Wednesday, October 20, 2021

Roe on Dodge v. Ford

Mark Roe has posted "Dodge v. Ford: What Happened and Why?" on SSRN (here). The first half of the abstract is excerpted below. My initial reaction to the abstract (I have not read the paper) is that lying in this context is similar to breaking the law when it comes to the business judgment rule.  IOW, just like a business decision to break the law is not protected by the BJR even if that decision otherwise maximizes shareholder value, so too should deceit be unprotected. This obviously has implications for our current stakeholder governance debate, given that this "noble lie" defense is one of the justifications given for greenwashing / woke-washing.

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three relevant industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly. Second, to stymie union organizers and to motivate his new assembly line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker acquiescence. And, third, if Ford pursued monopoly profit in an obvious and explicit way, the Ford brand would have been damaged with both his workforce and the company’s consumers. The transactions underlying Dodge v. Ford should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly-line produced, with Ford’s business plans requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—namely that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reversed. Ford had a true business purpose—spending on labor and a vertically-integrated factory to solidify his monopoly profit and splitting that profit with labor—but he would have jeopardized the strategy’s effectiveness by articulating it.

October 20, 2021 in Stefan J. Padfield | Permalink | Comments (4)

Monday, October 18, 2021

Viewpoint Diversity Shareholder Proposals - A Commentary

Earlier this year, Transactions: The Tennessee Journal of Business Law, published papers presented at the 2020 Connecting the Threads IV symposium, held on Zoom just about a year ago.  Back in July, I wrote about my coauthored piece from the 2020 symposium.  That was my primary contribution to the event and the published output.

However, I also had the privilege of commenting on two papers at the symposium last year, and my comments were published in the Transactions symposium volume. I have been wanting to post about those published commentaries for a number of months, but other news just seemed more important.  Given the recent completion of this year's Connecting the Threads V symposium, it seems like a good time to make those posts.  I start with the first of the two here.

This post covers my commentary on Stefan Padfield's paper, An Introduction to Viewpoint Diversity Shareholder Proposals.  It was a fascinating read for me.  I was unaware of this genre of shareholder proposal before I picked up Stefan's draft.  If you also are in the dark about these shareholder proposals, his article offers a great introduction.  Essentially, viewpoint diversity shareholder proposals are shareholder-initiated matters proposed for a shareholder vote that (1) are included in a public company's proxy statement through the process set forth in Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and (2) serve "to restore some semblance of balance" in public companies that are characterized by viewpoint bias or discrimination.  Stefan's article offers examples and provides related observations.

My commentary is entitled A Few Quick Viewpoints on Viewpoint Diversity Shareholder Proposals.  It is posted on SSRN here. The SSRN abstract is as follows:

This commentary essay represents a brief response to Professor Stefan Padfield’s "An Introduction to Viewpoint Diversity Shareholder Proposals" (22 TRANSACTIONS: TENN. J. BUS. L. 271 (2021)). I am especially interested in two aspects of Professor Padfield’s article on which I comment briefly in turn. First and foremost, I focus in on relevant aspects of an academic and popular literature that Professor Padfield touches on in his article. This literature addresses an area that intersects with my own research: the diversity and independence of corporate management (in particular, as to boards of directors, but also as to high level executive officers--those constituting the so-called “C-suite”) and its effects on corporate decision-making. Second, I offer a few succinct thoughts on the suitability of the shareholder proposal process as a means of promoting viewpoint diversity in publicly held firms.

The essay is reasonably brief (so feel free to read it in its entirety).  But the essence of my conclusion offers the bottom line.  

Although viewpoint diversity may be a vague or malleable term, the business environment and exemplar shareholder proposals featured in Professor Padfield’s Article offer guidance as to the contextual meaning of that term. Based on his depiction and the literature on management diversity’s role in efficacious decision-making, viewpoint diversity has the capacity to add value to the business management enterprise and enhance the existence and sustainability of a healthy, happy workforce. Moreover, his Article indicates, and this commentary affirms, that the shareholder proposal process may be a successful tool in raising viewpoint diversity issues with firm management. Even if the inclusion of specific shareholder proposals in public company proxy statements may be questionable under Rule 14a-8, the existence of viewpoint diversity shareholder proposals may open the door to productive dialogues between shareholders and the subject companies. In sum, Professor Padfield’s Article represents a thought-provoking inquiry into an innovative way in which securities regulation may contribute to forwarding corporate social justice in the public company realm.

So, even if you don't read my commentary, you should read his article.

October 18, 2021 in Conferences, Corporate Governance, Corporations, Joan Heminway, Shareholders, Stefan J. Padfield | Permalink | Comments (2)

Monday, August 30, 2021

Sharfman on the Problem of Three

Friend of the blog Bernard Sharfman has posted The Problem of Three In the Voting of Public Company Shares over at RealClearMarkets.  A brief excerpt follows.

The problem of the Big 3’s concentration of voting power is illustrated in Engine No. 1’s proxy fight at ExxonMobil …. Engine No. 1’s stated objectives in seeking the election of its own nominees was to: 1) enhance the value of ExxonMobil’s common stock; 2) reduce ExxonMobil’s carbon emissions; and 3) transition ExxonMobil into a global leader in profitable clean-energy production. Yet Engine No. 1 never provided specific recommendations on how it was going to accomplish these objectives. This was odd, as one would expect Engine No. 1 to present such recommendations if it were to convince shareholders that its director nominees were worthy of being elected.

The inability to provide such recommendations must have been a clear indication to the shareholders of ExxonMobil, including the Big 3, that Engine No. 1 was not truly informed about the operations of ExxonMobil or how it was going to achieve its stated objectives. Nevertheless, Engine No. 1 succeeded in getting three of its four nominated directors elected to Exxon’s board. How in the world was it able to do this?

…. I argue in my writing that Engine No. 1 was able to get the Big 3’s support by appealing to their desire to be perceived as investment advisers who are making a difference in mitigating climate change…. Such opportunistic shareholder voting by investment advisers is arguably a breach of an investment adviser’s fiduciary duties under the Investment Advisers Act of 1940. If so, it is up to the SEC to provide the necessary investor protection through enforcement actions. Alternatively, there is a potential market solution for mitigating the “Problem of Three.” This market solution … is for index funds to provide investors with some policy control over their proportional voting interest, as represented by their percentage of ownership in a specific fund.

August 30, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Sunday, August 22, 2021

Reyes on "Autonomous Business Reality"

Prof. Carla L. Reyes has published Autonomous Business Reality in the Nevada Law Journal.  The article apparently just became available on Westlaw.  The abstract is below and you can find a version of the paper on SSRN here.

Society tends to expect technology to do more than it can actually achieve, at a faster pace than it can actually move. The resulting hype cycle infects all forms of discourse around technology. Unfortunately, the discourse on law and technology is no exception to this rule. The resulting discussion is often characterized by two or more positions at opposite ends of the spectrum, such that participants in the discussion speak past each other, rather than to each other. The rich context that sits in the middle ground goes disregarded altogether. This dynamic most recently surfaced in the legal literature regarding autonomous businesses. This Article seeks to fill the gap in the current discussion by creating a taxonomy of autonomous businesses and using that taxonomy to demonstrate that automation, standing alone, is not what makes autonomous businesses exceptional. Rather, the capacity of autonomous businesses to make radical governance changes more prevalent in the market pushes the boundaries of current choice of entity and governance paradigms while also illuminating low-technology functional equivalents that may offer more traditional businesses a path to governance reform.

To make these claims, this Article begins in Part I by briefly introducing the two emerging technologies that enable business automation. Part II reviews the existing literature and argues that by focusing on only one specific segment of the current autonomous business landscape, the literature misses key opportunities to evolve business law. Part III builds a map of existing autonomous businesses, demonstrating the differences among them and explaining them as a function of design trade-offs. Part III then uses that map to build a taxonomy of autonomous businesses and offers a framework for considering the broader impacts of autonomous businesses on law. Part IV examines ways that autonomous business reality may incentivize reforms in traditional corporations while simultaneously emphasizing the need for continued research and innovation in choice of business entity, organizational governance, and regulatory compliance.

August 22, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, August 21, 2021

A Big Week for Scalia Law’s Capitalism & Rule of Law Project 

The following showed up in my inbox this week and may be of interest to readers of this blog:

As part of our Capitalism & Rule of Law Project (CapLaw), the Law & Economics Center (LEC) at George Mason University Antonin Scalia Law School is having a big week, including by focusing attention on an important anniversary in the debate over capitalism and the rule of law. Two years ago today, on August 19, 2019, the influential Business Roundtable released what it called a “new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.” This statement is one of many alarming calls for the abandonment of traditional and time-tested principles of corporate governance, perhaps most succinctly captured in the title of Milton Friedman’s 1970 essay in The New York Times: “The Social Responsibility Of Business Is to Increase Its Profits.”

Here's a selection of CapLaw highlights from this week: 

August 21, 2021 in Stefan J. Padfield | Permalink | Comments (1)

Monday, June 21, 2021

June 25th @ 1 PM: Limiting the Right to Exclude: Common Carrier and Market Dominance

This coming Friday, June 25, at 1 PM EST, the Federalist Society is presenting Part 3 of its Freedom of Thought Six-Part Zoom Webinar Series.  This Part is entitled Limiting the Right to Exclude: Common Carrier and Market Dominance.  You can find additional details and register here (a recording of Part 1 can be found here; Part 2 here).  Below is a brief description of the focus of the program.

The recent concurrence by Justice Thomas in Biden v. Knight First Amendment Institute has raised new questions about how we might think about restrictions on speech and debate on social media. Where private, concentrated control over online content and platforms exists, can a solution be found in doctrines that limit the right of a private company to exclude? 

June 21, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Friday, June 11, 2021

Do job interview questions about commitments to diversity violate state laws against discrimination on the basis of political viewpoint? recently profiled Jeffrey Housman, who is “chief people and services officer at Restaurant Brands International.”  Part of the article explains that:

One of the first DEI initiatives Housman's team spearheaded was a change to the interview process. RBI hiring managers now ask job candidates in their first interview what diversity means to them, and how they'd champion diversity if they joined the team. And, across RBI's corporate offices, at least 50% of all candidates in the final interview round must be "from groups that are demonstrably diverse, including race."

Putting aside the legality of the interview quotas, this reminded me of the debate a few years ago regarding “Diversity, Equity and Inclusion” statements required of applicants for faculty positions at a number of UC campuses.  An op-ed in the Wall Street Journal argued that:

This system specifically excludes those who believe in a tenet of classical liberalism: that each person should be treated as a unique individual, not as a representative of an identity group. Rather than helping achieve inclusion, these DEI rubrics act as a filter for those with nonconforming views…. Mandatory diversity statements can too easily become a test of political ideology and conformity.

There are grounds for concluding that Democrats have become the party of racial discrimination in the name of anti-discrimination (see, e.g., here and here), while Republicans defend the colorblind ideal that: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”  (We can assume that both parties take their respective positions in the good faith belief that they are championing the best way forward for us as a nation and, in particular, for the continued progress of historically marginalized groups.)  To the extent this partisan divide exists, do job interview questions asking about commitments to diversity violate state laws against discrimination on the basis of political viewpoint?

June 11, 2021 in Stefan J. Padfield | Permalink | Comments (2)

Tuesday, June 8, 2021

June 11 @ 2 PM: "First Amendment Challenges to a Marketplace of Ideas"

This coming Friday, June 11, at 2 PM, the Federalist Society is hosting a teleforum entitled, Free Speech and Compelled Speech: First Amendment Challenges to a Marketplace of Ideas.  You can register here (I believe registration is free).  What follows is a description of the program.

Section 230 has been understood to shield internet platforms from liability for content posted by users, and also to protect the platforms’ discretion in removing “objectionable” content. 

But policy makers have recently taken a stronger interest in attempting to influence tech companies’ moderation policies.  Some have argued the policies are too restrictive and unduly limit the scope of legitimate public debate in what has become something of a high-tech public square.  Other policy makers have argued the platforms need to more aggressively target “hate speech,” online harassment, and other forms of objectionable content.  And against that background, states are adopting and considering legislation to limit the scope of permissible content moderation to preclude viewpoint discrimination. 

Some have suggested that the §230 protection, in combination with political pressure, create First Amendment state action problems for content moderation.  Others argue that state efforts to protect the expressive interests of social media users would raise First Amendment concerns, by effectively compelling speech by social media and tech platforms.

What are the First Amendment limits on federal and state efforts to influence platform decisions on excluding or moderating content? 


Eugene T. Volokh, Gary T. Schwartz Distinguished Professor of Law, UCLA School of Law 

Jed Rubenfeld, formerly Assistant United States Attorney, U.S. Representative at the Council of Europe, and professor at the Yale Law School 

Mary Anne Franks, Professor of Law and Dean's Distinguished Scholar, University of Miami School of Law 

Moderator: Hon. Gregory G. Katsas, Judge, United States Court of Appeals, District of Columbia Circuit 

June 8, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, March 2, 2021

FYI: “Society of Socio-Economists (SoS) (Virtual) Meeting Program: ‘Ethical Dimensions of Economic Analysis and Pressing Social Issues’”

On Saturday, March 6, 2021, 1:00 pm - 4:00 pm (Eastern Time) the following presentations/discussions are scheduled as part of the next Society of Socio-Economists Meeting (Zoom link and additional information here).

1:00 - 1:30 Welcoming Remarks, Discussion of Pressing Social Issues and Future Meetings

1:30 - 2:25 Ethical Dimensions of Economic Analysis

Deirdre McCloskey (Economics, History and Communication, Emerita, Illinois-Chicago)

Shubha Ghosh (Law and Economics, Syracuse)

2:30 - 3:25 Modern Monetary Theory: Is Money Debt? Does it Matter? Who Decides When the Economy is at Full Capacity?

Rohan Gray (Law, Willamette)

William Black (Law and Economics, Missouri - Kansas City)

Philip Harvey (Law and Economics, Rutgers - Camden)

Nicolaus Tideman (Economics, Virginia Tech)

3:00 - 3:25 Continuation of Discussion of Pressing Social Issues and Future Meetings

3:30 - 3:50 For Whose Benefit Public Corporations?

Sergio Gramitto (Law, Monash) “The Corporate Governance Game”

3:50 - 4:00 Concluding Session.

March 2, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, February 20, 2021

Dreher: "How is Wells Fargo going to double black leadership in five years without actively hiring and firing people on the basis of race?"

I found the following in my inbox this morning: Facebook, Twitter, United Airlines and other large companies pledge to boost numbers of diverse leaders ("Nowhere in corporate America have I seen these metrics or an initiative with these types of metrics," said SVLG CEO Ahmad Thomas in an interview with MarketWatch before the announcement of the initiative.).

That reminded me of some commentary Rod Dreher posted last year in response to similar initiatives by Microsoft and Well Fargo (here):

Nadella didn’t say that Microsoft will attempt to do that; he said that Microsoft will do that. You can only double the number of blacks at the company through discriminatory hiring and firing. If you are white, Asian, or Hispanic, and work at Microsoft, you will not have the same chance at promotion, or perhaps you will even have to be laid off to make room for black managers…. How is Wells Fargo going to double black leadership in five years without actively hiring and firing people on the basis of race? ....

According to theorists of “antiracism” like Ibram X. Kendi, any time you see fewer blacks within an institution …, that is conclusive evidence of racism. Racial discrimination is the only explanation. It could not possibly be that, for example, fewer blacks chose to study finance (Wells Fargo), tech (Microsoft) or in related fields that would have brought them into the workplace at those particular companies. Only racism explains it…. This is what Microsoft apparently believes. This is what Wells Fargo apparently believes. This is what they are committed to doing: discriminating against non-black employees to fit this ideological idea of antiracism.

Relatedly, Ed Whelan had the following to say about Coca-Cola's new diversity guidelines for outside counsel (here):

Title VII of the Civil Rights Act of 1964 broadly prohibits employers from discriminating on the basis of race, including in assigning work. But that’s exactly what Coca-Cola would have law firms do. It’s often thought that the Supreme Court’s anti-textual ruling in United Steelworkers v. Weber (1979) gives a green light to racial preferences that favor blacks. But the Court’s actual holding is much narrower than that …. While declining to “define in detail the line of demarcation between permissible and impermissible affirmative action plans,” the Court emphasized that the plan at issue was “a temporary measure” and was “not intended to maintain racial balance, but simply to eliminate a manifest racial imbalance” resulting from the systematic exclusion of blacks from craft unions…. Far from adopting its guidelines as “a temporary measure” to “eliminate a manifest racial imbalance,” Coca-Cola contemplates that the guidelines will operate in perpetuity to achieve and “maintain racial balance.” Indeed, the guidelines explicitly state that their “minimum commitments will “be adjusted over time as U.S. Census data evolves.” In short, there is little reason to think that the employment discrimination that Coca-Cola’s guidelines call for would fall within the Weber exception to Title VII.

Richard Epstein makes the further point (here) that if there is a known pipeline problem (i.e., based purely on the current number of Black attorneys, the quotas appear to require reaching further into the talent pool) then a breach of duty claim might also be possible: It is also worth asking whether a shareholder could succeed with a derivative legal action that held that the adoption of Coke’s decision to hire weaker minority workers was a breach of its fiduciary duty.

It is easy to find at least some of the foregoing analysis offensive and/or just plain wrong, but the question remains for discrimination law experts: In terms of surviving a motion to dismiss in a reverse-discrimination case, how much (if at all) do these corporate diversity commitments help plaintiffs?  In terms of Epstein's fiduciary duty point, I find it very difficult to imagine a set of facts that would preclude management from claiming a pro-corporate cost-benefit analysis sufficient to dismiss a fiduciary duty claim.  You'd basically need "smoking gun" evidence of decision-makers having a Henry Ford or Tim Cook moment to even have a chance of avoiding that as a plaintiff (i.e., some version of "we have reason to believe this might destroy shareholder value but we don't care").

February 20, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Friday, February 12, 2021

Fleischer on "Corporate Purpose: A Management Concept and its Implications for Company Law"

Holger Fleischer has posted Corporate Purpose: A Management Concept and its Implications for Company Law on SSRN (here).  I like the idea of distinguishing (1) a "management concept" of identifying a corporate purpose "beyond mere profit" from (2) a corporate law conception of the for-profit corporation as a profit-maximizing entity.  Here is the abstract:

Many companies have recently been following the so-called corporate purpose concept that is recommended by leading management scholars. To this end, they identify a raison d'être for their enterprise that goes beyond mere profit making and they anchor it in the entire value chain. This paper puts the corporate purpose concept in perspective by linking it to the larger debate on corporate social responsibility and by outlining its theoretical foundations and practical application. It then goes on by explaining how this management concept fits into the company law framework, looking to France and the UK as well as to the US and Germany. Finally, this paper assesses various policy proposals made by leading purpose proponents, ranging from mandatory purpose clauses in the articles of association to say-on-purpose shareholder voting and dual-purpose business organisations.

February 12, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, January 26, 2021

Rogers Reviews Sunstein's "Too Much Information"

Over at Law & Liberty, James Rogers reviews Cass Sunstein's "Too Much Information: Understanding What You Don't Want to Know."  Below is a brief excerpt from the review.  There are apparently at least some references to the SEC in the book.

[Sunstein] writes, “The primary question in this book is simple: When should government require companies, employers, hospitals, and others to disclose information?” His answer, he writes, is simple, although perhaps deceptively simple. Government should require disclosure “When information would significantly improve people’s lives.” The surprise is that the book focuses mainly on the argument that making judgment of when disclosure “improves people’s lives” can be so complicated that government policymakers often should not attempt it except under carefully identified conditions.... The book reads almost as though Sunstein started the book with one hypothesis in mind—that he would develop a framework that would help with developing sensible government disclosure policies going forward—but he instead became increasingly skeptical of his initial project as he worked through the research.

January 26, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Sunday, January 24, 2021

Shaner on Privately Ordered Fiduciaries

Professor Megan Wischmeier Shaner (Associate Dean for Research & Scholarship; President's Associates Presidential Professor of Law, University of Oklahoma College of Law) recently published Privately Ordered Fiduciaries (28 Geo. Mason L. Rev. 345 (2020)). Below is an excerpt from the Introduction that might be of interest to readers.

Over the past two decades, legal and practical hurdles to developing doctrine addressing the corporate officer have been cleared away. In 2004, the Delaware Code was amended to provide for personal jurisdiction over nonresident officers of Delaware corporations. “Around this same time there was a dramatic shift underway in corporate governance norms that had been buttressed by federal regulation to create greater board independence from officers.” With fewer board seats occupied by company executives, officer conduct was no longer reliably regulated by bootstrapping obligations to an officer's concurrent director status, underscoring the need for specific rules addressing officer obligations.

The separation of director and officer status in public corporations led to a heightened focus on officers as distinct legal actors in the corporation and on the accompanying legal standards that would govern them. The Delaware Supreme Court's 2009 decision in Gantler v. Stephens clarified, in part, the fiduciary obligations and accountability of corporate officers. In Gantler, the court held that “officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.” These developments in corporate law, individually and collectively, cleared a path for the exploration and development of the legal contours of officer duties. The courts, stockholders, and their counsel, however, have declined the invitation to tackle officer accountability and responsibility. And somewhat ironically, when faced with the few officer challenges that have been brought before them, the Delaware courts have applied a director-centric lens in evaluating officer issues, narrowing the potential avenues for legal challenges, closing the door on future doctrinal development, and limiting the guidance available to market actors.

The absence of officer doctrine has not gone unnoticed. Academics, jurists, corporate managers, and their counsel have all commented on the ambiguity that exists with respect to the legal rules governing officer decisionmaking and liability. In fall 2018, the Officer Liability Task Force (the “Task Force”) of the American Bar Association (“ABA”) met for the first time to discuss: (1) the uncertainty in the law surrounding the nature and scope of the fiduciary duties of, and applicability of the business judgment rule to, corporate officers; and (2) potential ways to address that uncertainty, including whether any potential products, such as annotated model employment agreements, would assist in providing additional clarity. The Task Force's objectives are, however, relatively narrow ….

This Article tackles the broader issues raised by the Task Force's work, taking a deep dive into the issue of private ordering of corporate officer fiduciary obligations and liability.

January 24, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, January 20, 2021

Is Critical Race Theory Headed to the Supreme Court?


Via Christopher Rufo (here):

Today, President Biden rescinded the Trump executive order banning critical race theory training programs from the federal government.

Critical race theory is a grave threat to the American way of life. It divides Americans by race and traffics in the pernicious concepts of race essentialism, racial stereotyping, and race-based segregation—all under a false pursuit of “social justice.” Critical race theory training programs have become commonplace in academia, government, and corporate life, where they have sought to advance the ideology through cult-like indoctrination, intimidation, and harassment.

It is time to fight back. Last year, I declared a “one-man war” against critical race theory, which led to the presidential order banning these trainings from the federal government. Today, I am announcing a new coalition of law firms and legal foundations with the explicit goal of fighting critical race theory in the courts. This coalition, called Stop Critical Race Theory, has already filed three lawsuits against public institutions conducting critical race theory programs and, in the coming months, will file additional lawsuits in the state and federal courts.

Our ambition is to take one of these cases to the United States Supreme Court and establish that critical race theory-based programs—which perpetuate racial stereotypes, compel discriminatory speech, and create hostile working environments—violate the Civil Rights Act of 1964 and the United States Constitution.

January 20, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Monday, January 18, 2021

Akron Law Dean Peters on "Letter from a Birmingham Jail"

[I found the following in my inbox this morning and subsequently received permission from Dean Peters to republish it here.]

Dear members of the Akron Law family,

Over the weekend, I revisited Martin Luther King Jr.’s astounding Letter from a Birmingham Jail.  If you haven’t read it, or haven’t read it recently, it is worth ten minutes of your time on this day devoted to Dr. King’s legacy.  (Be aware that Dr. King twice repeats an offensive epithet in the Letter to describe racist insults in the South.)  Letter from a Birmingham Jail is essential reading for all Americans, and it carries particular significance for lawyers.

Dr. King wrote Letter from a Birmingham Jail in April 1963, at the height of the Civil Rights Movement and a few months before his “I Have a Dream” speech in Washington.  He and his colleagues had been arrested for illegally marching to protest segregation in Birmingham, Alabama, the fiefdom of the infamous Theophilus Eugene “Bull” Connor and his fire hoses and police dogs.  While Dr. King sat in jail, a group of white Alabama clergymen published an open letter denouncing King’s methodology of public (and sometimes illegal) protest and resistance.  The white clergy insisted that the anti-segregationist cause “should be pressed in the courts and in negotiations among local leaders, not in the streets.”

Letter from a Birmingham Jail was Dr. King’s response to this indictment, and there are many aspects of it that remain strikingly resonant today.  The Letter is a cogent defense of civil disobedience, one of the most eloquent explorations of that topic ever written.  But it is not an excuse for thoughtless lawbreaking or a call for disobedience without consequences.  And it is a powerful rejection of the urge to violence.

In the Letter, Dr. King argued that while a person “has not only a legal but a moral responsibility to obey just laws, … one has a moral responsibility to disobey unjust laws.”  But King was meticulous about the distinction between just and unjust laws.  An unjust law is not simply a law that one does not like, or even a law that one personally believes to be unjust.  Rather, an unjust law is one that is rotten at its core – a law that is made or applied so as to deny the equal humanity of those it purports to bind.  For example, King wrote, “[a] law is unjust if it is inflicted on a minority that, as a result of being denied the right to vote, had no part in enacting or devising the law.”

Segregationist laws were unjust in this way, Dr. King understood, and so disobedience of them was justified.  But even those who engage in justified disobedience had to be willing to pay the consequences:  “In no sense do I advocate evading or defying the law ….  That would lead to anarchy.  One who breaks an unjust law must do so openly, lovingly, and with a willingness to accept the penalty.”  For King, “an individual who breaks a law that conscience tells him is unjust, and who willingly accepts the penalty …, is in reality expressing the highest respect for law.”

Dr. King thus accepted the crucial distinction between peacefully resisting a particular unjust law and “defying the law” itself.  And he emphatically rejected the legitimacy of violent disobedience of the law.  In his Letter, King denounced the “force … of bitterness and hatred” that tugged at some opponents of segregation, one that “comes perilously close to advocating violence.”  In place of violence, King advocated “a type of constructive, nonviolent tension which is necessary for growth. …  It seeks so to dramatize [an] issue that it can no longer be ignored.”

These central threads of Dr. King’s message – the legitimacy of peaceful civil disobedience and the illegitimacy of unequal laws; the importance of respect for the underlying institution of the law; and above all the utter rejection of violence – deserve our attention now.  And there is another dimension of Letter from a Birmingham Jail that carries lessons for us today.  The Letter is an unfailingly civil document and a fastidiously reasoned one.  King takes his antagonists to task, certainly; but he never insults them or the intelligence of his readers.  He recognizes that his real audience is the nation and posterity, not the intransigent white clergymen whose letter sparked his reply.  And so he is careful about his facts and scrupulous about his assertions.  He lets his arguments speak for themselves.

Dr. King was an extraordinary man who lived in extraordinary times.  We live in such times too, and although we can only glimpse Dr. King’s greatness across the distance of years, we can aspire for ourselves to the values he espoused:  civility in the face of deep disagreement; reasoned argument supported by facts; abhorrence of violence; and an unflinching desire to make our laws more just.

Please be well; be safe; and be kind and respectful to each other.

All best,


January 18, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Thursday, December 17, 2020

AALS Panel: Perspectives on Shareholder and Stakeholder Primacy (Friday, January 8, 2021, 1:15 - 2:30 pm)

If you are attending the AALS Annual Meeting, I hope to see you here (Zoom link details forthcoming):

For Whose Benefit Public Corporations? Perspectives on Shareholder and Stakeholder Primacy
Sponsored by the Section on Socio-Economics
Co-Sponsored by the Sections on Business Associations and Securities Regulation 
Friday, January 8, 2021, 1:15 - 2:30 pm
(Papers drawn from this program will be published in the University of the Pacific Law Review)

Program Description

On August 19, 2019, the Business Roundtable, a self-described “association of chief executive officers of America’s leading companies,” issued a statement seeking to redefine the purpose of the corporation by moving away from shareholder primacy and towards a “commitment to all stakeholders.” Since that time, corporate governance experts have continued to vigorously debate the merits of shareholder primacy and stakeholder primacy. Focusing on tensions and synergies among the financial and other socio-economic interests of the corporation and its fiduciaries, shareholders, and other stakeholders, this panel seeks to provide relevant perspectives on the current state of this debate.


Robert Ashford (Syracuse)
Lucian Bebchuk (Harvard)
Margaret Blair (Vanderbilt)
June Carbone (Minnesota)
Joshua Fershée (Dean, Creighton)
Sergio Gramitto (Monash)
Stefan Padfield (Moderator, Akron)
Edward Rubin (Vanderbilt)
Marcia Narine Weldon (Miami)

December 17, 2020 in Stefan J. Padfield | Permalink | Comments (0)

ICYMI: SEC v. Robinhood

From the SEC press release (here):

The Securities and Exchange Commission today charged Robinhood Financial LLC for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders. Robinhood agreed to pay $65 million to settle the charges.

According to the SEC’s order, between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money – namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as “payment for order flow.” As the SEC’s order finds, one of Robinhood’s selling points to customers was that trading was “commission free,” but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Despite this, according to the SEC’s order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.

December 17, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 15, 2020

"$20,000 in scholarships are available to the high school students who best answer why 'free speech is a better idea than censorship.'"

For the high school student in your life:

The mission of FIRE is to defend and sustain individual rights at America’s colleges and universities. These rights include freedom of speech, legal equality, due process, religious liberty, and sanctity of conscience—the essential qualities of individual liberty and dignity. In addition to defending the rights of students and faculty, FIRE works to educate students and the general public on the necessity of free speech and its importance to a thriving democratic society.

The freedom of speech, enshrined in the First Amendment to the Constitution, is a foundational American right. Nowhere is that right more important than on our college campuses, where the free flow of ideas and the clash of opposing views advance knowledge and promote human progress. It is on our college campuses, however, where some of the most serious violations of free speech occur, and where students are regularly censored simply because their expression might offend others....

In a persuasive letter or essay, convince your peers that free speech is a better idea than censorship.

Details here.

December 15, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 8, 2020

Epstein on "Nasdaq’s Diversity Distraction"

Over at Defining Ideas, Richard Epstein notes:

This past week, Nasdaq announced that it had applied to the Securities and Exchange Commission for authorization to impose diversity requirements on the boards of directors of its listed companies. The substantive proposal requires that each company include on its board at least two diverse directors, one of whom must be a woman (or, more precisely, one who self-identifies as female) and one who self-identifies as a member of an underrepresented minority, including “Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities,” or as “LGBTQ+.” Whenever these targets are not met, the listed company must offer a public explanation as to why that is the case.... In defense of its diversity mandate, Nasdaq tries to bring itself within ... traditional rationales by claiming that increasingly diverse boards will help “prevent fraudulent and manipulative acts and practices.” Such avoidance of fraud and manipulation purportedly follows from a decrease in groupthink that comes from airing diverse perspectives.

This made me wonder whether we'll soon be seeing a similarly structured viewpoint diversity proposal from Nasdaq, given that according to the Free Enterprise Project:

The vast majority of members of the boards of directors of the largest companies in the United States are, where their viewpoints are discernable, demonstrably left of center. As Baron Political Affairs, LLC revealed in 2019, every single director of a Fortune 1-10 company who had been elected to political office or who had worked for an administration was (or had worked for) a Democrat. The ratio shifted to 2 Democrats for every Republican in the Fortune 100 generally, but only to 5:1 for financial or tech firms within that group. FEP’s own research, as part of a proposal-review proceeding this past winter, confirmed this trend at AT&T, where every member of the board of directors who had held elective or appointed office had done so as a Democrat or with a Democratic administration.

Turning back to the Defining Ideas piece, Epstein further notes that:

it is appropriate to ask whether the SEC, as a government agency, should give its explicit approval to a policy that introduces explicit racial and gender classifications.... Government imprimatur might give rise to serious constitutional challenges that the Nasdaq report never addresses, let alone resolves.

December 8, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Monday, December 7, 2020

Sharfman on "The Conflict between Blackrock's Shareholder Activism and ERISA's Fiduciary Duties"

Friend of the blog Bernard Sharfman has posted The Conflict between Blackrock's Shareholder Activism and ERISA's Fiduciary Duties (Case Western Reserve Law Review, Forthcoming) on SSRN (here).  The abstract:

The focus of this Article is on the agency costs that may be created by the empty voting of investment advisers to index funds and how they can be mitigated so as to protect the value of private employee pension benefit plans. This Article focuses on BlackRock because it has taken a leadership role in the leveraging of its delegated voting authority. Therefore, the issue I address in this white paper is whether the fiduciary duties of a plan manager of an “employee pension benefit plan,” as authorized under the Employee Retirement Income Security Act of 1974 (“ERISA”), requires it to investigate BlackRock’s shareholder activism. This indirect approach is required as the fiduciary duties of ERISA do not generally extend to mutual funds and ETFs and their investment advisors.

This Article takes the position that a plan manager has a fiduciary duty, the duty of prudence, to investigate BlackRock’s shareholder activism. This duty applies not only to the BlackRock’s mutual funds or ETFs that an ERISA plan invests in but also to those BlackRock fund selections that it makes available to its participants and beneficiaries in self-directed accounts.

Given these fiduciary duties, this Article argues that if a plan manager were to investigate BlackRock’s shareholder activism, especially its engagement strategy, it would likely find it to be in conflict with the manager’s fiduciary duties. Such a finding would require a plan manager to seek out other reasonably available alternatives that is not associated with such shareholder activism.

While the focus of this Article is on BlackRock’s delegated voting authority and associated shareholder activism, it is meant to apply to any and all investment advisers who attempt to leverage their delegated voting authority for purposes of engaging in such activism. Moreover, the Department of Labor should provide guidance to plan managers on when the investment products of investment advisers with delegated voting authority need to be excluded.

This Article was presented at the George A. Leet Business Law Symposium (Case Western Reserve University School of Law) on Nov. 6, 2020.

December 7, 2020 in Stefan J. Padfield | Permalink | Comments (1)