August 21, 2011
A Brief Google-Motorola Reader
Unless you've been sleeping under a rock, you know Google recently agreed to buy Motorola for $12.5 billion (a price that apparenlty translates to a 63% premium). You can read an overview of the deal here.
Steven Davidoff examines the large breakup fee here. He notes that the large fee actually signals both investors and regulators that Google is very confident of antitrust approval--and will likely fight hard to ensure it gets it.
While Motorola likely appreciated the breakup fee, it's probably not as thrilled with the restrictions it now faces in conducting its business till the deal is done. Davidoff also comments on that here.
The deal is ultimately about patents, and Bloomberg argues it serves to illuminate how much our current patent system is in need of reform. Write the editors: The current system "rewards lawyers and investment bankers far more than inventors or consumers."
Finally, some are noting that the deal could ultimately prove to be a disaster for Google, noting the conflicts it creates between Google and a number of its partners, as well as the fact that "hardware manufacturing is a crappy, low-margin commodity business." Google shares appear to be down over 10% since the announcement of the deal, compared to a roughly 6% decline for the S&P 500.
August 20, 2011
Poker and the Debt Crisis
Senate Majority Leader Harry Reid reportedly told the Las Vegas Review-Journal that Internet poker legislation "will get done." … The joint select committee on deficit reduction has been tasked with finding at least $1.5 trillion in debt savings over the next 10 years. Licensing and regulating Internet poker is a way the committee could identify billions of dollars with little effort.
Perhaps that will stop the exodus of poker pros.
August 18, 2011
How long can the Supreme Court continue to avoid adopting a theory of the corporation?
While I have argued elsewhere (specifically, here and here) that the Supreme Court did in fact rely on a particular theory of the corporation to decide Citizens United, it failed to do so expressly and has been frustratingly inconsistent in doing so in the bulk of its cases dealing with corporations. I am certainly not alone in seeing this as a problem (see Bainbridge on this point here), and we get more of the same from Daniel Greenwood in his latest piece, "FCC v. AT&T: The Idolatry of Corporations and Impersonal Privacy." Writes Greenwood:
Our Constitution and our political debate often divide the world into two categories: state and citizen, public and private, collective and individual. Do the multinational publicly traded corporations belong on the individual, private side of this great liberal divide? … The Court’s opinion [in FCC v AT&T] is silent on this basic issue. Only a strong theory of corporate rights could lead a native English speaker to conclude, as the Third Circuit did, that a statute should be interpreted to mean the opposite of what its words ordinarily mean. The Supreme Court’s purely linguistic analysis, as arid as any Lochner-era formalist opinion, demonstrates its ability to use the dictionary, but fails to address the underlying legal issues. More disturbingly, it hides behind its formalism to avoid making even the slightest attempt to explain how this decision can be consistent with its many decisions that, like the Third Circuit opinion, invent corporate rights with no deference to plain meaning. Why is ordinary meaning important here, but irrelevant when corporations assert constitutional rights that the text grants only to human beings?
The entire piece is well worth a read.
August 13, 2011
Love One Another: Business, Law, and the Power of Serving Others
Peggy Noonan opines on the recent London riots in today's Wall Street Journal and suggests that, "What we're seeing on the streets in Britain right now is something we may be starting to see here." I tend to agree. She mentions the "flash mob" curfews in Philadelphia as evidence, and we have the same thing in the suburbs of Cleveland where I live. While reading the Wall Street Journal has taught me that no matter how bad the news, there is almost always someone profiting from it--it is likely fair to say that few businesses flourish in riots. So what, besides instituting curfews, is the law to do? Noonan notes that government is in general in no position to throw more money at the problem right now, and even churches "too are hard-pressed these days." What she offers as a solution is Love:
The problem, at bottom, is love, something we never talk about in public policy discussions because it's too soft and can't be quantified or legislated. But little children without love and guidance are afraid. They're terrified—they have nothing solid in the world, which is a pretty scary place. So they never feel safe. As they grow, their fear becomes rage. Further on, the rage can be expressed in violence.
But in fact the benefits of a version of Love--helping others--has already been quantified by Dr. Maria Pagano (who also happens to be my wife--but please don't hold that against her). Pagano has already proved that helping others improves the likelihood of staying sober in addicts; is currently studying the effectiveness of helping others in teenage populations that have come into contact with the judicial system and are struggling with substance abuse; and is in the process of submitting a grant proposal to study the benefits of helping others for reducing the incidence and spread of HIV/STDs. You can find her "Helping Others" website here.
Of course, actively leveraging the benefits of service would only constitute one part of what will need to be a much broader solution to the related problems we are currently facing. But it is arguably a relatively inexpensive solution and can reasonably be expected to produce less negative side effects than at least some other typical interventions. The application would include, for example, simply incorporating service into the sentencing of juvenile offenders. Nor is this a completely novel idea. "Service learning" is being incorporated into education programs here at Akron and elsewhere, and programs like the Law & Psychology one at Nebraska already include altruism as one of their areas of study.
August 11, 2011
David Kershaw on The Path of Fiduciary Law
David Kershaw has posted "The Path of Fiduciary Law" on SSRN. Here is the abstract:
Contemporary accounts of corporate legal evolution view lawmakers as highly responsive to the economic interests of both pressure groups and markets. Through this lens law is understood to be the product of pressures exerted by managers, investors, institutional shareholders and the Federal Government, and the incentives of state lawmakers to accommodate the interests of these pressure groups. This lens dominates our current understanding of corporate legal evolution in the United States and is becoming highly influential in comparative accounts of corporate legal variation. This article sounds a note of objection. The article argues that the disciplinary pendulum has swung too far toward external accounts of legal evolution and too far away from internal accounts of legal change which view the path of law, at least in part, as the product of the internally generated constraints of the legal system – the relative autonomy of the law. To make this argument, the article considers the internal constraint of the conception of the corporation in 19th century US and UK corporate law and the evolution of self-dealing law in these two jurisdictions. It shows how two jurisdictions that started from the same legal proposition about self-dealing diverged rapidly as a result of the interaction of this proposition with profoundly different conceptions of the corporation. Contrary to the dominant account of the evolution of self-dealing law in the United States, the contemporary self-dealing rule is not the legally unexplained product of external market pressures but the logical and consistent product of the path of fiduciary law trodden through the corporate conception. The article shows that for contemporary corporate law a significant dose of inevitability was administered at the inception of general incorporation.
August 07, 2011
J.W. Verret Starts Open-Source Article Writing Project on SEC Rulemaking
By that I mean blogging about an article idea and updating it as I progress. Some say it’s a bad plan…people might steal your ideas, or maybe you expose yourself to the possibility of being wrong. I don’t think it’s an issue, particularly if readers take my musings in the rough-and-tumble blogging spirit. If you think I have interpreted a provision incorrectly, great. Email me and tell me why. Better that you send me a case I missed than I learn about it after the article is published.
He then goes on to outline a project to define what he describes as the four guiding principles of securities regulation as set forth in the National Securities Markets Improvement Act of 1996: (1) investor protection, (2) efficiency, (3) competition, and (4) capital formation. You can read the full post here.
I agree with Joan Heminway (as she states in a comment to the post) that the project is certainly a worthy one. However, I am even more excited to watch the open-source article writing process itself, since I think there could be all sorts of interesting offshoots from that project that could improve collaboration, interdisciplinary work, and the overall utility of our scholarly works.
July 31, 2011
A Market Cure for Too-Big-to-Fail?
Over at DealBook, Jesse Eisinger writes:
One of the most remarkable aspects of the debate about overhauling the financial system after the great crisis was the absence of serious contemplation of breaking up the largest banks…. Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors? Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable…. [However, e]ven in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay. “The biggest motivation for not breaking up is that top managers would earn less,” Mr. [Mike Mayo, an analyst with CLSA] said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.” Institutional investors — the major owners of the banks — are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target.
You can read the full post here.
July 30, 2011
Coates on Citizens United
John Coates has posted "Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?" on SSRN. Here is the abstract:
In Citizens United, the Supreme Court relaxed the ability of corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending. Little research has focused on the relationship between corporate governance – shareholder rights and power – and corporate political activity. This paper explores that relationship in the S&P 500 to predict the effect of Citizens United on shareholder wealth. The paper finds that in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings – together with the likelihood that unobservable political activity is even more harmful to shareholder interests – imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.
July 28, 2011
The SEC, the D.C. Circuit, and the Rule of Law
Earlier this week, Steve posted an interesting list of many of the recent cases the SEC has lost in the D.C. Circuit (including the latest proxy access case). Steve closed by noting that "an agency has to work really hard to lose this much," and that he was "inclined to think that the SEC simply doesn't care enough about the rule of law." That may be true, but if a lack of respect for the rule of law is an issue here (and that's a big "if"), then I'd like to add that the D.C. Circuit may also be deserving of some criticism. Steve himself notes that "the Financial Planning case is just bad statutory interpretation by the court." To that one can add Brett McDonnell's comments regaring the proxy access case that I posted here (remember, we are talking about the court concluding that the SEC acted arbitrarily and capriciously):
The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them. The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough. It will almost always be possible to do that with any agency rulemaking. Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still. This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences. Talk about judicial activism.
To this I would also add Jay Brown's take:
In some respects, the DC Circuit's decision … is a grave disappointment. The SEC has the authority to adopt an access rule, that was confirmed in Dodd-Frank. The rule was carefully crafted and vetted over a year long process. The panel, however, didn't like the rule and imposed an almost impossible burden on the SEC. It wasn't enough, for example, for the SEC to conclude that access could benefit boards and point to some studies making that point. Instead, the Agency had to rely on the right studies. The opinion criticized those used by the SEC but did not do the same with respect to those on the other side. In other words, it is clear that the court agreed with one side but not the other. One way or another that panel was going to strike down the rule. That the DC Circuit would issue a political decision is no real surprise. The circuit is full of judges who likely were too controversial for their home state senators to nominate. Without senators in Congress, DC has no politicians who can object to the White House nominees. As a result, the White House has a free hand and can more easily appoint controversial idealogues…. What the case shows is how far behind the courts are with respect to the evolution of the corporate governance process. Two of the [three] judges on the panel were appointed by President Reagan at the height of the law and economics movement. That was the hey day of deregulation and the view that the market can resolve all issues. The shallowness of that philosophy was brought home in the most recent recession. But it is clear that this panel views interference in the management prerogative with disfavor and does not need much excuse to overturn it.
July 25, 2011
Policy Paper: Ineffective Federal Transmission Policy
As regular readers know, I do much of my writing in the energy area, often considering how energy regulation and legislation could or does impact energy markets and businesses. While I don't expect that the energy sector has the same appeal for all business-law types, it is my hope that, at least once in a while, there is something of value in energy-related posts for readers of varying interests. I truly believe that our energy future is our business future. Admittedly, there is also an element of self-promotion here.
With that said, the Center for Energy and Environmental Law at the University of Connecticut School of Law posted a policy paper of mine this week, Reliably Unreliable: The Problems with Piecemeal Federal Transmission and Grid Reliability Policies (pdf).
Here's a part of the executive summary:
In the past, electricity was considered a local concern, but over time major portions of the electrical grid have become regional, national, and even international in scope. Electricity regulation has evolved into a complex web of multijurisdictional oversight, and this evolution has created both tensions and opportunities. National legislation and regulation have helped increase reliability, diversify the fuel mix for electricity generation, and create a more open market for electricity. However, national regulation designed to enhance open markets also created opportunities for abuse. In addition, the increasing level of federal oversight has led to conflicts between state and federal entities as the traditional sense of local control over siting and delivery of electricity has been eroded.
. . . .
There is no shortage of effort at the state, regional, and federal levels to improve [electricity grid] reliability and safety. Unfortunately, in many cases, the efforts have been competitive with other energy-related policies (such as climate change initiatives and renewable energy mandates), and jurisdictional conflicts have obstructed, rather than facilitated, many such efforts. It is time for Congress to provide clear authority to someone to make and coordinate changes. A failure to act to preserve and improve the safety and reliability of our electric system would be a costly and avoidable failure. And that is something no one can afford.
July 23, 2011
D.C. Court Strikes Down Proxy Access
Stephen Bainbridge pulls together some of the blogosphere reaction here. I highlight the following from that post:
Mike Scarcella at The BLT:
The appeals court sided with the business groups’ lawyers, who argued that investors with special interests, including unions and state and local governments, would be likely to put the maximization of shareholder value second to other interests. “By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown.
The opinion is a rather limited indictment of the proxy access proposal, relying on the lack of sufficient justification. The SEC is considering its options. While it might challenge the ruling, I suspect that the agency is more likely to produce a newly justified rule in the near future.
[L]et me briefly lament the D.C. Circuit's vacating of the proxy access rule.... The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them. The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough. It will almost always be possible to do that with any agency rulemaking. Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still. This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences. Talk about judicial activism.
July 21, 2011
Padfield on "The Dodd-Frank Corporation" (UPDATE)
Just in time for the one-year anniversary of Dodd-Frank, I have posted an updated version of my latest piece, "The Dodd-Frank Corporation: More Than a Nexus of Contracts." Here is the abstract:
Corporate theory matters. By way of example, I explain in this Essay how the Citizens United opinion can be read as a decision wherein the competing theories of the corporation played a dispositive role. Furthermore, some of the most important issues confronting courts and legislatures in the foreseeable future will involve questions about the nature of the corporation. In light of this, this Essay argues that the Dodd-Frank Wall Street Reform and Consumer Protection Act serves, in addition to all its other roles, as an important and novel data point in the on-going corporate theory debate. Specifically, I argue Dodd-Frank implicates corporate theory in two ways. First, it reaffirms yet again that corporations remain subject to significant government regulation as a matter of positive law - a fact that constitutes at least somewhat of a nuisance for contractarians. Second, and more importantly, Dodd-Frank’s formal recognition that at least some corporations have literally gotten too big to fail vindicates some of the most important normative assertions of concession theory broadly defined.
July 10, 2011
Pasquale on the Perils of Debt Brinksmanship
Over at Concurring Opinions, Frank Pasquale has put up an interesting post on Public Finance and National Security. Here's some of what caught my eye:
When the US went to war in Afghanistan and Iraq, it did not raise taxes to cover the enormous expenses involved (including spending on military services and hardware). Rather, it borrowed hundreds of billions of dollars, much of it from abroad. The borrowing has increased as conflict drags on, and as financial crises devastated tax receipts…. The financial crisis of 2008 marked a sudden lack of faith in the creditworthiness of many Western banks, including leading US-based ones. In order to maintain global confidence in the increasingly fragile and interconnected financial institutions that enable US borrowing, the US government has repeatedly “backstopped” private entities (or stepped in to alter markets) when their potential failure threatened to undermine investor confidence…. [However, as] long as the US appears capable of making political decisions to cut spending and raise taxes adequately to cover its debts, it does not appear to be in anyone’s national interest to spark a disorderly sell-off of Treasuries…. [But the] U.S. has recently proven itself incapable of achieving normal OECD-level taxation of its wealthy, in either good times or bad. A culture of tax-avoidance among America’s wealthy is approaching Greek levels…. As creditor nations watch the spectacle of a Republican party elected on deficit-cutting rhetoric immediately turn to budget-busting tax cuts, they are doubting the political seriousness of the US about repaying its debts.
July 07, 2011
1. Ramseyer on "Why Power Companies Build Nuclear Reactors on Fault Lines" (HT: Bainbridge):
Tokyo Electric built its reactors as it did because it would not pay the full cost of a melt-down anyway. Given the limited liability at the heart of corporate law, it could externalize the cost of running reactors.
2. NYT: "We Knew They Got Raises. But This?":
Brace yourself. The final figures show that the median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009.
3. Poker News: "Presidential Candidate Openly Campaigning for Poker Player Vote":
Former New Mexico Gov. Gary Johnson has set up a Web page targeting poker players. "Support me for President, and I'll support your freedom," Johnson is quoted as saying on the site.
July 01, 2011
Douglas Irwin's Peddling Protectionism
This is going to mark me as a real finance geek, but I just finished reading Peddling Protectionism: Smoot-Hawley and the Great Depression, by Douglas A. Irwin. Irwin is an economics professor at Dartmouth who has authored a number of books and articles on trade, tariffs, and the Great Depression.
Peddling Protectionism is both a history of the Smoot-Hawley Tariff Act and an examination of its consequences. The best part of the book, in my opinion, is the political history in the first chapter. Irwin really brings the debate to life, providing a close look at the involvement of Congressman Hawley, Senator Smoot, President Hoover, and the many other players in the political process. It's amazing how close the tariff bill came to failure; I wonder how U.S. economic history would have changed if we had no Smoot-Hawley
Irwin’s analysis of the economic consequences of the bill is also interesting, and convincing. Some of it might be a little difficult for readers without at least some background in macroeconomics, but most of the discussion is accessible to general readers. Marshaling a variety of statistics, Irwin concludes that Smoot-Hawley was not responsible for the Depression, but certainly exacerbated it. He also finds that, “although . . . [Smoot-Hawley] . . . was not the principal reason for the general outbreak of protectionism that so damaged world trade in the early 1930s, it was a contributing factor.” And it most certainly was a major factor in diverting international trade away from the United States.
It’s almost impossible to have a debate about international trade without Smoot-Harley coming up; it is the bête noire of free trade advocates. (Irwin begins the book with Al Gore's invocation of Smoot-Hawley in his 1993 debate with Ross Perot on Larry King Live.) That makes this book required reading for anyone interested in international trade.
June 30, 2011
Are institutional investors the new sheriff in town?
Over at the Harvard Forum, Chad Johnson has posted "Too Big to Fail or Too Big to Change." Johnson does a nice job of compiling much of the "they-knew-what-they-were-doing-and-it's-called-fraud" evidence, and bemoans the "lack of criminal prosecutions of, and absence of truly significant fines levied against, the senior executives and companies responsible for igniting the subprime meltdown." Johnson asks: "Are large, systemically important institutions and their ilk too big to be threatened with sanctions that approximate the size of the frauds perpetrated against the public? Has 'too big to fail' transformed into 'too big to challenge?'" He then goes on to argue that, whether due to unwillingness or inability, the SEC's failures here have opened the door for institutional investors to play a greater role in providing some accountability (the noteworthy recent Bank of America settlement may be further evidence of that). Finally, Johnson concludes by noting that perhaps it's time to give institutional investors some of the enforcement tools the SEC has seemingly failed to utilize, such as a more expansive rights of action against secondary actors and greater extraterritorial reach. The entire post is worth a read.
June 29, 2011
The Economist runs a series of debates, which allows expert and public input that I think is a worthwhile series. The current debate is over this proposition: "This house believes that an economy cannot succeed without a big manufacturing base." Here are excerpts from the experts:
While a simplistic "manufacturing good, services bad" viewpoint is unwarranted, we undervalue the manufacturing sector at our peril.
Even if you wished to reduce the size of the financial sector, you would not have to go into manufacturing.
This is a series that is well worth a regular look.
June 26, 2011
World Series of Poker (Law Reform) Update
June 25, 2011
More Pro-Business Decisions From the Roberts Court
The question of whether the Roberts Court can properly be characterized as pro-business is back in the news, with four recent cases taking center stage. In Wal-Mart v. Dukes and AT&T v. Concepcion the Court limited the availability of class actions. As my colleague Will Huhn notes, in American Electrical Power Co. v. Connecticut:
[T]he Supreme Court held that the Clean Air Act preempts the federal common law of nuisance, and accordingly the states lost on that point. The Court did not reach the question of whether the state law of tort is preempted by the Clean Air Act, and the case was remanded to the lower courts for a ruling on that issue.
(For an arguably related story, see: "Nuclear Regulatory Commission Colluded with Industry to Weaken Safety Standards.")
Finally, in Janus Capital the Court again chipped away at Rule 10b-5. As Jay Brown describes it: "The opinion ... is a piece of political decision making, more in line with a legislature than a court."
An Associated Press story noted:
Robin Conrad, the head of the legal arm of the U.S. Chamber of Commerce, dismissed the notion of a pro-business court as "a silly myth" that was undercut by a record of as many victories as losses in cases of interest to the Chamber of Commerce. Yet Conrad acknowledged that the group won the three cases — the class-action disputes and a successful effort to block a climate change suit by six states — that were "easily the most important business cases of the term."
June 10, 2011
Income Inequality as a Policy Consideration
Professor Alan Taylor writes for Financial Times that emerging markets are catching up to developed markets in a way that few would have expected five years ago. Still, the article notes that significant risks remain for developing markets, particularly concerns about the increasing level of income inequality. The full article is here: Do emerging markets deserve developed status? (H/T: Greg Mankiw).
A few days ago, for the New York Times, Nicholas Kristoff argued that increasing levels of privitization and reductions in local, state, and federal programs indicate some U.S. trends back toward developing nations, where wealthy people have their own private bodyguards rather than support a strong police force and use diesel generators instead of paying taxes to support a reliable electric grid. Kristoff also noted that income inequality is a significant danger, although on he concedes that the United States is "in no danger of actually becoming Pakistan, any more than we’re going to become Sweden."
I'm not on board fully with either article (and I'm more convinced by the former than the latter), but both raise the point that increased income inequality is a significant concern. On that, I definitely agree. So whether we are going to increase or reduce regulations on businesses or increase or reduce taxes on people and/or businesses, I think the impact on income inequality, and what that could mean for the country, needs to be part of the consideration.
Frankly, I don't want to live in a country where no one can afford a Bugatti Veyron ($1,700,000). I would, however, like to live in a place where a Fisker Karma ($100,000) is at least a possibility, and my Subaru Legacy is a reasonable expectation, for everyone. (If you're not a car person, please feel free insert your luxury to practical options of your own.)