Category: Corporate Law

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Benjamin Moore and Berkshire: Centuries of Repute

Sometimes the up-to-the-minute nature of contemporary life obscures ancient principles. A case in point is the news surrounding last week’s and last year’s firings by Berkshire Hathaway of the CEOs of its subsidiary, Benjamin Moore & Co. But the values that Benjamin Moore has embraced for more than a century and those Berkshire has embraced for nearly half a century speak louder than the gossipy whispers associated with these two sad episodes (hat drop to New York Post).

In 1883 Brooklyn, twenty-seven-year-old Benjamin Moore, along with his forty-three-year-old brother Robert, created the paint company that remains in business today. He articulated several business principles to guide his company:

  1. A fair deal for everyone.
  2. The giving of value received without any graft or chicanery.
  3. Recognition of the value of truth in the representation of our products and an effort at all times to keep the standard of our goods up to the highest mark.
  4. The practice of strict economy without the spirit of parsimony, and the exercise of intelligent industry in the spirit of integrity.

Moore’s motto was “quality, start to finish.” It charged a premium price for it, even when that sacrificed market share. To reinforce its investment in quality, the Moore brothers began the practice of selling paint through independent distributors. Other paint makers might sell in hardware stores, or as private-label products of customer retailers, or in their own retail stores. Benjamin Moore & Co. always strictly adhered to the model of distributing exclusively through certified dealers. Those distributors, in turn, have invested considerable effort in building their businesses to keep their end of the bargain. Read More

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UCLA Law Review Volume 60 Symposium: Volume 60, Issue 6 (September 2013) and Discourse

UCLA Law Review, Volume 60 Symposium

Twenty-First Century Litigation: Pathologies and Possibilities

A Symposium in Honor of Stephen Yeazell

 

Volume 60, Issue 6 (September 2013)
Articles

Complexity, the Generation of Legal Knowledge, and the Future of Litigation Ronald J. Allen 1384
Regulation by Liability Insurance: From Auto to Lawyers Professional Liability Tom Baker & Rick Swedloff 1412
When Courts Determine Fees in a System With a Loser Pays Norm: Fee Award Denials to Winning Plaintiffs and Defendants Theodore Eisenberg, Talia Fisher, and Issi Rosen-Zvi 1452
Symmetry and Class Action Litigation Alexandra D. Lahav 1494
Atomism, Holism, and the Judicial Assessment of Evidence Jennifer L. Mnookin 1524
Altering Attention in Adjudication Jeffrey J. Rachlinski, Andrew J. Wistrich, and Chris Guthrie 1586
Wolves and Sheep, Predators and Scavengers, or Why I Left Civil Procedure (Not With a Bang, but a Whimper) D. Michael Risinger 1620
Gateways and Pathways in Civil Procedure Joanna C. Schwartz 1652
Pleading and Access to Civil Justice: A Response to Twiqbal Apologists A. Benjamin Spencer 1710
Teaching Twombly and Iqbal: Elements Analysis and the Ghost of Charles Clark Clyde Spillenger 1740
Unspoken Truths and Misaligned Interests: Political Parties and the Two Cultures of Civil Litigation Stephen C. Yeazell 1752

 

 

Volume 61, Discourse

Discourse

Re-Re-Financing Civil Litigation: How Lawyer Lending Might Remake the American Litigation Landscape, Again Nora Freeman Engstrom 110
Of Groups, Class Actions, and Social Change: Reflections on From Medieval Group Litigation to the Modern Class Action Deborah R. Hensler 126
Procedure and Society: An Essay for Steve Yeazell William B. Rubenstein 136
What Evidence Scholars Can Learn From the Work of Stephen Yeazell: History, Rulemaking, and the Lawyer’s Fundamental Conflict David Alan Sklansky 150
Procedure, Substance, and Power: Collective Litigation and Arbitration Under the Labor Law Katherine V. W. Stone 164
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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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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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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

Big Rig? Libor & Beyond

BankstersTo inaugurate a series of posts about scandals and crime in the financial sector, I wanted to highlight John Lanchester’s work in the London Review of Books on “banks’ barely believable behaviour.” He mentions the still unwinding Libor scandal up front:

Libor is the single most important number in international financial markets, used as a reference point throughout the global financial system. It is a range of interbank lending rates, set after consultation between the British Bankers’ Association and two hundred and fifty-odd participating banks. During the daily process, each bank is asked the rate at which it could borrow money from other banks, ‘unsecured’ i.e. backed only by its own creditworthiness rather than by specific collateral. The question is, in effect: what would your credit be like today, if you had to ask? . . . .

It seems bizarre that something so central to the global markets – $360 trillion of deals are pinned to Libor – should have such a strong element of invention or guesswork. The potential for abuse is immediately apparent. As Donald MacKenzie prophetically said, ‘the obvious risk to the integrity of the calculation is that a bank on a Libor panel might make a manipulative input, trying to move Libor up or down so as to influence interest rates or the value of its swaps portfolio.’ Surprise! After the crisis, when investigators were taking an energetic interest in Libor, it turned out that that was exactly what had been happening, not just at one or two banks but across an entire swath of the industry.

Lanchester only brings up LIBOR as the opening act for what he considers a far deeper scandal in Britain—PPI. And guess what—it’s not just LIBOR where we’re seeing these concerns about privileged access to information turning into profit. Here are some other “rigging” scandals of recent vintage:
Read More

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Warren Buffett’s Single Bid Rule

Among the many ways that Warren Buffett is unusual is his approach to the role of price in business acquisition negotiations. Other people commonly haggle over price. Tactics include sellers naming an asking price that is higher than warranted or buyers making a low-ball bid. Some people enjoy the give and take and many believe it is a way to produce value in exchange.

Buffett eschews such exercises as a waste of time. One of Berkshire’s acquisition criteria (in addition to size, proven earnings power, quality management in place and relative simplicity of the business) is having a price. Eschewing the games so many negotiators like to play over ranges of values, Buffett wants a single price at which each side can say yes—or walk away. His bid is his bid; when he gives you a bid, what you have is what most people classify as the “best price,” “final offer,” or “highest bid.”

Buffett has repeatedly statesd this policy, along with the other acquisition criteria, in every Berkshire Hathaway annual report since 1983 (and once in a 1986 ad in the Wall Street Journal). Yet I know many people who are skeptical about whether Buffett and Berkshire actually adhere to this policy—doesn’t he engage in price negotiations in at least some cases, they ask? Aren’t there situations in which the value of an exchange is not discovered other than through the dynamic of negotiations, including about appropriate methodology?

To answer such questions, I examined the 16 Berkshire Hathaway acquisitions over the past two decades that involved public company targets. Unlike private company targets, those companies are required by U.S. federal law to publicly disclose the background of the transaction, including negotiation over all material terms, such as price. Read More

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Corporate Political Speech, Rent-Seeking, and Political Extortion

Before I sign off, I’d like to thank Danielle et al. for their hospitality.  I’m very glad to have had this opportunity to share some of my thoughts, and to get some great feedback.  Let me finish up by offering an alternative rationale – grounded in public choice theory – for limited shareholder authority over corporate political spending.

Shareholder regulation of corporate political activity may not only decrease agency costs within the firm, it may improve overall societal welfare.  First, diversified shareholders might be able to constrain the costs of rent-seeking behavior that merely redistributes wealth between portfolio firms. Second, all shareholders may want to reduce the possibility of political extortion by removing from management the final say on certain kinds of political expenditures.  Allowing shareholders to regulate corporate political activity could limit these social welfare-decreasing activities, and channel corporate resources to more productive uses.  I sketch these arguments in more detail below. Read More

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The Efficiency of Corporate Political Speech Bylaws

Nearly half a century ago, Albert Hirschman formalized two ways in which members of organizations could express their displeasure: exit and voice.  Exit is market-based expression, and is typically quiet, impersonal and cheap.  Voice, by contrast, is political expression — it is usually loud, messy, and expensive.  From an efficiency perspective, exit is thus generally favored as a matter of institutional design.

Corporate law largely track Hirschman’s theory.  Shareholders’ voice rights are, by default, quite constricted, and the business judgment rule imposes an important limitation on seeking judicial remedies.  In most cases, unhappy shareholders’ only practical method of expressing their discontent is to exit the firm by selling their shares.

But Hirschman warns that in certain circumstances, such as where the barriers to exit are sufficiently high, it is preferable to adjust institutional design to facilitate or strengthen members’ voice rights.  Corporate political activity presents exactly such a case, because the standard shareholder remedies – suing, voting for the board of directors, and selling their shares – are either unavailing or exceptionally costly.  I treat this range of options in more detail elsewhere, but below I will briefly describe these problems with a focus one key area in which corporate political activity differs markedly from other types of corporate action, and then turn to an important objection. Read More

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Legal Diversification

I’ve just posted my latest paper, Legal Diversification, on SSRN. The paper starts from the premise that investors derive significant protection from the risks of capital investment by diversifying their holdings. By the same token, it seems to me that investors may be able to realize benefits from the broad diversity of corporate and securities laws governing investment opportunities.

The Essay introduces a new dimension of diversification for investors: legal diversification. Legal diversification of investment means building a portfolio of securities that are governed by a variety of legal rules. Legal diversification protects investors from the risk that a particular method of minimizing agency costs will prove ineffective and allows investors to own securities in a variety of firms, with each security governed by the most efficient set of legal rules given the circumstances of the investment. Diversification of investment by legal rules is possible because of the varied menu of legal rules firms can choose from when organizing and raising capital. The most recent addition to the securities laws, the JOBS Act, may compromise the diversity of legal rules that protects investors by pushing even more firms toward organizing as public corporations, thereby threatening to curtail or eliminate the variety that allows effective diversification.

The Essay makes several contributions to the literature. By introducing legal diversification, it reveals a new understanding of how investors, issuers, and society can benefit from maintaining a variety of legal rules to govern investment in businesses. The corporate law scholarship has long advocated preserving a variety of rules under which firms can organize, but it has yet to consider how investors can take advantage of that variety to protect themselves before market competition has revealed the “best” rules. Legal diversification also complements recent literature emphasizing the importance of diversity in financial regulation by highlighting another reason diversity of legal rules is important to healthy capital markets. Legal diversification fills gaps in the literature advocating regulatory diversity by offering an explanation for why that diversity is a valuable protection for investors and an indispensable mechanism for allowing firms to choose the most efficient legal rules to govern their organization and operation.

I’m still working on editing the draft, so would greatly appreciate any thoughts or comments you may have on the project.