Category: Corporate Law

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Families, Corporations, and the Blackberry

BlackBerry.gif11D has an interesting post on the pressure that her husband has been getting to carry a Blackberry around with him and go to the bar with the “team” from work on Friday nights. 11D summarizes her anger thus:

Let me get this straight. He’s gone from the house for 60 hours per week. He sees his kids for an hour per day. And now he’s supposed to be checking his e-mail, while he watches his kid’s soccer game. The people that he spends 10 hours a day with are making him spend more time in the evening with them, so they can do jello shots and pat each other on the back for closing all those deals. As he’s pounding shots and head butting the other guys, the kids and I are supposed to amuse ourselves.

After I processed this information, I arranged the words, words shit, fuck and damn, in all sorts of unique combinations.

As well she might. (In particular, the notion that one gets pressure to socialize with co-workers rather than going home to your family strikes me as a bit ludicrous). The pithy conclusion to her expletive studded outrage is that “Corporate life is the enemy of the modern family.”

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10

Trump’s Net Worth

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This article press release details Donald Trump’s new defamation suit against New York Times reporter Timothy L. O’Brien and Warner Books, Inc., for, saying that Trump was not a billionaire in the book The Art of Being the Donald:

The lawsuit alleges that in publishing these false statements, O’Brien and Warner deliberately chose to ignore, among other things, voluminous and comprehensive financial information that Trump made available to them prior to the publication of the book, which confirmed conclusively that Trump’s net worth is in the billions of dollars. Indeed, Forbes Magazine rigorously analyzed the very same books and records and other financial data that O’Brien and Warner chose to ignore, and concluded that Trump’s net worth conservatively is at least $2.7 billion.

What I know about the topic of Trump’s net worth comes largely from O’Brien’s NYT articles on the topic, which (not incidentally) were quite skeptical of Forbes’ approach to valuation. I also am surprised that Trump would be interested in exposing his books to public scrunity, which (presumably) O’Brien and Warner could insist on as a part of their defense. Shucks, as a plaintiff, Trump might not even be able to obtain a protective order in N.J. State Court. [Being unfamiliar with local practice, this is just a guess, but Trump’s privacy claim is weaker than it would be if he had been forced to court as a defendant.]

Nevertheless, you’ve got to give Trump style points for being willing to double-down his bets:

The lawsuit, which was filed in state court in Camden, New Jersey, seeks $2.5 billion in compensatory damages and $2.5 billion in punitive damages….

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The Gorilla Award for 2005

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It’s award season. Not a suprise. The end of the year encourages thoughts of reflection and rankings.

I thought it might be fun to institute an award for the corporate news story that won’t make anyone’s list of top events this year: the 2005 Gorilla Award. The award is named for a famous video testing “inattentional blindness.” As professors who teach Enron are fond of relating, experimenters asked students to watch a video of folks playing basketball and to to count the total number of times that the people wearing white pass the basketball, while not counting the passes of folks wearing black.

Go ahead, click on the video and perform the test. Then come back.

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0

Alito and the ECMH

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For more evidence of Judge Alito’s strong support of the efficient capital market hypothesis, read this recently released Third Circuit opinion in the Merck & Co. Sec. Lit. that Alito joined (Ambro was the writing judge). The relevant discussion is on pages 15-20. The opinion follows Burlington and Oran, which (as I noted in the past) Alito did write. Obviously, this isn’t as useful evidence of the Judge’s views as his own work, but any product released in this highly sensitive period is surely something he gave a careful look at.

Merck interprets Oran and Burlington to mean that price movement must occur in the period “immediately following disclosure”. Plaintiff had argued that the market failed to appreciate the nature of the disclosure at issue until the Wall Street Journal had added up some figures that revealed (allegedly) $4.6 billion in inflated revenue.

The court, conscious of its status as having one of the “clearest commitments” to the ECMH of the appellate courts, applied what I’ve called in my work the “understand consequences materiality technique”* and dismissed plaintiff’s allegations out of hand. It noted that multiple analysts followed Merck, and queried:

“If these analysts-all focused on revenue-were unable for two months to make a handful of calculations, how can we presume an efficient market at all. [Plaintiff] is trying to have it both ways: the market understood all the good things that Merck said about its revenue but was not smart enough to understand the co-payment disclosure. An efficient market for good news is an efficient market for bad news.”

This is an interesting claim. It might not actually be true – there is evidence that individuals are significantly more resistant to incorporating evidence of bad news than evidence that confirms the optimism they naturally feel, which suggests that it is possible that market irrationality, if it exists, may not go in both directions. But, on the other hand, Ambro’s basic theory – that disclosure of underlying facts about a well-known stock followed by dozens of analysts should be curative – makes intuititve sense.

In any event, another data point suggesting that securities plaintiffs may not win lots of battles with (a Justice) Alito, but on the big, class-enabling, issue, he’s solid.

(Hat Tip: Naturally, Howard B.)

Related Posts:

1. Hoffman, Alito and Securities Law: Part II;

2. Hoffman, Alito: The Business Friendly Justice?

*No, it wasn’t my most catchy and inspired naming day.

0

Rocks, SOX, and roundhouse kicks

As all securities lawyers know, the Sarbanes-Oxley Act introduced new provisions relating to codes of ethics. Section 406 of the Act requires that companies disclose whether they have a code of ethics for their senior financial officers, and if not, the reason why not. This has led many companies to adopt codes of ethics.

I don’t think that the market has realized how simple this requirement actually is. As with most other areas of life, the best course here is simply to follow the guidance of Chuck Norris. To make this easier, Chuck has provided a clear list of “Chuck’s Code of Ethics.” (link via sharp-eyed reader Steve Evans). A company simply needs to adopt the list wholesale, and it can’t go wrong. chuck-ethics.jpg

What does Chuck’s code provide? A few highlights:

“I will develop myself to the maximum of my potential in all ways.

I will forget the mistakes of the past and press on to greater achievements.

I will always be in a positive frame of mind and convey this feeling to every person that I meet. . .”

Does Chuck’s code meet the requirements of Item 406 of Reg S-K? You might as well ask, “Does Chuck Norris have a beard?”

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3

Guidant/JJ Litigation

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Counsel, start your time-clocks.

As has been well-reported, Guidant has sued Johnson & Johnson for specific performance of J&J’s $25.4 billion acquisition. J&J will almost certainly assert that its obligation is void under the merger agreement’s “material adverse effect” clause, and, specifically, will argue that the clause has been triggered by Guidant’s messy encounters with state and federal regulators over its heart stents.

Bill Sjostrom at the Business Law Prof Blog has been all over this looming fight.

Back in September, he started questioning the deal’s continued viability. In October, he put up a great post on the MAE at issue in the (then) potential litigation. He argued that NY AG Spitzer’s lawsuit against Guidant may strengthen JJ’s claim here. Finally, he broke news of the suit here.

Obviously, I do not know how this will turn out. But doesn’t it seem that J&J could have protected itself against this type of risk with more precision? Isn’t regulatory action the number two legal problem medical device makers potentially face, after patent claims?

For more information, Pharmablog talks about the underside of drug testing here. Finally, the Stent Blog (!) is a must-read resource if you care about the statistical likelihood of stent failure.

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Horwitz on Sensitive Corporate Judges

Over at Prawfs, Paul Horwitz has been trying to get some precision on what it would mean for a judge to be “sensitive” to business interests.

Here is a taste:

If I were writing opinions in these [employment discrimination cases] that were “sensitive” to business, I would fully acknowledge that employees may use Title VII to try to turn garden-variety dismissals, demotions, etc. into discrimination cases, in the hope that the corporate defendant will settle after protracted litigation, and that this may ultimately drive down the incentive to hire; that class actions similarly attempt to induce settlement and may discourage innovation; and that consumer arbitration clauses are one way to efficiently channel disputes without the significant burden of litigation. But I might also “sensitively” acknowledge that proferring legitimate nondiscriminatory reasons is hardly the same thing as proving a dismissal was not, in fact, motivated by discrimination; that courts may be so tough on Title VII cases in part because they are caseload-driven; that businesses do in fact sometimes commit mass torts, and may even (at least until recently) collude in settlements that primarily serve the interests of the corporate defendant and plaintiffs’ counsel; that businesses may prefer arbitration because they think it ups their chances of success, particularly before repeat-player arbitrators, and deters consumers from pursuing their claims; and that there may be something qualitatively different between a commercial business contract and a boilerplate arbitration clause in a consumer or employment agreement. In short, I don’t know at first blush whether the corporate interest would win or lose; but I would be “sensitive” about the issues faced by business. So it doesn’t seem to me that a pro-business record of judicial rulings really tells us anything about whether that judge is sensitive to business interests. He may simply be insensitively supportive of them.

Go ahead and read the whole thing.

10

Alito: The Business Friendly Justice?

Larry Ribstein has a great new post up on the jurisprudence of Third Circuit Judge Samuel Alito, a potential SCOTUS nominee. He sums up:

In short, Alito has displayed a marked tendency to enforce contracts as written, specifically including choice of law/forum and arbitration provisions that are intended to mitigate litigation costs. He’s also obviously aware of the problems that can be caused by lax proof standards and open-ended liability.

On the list that Prof. Ribstein has created, I was particularly interested in In re Burlington Coat Factories Sec. Lit. Prof. Ribstein says that decision involves a “deni[al] securities claims for failure to adequately allege scienter and materiality, and for lack of a duty to update.” My reading of the decision produced a somewhat more complicated picture, which may give some insights into Alito’s opinions about securities complaints.

First, unlike the district judge whose opinion the Third Circuit was passing on, Alito’s opinion is significantly more respectful of the pleading standard, reversing (in effect) a dismissal on materiality grounds. This decision – if representative of Alito’s larger jurisprudence – suggests that he is not particularly hostile to securities plaintiffs. In the end, the opinion does dismiss claims on 9(B) grounds, but with leave to re-plead.

Most significantly, the Judge appears to buy into the efficient capital markets hypothesis without hesitation, dismissing one claim which failed to result in a market reaction with the following reasoning.

In the context of an “efficient” market, the concept of materiality translates into information that alters the price of the firm’s stock. . . . This is so because efficient markets are those in which information important to reasonable investors (in effect, the market) … is immediately incorporated into stock prices. … Therefore, to the extent that information is not important to reasonable

investors, it follows that its release will have a negligible

effect on the stock price.

There are two basic problems with the idea that non-price-movement should mean immateriality as a matter of law. First, there will be times when market-wide distortions will dampen reaction to disclosures — which is why we require litigants to conduct expensive loss causation analyses which correct for the effect of the market-basket. Second, the behavioral finance literature, summarized by Ribstein (in a great paper) here, should give pause to judges, plaintiffs and others who seek to rely heavily on the ideal of a perfectly well-functioning market. To be fair, we can’t blame Judge Alito for not being aware of this literature back in 1997, but it would be interesting to know what he thinks today.

Needless to say, if I were on the judiciary committee, we’d have fewer questions on intellectually moribund subjects like con law, and many more of the following type(s): “How should judges go about evaluating the question of whether the stock market is fully efficient? Can securities class actions survive evidence of irrational decisionmaking?”

[UPDATE: I’ve investigated Judge Alito’s securities decisions further here.]

9

Fictions, Concessions & Genossenschaft

Kaimi’s post about corporations and constitutional rights has provoked a response from Will Baude, who points out that at the time that the Fourteenth Amendment was passed it is not as though considering corporations as persons was beyond the pale. My own response to this issue (aside from a hearty “What Will said!”) is — in the best tradition of legal academia — self citation. Consider the following gem from “Corporations and Autonomy Theories of Contract,” forthcoming in the next issue of the Denver University Law Review:

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