As Joan Heminway has pointed out, I participated in a discussion group at the SEALS annual conference last week entitled "Does the Public/Private Divide in Securities Regulation Make Sense?" It was an engaging discussion with a lot of interesting ideas and views shared. Part of the discussion focused on the notion of "publicness" as that term was used by Hillary Sale, Don Langevoort and Bob Thompson. That is, a public-driven demand for regulation of public corporations that accounts for more than just managers and their shareholders, but also for a corporation's "societal footprint" and its impact on non-shareholder constituents. As Sale puts it, "the failure of officers and directors to govern in a sufficiently public manner has resulted not only in scandals, but also in more public scrutiny of their decisions, powers and duties." Sale suggests that because the definition of public corporation and the public's view of the corporation has evolved, directors' and officers' understandings of their obligations needs to evolve. I was in Boston this past weeked at the ABA annual meeting, and it struck me that the ongoing back and forth at the grocery chain Market Basket raised some interesting issues surrounding publicness.
Market Basket is a private company with 25,000 employees and 71 stores in Massachusetts, New Hampshire and Maine caught in a battle for control. In June 2014, then president Arthur T. Demoulas and two other executives were ousted by the board, controlled by Arthur T.'s cousin Arthur S. Demoulas. Since that time, the company has been plagued by rallies, strikes, and protest, one attracting crowds of over 5,000, seeking to reinstate Arthur T. According to the Boston Globe, the turmoil apparently has "crippled" the company's operations, resulting in the company losing "millions of dollars a day," "stores with little food," and a "steep decline in business." Apparently, the outpouring of support for Arthur T. stems from his support of employees, which includes not only ensuring that managers and other employees are well-compensated and receive regular bonuses and special benefits, but also his "personal touch"--remembering the names of low-level employees and their sick relatives.
Last Friday, Massachusetts Governor Deval Patrick entered the fray, which news outlets found remarkable because until that time the governor had insisted that he would not get involved in what he termed a "private" dispute between a company and its shareholders. But it seems like the public impact of that dispute compelled him to act. The governor wrote a letter to the Market Basket board offering to help resolve the dispute. Although the governor insisted that he would not take sides, the letter noted that the dispute had gotten "out of hand." The letter went on to state, in part: "Your failure to resolve this matter is not only hurting the company's brand and business, but also many innocent and relatively powerless workers whose livelihoods depend on you."
The dispute is still ongoing and involves a lot of important issues both related to employees and the struggle for control of the company, but the dispute and the letter is an interesting commentary on publicness and the idea that even directors of private companies must be aware of the impact of public scrutiny and the manner in which that scrutiny may shape their decisions, powers, and duties.
I very modestly like living wills, though they seem like a bother that would have to constantly be amended each time a bank's positions change. The Fed and FDIC rejected every living will submitted to them by a big bank last week, and we will outsource commentary to Stephen Lubben:
take a look at something like JPMorgan Chase’s recently released living will — or at least the bit that we are allowed to see.
Under the heading of “material entities” we are apprised of more than two-dozen legal entitles, and a host of branches, too. The relationship between these entities is not always clear — let’s hope the Fed and the F.D.I.C. get an org chart — but the names of several foreign jurisdictions pop up, as do some special treats, like the entity incorporated in Delaware that operates primarily out of its London branch. That would be an interesting Chapter 11 case.
The report also shows that “securities sold under agreements to repurchase” remains the single largest source of funding for JPMorgan after equity, representing some $155 billion of its total funding package. As others have noted, repurchase agreements were at the very heart of financial crisis.
Thanks to Gordon Smith for inviting me to guest blog on The Conglomerate. Having long been a big fan of Gordon’s work, I was gratified to finally meet him at the April 2014 conference/micro-symposium on Competing Theories of Corporate Governance, hosted by my friend and wonderful colleague Stephen Bainbridge and the Lowell Milken Institute for Business Law and Policy, UCLA School of Law. (The conference was a wonderful opportunity to debate and discuss the competing models of corporate governance with the leading proponents of those models. Streaming links to the conference panels can be found here.)
Although most of my work has been devoted to federal insider trading, the role of in-house counsel, and gatekeeping, what I’d like to write about this week is . . . sovereign debt. If you’ve been paying attention to the international financial news lately, you may have noticed that on Wednesday, July 30, Argentina missed its regular bond payment and defaulted for the second time in 13 years. This second default occurred after mediated talks between Argentina and a group of hedge funds broke down. The first default occurred in 2001 after which Argentina proceeded to restructure its debt by offering a take-it-or-leave-it exchange of new discounted bonds for old ones. At the end of the day, almost 93 per cent of Argentine bond investors consented to taking writedowns in two Argentine debt restructurings. But a group of hedge funds refused to participate in the restructuring and demanded full repayment, suing Argentina in NML Capital, Ltd. v. Republic of Argentina in New York. Because it’s notoriously difficult to enforce debt collection against a sovereign state, Argentina believed that it could simply exclude these defiant holdouts from the repayments.
Not so. In 2012, Argentina’s expectations were upended, when—in a highly controversial decision—Judge Thomas P. Griesa of the federal district court in Manhattan ruled that Argentina could not continue to pay the restructured bondholders without also paying the hedge fund holdouts in full. Moreover, any bank that aided the payment to holders of restructured bonds without also paying the old bonds held by the holdouts would be in violation of the court order. Judge Griesa’s ruling was affirmed by the U.S. Court of Appeals for the Second Circuit, and in June 2014 the U.S. Supreme Court declined to hear Argentina’s appeal.
Whether you side with the hedge fund holdouts or Argentina, commentators generally agree that these rulings against Argentina have at minimum a (short-term) destabilizing impact on the sovereign debt markets. For example, Floyd Norris (NY Times), notes that by rejecting Argentina’s appeal, the Supreme Court “most likely damaged the status of New York as the world’s financial capital. It made it far less likely that genuinely troubled countries will be able to restructure their debts. And it increased the power of investors — often but not solely hedge funds that buy distressed bonds at deep discounts to face value — to prevent needed restructurings.”
Professor Tim Samples (UGA) opines in a recently released article that the current state of affairs is “… a radical departure from the traditional unenforceability of sovereign debt in favor of the opposite extreme: enforcement through potent injunctive remedies applicable to third parties” and that these decisions “create major uncertainties for sovereign debt markets.”
Professor Joseph Stiglitz (Columbia, former chief economist of the World Bank) warned: “Unable to restructure, governments that default would be permanently shut out from the debt market, with consequential adverse effects on development and economic growth prospects.”
Professor Mitu Gulati (Duke): “The decision has very significant implications . . . . The world has changed.” And Professor Mark Weidemaier (UNC) warns about the expansive coverage of Griesa’s injunction: “The injunction by its terms extends to virtually the entire global financial system.”
So how did we get into this mess and what’s the long-term impact of these judicial decisions? To answer both questions, we need to focus on the particular clause in the Argentinian bonds that has been the subject of a growing body of scholarship and that has served as the legal hook for these judicial rulings: the pari passu (equal footing) clause. Now that we’re up to speed on the general factual background of the Argentinian debt litigation, in a follow-up post, I will discuss recent scholarship on the history and disputed meaning of the troublesome pari passu clause.
We are pleased to welcome Sung Hui Kim of the UCLA School of Law as a guest blogger for the next two weeks. Sung is Professor of Law and Director of the General Counsel Initiative, Lowell Milken Institute for Business Law and Policy at UCLA. She has taught Business Associations, Contracts, Professional Responsibility, and Securities Regulation, among other things, and her current research interests lie at the intersections of professional responsibility, securities regulation, and corporate governance. I am particularly fond of her recent papers on insider trading, which you can find here and here. Welcome, Sung!
Position Announcement – Washington and Lee University
The Department of Business Administration in the Williams School of Commerce, Economics & Politics at Washington and Lee University invites applications to fill a full-time tenure-track or clinical appointment in Business Law beginning in August 2015. The successful candidate will be hired at the Assistant Professor/Clinical Assistant Professor or Associate Professor/Clinical Associate Professor rank. Candidates applying at the Assistant Professor/Clinical Assistant Professor level should have at least three years of successful teaching experience at an AACSB accredited institution.
This position is a tenure-track or clinical appointment that requires a strong commitment to excellence in teaching in an undergraduate liberal arts environment. A qualified candidate for the tenure track appointment must demonstrate the capacity to conduct ongoing scholarly research that is consistent with the rank sought. A qualified clinical candidate must demonstrate the ability to remain engaged appropriate professional activities. The position requires appropriate service contributions to the W&L community including advising undergraduate business administration majors.
The successful applicant will teach Business Law (a core course in the business administration major) as well as electives. W&L provides faculty the opportunity to develop appropriate courses that are of interest to the faculty member and for which there may be student demand. In particular we are interested in the areas of negotiations, entrepreneurship, international law, or corporate governance.
Candidates must have a J.D. degree from an ABA accredited law school. Candidates with a second degree in a business-related field, a record of publishing in the field of business law, business or professional experience, and/or teaching experience in higher education in the field of business law are particularly encouraged to apply.
Applicants should send a letter of interest, curriculum vita, and teaching evaluations to: businessLaw@wlu.edu. Review of applications will begin immediately and continue until the position is filled. All application materials must be submitted by is October 15, 2014. Please state in your cover letter if you will be attending the Southeastern Academy of Legal Studies in Business conference.
If you have questions about the position, please contact Bob Ballenger, Head, Business Administration Department, email@example.com.
Washington and Lee is a highly selective, private, liberal arts university with 1800 undergraduates, located in the Shenandoah Valley in Lexington, Virginia. One of the nation’s finest liberal arts colleges, W&L is unique in having accredited pre-professional undergraduate programs in business administration, journalism, and accounting, plus a graduate School of Law. Established in 1749, it is the ninth oldest institution of higher learning in the nation. To learn more, please visit www.wlu.edu.
Washington and Lee University is an Equal Opportunity/Affirmative Action Employer.
Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
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I think I'm not alone in saying that Dan Markel's murder has thrown me. In fact, I know that from attending his memorial this past Monday at SEALS. The sudden death of one so young and vibrant is always shocking, and a violent murder all the more so. Amongst all the strangeness, one of the things that still feels strange is the way I learned about Danny's death: Facebook.
I've been hesitant to post this because it feels too personal-- transgressive of rules I can't articulate but which remain potent. But if I have taken anything from reading and listening to people's reminiscences of Danny, it's that he would have said "Just post it, Usha. Just blog. Start a conversation."
1. The discovery. I heard about Danny's death via text-- basically out-of-the-blue news that he'd been shot and killed. Nothing more. Incredulous, I went to Google. Nothing. Nothing. But on Danny's Facebook wall kept appearing post after post saying farewell, offering condolences. Thankfully someone had asked in a comment "Wait, what happened?" A comment thread elucidated the bare (and untrue) fact that it was a home intrusion.
2. The quest for information: For two days I kept returning to Danny's page, reading messages and grasping at rumors and details. I mostly lurk on Facebook, looking at photos and keeping up with people's lives. Suddenly, however, Facebook had a non-frivolous function: it was an efficient and effective way for an impromptu community based around one person to communicate news on the murder investigation and information about memorials, funds established for the boys, and funeral arrangements.
3. The grief. And here's the heart of it. Danny's Facebook page became this impromptu site for mourning and outpourings of grief. Many--indeed, most--of the messages addressed Danny personally and unself-consciously: "I will miss you. The last time I saw you...." Other messages voiced the awkwardness I felt, and went along the lines of messages of "This seems like an odd place to express my feelings, but Danny loved social media so much..." and went on to share their story. One,which particularly stopped me, was addressed to Danny's beloved sons. The writer averred that someday they would read these testimonials, which would let them know how important and beloved a man their father was.
Is this grief today? Facebook allows you to meorialize a deceased person's account. The account remains in a sort of suspended state: no friends or photos can be added, but the deceased's friends can share memories and even "send private messages to the deceased person." I have known only a few friends who have died with Facebook pages. They have remained, and on certain dates (often birthdays), their friends post tributes or just short notes of remembrance. I think Facebook's policy is that they can remain indefinitely. Which is to me equal parts comforting and disconcerting.
I look at Facebook a little differently now. For one, I can see that it is a powerful, perhaps uniquely efficient way for disparate individuals united in their caring for one person to share information in times of crisis. It is also a private community created by the deceased himself that can share their grief. That fact is important, I think. That Danny himself had chosen his friends meant that implicitly we could be trusted. The private nature of his page was especially important in a high profile murder case: I was contacted by a few members of the press. I am sure that on a public forum many would have refrained from posting at all.
Still, I was uneasy expressing myself to that community. I felt like I should say something, but I wasn't sure exactly what to say, or to whom I was speaking. Ultimately (wouldn't you know) I blogged and posted that link to Danny's page. While I knew Danny from starting law teaching at the same time, most of our recent interactions had been blogging-focused, so that seemed right. And Danny was never one to shy away from difficult or uncomfortable topics, so here's this question is a tribute to him: has Facebook changed the manner in which we grieve?
Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).
For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”). Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?
Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.
1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation. Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here. Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.
In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.
2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.
One caveat that is relevant to all nonfinancial disclosure regimes: The scope of firms required to disclose should be considered. I do not believe that the case is convincing that only public reporting companies under the securities laws should be included. (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,” 112 Harvard Law Review 1197 (1999)). Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate: the Federal Election Commission for political disclosures and the EPA for environmental disclosures.
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In the American Journal of International Law, Dick Stewart has an excellent piece on Remedying Disregard In Global Regulatory Governance: Accountability, Participation, and Responsiveness. I've got a commentary on it over at AJIL Unbound. A taste:
It may also be the case that as these bodies weave increasingly elaborate cross-border regulatory webs, they have no choice but to resort to something that looks quite law-like. In financial regulation, I view global administration as a sort of administration that has increasingly adopted stable bedrock principles that would be familiar to any international economic lawyer; indeed, given the importance of the cross-border work done to oversee financial institutions, it would be surprising if a measure of consistently applied rules, reason-giving, and transparency were not adopted. The banks being supervised would certainly find it arbitrary if done differently.
Do give the rest a look.
Thanks to Gordon Smith and my Wharton colleague David Zaring for inviting me as a guest blogger on The Conglomerate. I am a new entrant in the blogosphere here, and I appreciate this invitation very much.
What follows is a written version of remarks that I presented at the Society for Business Ethics in Philadelphia on August 3 at a panel on “Corporate Personhood – For or Against or Whether It Even Matters?” organized by Kendy Hess of Holy Cross. (Thanks, Kendy!) The panel also included excellent presentations on the topic by two of my Wharton colleagues, Gwen Gordon and Amy Sepinwall, as well as Kendy. A longer version will be presented in a conference in London in September, and a written version will also be included in a book that I'm co-editing with Craig Smith called The Moral Responsibility of Firms (forthcoming in Oxford University Press). It will also inform chapter 1 of a book that is underway (and still forthcoming) currently called Rethinking the Firm: An Interdisciplinary Interpretation (also under contract with OUP).
In these posts, I've been kindly invited to revisit some themes of my new book on Business Persons: A Legal Theory of the Firm. So I hope that I'll generate some interest in the book: or perhaps make some of the ideas there more accessible in "blog-sized" pieces. The following contribution is a first entry.
Let me be provocative first and say affirmatively: Corporations are legal persons and it matters. The thesis is qualified, however, by the fact that to say that corporations are persons is a conclusion that only then begins arguments about what it actually means in practice with respect to particular issues. The fact that corporations are “persons” means only that we provide them – through law – with certain capacities and powers, and certain rights and obligations. It remains to be decided what the nature and limits of these capacities and powers, and rights and obligations, may and will be.
Three main arguments support my claim.
1. Firms exist. Some economists (and lawyers following them) have argued that firms do not really exist. They are mere fictions, they say, and any serious epistemological analysis must look past the “legal fiction” of the firm – or the “corporation” in the form we are discussing here – to the actual human beings who are involved. Although this methodological reduction may be useful for some kinds of analysis (economic modeling, etc.), it is wrong from a realistic legal and social perspective. Firms exist because the law has evolved to say that they exist. They are constructions of human relationships that are socially sanctioned and legally recognized. They are “fictions” in the sense that they are created through the artificial mechanisms of law and government. They are also “real” because people acting under law and in society believe in them and make them real. Firms are therefore what I’ve called “real fictions”: both nominalism and realism are right, but only when they are combined together into a nominalist realism. See Business Persons, ch. 1. Philosophers such as Margaret Gilbert, John Searle, and Philip Pettit support this view. People acting in social groups form collective realities, which are reinforced and articulated by organizational law. Business firms – including for-profit corporations – are in this sense social constructions. Corporations are like money and nation-states. Exxon-Mobil and Patagonia are as real as China and the United States. They exist because we believe in them. We act as if they exist – and so as social constructions they exist. They have power and authority.
2. Firms are persons. The method of legal recognition is to bestow “personality”: The law recognizes an individual human being as a “person” who has “standing” to bring or defend a claim in court. A person has rights: personal rights against mistreatment and rights against violations of one’s dignity and physical integrity. The law matters here. Consider the situation of a slave (historically not so very long ago in the United States) or an illegal immigrant (such as children from other countries crossing the southern border of the United States today). The law does not recognize them fully as “persons” – or at least not to the same level of available rights and obligations as “citizens.” Even children of citizens do not have a complete set of rights: they cannot drive cars or enter contracts legally until reaching an age allowing legal capacity. The law makes other distinctions: “person” is a legally denominated concept. It is extended (or not) for various reasons of philosophy and social policy. Is a fetus a “person”? What rights does a “terrorist” have? Even: is a dog, such as my dog Butterbean, a legal person for certain purposes? I cannot, for example, torture him for fun (assuming that I’m that kind of person, which I’m not). In this sense, then, a dog too is a person: he has some minimal rights recognized under law (though he'll need someone else to speak for him).
An analogous argument applies to firms. They are “persons” because the law recognizes them as such and as having certain rights and obligations: standing in court, holding of property, a party to contracts, an organizational principal, a target for tort liability, and a potential plaintiff to insist on its “rights,” whatever they may be. The exact nature of these various rights of firms remains to be decided: The controversial recent cases of Citizens United and Hobby Lobby extend claims of political and religious freedom to include corporations as persons. Are these cases correctly decided? The answer does not, I believe, turn on whether they are considered “persons” or not. Firms are uncontroversially legal persons for many purposes. The question is whether or not we should extend certain kind of rights to firms as “persons” derivatively – representing the people who act collectively through them. Note that the answer can be qualified. We may say: “Yes, corporations hold property and should have standing to object on constitutional grounds if a government attempts to expropriate the property without compensation.” But we may also say: “No, corporations usually represent diverse groups of people regarding religion, so in these cases it is not correct to say that corporations should have religious rights" (contrary, of course, to the holding of Hobby Lobby). I make this latter argument in a previous blog for The Conglomerate on Hobby Lobby here.
3. Legal personality matters, but it is not dispositive. Firms exist, firms have legal personality, and it matters. The fact that a corporation is a person does not settle the argument for or against an assertion of rights or obligations. This is a mistake in argumentation, in my view, that opinions on both sides of the divided Justices of the Citizens United and Hobby Lobby cases make. In these kinds of cases, the Court should ask – as legislatures and citizens should as well – what is the purpose of a firm and of a corporation given the question that we're asking? Arguably, as Justice Alito argues in Hobby Lobby, business firms are not just profit maximizers (as some students are taught in some business school classes). They are moral creatures because the people who compose them are moral creatures (or, at least they have the potential to be moral -- nobody's perfect!) But we then have to dig deeper and ask “who” is involved in the firm. Why are we asking the question: “persons” for what purposes? Perhaps firms should have political rights, but perhaps also they should be constrained in this respect for good reasons of political theory and modern democracy. Perhaps some kinds of firms should have religious rights, but the scope of these potential rights should be constrained. Rights of employees may be equal to those of owners and managers in this context. There are other limits in principle that need to be drawn here too: but my main point here is that doing so assumes that “legal personality” matters. It is then a question of filling in the institutional portrait: who is this person? What kind of person? And how does the nature of this person relate to the considerations in play on a specific issue?
4. Conclusion. My argument is designed mostly to set up rather than to answer the hard questions, so I hope that my position will not be too controversial. Here again are my main propositions.
a. Firms exist. For our purposes here, corporations are a kind of firm. (The difference between for-profit and profit corporations raises another set of issues.)
b. Firms, including corporations, have legal personality. The question is not whether firms are persons, but what the fact that they are persons means with respect to particular further questions regarding the rights or obligations that we should extend to them as persons.
c. Legal personality matters, but is not dispositive. To argue about whether firms are persons or not persons does not advance the ball very much. The popular debate conflates the meanings of "persons" and "people." Firms are persons; begin there. And then engage the substantive policy issues as hand. Move the discussion forward, while recognizing the truth of the “real fictions” of firms as legal persons.
Portugal took the kind of quick action on its second largest bank that is completely by the book. What can we learn about the current reality of bank bailouts from it?
- Even medium sized banks are global: BES was doomed not by its Portuguese operations, but by its Angolan unit. This sort of thing has driven supervisors to set up global regimes - the idea that their domestically safe and sound bank is in trouble internationally, but they don't know it - or that its foreign counterparties are, and they don't know that.
- The government created a good bank and a bad bank, meaning that BES stakeholders now have one bank with depositors and branches, and another with dodgy loans in Angola. This is a way of giving everyone - creditors, shareholders, employees - a haircut, but, since the Portuguese government is loaning BES $4.5 billion, it is hard to say this isn't also a lender of last resort bailout. Still, a textbook approach.
- This sort of ring-fencing, on a much larger scale, is one of the ways that some regulators would like to practice bank safety. A British bank would have its British assets segregated from its overseas ones, and so on. That obviously creates internal inefficiencies in the bank, but there you go.
- What Portugal did was to "resolve" BES. You can perhaps see why some think that one of the failures of the post financial crisis reforms is the failure to, so far, come up with a cross-border resolution scheme. The British couldn't do this with Barclays, or couldn't without agreement by the Americans, and who knows if, when the chips are down, that would be forthcoming?
PrawfsBlawg and Concurring Opinions are sponsoring the first MarkelFest! at SEALS this Saturday. Unfortunately will miss this event, but I have fond memories of past Prawfs-sponsored happy hours at SEALS and other conferences through the years with Danny always in attendance. It won't be the same without him, but I know he'd be pleased with the idea. FSU is sponsoring a memorial program on Monday evening, and I will be at this one.
I'll also be at business-law-type panels Tuesday-Thursday. Hope to see many Friends of the Glom there.
In addition to his own blog launch, my colleague Eric Orts has agreed to occasionally blog for us for the next couple of weeks. He's the Guardsmark Professor here at Wharton, seconded in the Management Department, and is the director of the school's Initiative for Global Environmental Leadership. He's also the author of Business Persons. Welcome, Eric!
The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship. This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2015 through June 2016 or June 2017). The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching. No degree will be offered as part of the Fellowship program. Only one fellowship will be offered.
Fellowship candidates must hold a JD degree from an ABA accredited law school and be committed to a career of law teaching and scholarship in the field of business law and policy. Applicants should have demonstrated an outstanding aptitude for independent legal research, preferably through research and/or writing as a law student or through exceptional legal experience after law school. Law Teaching Fellowship candidates must have strong academic records that will make them highly competitive for law teaching jobs.
More information on the fellowship can be found at http://lowellmilkeninstitute.law.ucla.edu/lowell-milken-institute-business-law-and-policy-teaching-fellowship/. Applications must be submitted by November 14, 2014.
The announcements are after the jump; one of them you may have seen already, but all of them require applications outside of the AALS FAR process, and are, in my view, well worth your consideration.