In Stone v. Ritter, shareholders of AmSouth Bancorporation brought a derivative suit against AmSouth’s directors alleging a “classic Caremark claim.” In 2004, AmSouth had paid $50 million in fines and penalties to the federal government to settle criminal and civil charges that the bank had failed to file reports of suspicious activity required by the federal anti-money-laundering regulations. The plaintiffs thereafter brought a derivative claim, seeking to recover the $50 million from the directors. Plaintiffs alleged that “defendants had utterly failed to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to learn of problems requiring their attention.”
In Stone, the Delaware supreme court confirmed that “Caremark articulates the necessary conditions for assessing director oversight liability.” In doing so, however, the court described Caremark as a case in which the operative standards are good faith and loyalty rather than care, stating that:
[T]he Caremark standard for so-called “oversight” liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence). In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: . . . where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.
Stone further held that “In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions to assure a reasonable information and reporting system exists and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.”
Liability will arise only where there are alleged “red flags” that are “either waved in one’s face or displayed so that they are visible to the careful observer.” Rattner v. Bidzos, 2003 WL 22284323 at 13 (Del. Ch. 2003), quoting In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch. 2003).
Which raises the question: What's the difference between a red flag that can result in liability if ignored and a yellow flag that cannot?
Friend of the blog prominent Delaware corporate lawyer Francis Pileggi recently posted an essay, Court Explains Directors Fiduciary Duty of Oversight, which discusses a recent Delaware Chancery Court case, Reiter v. Fairbank, and provides a valuable overview of the law in this area.
In Reiter v. Fairbank, the Delaware Court of Chancery reasoned that there was no key event or doc- ument that constituted a red ag to the board. At most, there were a number of yellow ags that the board adequately addressed.
He goes on to discuss the yellow flags and why they were yellow rather than red.
 911 A.2d 362 (Del.2006).
As previously noted, I'm enrolled in Notre Dame's STEP program and currently taking the Core Course: Introduction to the Catholic Faith:
In the documents of Vatican II, the baptized are called to holiness and to greater understanding of their unique role in building the Kingdom of God. An informational and enriching introduction to the Catholic faith and theology, this course will enable you to take greater responsibility in promoting the life and mission of the Church. Using the United States Catholic Catechism for Adults as a primary text, this course will explore six core areas and will serve as a good foundation for those who seek to continue theological studies or develop theological competency for ministry. Theology is a fascinating and vital subject that challenges those who study it to think critically and personally about human existence, the world we live in and our relationship with God and one another. It is recommended (but not required) as a first course for those new to theological study.
Week 1's topic is faith development. The weekly assignment was to write 150-200 words on the question "How is faith both a gift and a human act?" As regular readers might expect, my weekly comment ran a bit long. Don't expect anything terribly profound. It's just my musing on the assigned topic:
In creating man and woman, God endowed us all with a yearning for the infinite. As the quotation from St Augustine reminds us, “Our heart is restless until it rests in you.”
Yet, on our own, we grope toward knowledge of God feebly and imperfectly. And so another step in the process by which God gives us faith is Revelation of himself.
God reveals himself to all through creation. “The heavens declare the glory of God; the firmament proclaims the works of his hands. Day unto day pours forth speech; night unto night whispers knowledge.” (Ps 19:2-3).
God most fully reveals himself in scripture. God inspired the prophets, apostles, and others who wrote the bible to provide a true account of God’s revealed nature. God granted insight to the Church Fathers who determined the canon of Holy Scripture, separating the wheat from the chaff, and thus giving us a rich foundation of revealed truth upon which to construct out faith. And, of course, the Church has built the Magisterium upon that foundation as God continues to reveal himself to the saints and scholars of the Church who grapple with how the eternal truths of scripture apply to an ever-changing world.
Yet, faith must also be a human act. If God granted justification to an elect few—if he predestined some for salvation and some for damnation—there would be no free will.
God invites us to join his company. Some (we may hope many or even most) will accept the gift he offers. In doing so, they complete the act of faith. There has been a proffered gift and a freely given acceptance thereof.
We may think of this as faith rather than knowledge, for faith is defined as “is the realization of what is hoped for and evidence of things not seen.” (Heb. 11:1). Unlike St. Thomas, who believed only after seeing the nail marks on Jesus and the hole in his side, we who have faith are blessed because we “have not seen and have believed” anyway. (John 20:29)
I've enrolled in the University of Notre Dame's Satellite Theological Education Program (STEP) to pursue their Certificate in Doctrine. The STEP program is an online educational program:
We use digital technology to offer theological education to pastoral ministers and other adult Catholics across the United States and beyond. We are part of Notre Dame's McGrath Institute for Church Life, which serves the University's larger mission of teaching, research, and service to society and to the Church.
Our staff members work with Notre Dame professors and other highly qualified instructors to assemble lectures, readings, and supporting materials for Web-based courses. We train and coordinate facilitators, who in turn guide STEP students as they interact with each other and with Notre Dame's online learning environment. From registration to course completion, we strive to provide you with a friendly, supportive place to grow in faith and understanding.
STEP Certificates of Catholic Theology recognize those who have completed a set of courses and a final assignment in a given area of theological study. A Certificate of Catholic Theology may enable you to:
Demonstrate competence in a given theological discipline.
Meet diocesan or national certification standards for the intellectual dimension of faith formation for diaconate or lay ecclesial ministry.
Certificates of Catholic Theology are available for the following areas of study: Doctrine, History, Liturgy, and Scripture.
The Certificate in Doctrine requires the following courses:
I'm currently enrolled in the Core Course. At the end of each week, we have to post a short discussion of the topic for that week. It's supposed to be 150-200 words. As you can imagine, that's a real problem for me. My week 1 post ran 350 words. Anyway, I plan to cross post my weekly comments here.
McGinnis points out that:
One of the best disruptions of Donald Trump has been his decision to nominate many officials to the Cabinet who have been enormously successful in business. Such appointees have run major organizations and thus can use their substantial management experience to impose order on the sprawling government bureaucracy. They also bring the perspective of business into the heart of government. A commercial republic can thrive only if, from time to time, officials set about lifting off the dead weights that democratic practices tend to place on the economy.
It is thus disheartening, if not surprising, that many Democrats in the Senate now want to eliminate most of the tax law that facilitates the transition of business people to government. This law permits appointees to an administration to defer their capital gains on the stock they must sell to avoid conflict of interest. It thus encourages wealthy individuals to take government posts, because otherwise they would face an unpalatable choice: Pay a huge capital gains bill or hold on to stock that would create conflicts of interest in their new positions. The legislation greatly aids in eliminating conflicts of interest, because in exchange for the tax deferral, appointees must put their money in treasuries or index funds.
Thus, it is not an interest in good government, but in insular government that is behind the push to change this law.
It's basically a reverse John Galt move: the party of big government trying to ensure that only career government and K Street types can afford to do public service. Go read the whole thing.
As part of the Obama administration-wide rush of midnight regulation, the Obama Department of Labor put out an "interpretative bulletin" on Exercise of Shareholder Rights and Written Statements of Investment Policy, including Proxy Voting Policies or Guidelines. It basically purports to tell ERISA fiduciaries--most notably pension fund managers--what their obligations are with respect to proxy voting corporate stock of companies in their portfolios.
As you might expect, it'll make shareholder activists and social justice warriors come over all tingly. With any luck, however, President Trump and Secretary of Labor Andy Pudzer will put it high on their list of last minute Obama regulations to be repealed.
The Labor Department's prior guidance had emphasized that "plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals." In other words, plan fiduciaries could not use their portfolios to try to effect social change.
The Obama DOL, however, claims to be worried that this rule might discourage "fiduciaries from recognizing the long-term financial benefits that, although difficult to quantify, can result from thoughtful shareholder engagement ...." The interpretative guidance therefore now encourages plan managers to engage with management on such social issues as:
In other words, plan fiduciaries now will have greater freedom to expend portfolio resources to effect liberal social goals simply by claiming that they think doing so will have long-term benefits without having to quantify those benefits.
There's a game of tag going on in my FB TL that asks one to identify ten albums that influenced you during your teen years (defined as 71-78 in my case). No more than one per band. You hopefully still love all of them and, at the very least, none make you cringe.
Born to Run-Springsteen
Who's Next-The Who
Madman Across the Water-Elton John
461 Ocean Boulevard-Eric Clapton
Live Bullet-Bob Seger
The Stranger-Billy Joel
Give Em Enough Rope-The Clash
Exile on Main St.-Stones
CSNY's Deja Vu just missed the list because I was 12 when it came out in 1970. Darkness on the Edge of Town missed the cut because I could only pick one per artist. Lynyrd Skynyrd's (Pronounced ‘l?h-’nérd ‘skin-’nérd) missed the list because I loved it then but now it just sort of annoys me. Ditto anything by Elvis Costello. I never liked Dylan, Pink Floyd, most punk bands, Michael Jackson, Stevie Wonder, Neil Young as solo artist, or Fleetwood Mac, which knocks out a lot of options.
A former student is starting her career as a corporate law associate and asked my advice on some books she could valuably read to prepare:
Every business lawyer must read: The Terrible Truth About Lawyers by Mark H. McCormack https://t.co/0btjj7oYaS— Professor Bainbridge (@ProfBainbridge) January 16, 2017
Highly recommended for starting lawyers: Drafting for Corporate Finance: What Law School Didn't Teach You https://t.co/O6rAJRRAbX— Professor Bainbridge (@ProfBainbridge) January 16, 2017
Aaron Rodgers has to be 2017 NFL MVP. When Packers were struggling at 4-6, he put that team on his back, ran the table to make the playoffs, and now has two playoff wins, including beating #1 seed Dallas in Dallas. Amazing performance.
Let's get the usual disclaimers out of the way. As a practicing Catholic, I give religious assent to the Magisterium of the Church and all due respect to the Bishops thereof. Yet, I also note that the church encourages lay initiative “especially when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” United States Catholic Conference, Catechism of the Catholic Church ¶ 899 (2d ed. 1997).
The Institute for Policy Research & Catholic Studies at The Catholic University of America (which I think is fairly described as left leaning) recently held a conference at which San Diego Bishop Robert McElroy gave a keynote address. There is much in Bishop McElroy's address that is worthy of comment and I likely will have more to say about it in the future. In this post, however, I want to focus on his call for the Church to stand in solidarity with public employee unions:
One of the lynchpins of the tradition of Catholic teaching on economic justice is that the right to workers' associations is not only an essential element of obtaining justice for the workers themselves, but that it also contributes to the common good of society as a whole. There is no doubt that there will be further attacks upon the rights of public sector unions to exist and seek justice for their members in the coming years. And while the duty of all unions to seek the common good of society as a whole presents special obligations for public workers, all of the fundamental principles of Catholic social teaching which have enshrined the right to organize and bargain collectively at the very heart of the church's social doctrine testify equally to the right of public sector workers to obtain justice in pay, benefits and working conditions through robust unions.
The highlighted passage calls to mind Harry Truman's famous plea: "Give me a one-handed Economist. All my economists say 'on hand...', then 'but on the other...” On the one hand, Bishop McElroy gives (dare I say grudging) recognition of the special problems created by public sector unionism. On the other hand, he also gives (may I say full throated) support for the principle of pubic sector unionism.
We may lay it down as a general and lasting law that working men's associations should be so organized and governed as to furnish the best and most suitable means for attaining what is aimed at, that is to say, for helping each individual member to better his condition to the utmost in body, soul, and property.
One hundred years later, the great Pope John Paul II reaffirmed in Centesimus Annus that:
Pope Leo XIII's Encyclical also affirms other rights as inalienable and proper to the human person. Prominent among these, because of the space which the Pope devotes to it and the importance which he attaches to it, is the "natural human right" to form private associations. This means above all the right to establish professional associations of employers and workers, or of workers alone.19 Here we find the reason for the Church's defence and approval of the establishment of what are commonly called trade unions: certainly not because of ideological prejudices or in order to surrender to a class mentality, but because the right of association is a natural right of the human being, which therefore precedes his or her incorporation into political society. Indeed, the formation of unions "cannot ... be prohibited by the State", because "the State is bound to protect natural rights, not to destroy them; and if it forbids its citizens to form associations, it contradicts the very principle of its own existence".
As I read the relevant papal encyclicals, which form the core of CST, however, the unions at issue typically are understood as associations of workers employed by private--especially industrial--enterprise. Even in that context, moreover, the encyclicals recognize that the right of free association must be balanced against the public good. In discussing the right to strike in Laborem Exercens, for example, John Paul II wrote that:
While admitting that it is a legitimate means, we must at the same time emphasize that a strike remains, in a sense, an extreme means. It must not be abused; it must not be abused especially for "political" purposes. Furthermore it must never be forgotten that, when essential community services are in question, they must in every case be ensured, if necessary by means of appropriate legislation. Abuse of the strike weapon can lead to the paralysis of the whole of socioeconomic life, and this is contrary to the requirements of the common good of society, which also corresponds to the properly understood nature of work itself.
Public sector unionism in fact poses a direct and inescapable threat to the common good of society in a way that private unions simps do not.
As Daniel DiSalvo writes, leading labor and political figures long recognized that public sector unions were a bad idea:
Prior to the 1950s, as labor lawyer Ida Klaus remarked in 1965, "the subject of labor relations in public employment could not have meant less to more people, both in and out of government." To the extent that people thought about it, most politicians, labor leaders, economists, and judges opposed collective bargaining in the public sector. Even President Franklin Roosevelt, a friend of private-sector unionism, drew a line when it came to government workers: "Meticulous attention," the president insisted in 1937, "should be paid to the special relations and obligations of public servants to the public itself and to the Government....The process of collective bargaining, as usually understood, cannot be transplanted into the public service." The reason? F.D.R. believed that "[a] strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable." Roosevelt was hardly alone in holding these views, even among the champions of organized labor. Indeed, the first president of the AFL-CIO, George Meany, believed it was "impossible to bargain collectively with the government."
He further explains that:
In 1943, a New York Supreme Court judge held:
To tolerate or recognize any combination of civil service employees of the government as a labor organization or union is not only incompatible with the spirit of democracy, but inconsistent with every principle upon which our government is founded. Nothing is more dangerous to public welfare than to admit that hired servants of the State can dictate to the government the hours, the wages and conditions under which they will carry on essential services vital to the welfare, safety, and security of the citizen. To admit as true that government employees have power to halt or check the functions of government unless their demands are satisfied, is to transfer to them all legislative, executive and judicial power. Nothing would be more ridiculous.
The very nature of many public services — such as policing the streets and putting out fires — gives government a monopoly or near monopoly; striking public employees could therefore hold the public hostage. As long-time New York Times labor reporter A. H. Raskin wrote in 1968: "The community cannot tolerate the notion that it is defenseless at the hands of organized workers to whom it has entrusted responsibility for essential services."
A core problem with public sector unionism is that it creates a uniquely powerful interest group. In theory, bureaucrats are supposed to work for and be accountable to the elected representatives of the people. But suppose those bureaucrats organize into large, well-funded, powerful unions that can tip election results. With very few and very unique exceptions, no workplace in which the employees elect the supervisors functions well for long. Yet, research by Terry Moe (22 J.L. Econ. & Org. 1) into the electoral power of teachers' unions finds just such an outcome:
The first study ... provides evidence that teachers, acting through their unions, are quite successful at getting their favored candidates elected to local school boards. When a candidate is supported by the unions, her probability of winning increases dramatically, so much so that the impact of union support appears to be roughly the same as the impact of incumbency. In terms of total impact, union influence may be even greater than this suggests, because union victories literally produce incumbents—and the power of incumbency then works for union candidates to boost their probability of victory still further in future elections.
The second study ... shows that public bureaucrats' turnout advantage over other citizens is much greater than the existing literature would lead us to expect. It also offers persuasive new grounds for believing that their high turnout is indeed motivated by occupational self-interest—and more generally, that they are actively and purposely engaged in an electoral effort to control their own superiors.
The prevailing theories treat bureaucrats as mere subordinates, controlled from above by political authorities. But the control relationship can run both ways, and not just because bureaucrats have expertise and other sources of private information. In a democratic system the authorities are elected, and this gives bureaucrats an opportunity to exercise electoral power in determining who will occupy positions of authority and what choices they will make in office. It would be odd indeed if public bureaucrats and their unions did not invest in this kind of reverse control—and there is ample evidence that they do.
In effect, public sector unionism thus means that representatives of the union will often be on both sides of the collective bargaining table. On the one side, the de jure union leaders. On the other side, the bought and paid for politicians. No wonder public sector union wages and benefits are breaking the back of state budgets. They are bargaining with themselves rather than with an arms'-length opponent.
Even if the public's representatives at the collective bargaining table are not de facto union representatives, the nature of public sector collective bargaining inherently leads to inefficiencies. As far back as 1971, in their book The Unions and the Cities, Harry Wellington and Ralph Winter argued that "there are sound reasons for concluding that government is not just another industry" (Book Review, 13 Wm. & Mary L. Rev.):
Foremost of these reasons is the unreliability of transplanting the private sector labor legislation's operating assumption that the employer's superior bargaining power should be equalized. That power in a given city may already be equal or tipped in favor of public employee unions due to the very nature of the public employer who, unlike the private employer, is not subject to market restraints but is subject to political restraints. Government decisions are properly political decisions and economic considerations, although para- mount to the private employer, are but one criterion among many for the public employer. Market restraints in the private sector are such that increased benefits will cause higher prices for the employer's product which in turn, in a system of tradeoffs, causes possible unemployment of some employees. No such market restraint exists in the public sector except in theory since discharging teachers, sanitation workers, or police- men as a result of granting higher benefits raises very real political pressures from within the affected government department and from an inconvenienced public. Government employers too frequently yield to constituents by a grant of increased benefits to employees and then either bury the increases in the "bowels of an incomprehensible municipal budget," seek new funds, or reduce other services by reallocating the city's treasury. Thus, normal market restraints are often supplanted by political restraints regardless of economic or social impact. ...
Add to this political power of public employee unions the private sector strike weapon and they may have, argue the authors, a disproportionate quantum of power sufficient to distort the normal political process. Their power may be so effective a means of redistributing income that they will have "an institutionalized means of obtaining and maintaining a subsidy for union members."
In sum, public sector unionism lacks the moral and economic justifications for private sector unionism. It results in significant distortions of the political process, which have real adverse consequences for the taxpayers.
Indeed, consider the looming economic disaster coming in most states and localities as bloated public sector union benefits--especially pension benefits--are essentially bankrupting the public sector. (See The Pension Fund that Ate California for a particularly detailed account of the problem.) A briefing paper from the left-leaning Brookings Institute explains:
The Providence Journal has observed that:
“At the bottom of it all is a political culture that rewarded politicians who made unsustainable promises, working in mutually beneficial tandem with public employee union leaders who extracted remarkably generous benefits without worrying about the long-term costs to the citizenry, especially when the inevitable recession arrived.”
Public employee unions are one of the most—if not the most—powerful political actors in state politics and have used that power to protect and expand the pension benefits of their members, as one would expect. As Healey, Hess and Nicholson have observed:
“Public sector unions are often highly involved in raising funds and donating to the campaigns of political candidates, often with the goal of preserving the pension status quo ... As important as it may be to take on the challenge [of pension reform] many lawmakers are still politically incentivized to maintain the status quo for as long as possible.”
Why do union leaders support pension policies that threaten to undermine the ability of a state to deliver promised benefits to their members? Dr. Thomas H. Little from the State Legislative Leaders Foundation noted that it has a lot to do with internal union politics: “Union representatives tend not to look long-term but rather focus on the short-term interests of the current and retired members who elected them and on whom they depend for re-election. These folks tend to be adamantly opposed to cuts in their benefits.”
Public sector unionism is thus inherently at odds with the common good, as it impedes the ability of the State to provide basic services to citizens at large.
In sum, the late Cardinal Edward Egan was thus correct when he argued at a 2011 conference on work (50 J. Cath. Legal Stud. 149) that:
There is a basic difference between the public employee and the private employee. You cannot fairly say, “Here is an argument for the private employee,” and apply it without distinction to the public employee. That tactic may get you through an opinion piece in a newspaper, but it will not work in a serious discussion where the participants are free to demand precise definitions and, above all, clear distinctions.
I call on Bishop McElroy to heed that warning and address squarely whether CST's plain teaching on private unions in fact ought to extend to public sector unions in whole or part.
An email from SSRN reports:
Your paper, "INTEREST GROUP ANALYSIS OF DELAWARE LAW: THE CORPORATE OPPORTUNITY DOCTRINE AS CASE STUDY", was recently listed on SSRN's Top Ten download list for: FEN: Legal Systems & Agency Conflicts (Topic) and Fiduciary Law eJournal.
As of 14 January 2017, your paper has been downloaded 25 times. You may view the abstract and download statistics at: https://ssrn.com/abstract=2894577.
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Here's the citation and abstract for the paper:
Bainbridge, Stephen M., Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study (January 5, 2017). UCLA School of Law, Law-Econ Research Paper No. 17-01. Available at SSRN: https://ssrn.com/abstract=2894577
Number of Pages in PDF File: 25
Keywords: Corporate Opportunity Doctrine, Fiduciary Duties, Directors, Officers, Interest Groups, Indeterminacy, Judicial Incentives
JEL Classification: K22
I recommend reading the whole thing, but here's the money quote:
The President-Elect and his lawyers at Morgan Lewis have released a plan that purports to address the conflicts of interest arising out of his various business ventures (hereinafter “the Plan”). Although I believe that the Plan does not go nearly far enough, I view it as a step in the right direction. Others are far lesssanguine.
The full Plan can be found here. ...
The Morgan Lewis plan for managing the President-Elect’s conflicts is not perfect. Indeed, there is unlikely to be a perfect plan. However, those concerned about Trump’s numerous business conflicts would be well served to suggest concrete improvements rather than continuing to insist on divestment, which poses its own ethical challenges.