August 29, 2014
icon The Price of Corruption
Posted by Usha Rodrigues

Please don't think me a hypocrite, but despite being a proud, dyed-in-the-wool corporate type, I have penned a con law piece.  In my defense, I came up on the story honestly, while doing empirical work in securities.  And it's just an essay!  Hopefully it won't cost me too much in corporate street cred.

Here's the abstract:

The Supreme Court recently held that campaign contributions under $5200 do not create a “cognizable risk of corruption.”  It was wrong. This Essay describes a nexus of timely contributions and special-interest legislation.  In the most noteworthy case, a CEO made a first-time $1000 donation to a member of Congress.  The next day that representative introduced a securities bill tailored to the interests of the CEO’s firm. 

 Armed with this real-world account of how small-dollar campaign contributions coincided with favorable legislative action, the Essay reads McCutcheon v. Federal Election Commission with a critical eye.  In McCutcheon the Supreme Court assumed that small-dollar donations do not pose a risk of corruption, and accordingly struck down aggregate contribution limits on the theory that the base limit of $5200 provides enough of a bulwark against corruption.  This Essay suggests otherwise.  The fact that the price of corruption is lower than commonly understood has fundamental repercussions for campaign finance law.

Tell me what you think!

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icon Are the Reports of the Cupcake Craze Death Greatly Exagerated?
Posted by Lisa Fairfax

Last month when Crumbs, America's first public cupcake company, announced it was closing most of its stores after its stock was delisted by Nasdaq, and it had defaluted on some $14.3 million in financing, many viewed the annoucement as a sign that the cupcake industry bubble had finally burst.

In the past decade, cupcakes appeared as if they were taking over with businesses sprouting up everywhere.  Not only had cupcakes come to replace traditional cakes at weddings and birthday parties, but people were willing to stand in ridiculously long lines and pay sometimes as much as $5 for a single cupcake or between $30 and $50 for a dozen.  A 2012 story on Georgetown Cupcakes in DC suggested that sometimes the lines could take up to an hour to get through.

Some view the apparent demise of Crumbs as a sign that the cupcake craze was a trend that had finally run its course.  Or put differently, an unsustainable business model.  In addition to concerns about potential market saturation and over exposure, some indicated that pricing was a problem.  Indeed, while cupcakes were touted as an "affordable luxury," some note that at $3.50-$6 each, cupcakes seemed more like an overpriced snack.  As this article suggests, these cupcakes were not something middle America could afford.  Another problem was low cost of entry--potentially reflected in the many people who thought they could give the cupcake business a try.  Still another was diversity--could an industry based on a single food really survive with competitors that offered more than just cupcakes?  And then there was the problem of potentially swimming against the health trend.  Cupcakes seem like a healthier option than your large slice of cake or pie, but alas as a Forbes article points out "your typical large frosted premium cupcake can have as much as 500 calories," and lots of people eat more than just one.

Of course others note that the demise of Crumbs may reflect issues unique to Crumbs.  Indeed, there are some cupcake businesses that continue to thrive.

And even the Crumbs story is not over.  Just this week it was annouced that Crumbs would begin reopening it stores because, as the Wall Street Journal notes, a court signed off on a sale of Crumbs to "self-styled turnaround guru Marcus Lemonis and Dippin Dots owner Fischer Enterprises."  Apparently, part of the turnaround strategy will be moving away from reliance on just cupcakes and incorporating other desserts.

So while the cupcake bubble has certainly gotten smaller, it may be too soon to tell if we can really call the cupcake craze a bust.

Permalink | Businesses of Note, Food | Comments (0) | TrackBack (0) | Bookmark

August 28, 2014
icon 2014 Aspiring Law Professors Conference at Arizona State University
Posted by Christine Hurt

AsuIt is that time again!  Time for appointments committees, FAR forms, and the AALS hiring conference!  If you are going to be on the candidate end of those things this year, or (even better) going to be a candidate next year (or so), then you should definitely make an effort to attend the 2014 Aspiring Law Professors Conference at the Sandra Day O'Connor School of Law at Arizona State University on Saturday, September 27, 2014.

I am being completely honest in saying that this conference has to be the most useful eight hours that you will spend if you are interested in going into law teaching.  Whether you are in practice trying to decide whether to wade into academic waters or a VAP or fellow poised to pounce on the hiring conference in October, this conference is well worth your time and plane ticket.  (There is no registration fee.)  I was honored to be a speaker last year and came away believing that I had never added so much value at any conference before.

What do you get if you go?  You get a few presentations and panels, but you also get one-on-one attention in a mock interview and/or mock job talk.  Now, I know that at a lot of fellowships/VAP programs, you get mock interviews and mock job talks, but not everyone has that opportunity.  And, it's a different feeling when you are having those mock experiences with strangers -- appointments veterans and even deans of other law schools.

Permalink | Law Schools/Lawyering | Comments (View) | TrackBack (0) | Bookmark

August 27, 2014
icon Family Film Blogging: The Hundred- Foot Journey
Posted by Christine Hurt

So, first let me tell you my agenda.  I try to frequent non-animated PG-rated films as much as possible.  Why?  So they will keep them coming.  I like movies that aren't necessarily kids' movies, but are family-friendly.  So, we saw The Secret Life of Walter MittyMillion-Dollar Arm, and now The Hundred-Foot Journey.

Our whole family went, and I have to say we all enjoyed it very much.  The movie did make us very, very hungry, and when we left we all had a huge desire to visit the French countryside.  So, be warned.  The plot is fun:  family from Mumbai, India leaves the country after popular restaurant destroyed by political protestors.  After stopping for awhile in London, the patriarch leads the family into France and decides to start a restaurant in a picturesque village they find when the brakes on their van malfunction.  But, their new restaurant is across the road from a one-star Michelin restaurant, which serves traditional French cuisine.  Hilarity ensues.  Prejudice and jealousy melts into friendship and affection.  And there is Helen Mirren.

Our hero is Hassan, the handsome and brilliantly talented son whose concoctions vault the family restaurant to local fame.  Madame Mallory is the owner of the fancy restaurant who tries to hate him.  Marguerite is the cute sous chef who also tries to hate him.  Neither female succeeds.  Try not to think how the plot is a little similar to Ratatouille.  Just enjoy the pleasant ride that is a feast for the eyes, but unfortunately not for the tastebuds due to limitations on film.  If only the movie could be showed while you enjoyed a great Indian-French fusion meal!

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August 26, 2014
icon Dodd-Frank Whistleblowing Check-In
Posted by David Zaring

Joe Nocera thinks that the new SEC whistleblower program is a winner, as it is rewarding people who go first to the firm, and only then to the agency, and the promise of a payday.

The Dodd-Frank law has provisions intended to protect whistle-blowers from retaliation, but there are certain aspects of being a whistle-blower that it can’t do anything about. “People started treating me like a leper,” recalls Lloyd. “They would see me coming and turn around and walk in the other direction.” Convinced that the company was laying the groundwork to fire him, he quit in April 2011, a move that cost him both clients and money. (Lloyd has since found employment with another financial institution. For its part, MassMutual says only that “we are pleased to have resolved this matter with the S.E.C.”)

In November 2012, MassMutual agreed to pay a $1.6 million fine; Lloyd’s $400,000 award is 25 percent of that. It was a slap on the wrist, but more important, the company agreed to lift the cap. This will cost MassMutual a lot more, but it will protect the investors who put their money — and their retirement hopes — on MassMutual’s guarantees. Thanks to Lloyd, the company has fixed the defect without a single investor losing a penny.

Could be.  The most difficult cases of this kind are those posed by lawyers or compliance officers who go outside their firm, rather than staying within it, when they raise questions.  That's something that seems to be happening at Vanguard right now, and Dave McGowan thinks such disclosures should be okay.  Disclosing private documents more broadly, he feels, looks more like theft:

a former in-house lawyer who has filed a complaint in NY alleging Vanguard has underpaid federal taxes.  Vanguard is reported to accuse the lawyer of breaching confidentiality; the lawyer has asked the SEC to intervene on his side.

Such cases may raise two distinct issues: the report itself, which may fall within exceptions to confidentiality in a Model Rules jurisdiction or under the SEC's rules, and backup for the report in the form of information--such as documents either in hard copy or digital form--the reporting lawyer might take from his or her employment.  Even if we assume the report is protected the taking of documents raises distinct issues regarding client property.  

I tend to think those issues should be resolved as issues regarding the report are resolved--i.e., taking such information does not violate a duty to a client to the extent the information is reasonably necessary to facilitate a permissible report.  In essence the report would create a privilege (in the tort law sense) covering the disclosure to enforcement officials or courts; no privilege would attach if the lawyer put the documents up on the internet or mailed them to a reporter.  

 

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August 22, 2014
icon The Con Law Conundrum
Posted by Usha Rodrigues

The question: to con law or not to con law?

The context: Steve Bainbridge responding to Anne Tucker's post on including a Citizens' United/Hobby Lobby discussion in a BA course (see Anne's reply to Steve here).  The question is a timely one for me:  Georgia Law started classes this week, and I (the rare bird who rotates casebooks because she is easily bored) am happily back teaching from Steve's casebook, co-authored with Klein & Ramseyer, which I highly recommend.  I never hand out a syllabus with assigned readings because invariably we move quicker or slower than I anticipate.  I have to cut or add material, and I find that students find such midstream changes unsettling.  So I don't tell them where we're going til we get there.

But I do have a "working syllabus" I hash out for myself at the semester's opening and tweak as the classes unfold.  As Anne and Steve point out, the semester is ridiculously crowded.  In 3 credits I cover partnership, corporations, and LLCs, and I cover the MBCA and Delaware corporate code.  It's way too much material (as I told my class Wednesday as part of my "drop this class" introductory speech).  My working syllabus has material for each of the 42 50-minute classes I'm allotted, and I agonize over the choices I make in filling each one.  This year, for the first time ever, my roughed-out working syllabus includes a day for Citizens United/Hobby Lobby.

Why?  Steve makes a terrific case for private law, and I am with him.  I love teaching BA for BA's sake.   Explaining to students the basic puzzle of ownership versus control, the different ways to run the railroad in terms of choice of entity and the tradeoffs among them?  Throw in the importance of private ordering and the ability to read a statute, and I'm in heaven.  I'm no public law scholar in sheep's clothing.  I'm a true believer, proselytizing for the beauty of business law in what sometimes does feel like a con law desert.

But I have got more doctrinal material than I can possibly cover.  Throw in a class where I invite in a practitioner, a class for Bill Chandler to talk about whatever the heck it is he wants to, and a review session, and we're talking precious few classes to cover a lot of material.


So why cede a precious class to public law jibber-jabber?  I'm still not sure I will.  But the reason came to me on a playground, chatting with an English professor mom.  We were commiserating over our lack of preparation for the start of the semester (secret: professors procrastinate, too), and she said, "well, it must be nice to teach a subject so interesting to students.  Hobby Lobby, Citizens United."  She nodded knowingly. 

The comment brought me up short.  Nobody things corporations are interestng.  At least, no one used to.  But now they do.  And sure it's for the "wrong" reasons--not for coprorate law reasons, but for reasons that deal with corporations' role in society.   And I think that might be enough to devote one class out of my 42.  Not for Anne's reason,  "to “hook” students who didn’t come to my class with an interest in corporate law."  I'm confident I can hook them on the merits.  But because, as she also says, "Corporate law also matters to general members of society because corporations wield tremendous power in elections, in lobbying (regulatory capture anyone?), in shaping retirement savings, in religious and reproductive rights debates and setting other cultural norms around issues like corruption, sustainability, living wage, etc."  It struck me on the playground that the "legal literacy" reason I give for taking Corporations--it's just something that every lawyer should know--may apply here as well.  With Hobby Lobby we might have reached the point where corporate law literacy demands a passing understanding of these two cases.  

Maybe not.  The CU/Hobby Lobby class may well end up on the cutting room floor.  But one last thing: as I get older, it is increasingly less clear to me that my students retain much past the exam.  What I want them to get out of the class, ultimately, is a basic knowledge of the relevant codes, of the importance of codes, an ability to read statutes, an understanding of the importance of default rules versus mandatory ones, agency costs, the trade-offs in choice of entity, the business judgment rule, and fiduciary duty.  Looked at that way, perhaps one public law class out of 42 isn't too much of a sacrifice in terms of coverage.

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August 21, 2014
icon Outsourcing the Board: A Good Idea?
Posted by Sung Hui Kim

This week’s Economist has a column praising my UCLAW colleague Stephen Bainbridge’s and University of Chicago law professor Todd Henderson’s creative proposal, published in the Stanford Law Review, to replace individual directors with professional-services firms acting as Board Service Providers (BSPs).  (That article can be accessed here.)  The column nicely summarizes the possible impact of such a change:

“Messrs Bainbridge and Henderson argue that this would require only a simple legal change but could revolutionise the stick-in-the-mud world of boards. It would replace today’s nod-and-a-wink arrangements with a market in which rival BSPs compete. It would create a new category of professional director. And it would allow BSPs to exploit economies of scale to recruit the best board members, introduce more rigorous training programmes and develop the best proprietary knowledge. Now, even the most diligent board member can only draw on his or her experience. BSPs would be able to draw on the expertise of hundreds. This would increase the chances that corporate incompetence will be corrected, corporate malfeasance found out and corporate self-dealing, in the form of inflated pay, countermanded.”

The BSP idea is very creative. (Frankly, I am always puzzled by the extent to which academics have trouble appreciating creativity. Perhaps—and I’m speculating here—traits such as creativity are weakly correlated with succeeding in the academic tournament—getting high LSAT scores, writing good law school exams, getting judicial clerkships, and placing law review articles?)  I also agree that introducing market competition by enabling firms to compete on performance will likely benefit consumers and shareholders, as well as increase the leverage of the board vis-à-vis executive officers.

That said, I worry about uncontrolled expenditures as BSPs find yet another reason to bill the corporation another $250,000 for yet another “critical project.” My prior experience as general counsel of a corporation (plus my six years of practicing law in a law firm) make me skeptical of the incentives of partners within firms (“Bill, bill, bill!”). I worry about the ratio of the value of services to cost. While we may see a decrease in executive compensation as a result of increased board leverage, are we going to see an increase in the effective compensation (i.e., including billings) of the board? My guess is yes.

I also worry about the audit/gatekeeping function of the Board.  After all, we have plenty of experience with auditors being firms, rather than individuals. And the record there doesn’t look so hot. Remember Enron and Arthur Andersen? And remember Ted Eisenberg’s and Jonathan Macey’s empirical study suggesting that Andersen was not an outlier but typical?  While gatekeeping theory provides that market gatekeepers, such as investment banks and accounting firms, are incentivized to work hard to prevent malfeasance out of fear that their longstanding reputations will be damaged, the reality is that the reputational informational markets are noisy and manipulable. Moreover, the incentives of the firm’s agent – the functional gatekeeper – may diverge from the incentives of the firm.  In other words, large firms may suffer from principal-agent problems, as has often been alleged with David Duncan, the lead audit partner responsible for the Enron account at Andersen. (In prior work, I wrote about the incentives of firms vs. individuals for the audit/gatekeeping function.)

But I suppose Henderson and Bainbridge would respond that still, those reputation markets would work better with firms competing with one another than the status quo—little to no competition with respect to individual directors (for various reasons).

Perhaps there’s room for compromise. If you’ve been following the accounting profession, you know that the PCAOB (the body that regulates the accounting of public companies) in an effort to improve the transparency of audits has proposed to require the disclosure of the name of the engagement partner for the most recent period’s audit. Also, it has been suggested that the engagement partner individually sign the audit report. It should not be surprising that accounting firms uniformly dislike these suggestions. This indicates that they are probably good ideas. Perhaps, then, as a means of dealing with the principal-agent problem within BSPs themselves and to ensure that the incentives of the firm’s agents (the persons who actually sit in board meetings) are more properly aligned, similar measures should be taken.  

Permalink | Accounting, Business Ethics, Corporate Governance | Comments (View) | TrackBack (0) | Bookmark

August 20, 2014
icon Trying To Understand New York State's Regulation Of Business
Posted by David Zaring

You'd think that the state that's home to the center of American business would take a Delaware-style light touch approach to overseeing it.  But instead, the New York paradigm is to take ambitious politiicans, blend with broadly worded supervisory or anti-fraud statutes like the Martin Act, and come up with stuff that, to my ears, sounds almost every time like it is off-base, at least in the details.  So:

  • Eliot Spitzer pursued research analysts for the sin of sending cynical emails even though they issued buy recommendations, despite that fact that analysts never issue negative recommendations, and if cynical emails are a crime, law professors are the most guilty people in the world.
  • I still don't understand what Maurice Greenberg, risk worrier par excellence, did wrong when he was running AIG.  I do know that after he was forced out by Spitzer, the firm went credit default swap crazy.
  • Maybe there's something to the "you didn't tell your investors that you changed the way you did risk management for your mortgage program" prosecutions, but you'll note that it is not exactly the same thing as "you misrepresented the price and/or quality of the mortgage products you sold" prosecutions, which the state has not pursued.
  • Eric Schneiderman's idea that high frequency trading is "insider trading 2.0" is almost self-evidently false, as it is trading done by outsiders.
  • Federal regulators wouldn't touch Ben Lawsky's mighty serious claims that HSBC or BNP Paribas were basically enabling terrorist financing.
  • And now Lawsky is going after consultants for having the temerity to share a report criticizing the bank that hired them to review its own anti-money laundering practices with the bank, who pushed back on some, but not all of the conclusions.

The easiest way to understand this is to assume that AGs don't get to be governor (and bank supervisors don't get to be AGs) unless people wear handcuffs, and this is all a Rudy Giuliani approach to white collar wrongdoing by a few people who would like to have Rudy Giuliani's career arc.

But another way to look at it is through the dictum that the life of the law is experience, not logic.  The details are awfully unconvincing.  But these New York officials have also been arguing:

  • Having analysts recommending IPO purchases working for the banks structuring the IPO is dodgy.
  • HFT is front-running, and that's dodgy.
  • This new vogue for bank consulting is dodgy, particularly if it's just supposed to be a way for former bank regulators to pitch current bank regulators on leniency.
  • If we can't understand securitization gobbledegook, we can at least force you to employ a burdensome risk management process to have some faith that you, yourself, understand it.
  • And I'm not saying I understand the obsession with terrorism financing or what the head of AIG did wrong.

Their approach is the kind of approach that would put a top banker in jail, or at least on the docket, for the fact that banks presided over a securitization bubble in the run-up to the crisis.  It's the "we don't like it, it's fishy, don't overthink it, you're going to pay for it, and you'll do so publicly" approach.  It's kind of reminiscent of the saints and sinners theory of Delaware corporate governance.  And it's my pet theory defending, a little, what otherwise looks like a lot of posturing.

Permalink | Administrative Law, Finance, Financial Crisis, Financial Institutions, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

August 19, 2014
icon In Praise of Maritza Munich
Posted by Sung Hui Kim

The blogosphere is filled with chatter about the recent decision Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014), in which the Delaware Supreme Court en banc explicitly endorsed the Garner exception to the attorney-client privilege in a Section 220 books-and-records proceeding. But there been less attention showered on Maritza Munich, the general counsel of Walmart International, who resigned. As the court opinion tells us, Munich tried to stop the bribery scandal that was unfolding at the world’s largest retailer. As summed up nicely by Michael Scher of the FCPA Blog (HT to Stephen Bainbridge):

“As head of international compliance, Munich insisted on an investigation of a ‘campaign of bribery’ in Mexico and the top manager who led it. According to ongoing media reports, the top executives of Wal-Mart blocked the investigation. She then ‘resigned,’ while other executives were promoted.

Munich’s career at Wal-Mart was stolen from her. Instead of incentive pay, a bonus, and a stellar career, she lost out on the recognition, respect and financial security she deserved for doing a [compliance officer’s] job when it mattered most.”

I think it is important to circulate stories of lawyers who take ethical stands against those who hold power over them. Although martyrs and whistleblowers are common subjects of films and books, as I’ve argued in prior work and based on a plethora of research in sociology departments and management schools, such acts of courage and integrity are rare. But they do happen and, when we encounter such an instance, we should take a moment and celebrate that person's courage.

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icon Does the Public/Private Divide in Federal Securities Regulation Make Sense?
Posted by Usha Rodrigues

Like Lisa, I participated in this excellent discussion group at the SEALS conference co-organized by Joan Heminway.  As I told co-organizer and friend-of-Glom Mike Guttentag, for a week I had a Word document open with the titular question at the top.  Participants were supposed to submit a 2-3 page paper before the meeting.  I totally lamed out.  I kept trying to write, but couldn't come up with anything coherent. 

I do have an answer to the question, though: Yes, the public/private divide does make sense.  But it's gone, daddy, gone. 

As I said at the conference, I think I'm essentially a conservative person: I'm resistant to change.  And when I learned the world of securities, it seemed to me that there was this Grand Bargain.  If you wanted to go public, you got many benefits, most notably a high degree of liquidity and access to public capital markets.  But you had to take the bitter with the sweet: mandatory disclosure and increased liability risks.  If you stayed private, your equity was far less liquid, and you couldn't make use of general solicitation.  Your capital raising was much more circumscribed.  But within those limitations you were free to order the firm more or less as you saw fit.  Other substantive areas of law of course constrained private firms--environmental law, labor law, etc.--but in terms of corporate and securities law, they were relatively free.  I realize this is a simplification, but in broadstrokes I think it's true.

No more.  The Grand Bargain is gone. General solicitation for private firms.  Conflict minerals rules.  Emerging growth companies.  Disclosure of executive pay ratios. Private secondary markets.  Dodd-Frank, the JOBS Act, and technology have made a hash out of it.  Or at least, the line between public and private is blurred.

This blurring makes me uneasy.  I feel like there's a disruption in the natural order of things. But I can't tell if that's my innate conservatism talking, or if there really was something we lost with the Grand Bargain. 

Permalink | Rants, Securities | Comments (View) | TrackBack (0) | Bookmark

August 18, 2014
icon Family Film Blogging: Guardians of the Galaxy
Posted by Christine Hurt

Man, the deadweight loss of moving cannot be underestimated!  We are finishing the busiest yet least productive summer in history, but we did find time to go to the movies!

So, I'll start with the fact that when we saw the trailer for Guardians of the Galaxy, I looked over at our youngest and said, "You will have to make Dad take you to that one."  A racoon?  I don't think so.  I have taken the kids to a lot of really dumb movies (top of that list:  Dougal, Space Chimps, Ice Age 24), but I have standards.  A superhero raccoon is where I draw the line.  Can you see Iron Man fighting side by side with a raccoon?  No.  But then, when the movie came out a few weeks ago, the reviews were pretty universally great.  And, there was a lot of construction and confusion at my house.  So, off to Guardians of the Galaxy we went.

My take:  Guardians is the Fletch of the Marvel universe.  That is a compliment.  The movie has a lot of action, violence, etc., but it's also really funny.  And not funny every half hour like the Avengers or even the Iron Man series, but funny throughout.  The big four Avengers are serious.  Captain America is super-serious, and Thor couldn't even get the timing right on the funniest line in the Avengers ("He's adopted.")  Tony Stark is usually funny, but had serious mental illness in his last movie that dampened the mood.  Peter Quill (aka Star Lord or Star-Lord) is mostly funny.  Action comedies are a hard combination to get right, but Guardians seems to get it right.  We started quoting the movie as we were walking out of the theater, and are still quoting it today.

For Marvel junkies out there, the Peter Quill backstory does not follow any of the various Marvel narratives.  In the movie, his mother dies, apparently from cancer, when Peter is small.  She speaks lovingly of his father, who she believes will return to them.  Minutes later, a spaceship arrives at the hospital and takes Peter away.  The next time we see him, he is a grown man flying around the galaxy retrieving artifacts for shadowy clients.  (The second scene is reminiscent of Indiana Jones, but Peter Quill is no archaelogical genius.)  Unfortunately, he unwittingly becomes involved in a high-stakes grab for a valuable object, the importance of which ties this movie into other Marvel movies.

Quill eventually bands together with four others -- Rocket (the raccoon), Drax (who looks like a body builder, but seems to lose most fights for some reason), Groot (a tree-man), and Gamora (the requisite female).  The movie is very self-aware, and people don't just casually join up with a talking raccoon.  There is quite a bit of condescension there, which gets dispelled, thereby dispelling my own skepticism.  Groot is the fan favorite, and Gamora is sufficiently complex and interesting to be more than just the token girl.  Most of the buzz about the movie is how awesome Chris Pratt (Parks & Rec, Lego Movie) is as Quill/Star-Lord.  He is very enjoyable.  Indiana Jones Harrison Ford enjoyable, I'm not sure.  We'll (anxiously) wait for the sequel.

One caveat:  The Marvel/Avengers movies are fairly family-friendly.  (Our 6 year-old is still a little too freaked out by the more graphic and dark Iron Man movies, though.)  Guardians is definitely more on the 13-level of PG-13 for language than it needs to be, but your mileage may vary.

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August 17, 2014
icon After the Deal: Fannie, Freddie and the Financial Crisis Aftermath, by Davidoff Solomon and Zaring
Posted by David Zaring

Steve Davidoff Solomon and I have put together a paper on the litigation between the government and the preferred shareholders of Fannie Mae and Freddie Mac.  Do give it a look and let us know what you think.  Here's the abstract:

The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.

Permalink | Administrative Law, Corporate Law, Financial Crisis, Financial Institutions | Comments (View) | TrackBack (0) | Bookmark

August 16, 2014
icon Ownership and Control in Startups
Posted by Gordon Smith

Since reading Barbarians at the Gate in the early 1990s, I have been a huge fan of business histories. Although I have read scores (perhaps hundreds) of business histories, my list of "must reads" is still long. Recently, I decided to read one of the books on that list, The Soul of a New Machine, Tracy Kidder's account of Data General's efforts to build a minicomputer in the 1970s. This book was published in 1981, and it deals with events during my high school years, so it is a great trip down memory lane.

Here is an observation about the founders of Data General early in the book:

Some notion of how shrewd they could be is perhaps revealed in the fact that they never tried to hoard a majority of the stock, but used it instead as a tool for growth. Many young entrepreneurs, confusing ownership with control, can't bring themselves to do this.

Hmm. The distinction between ownership and control is a familiar one in corporate law circles, but this Berle-Means concept is typically applied to large corporations. What does it mean in the startup context?

Chuck O'Kelley examines the connection between entrepreneurship and the Berle-Means corporation in his 2006 article, The Entrepreneur and the Theory of the Modern Corporation, 31 J. Corp. L. 753, but I am curious about viewing this from the other direction. As noted by O'Kelley, the separation of ownership and control is used by Berle and Means to describe firms after the decline of the classical entrepeneur, so it seems somewhat surprising to see Kidder use those terms to describe a startup.

Founders often exert a tremendous influence on a company, even when shares are held by other employees and investors. This control may emanate from their formal positions within the company (CEO, CTO) or perhaps from the respect they are paid from other employees. But I think it is fair to say that ownership matters a great deal in the startup context because it is more concentrated than in the public company context. Thus, to a large extent, ownership is control in a startup.

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August 15, 2014
icon Paul MacMahon on Good Faith and Fair Dealing
Posted by Gordon Smith

In Good Faith and Fair Dealing as an Underenforced Legal Norm, Paul MacMahon of the London School of Economics explores the divide between "the rhetoric of good faith and fair dealing and the reality of judicial enforcement." MacMahon relies in part on Meir Dan-Cohen’s distinction between conduct rules and decision rules, which corporate law scholars should recognize from discussions of the business judgment rule by Mel Eisenberg, Julian Velasco, and others. MacMahon also references the substantial literature on underenforcement in constitutional law. And, of course, the vast discussion of the duty of good faith and faith dealing, which contract scholars know well. The thesis is elegant: "the underenforcement idea allows courts to lend their expressive support to the broader norm while avoiding the negative side effects that attempted full enforcement would entail."

This is a great paper, but the most intriguing comes near the end and I hope MacMahon plans to develop this idea in a future paper. The idea emanates from a fairly simple extension of the idea of underenforcement: if underenforcement of the legal norm of good faith and fair dealing is the right strategy, what is the optimal level of enforcement? To MacMahon's credit, he recognizes that the optimal level may vary by circumstance: 

There is no a priori reason why the choice of decision rule should be made at the wholesale level. In different contexts, the relative strengths of judicial enforcement and alternative mechanisms for inducing compliance with good faith and fair dealing will wax and wane. Accordingly, it probably makes sense for scholars and courts to develop differing levels of scrutiny for good faith and fair dealing claims. A single doctrinal test has the merit of simplicity, but a one-size-fits-all approach is unlikely to be optimal.

My sense is that Delaware courts are doing something like this with fiduciary law (indeed, I am writing a paper on this topic), and I suspect that other common law courts are calibrating the duty of good faith and fair dealing.

This is a well-researched, well-written, thought-provoking article, and I recommend it highly.

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August 14, 2014
icon The Argentinian Sovereign Bond Litigation, Part III
Posted by Sung Hui Kim

The saga of Argentina v. NML Capital, Ltd. (known by the anti-hedge fund camp as “Argentina v. Vulture Funds”) continues. And it’s getting pretty heated. Argentina published a two-page ad in the New York Times and The Wall Street Journal last Thursday, calling the judgment of the original U.S. court finding against Argentina (Judge Griesa of the federal district court of Manhattan) “erroneous and improper” and maintaining that Argentina had not defaulted on its debt obligations because the country deposited the money necessary for an interest payment due to the restructured bondholders on June 30. (Note: Every default has a 30 day grace period.) Argentina’s action is contemporaneous with its filing of a case against the U.S. in the International Court of Justice, contending that the U.S. court judgments violated its sovereignty. In response to the ad, Judge Griesa issued a summons to Argentina’s lawyers to appear in his court last Friday.  Judge Griesa told Argentina to cease making “false and misleading” statements about its debt obligations (i.e., that it did not default); also, if Argentina defies his orders, he would have to consider finding Argentina in contempt of court. Perhaps Griesa is annoyed with reports that Argentina is waging a social media campaign against the court rulings:

“Argentina recently sought to vilify not just the hedge funds [holding out from Argentina’s restructuring] but also Judge Griesa, resulting in a social media campaign under the name #GrieFault. In Argentina, posters have been mounted around the capital of Buenos Aires with images of Judge Griesa’s head imposed on the body of a vulture.” [NY Times]

The NY Times’ story can be found here. Parts I and II of this blogpost can be found here and here.

***

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