Archive for the ‘Corporate Law’ Category
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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GW’s Junior Scholars Finalists
posted by Lawrence Cunningham
Thanks to my colleague, Lisa Fairfax, GW has finalized the program for this year’s Junior Faculty Business and Financial Law Workshop and Prize (detailed here). Of the more than 100 papers submitted, the following dozen presenters were chosen. [Commentators appear in brackets; I've shortened some paper titles.]
The workshop will take place at GW on April 1 and 2, 2011. We are delighted by the submissions, congratulate those chosen, and stress that making the selections was difficult because of the volume of amazing papers. We encourage everyone interested to attend and look forward to the weekend.
Adam Leviton (Georgetown), In Defense of Bailouts [George Geis (Virginia) & Art Wilmarth (GW)]
Jodie Kirshner (Cambridge), A Transatlantic Perspective on Regional Dynamics and Societa Eurpoea [Francesca Bignami (GW) & Theresa Gabaldon (GW)]
Alan White (Valparaiso), Welfare Economics and Regulation of Small-Loan Credit: Lessons from Microlending in Developing Nations [Michael Pagano (Villanova) & Lawrence Mitchell (GW)]
Nicola Sharpe (Illinois), Corporate Board Performance and Organizational Strategy [Deborah Demott (Duke) & Michael Abramowicz (GW)]
Julie Hill (Houston), The Rise of Ad Hoc Bank Capital Requirements [Anna Gelpern (American) & John Buchman (E*Trade Bank & GW Adjunct)]
Michael Simkovic (Seton Hall), The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions [Richard Booth (Villanova) & Henry Butler (Mason)]
Michelle Harner (Maryland), Activist Distressed Debtors [Donna Nagy (Indiana Bloomington) & Lisa Fairfax (GW)]
Saule Omarova (UNC), The Federal Reserve Board’s Use of Exemptive Power [Patricia McCoy (Connecticut) & Arthur Wilmarth (GW)]
Heather Hughes (American), Suburban Sprawl, Finance Law and Environmental Harm [Scott Kieff (GW) & Lawrence Cunningham (GW)]
Robert Jackson (Columbia), Private Equity and Executive Compensation [Norman Veasey (Weil Gotshal) & William Bratton (Penn)]
Brian Quinn (BC), Putting Your Money Where Your Mouth Is: Post Closing Price Adjustments in Merger Agreements? [Gordon Smith (BYU) & John Pollack (Schulte Roth)]
Mehrsa Baradaran (BYU), Reconsidering Wal-Mart’s Bank [Heidi Schooner (Catholic) & Renee Jones (BC)]
This is one of many events sponsored by GW’s Center for Law, Economics and Finance.
February 28, 2011 at 8:53 pm
Posted in: Corporate Finance, Corporate Law, Law School, Law School (Hiring & Laterals), Law School (Law Reviews), Law School (Scholarship), Law School (Teaching), Law Talk, Securities, Securities Regulation
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Brazil’s First Insider Trading Conviction?
posted by Dave Hoffman
I find it hard to believe, but apparently so:
Two former executives of Sadia SA, the foodmaker that BRF Brasil Foods SA bought to form the world’s biggest poultry exporter, were sentenced and fined in the country’s first insider trading court ruling.
Former Chief Financial Officer Luiz Gonzaga Murat Jr. was sentenced to 21 months in prison and fined 349,712 reais ($210,100), Brazil’s securities regulator said today in an e- mailed statement. Romano Ancelmo Fontana Filho, a former board member, was sentenced to 17 months and fined 374,941 reais. Both can serve community service in lieu of prison.
Murat, who was Sadia’s CFO for 12 years until resigning in 2006, and Fontana were charged with illegally purchasing American depositary receipts of Perdigao SA before Sadia made a hostile bid to buy the rival in 2006. Murat and Fontana settled similar allegations of insider trading with the U.S. Securities and Exchange Commission in 2007.
The student who passed this along to me seemed relatively confident that the ruling would be overturned on appeal. If anyone out there knows something about Brazilian securities law, sufficient to explain how the market there functioned without a rigorous enforcement regime, please drop on by and comment. Otherwise, lots of L&E folks will be made very, very happy.
February 23, 2011 at 4:51 pm
Posted in: Corporate Finance, Corporate Law
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What’s Excessive Pay?
posted by Lawrence Cunningham
Proponents of massive and unregulated executive compensation often object to limiting it on the grounds that it is too complicated for amateurs to understand and none of the public’s business anyway. Thanks to the Dodd-Frank Act, it is now the public’s business and some of the regulatory staffers the Act charged with drafting required regulations show that the subject is not nearly so complex as so-called compensation experts portray.
In proposed regulations, spanning a mere dozen double-spaced pages written in plain English, financial regulators wrote prohibitions against excessive executive compensation of executives at billion-dollar banks. The central operative prohibition defines compensation as excessive when “amounts paid are unreasonable or disproportionate to, among other things, the amount, nature, quality, and scope of services performed by the covered person.” §372.5(a).
The proposal lists a half dozen factors to consider when evaluating the relationship, including the amount paid, the recipient’s compensation history and those of peers within the firm and at comparable firms, the firm’s financial condition, for post-employment compensation the cost-benefit relation for the firm, and any links between the recipient and misconduct at the firm.
February 23, 2011 at 4:14 pm
Posted in: Contract Law & Beyond, Corporate Law, Current Events
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Creating Value
posted by Frank Pasquale
I’ve talked in previous posts about a “closed circuit” economy among the wealthy. A plutonomy at the top increasingly circulates buying power (be it luxury goods, real estate, gold, or securities) among itself. The middle class used to dream that a rising Wall Street tide would lift all boats; as Felix Salmon shows, that hope is fading. Whatever innovations arise out of these companies aren’t doing much for average incomes.
On the other hand, financial innovation has done wonders to extract purchasing power from the broad middle into the closed circuit at the top. Here, for example, is how one of our leading firms created enormous value in 2006:
Consider the tale of Travelport, a Web-based reservations company. [A] private equity firm and a smaller partner bought Travelport in August 2006. They paid $1 billion of their own money and used Travelport’s balance sheet to borrow an additional $3.3 billion to complete the purchase. They doubtless paid themselves hefty investment banking fees, which would also have been billed to Travelport.
After seven months, they laid off 841 workers, which at a reasonable guess of $125,000 all-in cost per employee (salaries, benefits, space, phone, etc.) would represent annual savings of more than $100 million. And then the two partners borrowed $1.1 billion more on Travelport’s balance sheet and paid that money to themselves, presumably as a reward for their hard work. In just seven months, that is, they got their $1 billion fund investment back, plus a markup, plus all those banking fees and annual management fees, and they still owned the company. And note that the annual $100 million in layoff savings would almost exactly cover the debt service on the $1.1 billion. That’s elegant—what the financial press calls “creating value.”
The corporate geniuses at Boeing offer another display of modern-day business acumen.
The more stories like this you read, the more you realize that massive unemployment isn’t a bug in our economic system; it’s a feature. A country can’t have legal rules that permit these moves without expecting to hemorrhage jobs. All the Michael Porter homilies in the world can’t put this Humpty Dumpty back together again.
February 20, 2011 at 10:45 am
Posted in: Accounting, Corporate Finance, Corporate Law, Corruption, Economic Analysis of Law
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Some Sense on Top Pay
posted by Lawrence Cunningham
Executive pay continues to spark heated debate: some want it curtailed across the board, the impetus of recent federal law, while others want no legal oversight whatsoever, the effect of Delaware corporate law. Contract law may provide an optimal solution, narrower than the overly broad federal regime yet targeting egregious cases ignored by Delaware.
Thanks to readers of this blog for comments, forthcoming in the Iowa Law Review is my paper, now available on SSRN, “A New Legal Theory to Test Executive Pay: Contractual Unconscionability.” The paper is available for free downloading here. The abstract follows below.
Lucrative pay to corporate managers remains controversial yet continues to evade judicial scrutiny for legitimacy. Although many arrangements likely would pass the most rigorous scrutiny, it seems equally clear that some would not. Some agreements are not the product of arm’s-length bargaining, can rivet managers on short-term stock prices at the destruction of long-term business value, and can misalign manager–shareholder interests.
Yet even such objectionable arrangements are immune from serious legal oversight. In theory, they are open to judicial review under corporate law, but shareholders challenging pay contracts face formidable procedural hurdles in derivative litigation and substantive obstacles from corporation law’s business judgment rule and the anemic doctrine of waste. A new legal theory would be useful to check board excesses in the population of clearly objectionable cases.
February 15, 2011 at 12:51 pm
Posted in: Contract Law & Beyond, Corporate Law, Current Events, Law Rev (Iowa), Securities Regulation
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Fundamental Thought for the Crisis Series
posted by Frank Pasquale
I’ve recently been listening to a series of talks hosted by the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA), many on economic issues. When you compare the range of opinion entertained by the over 250-year-old RSA to that of the US media or academy, the narrowness of our debates is painfully apparent. To give just two examples: extreme trends toward inequality and youth unemployment are largely ignored by the powerful, from Washington to Davos. Mainstream academics have barely been better, lulled by specialization into picking at the edges of extreme phenomena.
To help remedy that in some small way, I’m starting an occasional series called “Fundamental Thought for the Crisis.” I’m trying to highlight thinkers who realize we’re not seeing some small “blip” in the American or global economy now. Equilibrium-based or Gaussian thinking is bound to be misleading in several ways. In alphabetical order, here are some of the thinkers to be highlighted:
Dean Baker on Debt.
Amar Bhide on Hayekian Finance.
Peter Boettke on Economic Formalism.
Mike Konczal on the Kochtopus.
Michael Mandel on Modern Mercantilism.
Harold Meyerson on the Mittelstand
Dambisa Moyo on Industrial Policy
Ha-Joon Chang on Wages
Russell Roberts on Wall Street.
Yves Smith on Commodities
Yves Smith on GSEs
David Zweig on Corporate Boards.
I highlight these figures because they are asking the deep questions left untouched by much conventional economic thought. Policymakers are still enchanted by zombie ideas. These thinkers offer glimpses of a vibrant and humane future for economic ideas, and hopefully for the laws & policies these ideas animate.
February 11, 2011 at 8:58 am
Posted in: Corporate Law, Economic Analysis of Law
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The Very Active Activist Investors
posted by Michelle Harner
Activist investors have been very busy in recent months, both in the U.S. (see here, here and here) and elsewhere. Among other things, Bill Ackman, through Pershing Square Capital Management, obtained seats on the board of J.C. Penney and was named Chairman of Howard Hughes Corp.—the spinoff of General Growth Properties. Ackman invested in both the equity and debt of General Growth Properties shortly before its chapter 11 bankruptcy filing and, by many accounts, hit a home run on this particular investment. The governance structure of the resulting company, Howard Hughes Corp. (which is reportedly named for the former filmmaker/entrepreneur), also is very interesting. According to Ackman, “it’s a company you can buy stock in. You can throw out the board. The board is elected annually. You can call a shareholder meeting with 15 percent of the vote…so, you know, you can get me back.” So is this a sign of things to come?
Many predict a very active proxy season for activist shareholders and the companies they target. (For an explanation of this trend, see here.) Commentators also suggest the activist agenda likely will include “proliferation of majority voting for directors from the larger public companies to mid-size and smaller companies (which we believe will see the largest number of proposals), separation of the offices of Chairman of the Board and CEO, 10 percent or lower thresholds for shareholders to call special meetings and enabling shareholders to act by majority written consent.” This agenda includes governance features that are similar to those ascribed to Howard Hughes Corp., but Ackman was able to achieve that structure without a proxy fight. Ackman, like a growing number of activists, turned to the chapter 11 bankruptcy process to win control and implement a specific governance agenda. (For an explanation of this loan-to-own strategy, see here.)
Activist distressed debt investors recently acquired ownership and control of companies like Lear Corp., Philadelphia Newspapers, Reader’s Digest, Six Flags and Tropicana Casino & Resorts through chapter 11. Certainly, not all activist distressed debt investors are focused on governance changes, and the value added by their activism is subject to debate. And interestingly, much of their activism goes unnoticed, unlike their shareholder counterparts. So will these debtholder activists follow Howard Hughes Corp.’s lead and implement investor-friendly governance policies? Will these policies truly enhance enterprise value? These important questions—related to both shareholder and debtholder activism—will only be answered with time and performance results, but create many issues for corporate boards and governance scholars to consider in the interim.
January 28, 2011 at 11:28 am
Tags: Corporate Law, Current Events
Posted in: Corporate Law
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Creating Corporate Culture Through Comedy?
posted by Michelle Harner
As I was preparing to fly home from a conference yesterday, I was watching msnbc’s Your Business, which was profiling a small business that uses comedy to create a positive corporate culture. The company, Peppercom (a public relations firm), employs a comedy coach to work with its employees not so much to help employees tell good jokes but to build confidence and communication skills. Although this approach may not work for every business, Peppercom apparently has landed several large accounts based on its approach to business and the personality of the firm and its employees. (For an example of using comedy to discuss corporate ethics with employees, see here.)
I have to admit that I initially thought the msnbc segment was entertaining but not really applicable to the larger business community. I then boarded my Southwest Airlines’ flight and, along with the other passengers, was serenaded by one of the flight attendants who actually got most of the people on the flight to join her in the chorus of “Rolling Down the Runway” (adapted from John Fogerty’s “Proud Mary”). This experience made me reflect further on the importance of corporate culture to the overall productivity of a firm (see here and here) and the tools available to cultivate that culture.
I have previously written about corporate culture and “tone at the top” in the context of enterprise risk management (see here and here), but certainly the benefits of a positive corporate culture do not end there. Employing a workforce that enjoys coming to work, is comfortable communicating throughout the firm and portrays that positive image to the outside world potentially holds real value. (For interesting discussions of corporate culture at AIG and Lehman Brothers prior to the crisis, see here, here, here and here.) I think the challenge in this broader context, as in the enterprise risk management context, is finding the right people to foster that culture. Policymakers can impose incentives and perhaps even a process designed to promote a positive, ethical and risk aware culture at any given company, but those regulations only go so far. The people leading the company must be committed to the endeavor and the implementation of that culture—checking the box or adopting an ethical code or employee handbook is not enough.
This notion of good corporate governance being tied to the individuals serving on boards of directors and management teams was one of the issues explored during the conference I was attending. That conference, hosted by the Adolf A. Berle, Jr. Center on Corporations, Law and Society at the Seattle University School of Law, was a wonderful collection of corporate scholars from various disciplines discussing the issues we continue to face in corporate governance generally and how Adolf Berle’s work informs that discussion. I am not sure we uncovered any definitive answers, but I certainly am encouraged by the discourse and energized to continue the pursuit.
January 24, 2011 at 12:52 pm
Tags: Corporate Law, Current Events
Posted in: Corporate Law
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Bylaws Not Contracts, Court Rightly Holds
posted by Lawrence Cunningham
In the first of many opinions likely to come, a California federal court last week refused to recognize a Delaware corporation’s by-law naming Delaware the exclusive place for derivative shareholder litigation. As noted here, on this hot issue in corporate law, Delaware courts no doubt would enforce such clauses, retaining litigation business, but other states may disagree.
Much of the fight in the case, Galaviz v. Berg, involving Oracle, concerned whether to take literally standard corporate law talk that classifies bylaws as “contracts” and describes the arrangement among corporate participants as a “nexus of contracts.” Oracle’s board, slavish to such rhetoric, classified the bylaw as a “contract” and urged that standard contract law principles applicable to choice of forum clauses apply.
The Galaviz court, rejecting such rhetoric, distinguished bylaws from contracts. Differences include how the Oracle board unilaterally adopted the bylaw change in 2006 without involving any Oracle shareholder, the challenged conduct occurred before the change was made, and claims involve directors who made the switch. Bylaws are not contracts and contract law principles do not apply.
The rhetoric of the corporation as a nexus of contracts was once widely-known to be merely useful imagery borrowed from the theoretical finance literature in the 1970s and 1980s. It was never intended to literally describe bylaws as a contract. But Delaware courts and some scholars over the last two decades seem to have gotten carried away with the metaphor, so that they actually think that bylaws are contracts. Oracle’s lawyers wrongly counted on that magic of making reality out of rhetoric to work outside of Delaware.
January 12, 2011 at 1:17 pm
Posted in: Corporate Law, Uncategorized
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