May 13, 2013

---

After Kiobel, extraterritoriality is not a question of subject matter jurisdiction under the Alien Tort Statute – and neither is corporate liability

posted by Marco Simons

(Marco Simons is Legal Director of EarthRights International.  He is a graduate of Yale Law School, where he received the Robert L. Bernstein Fellowship in International Human Rights.)

The Supreme Court issued its decision in Kiobel v. Royal Dutch Petroleum a few weeks ago, and it has raised more questions than it has answered. Commentators and scholars have puzzled over what the Court did and what it means – all we really know is that the Court did not expressly rule on whether corporations could be sued for human rights abuses under the Alien Tort Statute (ATS) (the original question certified), and only began to elaborate under what circumstances an ATS suit could be brought for injuries arising in a foreign country (the question certified for reargument).

As to the extraterritoriality question, the Court held that some sort of presumption against extraterritoriality applied to ATS claims. Unlike the usual application of such presumptions, however, the Court did not suggest that this meant that no claims arising in foreign countries could be heard. Instead, the Court’s five-justice majority said that claims needed to be assessed on the basis of the extent to which they “touch and concern” the United States, and that where the only connection to the U.S. is the “mere corporate presence” of a foreign multinational, that is insufficient to allow an ATS claim to proceed.

This raises an interesting question of how this presumption is being applied. As the Supreme Court ruled in Sosa v. Alvarez-Machain, the ATS is a purely jurisdictional statute – claims under the statute come from federal common law. Ordinarily, the presumption against extraterritoriality does not apply to jurisdictional provisions; it only applies to substantive provisions. So Kiobel did not decide that the ATS is not an extraterritorial statute – it decided that the presumption against extraterritoriality applies to claims brought under the ATS. Read the rest of this post »

  May 13, 2013 at 5:41 pm   Posted in: Uncategorized   Print This Post   Comments (9)

Software Patent Eligibility

posted by David Schwartz

This post reflects my initial impressions of an important Federal Circuit development in patent law, which is my primary area of scholarly focus. On Friday, the Federal Circuit, sitting en banc, ruled on a controversial and divisive patent law issue, whether software inventions are patent eligible subject matter. Unfortunately, I find the decision in this case, CLS Bank v. Alice Corp., quite unsatisfying.

The court, sitting with 10 judges, issued 7 separate opinions spanning 135 pages. The court only agreed upon a very brief – 55 words – per curiam opinion affirming the district court ruling that the asserted patents were invalid. The per curiam opinion explained that the “method” and “computer readable media” claims were deemed not patent eligible by the Federal Circuit, while the court was equally divided on the status of the “system” claims. (Basically, there are several different ways that a software invention can be claimed in a patent, including as a process/method of performing steps; as software embedded upon a computer readable medium (i.e., a DVD); and as a system (i.e., software running on a machine/computer).) None of the remaining substantive opinions garnered more than 5 votes – thus, none are binding precedent. Although a majority of the Federal Circuit judges found the method and media claims invalid, a majority could not agree upon the reasoning. Below I will briefly provide a few preliminary observations about the opinions.

Read the rest of this post »

  May 13, 2013 at 3:26 pm  Tags: CLS Bank, Federal Circuit, patent, patent eligibility, patentable subject matter, software  Posted in: Courts, Intellectual Property, Uncategorized   Print This Post   Comments (0)

May 12, 2013

---

Happy Mother’s Day . . .

posted by admin

From everyone here at Concurring Opinions!

  May 12, 2013 at 4:26 pm   Posted in: Uncategorized   Print This Post   Comments (0)

May 11, 2013

---

Privacy and the Bloomberg Terminal

posted by William McGeveran

The privacy scandal of the week involves Bloomberg terminals, reporters, and Wall Street traders. It started making the rounds of the financial press in the last couple of days and today reached the New York Times, which led its story by declaring that a “shudder went through Wall Street” in response to the revelations. But as with many of the periodic Facebook privacy scandals, this one is only surprising if you haven’t been paying attention. And it distracts the press and the public from more serious matters.

The story, in a nutshell: a Bloomberg terminal like the one in the picture sits on every trading desk. It is the central platform for managing a constant stream of information about market activity, financial news, economic data, and much more. By making this very expensive equipment a necessity, Michael Bloomberg (now New York’s mayor, of course) built a multibillion-dollar empire and made himself fabulously wealthy.

From the beginning, company employees have been able to look up individual Bloomberg subscribers and scrutinize their most recent activity in the system. That may make some sense for sales and technical personnel (although even then it probably ought to have been more anonymized than it seems to have been). Unfortunately, that access also extended to journalists at the many news outlets that have been added to the Bloomberg corporate family over the years. And these reporters appear to have mined that data routinely for tidbits that might have helped with their stories.

Don’t get me wrong, this is not an example of good privacy practices. But it ain’t exactly the allegations of pervasive bribery, eavesdropping, and hacking by journalists in the employ of Rupert Murdoch. Quartz has a pretty good explanation of the data that was available. Primarily, it boils down to the last time a person logged in, the “functions” used (essentially, what general categories of information services were accessed, such as reports of corporate bond trades), and the transcript of any online customer service chats. Crucially, Quartz notes, “Employees can see how many times each function was used but not further details, like which company’s bonds were being researched.” In other words, a lot of it resembles information that many web sites, including news sites, can already glean about most of their customers, particularly those who are logged in. At most, Bloomberg journalists might have obtained some slight lead that would send them on the hunt for more solid information, much as a tip from a source might. In the incident that brought the practice to light, for example, a reporter surmised that a Goldman Sachs partner might have left the firm because he stopped using his Bloomberg terminal.

Read the rest of this post »

  May 11, 2013 at 2:42 pm   Posted in: Current Events, Privacy, Technology   Print This Post   Comments (0)

Wachtell Lipton’s Errors on Shareholder-Paid Director Bonuses

posted by Lawrence Cunningham

Amid debate over shareholders offering contingent payments to directors, Wachtell Lipton recommends an option that may be tempting for incumbent boards: unilaterally adopting a bylaw banning the arrangements.  Boards should be wary of this advice.

True, Wachtell’s position concurs with my view that such payments are lawful, contrary to the position urged by my esteemed fellow corporate law Prof., Stephen Bainbridge.  But that’s where Wachtell and I part company, first because Wachtell’s proposal is myopically universal and second because it errs on a basic legal point about board and shareholder power.

In my view, not only are the arrangements lawful, but shareholder bodies ought to have the choice to embrace or reject them.  My guess is that they are desirable for some corporations in some settings and not so for others.  Therefore, the use or rejection of these ought to be determined, as with much else in corporate life and law, in context by business people participating in particular governance situations. Read the rest of this post »

  May 11, 2013 at 1:10 pm   Posted in: Corporate Law, Current Events   Print This Post   Comments (5)

Happy 10,000th Post!

posted by William McGeveran

I was just working on my next guest post when I noticed a little statistic in the dashboard: there have been 10,007 posts to Concurring Opinions. Which means this lil’ ol’ “blawg” passed a significant milestone about a week ago that deserves some celebration — and heartfelt  thanks to Dan Solove and the cadre of other permanent bloggers who keep it going.

By my count, post number 10,000 was a pointer to a new essay about the Kirtsaeng decision in the Stanford Law Review Online. That’s appropriate, because spreading the word about interesting and timely legal scholarship — especially stuff that appears in less traditional places like the journals’ online supplemnets — has been one of ConOp’s many services to the rest of us for years now.

  May 11, 2013 at 12:37 pm   Posted in: Administrative Announcements, Blogging, Law Rev (Stanford), Law School   Print This Post   Comments (2)

May 10, 2013

---

Vanderbilt Law Review En Banc – Roundtable: The JOBS Act and SEC Rulemaking

posted by Vanderbilt Law Review

Vanderbilt Law Review En Banc is pleased to present our Spring 2013 Roundtable, which considers the SEC’s rulemaking authority under the JOBS Act of April 2012.

Practicing securities attorney Douglas Ellenoff, and Professors Usha Rodrigues and Andrew Schwartz each consider the public policy rationales of the JOBS Act, its legislative history, congressional intent, and practical considerations in order to offer some friendly advice to new Chairman Mary Jo White and the Commission.

Mr. Ellenoff and Prof. Schwartz focus on the rules required or allowed relating to crowdfunding under Title III of the Act, while Prof. Rodrigues examines the lifting of the ban on solicitation and advertising of securities offered to accredited investors under Title II. We hope you find this Roundtable informative and engaging.

Roundtable Essays

Making Crowdfunding CREDIBLE
Douglas S. Ellenoff · 66 Vand. L. Rev. En Banc 19 (2013)

In Search of Safe Harbor: Suggestions for the New Rule 506(c)
Usha Rodrigues · 66 Vand. L. Rev. En Banc 29 (2013)

Keep It Light, Chairman White: SEC Rulemaking Under the CROWDFUND Act
Andrew A. Schwartz · 66 Vand. L. Rev. En Banc 43 (2013)

  May 10, 2013 at 9:41 pm   Posted in: Law Rev (Vanderbilt), Securities, Securities Regulation   Print This Post   Comments (0)

Max Olson Helps Berkshire Hathaway with Letter Compilation

posted by Lawrence Cunningham

Berkshire annual reports of the late 1980s and early 1990s (some pictured at left), all stated that compilations of letters from earlier annual reports, dating to 1977 (also pictured), were available on request from the company without charge.  By the mid-1990s demand had begun to rise, prompting a new policy: continuing to offer the historical compilations to shareholders for free, but charging non-shareholders $15 (for production and shipping).

Beginning with the 1997 report, the letters, again dating to 1977, were made freely available on the internet (and they still are there).  The two-volume historical compilation remained available, but now at a charge of $30, payable by non-shareholders and shareholders alike (shipping included).  In 1999, the printed set became a three-volume issue and the charge was raised to $35 for all.

Those printed volumes have not been available for several years (and I feel lucky to have some in my library). That’s been a relief to staff at Berkshire’s famously minimalist headquarters, a handful of people with no time to process payments and stuff envelopes.  It is this lacuna that Max Olson’s alternative fills, a good job, especially at the price of $24.50 (plus shipping). Read the rest of this post »

  May 10, 2013 at 1:14 pm   Posted in: Book Reviews   Print This Post   Comments (0)

May 9, 2013

---

Blogging Hiatus

posted by Gerard Magliocca

I won’t be posting for the next month or so, unless the Supreme Court does something exciting.  I have three good reasons for taking a break.  First, I have to grade exams.  Second, I’m doing the final proofreading of the book.  And third, I’m getting married.  After the honeymoon, I’ll be back and ready to inflict my opinions on you again.

Here, by the way, is the Amazon ad for the Bingham book.

  May 9, 2013 at 6:38 pm   Posted in: Uncategorized   Print This Post   Comments (8)

Short-termism: Fact or Fiction?

posted by Kelli Alces

Last week, I wrote about Lynn Stout’s new book, The Shareholder Value Myth, and her argument that shareholder value maximization should not be the goal of managers in corporate decision making, nor should it be the purpose of corporate operations. In the book, and in her presentation last week, Stout seemed particularly concerned that managers of public companies seem to manage firms with an eye to current stock price and so may take action to increase earnings in the short term at the expense of long term viability. For example, a firm might not invest in research and development in order to keep the cash on the books and enhance current share price without having to take the risk that a long term investment in innovation might not work out. More perniciously, managers may manipulate financial reports in order to boost current stock price in the hopes that next quarter’s numbers will take care of themselves somehow.

If these short-termist tendencies were a pervasive problem, that would be troubling indeed. In some ways, evidence of short-termism seems to be all around. Executives are paid handsomely in the form of stock option awards that allow them to capitalize on sharp increases in stock price. If stock price falls shortly after the executive exercises her options, the executive does not have to disgorge her gain. Executives are under constant pressure to “meet expectations” and the average CEO tenure is relatively short (less than seven years, according to Steven Kaplan & Bernadette Minton). A CEO could well drive up the stock price of one company with a creative display of smoke and mirrors and move on to her next employer before the first one tanks from her failure to plan for its future. If public corporations were being run to seem to flourish today while disaster lurks next year, then our economy would suffer greatly.

Many blame executive compensation, particularly compensation with stock options, for managers’ seeming short-term focus on daily stock prices. (On the other hand, Gregg Polsky and Andrew Lund have argued that incentive compensation may not matter much, given the other incentives managers have to abide by shareholders’ wishes.) Stock options not only focus managers’ attention on stock prices, but they also have the effect of increasing managers’ appetite for corporate risk-taking. Options give managers an incentive to take big risks in the hopes of big returns as they are insulated from losses. Stout pointed out that current executive compensation schemes tie managers’ interests to those of well-diversified shareholders (which is exactly what they were designed to do), and that connection is harmful because if no one has an interest in the corporation’s long-term viability, companies will fail frequently and spectacularly and impose significant social costs in doing so. A well-diversified shareholder can diversify away firm-specific risk, so is not vulnerable to the risk of loss associated with any one firm, but society suffers if public corporations are driven to insolvency by greedy short-term shareholders. With bubbles bursting all around us, how can one argue that short-termism is not a problem?

Read the rest of this post »

  May 9, 2013 at 4:39 pm   Posted in: Uncategorized   Print This Post   Comments (0)

May 8, 2013

---

Continuous Assessment

posted by William McGeveran

Thanks so much to the Concurring Opinions gang for having me back for another guest blogging stint. My semester has ended, so let the blogging begin!

Except … even though I have not received my students’ exams from the registrar yet, I am grading. Why?  Because I assigned group projects during the semester and have not completed marking the last one. This raises an uncomfortable question for me: have I done the students any good by giving them a graded assignment during the semester if they don’t receive feedback on it until they are on the cusp of taking the final exam?

That really depends on the reasons for requiring “grading events” such as group projects, short papers, quizzes, midterms, or oral presentations during the semester. Like many of my colleagues, I have increasingly moved away from the traditional law school model that based the entire course grade on a high-stakes final examination, perhaps with some small adjustment for class participation. It seems clear to me that this is a good decision — even though it has meant a lot more grading (every professor’s least favorite task) and even though the institutional incentives for law faculty don’t really encourage or assist us to do depart from the tradition of the all-or-nothing final exam.

But I have to confess that my views of the reasons for continuing assessment are unsettled and even a little muddled. Here are the main candidates in my mind:

• Earlier graded events give students feedback about their understanding of the material and performance in the course while there is still time to correct it.
• Basing the course grade on more than one event reduces the “fluke factor” of a student who is ill or overtired or just not in top form the day of the final exam.
• The events themselves — say, a group project — serve valuable pedagogical goals and making them part of the grade ensures that students will take them seriously.
• Educational research shows that students learn more effectively if they synthesize knowledge as they go along rather than just doing a big outline at the end of the course, and graded events spur them to synthesize earlier.
• Basing the grade on different types of exercises rewards varied abilities beyond the particular (and slightly bizarre) skill set that excels at law school issue spotter exams.

 

Only the first of these requires me to return students’ grades sooner than I’ve managed to do for this group project. Of course, I am saying this partly to assuage my guilt over my own tardiness. But I also wonder how well we articulate the reasons for continuous assessment to our students — or even, frankly, to ourselves. I have now more carefully engaged in the sort of reflection about these goals that I should have gone through before the semester started. Now I know for next time that my answer is: all of the above.

Uh oh. I better get back to grading those group projects right now.

  May 8, 2013 at 2:12 pm   Posted in: Education, Law School, Law School (Teaching), Teaching, Uncategorized   Print This Post   Comments (1)

Should Empirical Legal Scholars Have Special Responsibilities?

posted by David Schwartz

Before delving into the substance of my first post, I wanted to thank the crew at Concurring Opinions for inviting me to guest blog this month.

Recently, I have been thinking about whether empirical legal scholars have or should have special ethical responsibilities. Why special responsibilities? Two basic reasons. First, nearly all law reviews lack formal peer review. The lack of peer review potentially permits dubious data to be reported without differentiation alongside quality data. Second, empirical legal scholarship has the potential to be extremely influential on policy debates because it provides “data” to substantiate or refute claims. Unfortunately, many consumers of empirical legal scholarship — including other legal scholars, practitioners, judges, the media, and policy makers — are not sophisticated in empirical methods. Even more importantly, subsequent citations of empirical findings by legal scholars rarely take care to explain the study’s qualifications and limitations. Instead, subsequent citations often amplify the “findings” of the empirical study by over-generalizing the results. 

My present concern is about weak data. By weak data, I don’t mean data that is flat out incorrect (such as from widespread coding errors) or that misuses empirical methods (such as when the model’s assumptions are not met). Others previously have discussed issues relating to incorrect data and analysis in empirical legal studies. Rather, I am referring to reporting data that encourages weak or flawed inferences, that is not statistically significant, or that is of extremely limited value and thus may be misused. The precise question I have been considering is under what circumstances one should report weak data, even with an appropriate explanation of the methodology used and its potential limitations. (A different yet related question for another discussion is whether one should report lots of data without informing the reader which data the researcher views as most relevant. This scattershot approach has many of the same concerns as weak data.)

Read the rest of this post »

  May 8, 2013 at 12:17 pm  Tags: academia, empirical legal studies, law reviews, legal scholarship  Posted in: Empirical Analysis of Law   Print This Post   Comments (5)

May 7, 2013

---

Stanford Law Review Online: Kirtsaeng and the First-Sale Doctrine’s Digital Problem

posted by Stanford Law Review

The Stanford Law Review Online has just published an Essay by Professor Clark D. Asay entitled Kirtsaeng and the First-Sale Doctrine’s Digital Problem. Professor Asay argues that:

[T]he history and purpose of the first-sale doctrine provide good reasons to abandon the licensee/owner dichotomy as well as the formalistic approach to interpreting the doctrine’s applicability to digital transfers. Doing so, furthermore, is unlikely to undermine markets for copyrighted works, but instead will help preserve the appropriate balance between the rights of copyright holders and consumers that first-sale rights have historically helped maintain.

He concludes:

The Kirtsaeng decision helped further cement the first-sale doctrine as an important limitation on the rights of copyright holders. But more cement is needed. Specifically, as the digitization of copyrighted works increases, first-sale rights face increasing peril as copyright holders subject consumers to click-through agreements that eviscerate first-sale rights in effect if not in theory. Furthermore, some courts have recently employed a formalistic ap-proach to the statutory text that renders first-sale rights simply inapplicable to digital transfers. If Kirtsaeng is to avoid becoming the first-sale doc-trine’s “swan song,” courts and Congress must respond to save it.

Read the full article, Kirtsaeng and the First-Sale Doctrine’s Digital Problem at the Stanford Law Review Online.

  May 7, 2013 at 4:47 am   Posted in: Intellectual Property   Print This Post   Comments (0)

May 6, 2013

---

Deep Dive in Prawf Lateral Market Confirmed

posted by Lawrence Cunningham

As anticipated (here and here), 2013 witnessed a deep dive in lateral recruiting by law schools and movements by law professors.

Only 41 schools secured recruits, which totaled 56 prawfs, according to the latest information reported at the Faculty Lounge.

Compare similar information reported since 2006  in the following table.  (Obviously, FL may have missed some results, so the data are not necessarily complete, but that is true for 2013 as well as any prior year.)

Year	Schools	Faculty
2006	71	132
2007	72	131
2008	80	136
2009	68	114
2010	72	92
2011	55	93
2012	56	84
2013	41	56

  May 6, 2013 at 4:03 pm   Posted in: Law School (Hiring & Laterals)   Print This Post   Comments (2)

Notes on Berkshire’s 2013 Annual Meeting

posted by Lawrence Cunningham

Spent the weekend in Omaha with my wife at the Berkshire Hathaway shareholders’ meeting, one of many I’ve attended since my first in 1998 after publishing The Essays of Warren Buffett: Lessons for Corporate America.  The pace is always busy and has gotten hectic as I’ve gotten to know more people and the scale and size of the meeting expands.

For us, this meant, besides the meeting, which takes place from about 9 to 4 on Saturday, various interviews (Yahoo! Finance Friday, USA Today Saturday afternoon and Motley Fool Saturday evening); book signings (conference at U. Nebraska Friday evening, the Bookworm Sunday early afternoon and Hudson Books later Sunday); and social gatherings (a party given by hedge fund manager Whitney Tilson Friday evening and Warren Buffett’s brunch for out of town friends on Sunday).

The result was catching up with scores of people I know through this world, including both luminaries and students, those I’ve known for decades and those I’ve gotten to know more recently.  One comes away with reflections, during such occasions, and herewith a few of mine. Read the rest of this post »

  May 6, 2013 at 2:13 pm   Posted in: Current Events   Print This Post   Comments (2)

Presidents Not Signing a Bill

posted by Gerard Magliocca

Over the weekend I was wondering about one way in which a bill no longer becomes a law.  Article I, Section 7, gives the President three options about what to do when Congress passes something.  He can sign it within ten days.  He can veto it within ten days.  Or he can do nothing.  If he does nothing right before a congressional recess or an adjournment, the law can be pocket vetoed.  That happens from time to time.

What presidents do not do anymore is refuse to sign a bill that they don’t like and allow it to become law.  This used to happen in the 19th century.  At some point, though, this practice died out.  Presidents used to refuse to sign as a kind of protest.  Today they sign and issue a signing statement listing all sorts of objections to the legislation.  Setting aside whether you think that is a valid practice, I’m curious why the “no signing” custom became extinct.

  May 6, 2013 at 11:00 am   Posted in: Constitutional Law, Uncategorized   Print This Post   Comments (4)

The Reality of Short Termism Per Mark Roe

posted by Lawrence Cunningham

Short-termism in stock markets preoccupies many policy makers and analysts of late but Mark Roe wonders about the validity of some of the conventional talk.   He has posted a series of three short articles on the topic excerpted from a larger project, all worth a look: (1) about whether the cause of any new corporate short-termism may not be stock markets but the speed of change in business pressures;  (2) Are Stock Markets Really Becoming More Short-Term?, and (3) Apple’s Cash Flow Problem, using that case to question the assumption of short-termism.   Business Lawyer will publish the longer version of the inquiry this summer in Mark’s piece, Corporate Short-termism — In the Boardroom and in the Courtroom.  All worth reading.

  May 6, 2013 at 9:44 am   Posted in: Corporate Law, Current Events   Print This Post   Comments (0)

May 5, 2013

---

Epstein, Landes, & Posner Find SCOTUS Very Pro-Business

posted by Frank Pasquale

Adam Liptak’s story on the Supreme Court offers a nice empirical validation of Jeffrey Rosen’s observation in Supreme Court, Inc.: this is a very pro-business SCOTUS.

Whether the Roberts court is unusually friendly to business has been the subject of repeated discussion, much of it based on anecdotes and studies based on small slices of empirical evidence. The new study, by contrast, takes a careful and comprehensive look at some 2,000 decisions from 1946 to 2011.

Published last month in the Minnesota Law Review, [a study by Lee Epstein, William Landes, & Richard Posner] ranked the 36 justices who served on the court over those 65 years by the proportion of their pro-business votes; all five of the current court’s more conservative members were in the top 10. But the study’s most striking finding was that the two justices most likely to vote in favor of business interests since 1946 are the most recent conservative additions to the court, Chief Justice Roberts and Justice Samuel A. Alito Jr., both appointed by President George W. Bush.

The ideological shift on the Court is also affecting the academy. If a scholar aims to influence the Court, he or she would be smart to find some new interpretation of an old right that dramatically expands corporate power. To the extent influence on the Court is taken as a bellwether of the quality of one’s legal scholarship, perhaps that ostensibly neutral evaluative mechanism is promoting the political commitments of a durable conservative majority.

  May 5, 2013 at 5:50 pm   Posted in: Supreme Court   Print This Post   Comments (0)

Market Efficiencies Come to Legal Practice

posted by Frank Pasquale

Dustin A. Zacks has posted a fascinating article on the role of “foreclosure mills” in bringing a more corporate, bottom-line oriented mentality to law firms:

The recent housing crisis increased demand for attorneys to process foreclosures through state courts. [High volume foreclosure firms developed; they] differ in makeup from traditional large law firms. Notable characteristics of these foreclosure firms include lenders and servicers’ relentless demand for increased speed and low costs, lack of firm-specific capital at foreclosure law firms, and a factory-like atmosphere of legal practice.

[As they developed] the fastest and cheapest legal services available. . . .these firms consistently generated complaints about their conduct, including questions about their ethical decision-making and about the veracity of the pleadings and documents they filed. . . . The Article accordingly examines the curiously muted reaction from state bar associations, judges, and state legislators.

Read the rest of this post »

  May 5, 2013 at 2:39 pm   Posted in: Financial Institutions, Legal Ethics   Print This Post   Comments (4)

May 4, 2013

---

Prof. Bainbridge on Hess: Critics Still Not There Yet

posted by Lawrence Cunningham

Prof. Steve Bainbridge replied to my post about shareholders paying bonuses to director nominees elected in contested elections, highlighted by the pending proxy battle at Hess.  Steve clarifies his objection to Elliott Associates, the activist shareholder hedge fund, promising to pay its director nominees bonuses if Hess’s stock price outperforms a group of industry peers over the next 3 years:

When I described these transactions as involving a conflict of interest, what I had in mind was the general conflict of interest ban contained in Restatement (Second) of Agency sec 388:  ”Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.”  Surely the hedge fund payments here qualify as, for example, the sort of gratuties picked up by comment b to sec 388:

“An agent can properly retain gratuities received on account of the principal’s business if, because of custom or otherwise, an agreement to this effect is found. Except in such a case, the receipt and retention of a gratuity by an agent from a party with interests adverse to those of the principal is evidence that the agent is committing a breach of duty to the principal by not acting in his interests.  Illustration 4.   A, the purchasing agent for the P railroad, purchases honestly and for a fair price fifty trucks from T, who is going out of business. In gratitude for A’s favorable action and without ulterior motive or agreement, T makes A a gift of a car. A holds the automobile as a constructive trustee for P, although A is not otherwise liable to P.”

How is the hedge fund’s gratitude for good service by the Hess director any different than T gift to A?  To be sure, directors are not agent of the corporation, but “The relationship between a corporation and its directors is similar to that of agency, and directors possess the same rights and are subject to the same duties as other agents.” . . . Thus, I believe, even if the hedge fund nominee/tippees are scrupulously honest in not sharing confidential information with the funds, put the interests of all shareholders ahead of those of just the hedge funds, and so on, there would still be a serious conflict of interest here.

I can offer 4 replies to Steve’s fine legal points, which I’ll first summarize and then elaborate:

1.  While Steve acknowledges that agency law doesn’t apply, he stresses similarities between agency and corporate law when justifying reference to the American Law Institute’s Restatement (Second) of Agency, but then omits the differences that warrant treating directors differently than agents.

2. Even accepting arguendo Steve’s proposal to rely on the Restatement (Second) of Agency,  he chose to present Illustration 4 as governing the Elliott-Hess arrangement, but the next one, Illustration 5 (excerpted below), is more on point and comes out the other way because the agent and principal are free to agree otherwise.

3.  Even if agency law applied, the Restatement (Second) of Agency, initially adopted in 1958, was superseded in 2006 by the Restatement (Third) of Agency, whose provisions support the Elliott-Hess arrangements.

4.  But agency law doesn’t apply.  The ALI’s applicable standard from corporate law is stated in its Principles of Corporate Governance, expressly referenced in the Restatement (Third) of Agency.  This standard puts the burden on those challenging such arrangements to prove defects such as unfairness or secretiveness, which opponents have not done.  Read the rest of this post »

  May 4, 2013 at 5:44 pm   Posted in: Agency Law, Corporate Law, Current Events   Print This Post   Comments (4)

• « Older Entries
• Newer Entries »