Archive for the ‘Corporate Law’ Category
Lifecycles and the Firm
posted by Dave Hoffman
As Joan Hemingway nicely illustrated, firms ought to disclose facts about their managers which are likely to influence stock purchasing decisions, even if those facts are otherwise private and personal. Now, from a different direction, comes further evidence of the point that managers’ self-interested goals can influence their firm’s disposition. In CEO Preferences & Acquisitions, Jenter and Lewellen take a look at the relationship between CEO retirement and “the incidence, the pricing, and the outcomes of takeover bids.”
“Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.”
A few thoughts.
1. As Brian Quinn noted, this is exactly what seemed to be going on in Smith v. Van Gorkom.
2. The paper includes a nice set of confounding controls, but it’d be useful to have compared founding- with non-founding-CEOS. At least anecdotally, one hears often of the founding CEO seeking cash out his sweat in a swan-song merger – and that kind of behavior seems less pernicious than a caretaker selling the company to pad her nest. In the authors’ defense, I’d imagine thatin this fortune 500 dataset there weren’t many such originating great leaders.
3. It’d be surprising if this common-sense result wasn’t already priced into the acquiring company’s shares, which might make it difficult to truly control for a recent rise in company performance against the market basket.
4. But if #3 isn’t right, I have a strong sense that I know what my new investment strategy would like. Someone want to start a corporate-executive retirement watch list with me? There are models available.
February 10, 2012 at 7:42 pm
Posted in: Corporate Law
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AALS “Hot Topics” Program: Russia’s “Dictatorship of Law”
posted by Jeffrey Kahn
I am glad to announce that the AALS Committee on Special Programs selected my proposal as a “Hot Topics” panel for the 2012 AALS Annual Meeting in Washington D.C. next month. The program is called: “The Dictatorship of Law: The Khodorkovsky Case, Human Rights, and the Rule of Law in Russia.” William Pomeranz, Deputy Director of the Kennan Institute for Advanced Russian Studies at the Woodrow Wilson International Center for Scholars, will chair a panel that includes Kim Lane Scheppele (the University of Pennsylvania and Princeton), Bruce Bean (Michigan State University), Christopher Bruner (Washington and Lee University), Alexei Trochev (Nazarbayev University) and me. The program will begin at 10:30 on Friday morning, January 6.
Below is a description of the panel, which will occur (as perhaps a “hot topic” should) between two central events on the Russian calendar: the surprising results of yesterday’s parliamentary elections in Russia and presidential elections scheduled for March 4 that (at least until yesterday) everyone was saying would be certain to return now Prime Minister Vladimir Putin to the presidency currently held by his protégé, Dmitrii Medvedev.
During his first campaign for President of Russia in February 2000, Vladimir Putin defined democracy as a “dictatorship of law.” This was meant to signal a shift away from the perceived lawlessness of his immediate predecessor’s governance, and to feed the nostalgia for Soviet-era stability. As Putin starts his gambit to return to the Russian presidency, this panel examines which half of that slogan will dominate the other. Recent developments in the most well-known case in the courts of both Russia and the Council of Europe present an opportunity to do so at a pivotal moment not only in that case but for the future of the rule of law in Russia.
Mikhail Khodorkovsky was the CEO of the Yukos Oil Company and the richest man in Russia when in 2003 he and his business partner, Platon Lebedev, were arrested and charged with crimes connected to Yukos, Russia’s most profitable and well-known private corporation. They were convicted of fraud, causing property damage by deceit or breach of trust, and tax evasion and sentenced to eight years in prison. Yukos was seized and sold to state-controlled companies. In December 2010, as their sentences drew to a close, Khodorkovsky and Lebedev were convicted by another court of embezzlement and money-laundering, charges arising out of the same time period and concerning the same corporate activities that were the basis for the first conviction. On the eve of that verdict, Prime Minister Vladimir Putin informed a nationwide television audience that “a thief should sit in jail,” a reference to a well-known Soviet mini-series that would have been quite familiar to viewers (the quote continues: “… and people don’t care how I put him away.”). In midsummer 2011, a Russian court upheld the verdict, extending the defendants’ sentences until 2016.
A bit more on the tension this case embodies for Russian law and human rights after the break …
December 5, 2011 at 11:33 am
Posted in: Corporate Law, Corruption, Courts, Criminal Procedure, Current Events, Law School, Uncategorized
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Does the Secured Transactions Course Make Sense?
posted by Dave Hoffman
I’ve never taught Secured Transactions, so I’ll start by saying that the following is purely speculative and subject to correction.
We had a job candidate come through at some point this Fall who generally is interested in the field of commercial law. That person mentioned in passing that although they were more than willing to teach the traditional secured transactions course, in their opinion it wasn’t well structured. Why? Not, as the navel-gazer might imagine, because the field of commercial law is supposedly intellectually dead. Rather because the traditional secured transaction course is too narrowly conceived — it usually is limited in coverage to personal property security interests under Article 9. But many security interests that matter to lawyers aren’t held on movable property. Since secured is ordinarily the foundational course for the commercial curriculum, students are left starting on too narrow a footing in understanding bankruptcy and bank regulation. It’s even worse than having a corporations course that excludes LLCs. Because of its technicality, ST is traditionally so difficult to teach that many students are turned off to the idea of commercial law practice at all.
Again, I don’t know much about this area of law. I never took ST in law school, I haven’t taught it, and (worse) I haven’t even read a ST syllabus at my current institution. But it struck me as an interesting thought, at least worth airing. It’s related to concerns I have about the general corporate curriculum — is “corporations” really a subject that ought to be taught in a single course, or is it really a merger of too many (or too few) legal principles that have glommed together over time. It’s also related to concerns that one might have about continuing to use the increasingly outdated, purportedly uniform, UCC to teach when States’ adopted versions are moving ever-further-away from that ideal.
December 2, 2011 at 11:54 pm
Posted in: Bankruptcy, Contract Law & Beyond, Corporate Finance, Corporate Law, Law School (Teaching)
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The Corporate Law Gorilla Award for 2011
posted by Dave Hoffman
The last question in tonight’s Republican debate was, essentially, “what important threat to national security aren’t we talking about enough.” This was a useful question — and it produced surprisingly illuminating answers. (I’m with Newt– EMP!) It reminded me of an occasional tradition here at Co-Op, the Gorilla Award. As I explained in 2005, the award is named for this famous video demonstrating the phenomenon of “inattentional blindness.” The gist was to recognize corporate law crises on the horizon. 2007′s lone entrant, Ben Barros, won by default and by retrospective acclimation:
“If the big bond insurers like MBIA and Ambac get downgraded because of the subprime mess, there could be a big ripple effect throughout the markets. A lot of investment-grade securities get their rating from the insurance policy (or “wrap”) that the bond insurers place on the issue. If the insurers get downgraded, a lot of debt instruments might also get downgraded. Among other things, entities that can only hold investment-grade instruments might be forced to sell lots of this stuff at the same time.”
The floor is open for nominations. The criterion: what stuff is happening now that is likely to cause an important set of problems for corporate/financial regulatory law in the next 12-18 months, and which is not being talked about enough. So, in my view, that excludes the European debt crisis, corporate political contributions, anything to do with credit swaps or mortgages, and (of course) the continued regulatory overhang from Dodd-Frank. Basically, anything that comes to first to mind. You can see why the Award is so prestigious — it requires out-of-the-box thinking!
What do you think?
November 23, 2011 at 1:03 am
Posted in: Corporate Law
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Starr and Greenberg File Fiduciary Case Against FRBNY After AIG Takeover
posted by Lawrence Cunningham
In September 2008, at the depth of the financial crisis, the U.S. Government arranged for control of the American International Group to be lodged in the Federal Reserve Bank of New York. With that power, FRBNY for two years caused AIG and its board and top managers to engage in a series of deals that, to AIG shareholders, were designed more to benefit the financial system and other financial institutions than AIG.
As AIG’s controlling shareholder, FRBNY thereby breached its fiduciary duties to AIG and its other shareholders, charges a complaint filed in Federal court in Manhattan. The complaint, filed by AIG’s largest private shareholder, Starr International and its CEO Maurice (“Hank”) Greenberg, was drafted by David Boies (Boies, Schiller & Flexner) and John Gardiner (Skadden Arps). It accompanies the commencement of a parallel case filed in the Federal Court of Claims against the United States under the takings clause of the Fifth Amendment. Following are some excerpts from the complaint against the FRBNY. Read the rest of this post »
November 21, 2011 at 1:57 pm
Posted in: Corporate Law, Current Events
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Ciara Torres-Spelliscy: American Corporate Political Transparency Is 44 Years Behind the UK
posted by Frank Pasquale
Ciara Torres-Spelliscy is an Assistant Professor at Stetson University College of Law and the co-author along with economist Dr. Kathy Fogel of Shareholder-Authorized Corporate Political Spending in the United Kingdom. I am posting her views on American corporate political transparency below [FP]:
by Ciara Torres-Spelliscy
As I told my law students in a recent class, when I was in law school, no one cared a fig about corporate political spending. I did not hear about it in Constitutional Law, Corporate Law or Fed. Tax. It was a non-issue because for the most part, it was banned. It made sense that back then, the SEC would not have a corporate political spending reporting requirement. That would have been tantamount to the agency’s asking, “have you committed any federal election crimes?” Now that such political spending is legal, the SEC should respond to the growing calls for a new disclosure rule.
Much has changed in the years since I was on the business end of a Con Law exam. In particular, in 2010, the Supreme Court did away with corporate source limits on election ads altogether in the infamous Citizens United case. The upshot of this case changed not just federal law going back to 1947, but also state laws, some of which dated back to the turn of the twentieth century.
The new normal is corporations can spend an unlimited amount of their treasury funds on independent political expenditures in local, state and federal elections. This brings us back to the SEC and its utter lack of political disclosure rules. Because of this gap, publicly-traded corporations can spend in elections without ‘fessing up. This seems odd given how passionate shareholders are about transparency.
In the summer of 2011, ten corporate law professors petitioned the SEC for a new disclosure rule to rectify this situation. These professors are both conservative and progressive, yet they all agree transparency of corporate political spending is a must.
Economists have already written in support of the professors’ petition. Economist Dr. Michael Hadani of Long Island University noted that one of the reasons why shareholders should want more reporting on corporate political spending is that it can backfire. His regression analysis of over 1,100 companies over an 11 year period found political spending had a negative impact of firms’ market value.
November 16, 2011 at 11:53 am
Posted in: Corporate Law, Corruption, First Amendment
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Labor Day Links
posted by Frank Pasquale
Just a few points of interest on Labor Day:
1) Alan Hyde, The Idea of the Idea of Labour Law: A Parable.
2) Yves Smith, The Decline of Manufacturing in America: A Case Study.
3) Mark E. Anderson, $500 a Month Less.
4) John Bowe, Nobodies: Modern American Slave Labor and the Dark Side of the New Global Economy.
5) Liza Featherstone, Selling Women Short: The Landmark Battle for Worker’s Rights at Wal-Mart.
6) Robert Reich on the great regression.
7) Kyle Leighton, Less Fruits Of More Labor.
8. Andrew Leonard, The Big Squeeze on Labor.
9) Washington Post, Breakaway Wealth.
10) But don’t worry, CEOs are doing something to stanch the flow of such disheartening news:
Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.
The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee. The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company “useless.”
But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.
Opaque pay is a big problem in the UK, too. In pay-without-performance world of corporate titans, expect a lasting war against disclosure.
September 5, 2011 at 5:07 pm
Posted in: Corporate Law, Corruption, Employment Law
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Modern Directors Still Anachronistic
posted by Lawrence Cunningham
A new McKinsey study of corporate directors of international companies shows that today’s boards remain exemplars of the modern era’s so-called monitoring board, swinging into action occasionally when needed, rather than the old-fashioned managerial board, actually overseeing and directing the corporation.
The findings reflect sharp differences between law on the books in most countries, where directors command plenary authority over a corporation and are accountable to shareholders, and business in practice, where they delegate power to managers, who really call all the shots. They also reflect no change in practice in the three years since the financial crisis, which many blame, in part, on weak boards.
Some highlights from the report:
* 44% of respondents say their boards simply review and approve management’s proposed strategies;
* only 1/4 characterize their boards’ overall performance as excellent or very good;
* directors report that their boards have not increased the time spent on company strategy since the previous survey of February 2008—seven months before the collapse of Lehman Brothers;
* the share of boards that formally evaluate their directors has dropped over the past three years;
* only 21% of directors claim a complete understanding of their companies’ current strategy;
* boards in the financial sector indicate that directors’ knowledge is below average on industry dynamics (just 6% claim complete understanding);
* directors on average spend 28 days’ worth of work annually, but think they should ideally spend 38 to do the job well. Read the rest of this post »
July 15, 2011 at 6:00 am
Posted in: Corporate Law
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Call for Papers: Dodd-Frank
posted by Lawrence Cunningham
Call for Papers:
Financial Institutions and Consumer Financial Services Section
AALS Annual Meeting – January 2012
Rubber Hits Road: Implementing Dodd-Frank amid Reform Fatigue
This program will take place one and a half years after the Dodd-Frank Act was signed into law. The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture. Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress.
What lessons can we draw from the implementation of Dodd-Frank so far? What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative? What devils have lain hidden in the details of the Federal Register? What aspects of reform have been largely forgotten? What does the path of financial reform say about legislative and regulatory process? What lessons can be drawn from the reform efforts in Europe and elsewhere? Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks?
More ominously, is the crisis truly over? Are we at grave risk of fighting the last war? Has reform missed the mark altogether? This meeting is part of a project to engage the legal academy in sustained theoretical and policy contributions to financial regulation. It also presents an opportunity to look at specific rulemakings in detail, as well as to address larger questions about the course of reform after laws are made.
Call for papers:
Law teachers and other scholars are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Junior faculty members are particularly encouraged to submit manuscripts or abstracts. A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to present their work at the program session in Washington, D.C. in January 2012.
Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Please send manuscripts or abstracts to the Program Chair (Erik Gerding, University of Colorado) at profgerding@gmail.com no later than August 30, 2010. Please place the name and contact information of authors only on the cover page of submissions.
Please forward this Call for Papers to anyone who might be interested.
June 15, 2011 at 7:54 am
Posted in: Administrative Announcements, Conferences, Corporate Finance, Corporate Law, Current Events, Securities, Securities Regulation
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Deceptive by Design: Derivatives as Secret Liens
posted by Frank Pasquale
Secretive practices and institutions are common in contemporary finance. For those who’ve ceased the search for long-term value creation, temporary information advantage is key. Even commonplace practices can be reinterpreted as havens of hiddenness. My colleague Michael Simkovic’s article “Secret Liens and the Financial Crisis of 2008” exposes the role of derivatives and securitization as secretive borrowing strategies, designed to keep the naive or trusting from discovering the fragility of the institutions they loan funds to. His work has been presented to the World Bank Task Force on the Bankruptcy Treatment of Financial Contracts, and is relevant to both private and sovereign debt risks.
Simkovic argues that 80 years of erosion of classic commercial law doctrine ensured that “complex and opaque financial products received the highest priority in bankruptcy.” Products like swaps and over-the-counter derivatives were not adequately disclosed (either by banks in their consolidated financial statements or by their counterparties in publicly accessible transaction registries). By concealing those debts, these already overleveraged financial institutions were able to attract ever more credit and investment, at better rates than those who reported their overall financial health more accurately. (All other things being equal, it’s safer to lend to an entity that owes 10 billion rather than 100 billion dollars.) The genius of Simkovic’s article is to show how “fundamental causes of the financial crisis are relatively old and simple,” even as an alphabet soup of instrument acronyms (CDO, CDS, MBS, ad nauseam) and government programs (TARP, TALF, PPIP, et al.) makes our time seem unique.
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June 8, 2011 at 8:54 am
Posted in: Bankruptcy, Corporate Finance, Corporate Law, Corruption, Financial Institutions
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Transactional Lawyering at the Movies
posted by Dave Hoffman
I’m looking for some good examples of movie clips from recent films in which the presence (or absence) of transactional lawyering is key to the action. The best example I’ve got so far is from the Social Network. Recognizing that showing clips of business lawyering isn’t for everyone, I’d still appreciate your tips. Negotiation scenes, drafting discussions, closings — anything that would motivate student excitement about transactional practice.
June 2, 2011 at 2:12 pm
Posted in: Contract Law & Beyond, Corporate Finance, Corporate Law
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Pareto in Practice
posted by Andrew Sutter
It’s not everyday that textbook law and economics concepts have a practical application. But a nice little object lesson came up recently in my practice. It’s a classic case of Pareto inefficiency, or suboptimality – arising entirely from the way lawyers chose to draft a contract. The true life case study is after the fold.
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May 18, 2011 at 12:48 pm
Posted in: Contract Law & Beyond, Corporate Law, Uncategorized
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The War Against Disclosure
posted by Frank Pasquale
Three remarkable recent lobbying campaigns go beyond the normal bounds of partisan sniping over “markets vs. regulation.” They threaten our capacity to understand how society is ordered: whom it serves, for what purposes, and at what costs. Consider these attacks on basic disclosure norms in politics and business:
1) Campaign Finance Disclosures: Regardless of ideology, almost everyone used to agree that campaign funding sources and amounts should be disclosed. 92% of Americans had that position in 2010. Justice Scalia has eloquently insisted that such disclosure laws violate no one’s rights. But thought leaders in the Republican party are now vigorously resisting disclosure, as Norm Ornstein observes:
The 2010 mid-term elections showed clearly how legal loopholes involving non-profit groups called 501(c)4s, and the failure to adopt clear regulations surrounding campaigns, can result in hundreds of millions of dollars of spending to influence campaigns that masked the identity of huge donors. In response to these realities, the Federal Communications Commission is considering requiring robust disclosure by TV stations of the major donors of political ads; the Securities and Exchange Commission is considering requiring public corporations to disclose to stockholders their spending on politics, and the White House has drafted an executive order to require companies applying for federal contracts to disclose their spending on political campaigns. . . .
Last month, Mitch McConnell [said] he views disclosure as “a cynical effort to muzzle critics of this administration and its allies in Congress.” . . . The Wall Street Journal’s full-throated support for transparency has disappeared as well; it blasted the FCC recently for considering requiring TV stations to put donors of campaign spots on the Internet . . .
John Yoo has also joined the debate, arguing that presidential power stops just short of the prerogative to require federal contractors to disclose their political donations.
2) Conflict Mineral and Extractive Industry Disclosures: One of the surprising victories for decency in the Dodd-Frank Act last year was a provision requiring certain disclosures from mining and resource extraction companies, and companies using “conflict minerals” from in or around the Congo. If you’re a consumer with preferences for certain industrial processes (say, those that don’t create incentives for rape, murder, and starvation), you want to be able to see which companies are fueling conflict and corruption and which are not. But intense corporate pressure is now delaying the rulemaking process needed to implement the disclosure provisions. According to Gerry Fay, “it is estimated that going ‘conflict free’ would cost companies just one penny per product.” But apparently that is too high a price to end corporate complicity in one of Africa’s bloodiest wars.
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May 15, 2011 at 3:32 pm
Posted in: Constitutional Law, Corporate Law, Corruption, Government Secrecy, Law and Inequality, Politics, Privacy, Privacy (National Security), Technology
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Corporate Control in the Courtroom
posted by Jessica Erickson
Corporate litigation has long followed a predictable pattern. When a corporation announces a restatement or similar bad news, shareholders race to the courtroom, filing nearly identical complaints in multiple courts. Congress sought to halt this practice in federal securities cases through the Private Securities Litigation Reform Act, but the practice continues unabated in state law cases. The Delaware Court of Chancery has been the clear loser of this filing strategy. Empirical evidence suggests that shareholder lawsuits are leaving Delaware in droves. Defense lawyers even claim that plaintiffs now use an “Anywhere but Chancery” approach when filing state law class actions and derivative suits.
The Delaware Court of Chancery recently suggested one way for corporations to protect themselves from these practices. Last summer, Vice Chancellor Laster stated in dicta that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution,” these corporations should adopt a charter provision selecting this forum as the exclusive venue for shareholder lawsuits. This idea was not unprecedented—a small number of companies had already included such provisions in their governing documents—but it was the first time (to my knowledge) that the concept received judicial approval. The defense bar quickly picked up the charge, with Wachtell, Lipton, Rosen & Katz recommending to its corporate clients that they adopt a charter amendment requiring that the Delaware Court of Chancery be the “sole and exclusive forum” for any breach of fiduciary duty suit filed against the company or its officers, directors, or shareholders. A recent memorandum by Latham & Watkins reports that more than 70 companies have included these provisions in their bylaws or charters.
This development raises intriguing questions about how much control corporations should have when it comes to lawsuits filed by their shareholders. Read the rest of this post »
May 11, 2011 at 4:57 pm
Posted in: Civil Procedure, Corporate Law, Courts
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Teaching Materials for Practicum Courses
posted by Jessica Erickson
You would have to live under a rock not to know that law schools increasingly feel the pressure to teach practical skills. Law schools can no longer teach doctrine and count on law firms to teach new lawyers the skills they need. As a result, many schools are starting to incorporate practicum-style courses into the curriculum. These courses allow students to learn litigation or transactional skills in the classroom by working on simulated cases or transactions.
My sense is that many of us are interested in teaching these courses, but the practicalities are daunting. Two years ago, I set out to create a course that would teach students how to be corporate litigators. I had visions of teaching my students an array of practical skills, including how to untangle financial statements, read complex statutes, and draft various case materials. It looked so good in my head. Then I actually tried to put together the course. There was no textbook. There were no model exercises. There was no anything… I spent a crazy amount of time putting together a course packet, coming up with weekly drafting assignments, and thinking about how to teach the skills I thought my students would need. I hesitate to say exactly how much time out of fear of scaring away others, but I still have flashbacks of sitting at my kitchen table for days on end trying to come up with creative fact patterns and drafting exercises.
At the end of the day, I was able to put together the materials for a course called Corporate Fraud & Litigation. I have taught the course twice now, and I really love it. But the preparation continues. I still develop new graded exercises every year out of fear that last year’s students will pass on their answers to this year’s students. The end result is that I spend significantly more time preparing for this course than for my other two courses combined. I am currently contemplating a complete overhaul of my course, but I have to admit that the massive work involved gives me pause.
I wonder whether the reality of having to prepare these materials—and then prepare many of the exercises anew every year—is holding back the development of these courses. Read the rest of this post »
May 5, 2011 at 8:03 pm
Posted in: Corporate Law, Law School (Teaching), Teaching
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Business Basics for Law Students
posted by Jessica Erickson
Thanks to Dave and the other folks at Concurring Opinions for inviting me to blog this month. I plan to write about two topics close to my heart: corporate law and the law school curriculum.
I want to start with a topic that combines both of my passions. Over the last four years, I have taught many students who develop an interest in corporate law after spending their undergraduate years studying philosophy, political science, or other non-business subjects. These students all worry that they do not have the business knowledge to succeed as corporate lawyers. It is easy to tell them that they will learn on the job, and certainly that is true to some extent, but I wonder if law schools should be doing more to introduce students to basic business and finance concepts.
I have often struggled with how to teach my students these concepts. On one hand, our job is to teach law. Teaching students about venture capital funding or accounting rules is arguably beyond this purview, at least unless a case deals directly with these concepts. On the other hand, I want to prepare my students to be lawyers, a task that requires teaching more than just the black letter law. I would hate to send my students out into the world with a strong understanding of Revlon and Unocal, but with no understanding of the business issues underlying basic M&A transactions.
The conventional approaches to teaching these skills have always seemed unsatisfying to me. Read the rest of this post »
May 2, 2011 at 11:56 am
Posted in: Corporate Law, Law School (Teaching)
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Why David Sokol Traded
posted by Lawrence Cunningham
- Live From Omaha: Berkshire Hathaway Shareholders’ Meeting:
Sitting this morning at Berkshire Hathaway’s annual meeting, I heard my great friend Warren Buffett report that it remains inexplicable to him why top Berkshire officer, David Sokol, violated corporate policy by buying shares in a company he was about to propose that Berkshire acquire.
Here is my theory, pieced together based on all the available evidence: Sokol desperately wanted to resign from Berkshire and eschewed succeeding Buffett as CEO, but the board would not let him resign. So Sokol, by calculation or subconscious action, did something egregious enough that his resignation would be accepted, but not criminal enough to land him in jail.
Elements of the theory: Sokol has sought to resign from Berkshire on several occasions the past two years. Each time, the board urged him to stay, making it impossible to refuse. There may be compelling reasons, as one of several rumored as potential successors to Buffett, to wish to resign. The strongest? Following Warren Buffett will not only be difficult, it may inevtiablly result in comparative failure.
Further circumstantial evidence: when Dave reviewed for accuracy a press release announcing the objectionable trading that finally induced the board to accept his resignation, he told Warren to delete a sentence Warren had written that the resignation stemmed in part from a sense that Dave was no longer in the running to succeed him. On the contrary, in this theory, he absolutely did not want to be in that running and was having a very hard time getting the board to understand that.
Without some theory such as this, it is difficult to explain why an executive who had enormous wealth and amazing stature, along with considerabe generosity to business partners that Buffett described this morning , would do something so dumb, obvious, and obviously wrong–but not obviously illegal.
As a student of Warren Buffett’s business and investment philosophy, a long-time shareholder of Berkshire Hathaway, and proud compliler of the book, The Essays of Warren Buffett: Lessons for Corporate America, I see potential explanations in this strange event, along with lessons from the lament.
April 30, 2011 at 4:30 pm
Posted in: Corporate Law, Current Events
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Welcome to the Blogosphere: Corporate Justice Blog
posted by Frank Pasquale
There are a number of interesting posts up at the Corporate Justice Blog, which has discussed both the FCIC Report and the Levin-Coburn Report. It’s great to see this terrific group of scholars comment on economic justice issues in the blogosphere.
April 26, 2011 at 10:53 pm
Posted in: Blogging, Corporate Law, Economic Analysis of Law, Financial Institutions
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Targeting Odious Top Pay Contracts
posted by Lawrence Cunningham
Cross-posted at Harvard Law School’s Corporate Governance blog, this summarizes in some detail my new paper on applying simple contract principles to police odioius executive pay contracts:
Executive pay has skyrocketed in recent decades, in absolute terms and compared to average wages. The area of largest growth has been in stock-based components, including stock options, often tending to focus on the short-term, with associated risks we’ve seen. A vigorous academic debate has run for more than a decade, becoming a popular political discussion amid the financial crisis exposing arcane debate to public scrutiny.
Growth could be laudable, explained as creating proper incentives to align manager interests with shareholder interests and to promote optimal risk taking. In this view, if there is a problem, it is narrow and limited. Critics are skeptical whether this story holds up. They worry that managerial power has strengthened to enable top executives to control setting their own compensation. In this view, the problem is pervasive and warrants a comprehensive response—and proposals abound.
I come down in the middle. There are problems in at least an important number of cases, and current proposals to redress them are unlikely to work. So I seek a new approach—contract unconscionability—to police extreme cases. The proposal must surmount some hurdles but isn’t as radical as it sounds.
A good way to summarize the debate highlights a three-pronged theory that promotes much of prevailing executive compensation, especially stock-based components, and contrasts it with limits on each prong.
First: in optimal contracting theory, boards design manager contracts to minimize agency costs. But when managers dominate the process, the managerial power thesis suggests this ideal may not be met.
Second: with efficient stock markets, stock price is a good proxy for the shareholder interest and a mirror of managerial performance. But stock price can differ from business value for sustained periods, fogging both.
Third: stock-based pay could align managerial incentives with shareholder interests if designed right and markets work well. But otherwise they create perverse effects. Read the rest of this post »
April 13, 2011 at 12:09 pm
Posted in: Contract Law & Beyond, Corporate Finance, Corporate Law, Securities, Securities Regulation
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Law & Econ’s Influence on Law & Accounting
posted by Lawrence Cunningham
The hottest book of the century, on corporate law, is in production, thanks to editors Brett McDonnell and Claire Hill, both of Minnesota. As part of a series investigating the economics of particular legal subjects, overseen by Richard Posner and Francesco Perisi, this Research Handbook on the Economics of Corporate Law, promises a comprehensive canvass of the broadest definition of this field of law as it has been structured by economic theories over the past forty years.
My contribution addresses the influence of law and economics on the sub-field of law and accounting, which I suggest takes the form of “two steps forward one step back.” You can read a draft of my chapter (comments welcome!), available free here, accompanied by the following abstract:
Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That’s the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.
Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable. Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That’s vital since the effects of law and economics on law and accounting remain debated in many contexts.
Other contributions to the book similarly available in draft form are by Matt Bodie (St. Louis), David Walker (BU) and Charles Whitehead (Cornell). The following scholars are also contributing chapters: Bobby Ahdieh (Emory), Steve Bainbridge (UCLA), Margaret Blair (Vandy), Rob Daines (Stanford), Steve Davidoff (Ohio State), Jill Fisch (Penn), Tamar Frankel (BU), Ron Gilson (Stanford/Columbia), Jeff Gordon (Columbia), Sean Griffith (Fordham), Don Langevoort (GT), Ian Lee (Toronto), Richard Painter (Minnesota), Frank Partnoy (SD), Gordon Smith (BYU), Randall Thomas (Vandy), and Bob Thompson (GT).
March 4, 2011 at 9:46 am
Posted in: Accounting, Behavioral Law and Economics, Corporate Finance, Corporate Law, Jurisprudence, Legal Theory, Securities Regulation
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