rate as proxy for the firms’ exposure to uncertainty about fiscal policy in a regression analysis. We do not find a consistent pattern in industry returns when comparing the effect of Democratic versus Republican victories. However, the extent of the reaction differs among industries. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republican victories. Furthermore, a change in presidency from either a Democratic to a Republican candidate or from a Republican to a Democratic candidate causes stronger stock market effects than re-election or the election of a president from the same party. We also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. The results are relevant for academics, investors and policy makers alike because they provide insight on the question whether stock market participants respond to expected changes in policy making as a result of presidential elections.

November 4, 2014 in Corporate Finance, Corporations, Current Affairs, Financial Markets, International Business, Joshua P. Fershee | Permalink | Comments (1)

Monday, November 3, 2014

Preventative Lawyering and Succession Planning

On Monday, The University of Tennessee (UT) College of Law hosted Larry Cunningham to talk about his book, Berkshire Beyond Buffett: The Enduring Value of Values, which he previewed with us here on the BLPB a few months ago in a series of posts (here, here, and here).  As you may recall, the book focuses on corporate culture and succession planning at Berkshire Hathaway.  Joining Larry at the book session was UT College of Law alumnus James L. (Jim) Clayton, Chairman and principal shareholder of Clayton Bank and the founder of Clayton Homes, one of the Berkshire Hathaway subsidiaries featured in the book.  The impromptu conversation between Larry and Jim was an incredible part of the event (although Larry's prepared presentation on the book also was great).

As part of the event, Larry and Jim answered a variety of  audience questions.  Included among them was a question from UT College of Law Dean Doug Blaze on the role of lawyers in management,  transactions, and entrepreneurialism.  As part of Jim Clayton's response, he noted the value of preventative lawyering--advising businesses to keep them out of trouble.  I was so glad, as a business law advisor, to hear him say that! 

Following on that, given that (a) Larry's book focuses on the factors influencing succession planning,  (b) I am teaching the Disney case to my Business Associations students this week, and (c) the Disney case is about . . . well . . . failed succession and executive compensation, I asked about management compensation in the context of succession planning at Berkshire Hathaway.  Both Larry and Jim (whose son Kevin is President and Chief Executive Officer of Clayton Homes) were clear that Warren Buffett is an exacting manager, but that he believes in paying his portfolio company managers well.  Of course, the precise nature of the compensation arrangements of those portfolio firm executives (unlike Michael Ovitz's compensation arrangements at issue in the Disney case) are not a matter of public record.  But given the markedly different contexts, I assume the arrangements are very different . . . .

As I approach discussing the Disney case once again in the classroom, I am (as always) looking for new angles, new insights to share with the class (in addition to the core fiduciary duty doctrine).  One I will share this year is Jim Clayton's advice about preventative lawyering.  What could lawyers have done to reduce the likelihood of controversy and litigation?  I have some thoughts and will develop others in the next 24 hours.  Leave your thoughts here, if you have any . . . .

November 3, 2014 in Business Associations, Books, Compensation, Corporate Governance, Corporations, Delaware, Joan Heminway | Permalink | Comments (3)

The Unintended Consequences of Public Policies

Note to all legislators and regulators: don’t do anything until you’ve thought through all the consequences.

One of the most important things I learned as a student of public policy was the difference between static and dynamic analysis. Static analysis looks only at the immediate consequences of a change. Dynamic analysis looks at the long-term consequences of a change, taking into account how people will adjust to that change.

If I tell my students they must write a 50-page paper by Friday or fail, most of them will at least try to write the 50-page paper. That’s the static effect. But no one will ever take my Business Associations class again. That’s the dynamic effect.

For some people today, including an increasing number of politicians on both sides of the aisle, neither static nor dynamic effects matter. It’s enough just to have good intentions. “Don’t you care?”, those people ask. “We need to do something.”

Even when policy makers do consider the effects of their policy choices, many of them consider only the immediate effects—static analysis—and don’t think about the long-term consequences. That’s unfortunate, because legislation and regulation often have unintended consequences.

That’s the point of Thomas E. Hall’s new book, Aftermath: The Unintended Consequences of Public Policies. Hall, a professor of economics at Miami (Ohio), looks at the unintended consequences of four policies: (1) the federal income tax; (2) cigarette taxes; (3) minimum wage laws; and (4) Prohibition.

None of the evidence Hall lays out will surprise anyone familiar with these four policies, and the results are predictable to anyone familiar with economics. But the book is a great introduction to the idea of unintended consequences, and an illustration of the need for dynamic analysis (although Hall doesn’t use that term).

The book is short; it won’t take you long to read it. And Hall writes well, using non-technical language, so the book won’t put you to sleep. I recommend it to anyone interested in public policy—which should cover most of the readers of this blog.

November 3, 2014 in Books, C. Steven Bradford, Law and Economics | Permalink | Comments (4)

Sunday, November 2, 2014

ICYMI: Tweet From the Week (Nov. 2, 2014)

November 2, 2014 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 1, 2014

Two More Professor Postings

SFA                                   DePaul

I have updated my list of law professor positions at business schools with recent postings by Stephen F. Austin State University (legal studies) and DePaul University (ethics).

Details about both positions are available after the break.

Continue reading

November 1, 2014 in Business School, Ethics, Haskell Murray, Jobs | Permalink | Comments (0)

I hate to dispute the marketing experts, but as a chocoholic, I object


(demonstrating that variety isn't always a good thing)

Well, Halloween was yesterday, but the chocolate-y remains will last for ... at least another 5 3 2 hours.  Which brings me to this article on how, despite increases in chocolate prices, sales of chocolate continue to rise:

Chocolate candy sales for last Halloween hit $217 million, up 12 percent from the year before, the consumer market research firm Packaged Facts reported in September. For all of 2013, the American market for chocolate grew 4 percent, to $21 billion in sales. But chocolate lovers took a hit this summer, when Hershey and Mars announced price increases of 8 percent and 7 percent...  But don’t expect higher prices to dampen sales, analysts said....

Chocolate makers have also adopted a marketing strategy that is increasingly driving sales: the variety bag, a single package filled with several different types of bars. Mars said sales of the variety bag it introduced a few years ago (with Milky Ways, Three Musketeers and such) grew by 14.5 percent in 2012, accounting for 54 percent of its total Halloween sales growth, and have remained strong.

Scientists who research how our brains respond to food have another term for variety: the smorgasbord effect (as in stuffing yourself at Chinese buffets). Studies show that we quickly acclimate to any food or flavor we’re eating, causing the brain to register a feeling of fullness. Variety delays this process by keeping food exciting.

Okay, look, I'm not denying that we habituate to certain flavors, or that variety packs can introduce consumers to things they wouldn't otherwise buy.  But people buy big bags of smaller candies for a reason:  To distribute.  And in that context, they like variety not because they get bored with one flavor, but because as a Halloween candy-giver, you want to give trick-or-treaters a choice.  You never know which kid will hate almonds or love dark chocolate or which kid (uh, kid, yes, we'll go with kid) treats peanut butter cups as a meal replacement.  Variety packs are an easy way of making sure you offer the best treats in the apartment complex no matter who shows up at your door.  I'd rather buy two variety bags than 10 bags of different single-type candies just to give trick or treaters a choice. 

I mean, if I bought 10 bags of candies to make sure I catered to every kid's idiosyncratic tastes, I'd have the equivalent of 8 bags left over.  Which would be... terrible. 

Yes.  Terrible.  That's totally the word I was looking for.

November 1, 2014 in Ann Lipton | Permalink | Comments (3)

Friday, October 31, 2014

SEC Withholds Data from Columbia Researcher

Daniel Fisher at Forbes has posted an interesting story about Columbia Law Professor Robert Jackson's attempt to obtain information about investment advisors from the SEC. The SEC first denied they had the information, then said it would be too burdensome to produce the information. The kicker: an SEC economist has published a study using that very data. Fisher provides copies of Professor Jackson's persistent FOIA requests and the SEC's responses.

It's a fascinating study in bureaucratic favoritism and stubbornness. Not particularly surprising, but fascinating.

October 31, 2014 in C. Steven Bradford, Securities Regulation | Permalink | Comments (0)

Two Law Review Exclusive Submission Windows

At least two law reviews currently have exclusive submission windows. See below for details.

Exclusive submission windows seem like a good idea, in general, and more law reviews seem to be using them recently. Most of the traditional peer reviewed journals already require exclusive submissions and it is nice to see some law reviews following along. The exclusivity requirement should cut down, substantially, on the number of submissions, allowing for a more thorough review. Exclusivity will also likely lead to some helpful self-selection because professors will not want to submit to a journal that is either too far above their target (unlikely to be accepted, which will delay their process) or below their target (may be accepted and they will be prevented from trading up). 

I still think more law journals should move to blind review, which these exclusive submission window announcements do not promise, but the fact that exclusive submission windows cut submissions to a manageble number is important as well. While law review websites usually say the editors review each submitted article carefully, I find that unlikely when some of those law reviews get 2,000 or more submissions. The editors don't even have time to read each abstract carefully. 

The promised information about the exclusive submission windows is below.

The University of Memphis Law Review:

The University of Memphis Law Review has 3 immediate openings for submissions for publication in issue 3 of this year's volume, which will be published in April 2015. The Editorial Board is looking for authors willing to submit exclusively to The University of Memphis Law Review in return for a guaranteed quick and thorough review and response (not later than four days after receipt). This expedited, exclusive review will be open until November 8, 2014.  Articles may be submitted after this date, however there is not guarantee of an expedited response and open slots will be filled on a first-come basis.


Please direct submissions to Nick Margello at and include the subject line “Exclusive Review.” No specific topics are requested, but the Law Review seeks timely, relevant articles between 7,000-18,000 words in the text. The University of Memphis Law Review  has an excellent staff that works professionally with authors and consistently meets its own strict deadlines.  If you have an article looking for a placement, please consider sending it along. Thanks for your interest.

The Kentucky Law Journal (h/t Faculty Lounge):

The Kentucky Law Journal is opening an exclusive submission window for articles until November 14, 2014, at 5:00 PM EDT. All papers submitted during this window will be reviewed for publication in Volume 103, Issue 4, set for publication in Spring 2015. By submitting your article during this window, you agree to accept a publication offer, should one be extended. This window is available for articles on all topics, including articles previously submitted to the Kentucky Law Journal, though resubmission will be required. Submissions should be between 15,000 and 25,000 words with citations meeting the requirements of The Bluebook.


Submissions should be sent via email to Please include your article, a copy of your C.V. and a short abstract or cover letter.

October 31, 2014 in Call for Papers, Haskell Murray, Law School | Permalink | Comments (0)

Thursday, October 30, 2014

Do Small and Large Shareholders Have a Say on Pay?




Miriam Schwartz-Ziv from Michigan State University and Russ Wermers from the University of Maryland have written an interesting article in time for the next proxy season. The abstract is below:

This paper investigates the voting patterns of shareholders on the recently enacted “Say-On-Pay” (SOP) for publicly traded corporations, and the efficacy of vote outcomes on rationalizing executive compensation. We find that small shareholders are more likely than large shareholders to use the non-binding SOP vote to govern their companies: small shareholders are more likely to vote for a more frequent annual SOP vote, and more likely to vote “against” SOP (i.e., to disapprove executive compensation). Further, we find that low support for management in the SOP vote is more likely to be followed by a decrease in excess compensation, and by a more reasonable selection of peer companies for determining compensation, when ownership is more concentrated. Hence, the non-binding SOP vote offers a convenient mechanism for small shareholders to voice their opinions, yet, larger shareholders must be present to compel the Board to take action. Thus, diffuse shareholders are able to coordinate on the SOP vote to employ the threat that large shareholders represent to management.


October 30, 2014 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)