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Author: Lawrence Cunningham

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GW Law’s C-LEAF Jr. Faculty Workshop

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School is pleased to announce its fourth annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  The Workshop and Prizes are sponsored by Schulte Roth & Zabel LLP. The Workshop will be held on February 7-8, 2014 at GW Law School in Washington, DC.

 The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty and practitioners. By providing a forum for the exchange of creative ideas in these areas, C-LEAF also aims to encourage new and innovative scholarship.

Approximately ten papers will be chosen from those submitted for presentation at the Workshop pursuant to this Call for Papers. At the Workshop, one or more senior scholars and practitioners will comment on each paper, followed by a general discussion of each paper among all participants. The Workshop audience will include invited young scholars, faculty from GW’s Law School and Business School, faculty from other institutions, practitioners, and invited guests.

At the conclusion of the Workshop, three papers will be selected to receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively.  All prize winners will be invited to become Fellows of C-LEAF.* C-LEAF makes no publication commitment, but chosen papers will be featured on its website as part of the C-LEAF Working Paper series. Read More

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Should Berkshire Hathaway Stay Public or Go Private?

aaa NYSEPonder this: should Berkshire Hathaway remain a public company or consider going private instead?

Venture entrepreneurs and seasoned executives alike often weigh the pros and cons of a U.S. company being privately held or publicly listed. That goes for start-ups trying to decide to make an initial public offering as it does for listed companies trying to decide whether to go private.  

Everyone considers the transaction costs of such a switch high because IPOs and going private transactions are complicated, requiring paying accountants, appraisers, lawyers and other professionals. They are also time-consuming.

So setting aside transaction costs, let’s highlight the usual pros and cons, to do an IPO or stay public:

Pros:

● access to capital

● liquidity for shareholders

● a currency (stock) to pay managers or make acquisitions

● cache from the sign of business maturity or stature

Cons:

● the public arena invites the threat of hostile takeovers via proxy battles or tender offers

● rigid governance requirements, especially board size, independence and oversight

● Wall Street analyst attention that drives focus on short-term results, not long-term prosperity

● required disclosure, posing direct administrative costs and potential indirect costs as to competitive matters

● exposure to securities lawsuits by disgruntled stockholders

Although disclosure may be a “con” to a company, from a social perspective, watchdogs value the transparency, especially as to matters of stewardship and corporate social responsibility of larger institutions.

Assuming such a list is roughly complete, how should you evaluate the situation for Berkshire Hathaway? Stipulate that it had good reasons for public company status in its early days, the 1970s and 1980s, even the 1990s. Is it still worth it today? Read More

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ABA Task Force on Legal Education: Down with Status

aba status merceGood news for law professors now submitting articles seeking offers from high-status journals: the importance of status in American law schools is over-rated and is about to be reduced. At least that is the urging of an American Bar Association Task Force Working Paper released last Friday addressing contemporary challenges in U.S. legal education.

Obsession with status is a culprit in the woes of today’s American law schools and faculty, the Working Paper finds.  It charges law professors with pitching in to redress prevailing woes by working to reduce the role of status as a measure of personal and institutional success.  The group’s only other specific recommendation for law faculty is to become informed about the topics the 34-page Working Paper chronicles so we might help out as needed by our schoools. 

Much of the rest of the Working Paper is admirable, however, making the two specific recommendations to law faculty not only patently absurd but strange in context.   After all, the Working Paper urges reform of ABA/AALS and state regulations with a view toward increasing the variety of law schools. It calls for serious changes in the way legal education is funded, though it admits that the complex system of education finance in the U.S. is deeply and broadly problematic and well beyond the influence of a single professional task force.

The Task Force urges US News to stop counting expenditure levels as a positive factor in its rankings.  It stresses problems arising from a cost-based rather than market-based method of setting tuition. It notes a lack of business mind-sets among many in legal education.  It questions the prevailing structure of professorial tenure; degree of scholarship orientation; professors having institutional leadership roles; and, yes, faculty culture that makes status an important measure of individual and institutional success.

But amid all that, law professors have just two tasks: becoming informed and demoting status.  So there must be some hidden meaning to this idea of status as a culprit and the prescription for prawfs to reduce the importance of status as a measure of success.  I am not sure what it is. The Working Paper does not explain or illustrate the concept of status or how to reduce its importance.

I’ll to try to be concrete about what it might mean.   Given the other problems the Task Force sees with today’s law faculty culture (tenure, scholarship and leadership roles), I guess they are suggesting that faculty stop making it important whether: Read More

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Warren Buffett: Not Bullish on the Newspaper Business

The Washington Post Co., in which Warren Buffett’s company Berkshire Hathaway has been  a large shareholder for decades, is selling its flagship asset, The Washington Post, to Jeff Bezos.  Buffett was not interested in bidding for the paper, despite the price Bezos is paying of $250 million, a sharp discount from historical valuations.  The Boston Globe, which The New York Times bought two decades ago for $1.1 billion, has just sold to John Henry for a mere $70 million. Buffett was not interested in that franchise either. Nor is he interested in buying other papers recently up for sale, such as the Chicago Tribune, the Los Angeles Times or the Philadelphia Inquirer.  I’d be surprised if he cared to bid on The Wall Street Journal or New York Times when they go on the block.

These might be good newspapers, but they are not good businesses.  Buffett’s Berkshire Hathaway has bought numerous small newspapers this year and last. They are very different animals. They are known less for outstanding national journalism than for local beats and especially local information and advertising.

Despite these realities, journalists just five months ago (and one at the New York Times this morning, Andrew Ross Sorkin!) congratulated themselves and their industry after they thought they read Buffett saying good things about them.  As I wrote then (March 19, 2013), the journalists read things Buffett didn’t write.  He is not bullish on newspapers; but quite bearish.   In light of recent events, herewith that post updated.

* * * * *

In case you missed it, journalists have been saying that Warren Buffett is bullish on newspapers, with the New York Times running a headline reading “In His Annual Letter, Buffett Plays Up Newspapers.”  They cite the fact that he devoted 1800 words of his March 2013 missive to Berkshire Hathaway shareholders to the topic of newspapers. They stressed how Berkshire invested $344 million in the industry in the past 15 months. The Oracle of Omaha was putting his mouth where his money was, newspaper insiders reported.

The trouble with this narrative is that it’s not exactly what Buffett’s letter said, suggesting a dose of wishful thinking among practitioners of the trade. True, Berkshire has made the indicated investment and Buffett expresses his belief that newspapers, especially local newspapers with local niches, have a vital role which should translate into profitability. That was followed by a huge qualification: IF they can find an appropriate business model that marries traditional print and advertising with on-line distribution and revenue. But none has done so yet, Buffett’s letter reminds everyone.

Buffett’s allocation of three pages of his letter to newspaper investments seemed more an explanation of why Berkshire would invest such small sums, for its size, in anything, whether newspapers or some other industry. The letter stressed the continuing decline in circulation, profitability and cash flows of the newspaper business, though mentioning that Berkshire’s own newspapers have done better than most.  The letter also made clear that, should the economics of the newspaper businesses Berkshire owns continue to deteriorate substantially, they will be candidates for sale.

The newspaper business, in short, remains in serious trouble. In fact, the real information content of this year’s Berkshire letter may be another point that Buffett emphasized: the only way buying a newspaper business makes sense today is if it can be bought for an extremely low price compared to earnings.  Berkshire’s acquisitions met the stringent test.

That mindset reflects the market’s sense about the value of the newspaper business as well, suggested by such examples as the lack of buyers a few years ago for the Seattle Post-Intelligencier and Rocky Mountain News (Denver) and what has become notoriously clear were wildly excessive valuations of Rubert Murdoch when be acquired the Wall Street Journal in 2007 and of the New York Times when it acquired the Boston Globe two decades ago.

Civic mindedness, noblesse oblige, or a desire to be relevant and in the mix may stoke the appetites for some potential buyers of newspapers, such as Murdoch, the group of businessmen who bought the Philadelphia Inquirer last year, Mort Zuckerman, or even the Hearsts, Sulzbergers and Zells of the world. Today: add Jeff Bezos and John Henry. But despite Buffett’s obvious personal fondness for newspapers, that isn’t his style. Journalists who thought Buffett was saying he’d play that role should likewise think again.  As I read the letter, the real message is that the newspaper business, like many others being throttled by rapid disruptive change, faces profound challenges.

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Prawf Musings and Query on the Value of Values

My Mother, God bless her, had a hard time understanding why I’d trade a higher-paying job for a lower-paying one.  This happened in the early 1990s.  I had begun my career as a high-paid corporate lawyer at the prominent New York law firm of Cravath, Swaine & Moore. There I had at least some chance of becoming partner and an excellent chance of becoming partner at some such firm upon leaving Cravath.

Then another future appeared: an offer to become a law professor, first at Cardozo Law School and later at Boston College and George Washington University.  The pay at Cravath or another law firm dwarfs the pay at GW, BC or Cardozo (though longer term, when book royalties and consulting fees are added, being a law professor remains a reasonable living).

My Mother wondered: “aren’t you supposed to move up, from lower-paying jobs to higher-paying jobs?”  I explained that there are compensating values of the professorial position. Chief among these, for me, were tenure and academic freedom.  I was willing to trade the higher pay in part for those commitments of permanence and autonomy.

There are many other such compensating values too. Those who are thrifty by nature may like the budget-consciousness of a school compared to the lavishness of the kind of private practice I had. I valued the earnestness and sincerity of legal pedagogy and scholarship (calling things as I seem them) over the advocacy of law practice (whose bread I eat, his song I sing), true even when I take consulting assignments.

Many find the academy more congenial in the sense of boasting a shared mission and aspiring to morals above those of the marketplace.  In contrast to many law firm cultures, I welcomed the opportunity for entrepreneurship: academic entrepreneurship of hosting innovative conferences, writing on unusual topics, pioneering programs, redesigning curriculum, building institutions, leading student learning.

Some like professorial life because it exists at the basic level in the legal profession, the gate-keeping end where new lawyers are vetted and trained. Something about that rudimentary point is more enticing than working to add new clients to an old practice or derive new sub-specialties from there.

I explained to my Mother how some sellers of companies feel the same way and analogized to a situation my Dad once faced.  He once had to choose between two business opportunities, one that paid more but the other that put his name on the door, put him in charge and gave him a sense that his business would be around forever.  That recall helped my Mom get why I was moving from Cravath to Cardozo.  

I  wonder how other professors (or aspiring professors) might answer their parents or spouses or kids when explaining why they wish to take a lower-paying job over a higher-paying one.  Not only what the factors are but how to interpret them commensurately.  If you could earn $60 million in a 30-year partnership career at Cravath but only $6 million in the same time period as a Cardozo professor, does that mean the value of tenure and autonomy and the rest is something like $54 million?

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A Lament on Corporate Governance

The following essay, which I wrote for a book with Hank Greenberg about AIG, laments recent decades of changes in corporate governance and is excerpted from the current issue of Directors & Boards, as adapted by its editor, Jim Kristie.

AIG’s founding corporate board in 1967 included luminaries who made AIG into the largest insurance company in the world. In the ensuing decades, AIG enlisted some of its most distinguished corporate officers to serve on its board of directors. Those traditional officer-directors not only knew the company and the insurance business well but were world travelers who understood the demands of building a global financial services company.

The early board appreciated the appeal of nominating some directors from outside AIG for election by shareholders. Such nonemployee directors offered fresh perspectives, opened doors to business opportunities and made decisions when employee directors faced conflicts of interest.

Outside directors who served during the 1970s through the 1980s included former cabinet officials, international business executives, foreign service officers, central bankers and financial accountants. In general, these outside directors served as senior advisors, without intending to second-guess managerial judgments, particularly concerning arcane insurance industry matters beyond their expertise. Outside director Dean P. Phypers (1979–1999), chief financial officer of IBM, noted that this was the standard corporate governance model of the period, at AIG and elsewhere: a collegial body operating in an atmosphere of trust and informality.

A changing model

That model began to change in the 1970s—just as American Home launched its thriving directors and officers (D&O) insurance business. Routinely ever since, in response to national scandals involving corporate misconduct, Congress passed new legislation and the New York Stock Exchange—where AIG listed its shares in 1984—adopted rules that increasingly required corporations to add outside directors to the board. The authorities also first suggested and later required increasing numbers of committees whose membership was limited to outside directors.

These changes were aimed at checking management shirking and enhancing corporate performance, though empirical research never provided much support that such reforms achieved such objectives. Legislators, regulators, and judges seemed to believe that, at the very least, outside directors would be able to exercise independent judgment. On that basis, as a “reform” to respond to crisis, elevating the number and power of outside directors helped forge political consensus. It did not matter whether directors had knowledge of a company’s operations or industry or any other expertise.

Letting political expediency dictate business practice is always dangerous and such universal regulation necessarily overlooked variation among companies. Concerning AIG, its roots as a private company, its long-standing entrepreneurial culture and engagement in the complex field of international insurance all pointed in favor of an inside board. Nevertheless, throughout this period of increased enthusiasm for outside directors on corporate boards, AIG successfully recruited capable people who added the value of their business judgment and experience and put the interests of AIG and shareholder prosperity first. Read More

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The Wild Eliot Spitzer

Eliot Spitzer says he’ll do in the New York City comptroller’s office what he did in the New York State Attorney General’s office.  Assuming he is not lying, that would be a very dangerous thing. New York City voters should remember what he did as AG.  Here is a sampling.

As AG, Spitzer twisted a Depression-era law called the Martin Act, intended to police bootleggers, into a despotic sword against corporate New York—the “legal equivalent of King Arthur’s Excalibur,” an informed legal analyst wrote.[i]  Writers at Forbes summarized the modus operandi: “The hallmark of a Spitzer trophy is victory by intimidation.”[ii] To give some examples, AG Spitzer:

● coerced Marsh & McLennan’s board to oust CEO Jeff Greenberg, an abuse of power that prompted corporate governance expert Richard I. Beattie, chairman of Simpson Thacher, to condemn Spitzer’s misconduct.[iii]

● pressured AIG’s board to oust CEO Hank Greenberg, an abuse of power that prompted Stanford law professor and former SEC Commissioner Joseph A. Grundfest to lament that if a government official insists that a board fire a CEO, the CEO will be fired, even before any investigation or hearing and even if evidence later shows the government was wrong.[iv]

● blackmailed Merrill Lynch’s board into settling a civil case by saying he would otherwise file assorted criminal charges, dubious as a matter of legal ethics.[v]

● threatened John C. Whitehead, former deputy secretary of state and chairman of Goldman Sachs, for a Wall Street Journal op-ed questioning Spitzer’s tactics, yelling “there is now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. . . . You will pay dearly.” [vi]

● bullied friends of  Kenneth R. Langone, co-founder of Home Depot and benefactor of NYU medical school, cornering Jack Welch, former chairman of GE, to say he “was so mad that he was going to put a spike through Langone’s heart.”[vii]

● ranted to former New York State Attorney General Dennis C. Vacco about  Hank and Jeff Greenberg, that he was going “to take those mother fuckers down.”[viii]

● screamed at a law partner of David Boies, the prominent lawyer who represents Hank Greenberg: “Because your firm is in bed with someone like Hank Greenberg, you have to bear the consequences and I have a bazooka pointed at David Boies, you and everyone else at your firm who is involved.”[ix]

Spitzer brought many down and rattled innocent good citizens.  Everyone in New York City should worry that Spitzer will find ways, as he threatens, to radically expand the power of the comptroller to do equally dangerous things in the City.  That will include trampling on due process rights and instilling in people fear of out-of-control government officials such he aspires once again to be.

Read More

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Berkshire Hathaway’s Unique Permanence

aaa rock of gibralterPermanence is the most distinctive trait of Berkshire Hathaway, the diversified Fortune 10 conglomerate whose unusual features, thanks to iconoclastic chairman Warren Buffett, are legion. Permanence is salient because, unlike any other conglomerate in history or rival in the acquisitions market, Berkshire has never sold a subsidiary it acquired.

Ironically, the experience that led to this unique practice culminated in the reluctant sale of Berkshire’s original business, textile manufacturing, in 1985. That sale was so painful for management, employees and other stakeholders that Berkshire committed to avoid a replay.

Instead, it adopted a policy of up-front screening, rigorous acquisition criteria that cut the chances of owning a business that would be tempting to sell. Berkshire then turned that policy into a huge advantage, assuring prospective sellers of companies a permanent corporate home.

In turn, the assurance of permanence appealed strongly to the kinds of companies that would meet Berkshire’s rigorous acquisition criteria: those owned and loved by families, entrepreneurs and other owner-oriented types. Some fifty acquisitions later, the promise has never been broken.

That is why I found so peculiar the following passage in William Thorndike’s well-selling book, The Outsiders, a profile of select big-name CEOs, including Buffett, whom Thorndike considers to have been similar to each other but different from everybody else. After referencing the 1985 closure of Berkshire’s ailing textile business, he writes: Read More

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Top Differences Between the UCC and the Common Law of Contracts

aaa uccSuppose a Contracts student asks “What are the top dozen differences between the common law of contracts and Article II of the Uniform Commercial Code?” Which of the following is the best answer? 

(Please note: most contracts teachers receive such a question from many students every year; it would be nice if we could all agree on the answer.  So I eagerly urge all law teachers to chime in here.  Maybe we can develop a single standard response to give to every student in the future.)

(A) Make a list yourself.  Doing so is part of the learning process in law school.

(B) Go through our course syllabus and identify all the places where the UCC is cited.

(C) Study our casebook and scour all the “Notes” that highlight the UCC in more than a paragraph.

(D) Make a list of all the cases we read that focus on the UCC.

(E) Happy to hazard a list: Read More