From this week's leader:
An analysis of around 2,000 interventions in America during 1994-2007 found not only that the share prices and operating performance of the firms involved improved over the five years after the intervention, but also that the improvement was greatest towards the end of the five-year period. The firms activists targeted tended to be underperforming relative to their industry.
Yes, there was such an analysis, but for one thing is was a study solely of interventions by hedge funds. It says nothing--nada, zip, zilch--about the merits of activism by, say, union pension funds.
Second, the analysis was done by folks with skin in the game--a deep ideological commitment to shareholder activism, so deep that they set up a Harvard law school clinic to promote it. I'm not saying they skewed their numbers. They are too good scholars to do that. I am just saying that all empirical studies need to be taken with a grain of salt and those by folks with an agenda need a larger than usual grain. (And, yes, I have skin in this game too.)
Back to The Economist:
Rather than making life harder for activists, America’s regulators should make it easier. They could adopt Britain’s practice of allowing activists to call a shareholder meeting at which individual board members can be voted out. “Poison pills” that are triggered when activists buy shares should be banned.
Stuff and nonsense. As I explained in Preserving Director Primacy by Managing Shareholder Interventions:
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
I've said it before and, sadly, I must say it again: The Economist is ineducable on shareholder activism.
Now that the GOP has (wisely) caved on raising the debt ceiling, it may seem moot, but I nevertheless wanted to call your attention to a fascinating article by Duke law professor Steven Schwarcz that may come in handly the next time the ceiling becomes a political football. In Bypassing Congress on Federal Debt: Executive Branch Options to Avoid Default, he argues that:
Even a “technical” default by the United States on its debt, such as a delay in paying principal or interest due to Congress’s failure to raise the federal debt ceiling, could have serious systemic consequences, destroying financial markets and undermining job creation, consumer spending, and economic growth. The ongoing political gamesmanship between Congress and the Executive Branch has been threatening — and even if temporarily resolved, almost certainly will continue to threaten — such a default. The various options discussed in the media for averting a default have not been legally and pragmatically viable.
This article proposes new options for avoiding default, arguing that although the Executive Branch lacks authority to directly issue Treasury securities above the debt ceiling, it has the power to raise financing by monetizing future tax revenues. In each of the proposed options, a non-governmental special-purpose entity (SPE) would issue securities in amounts needed to repay maturing federal debt. Depending on the option, the SPE would either on-lend the proceeds of its issued securities to the Treasury Department on a non-recourse basis, secured by future tax revenues; or the SPE would use the proceeds of its issued securities to purchase rights to future tax revenues from the Treasury Department. In each case, therefore, future tax revenues would form the basis of repayment to investors.
These options should be legally valid and constitutional, notwithstanding the debt ceiling: neither involves the issuance of general-obligation or full-faith-and-credit government debt, and indeed the second option doesn’t involve the issuance of any government debt. Furthermore, based on the similarities of these options to successful financing transactions that are widely used in the United States and abroad, the securities issued there under should receive high credit ratings and also be attractive to investors. Because of provisions in foreign treaties, those securities should be especially attractive to foreign investors — who already purchase half of all Treasury securities.
These options are not intended to be standard financing structures. Being riskier than full-faith-and-credit Treasury securities, the securities issued under these options would almost certainly have to pay a higher interest rate than Treasury securities. The options should therefore be viewed, and this article presents them, as viable emergency measures, if needed, to avoid a U.S. debt default.
I must confess that I would find it most amusing if Obama had to resort to securitizing future tax revenues in order to keep the government open after all the calumny he has heaped on securitization over the years. In any case, it is a thoughtful, well-researched, and well-argued article. Highly recommended.
In the WaPo, Harold Myerson opines that:
In a well-intentioned op-ed in The Post [“Dialing up the power in people’s phone calls,” op-ed, Feb. 9], Wikipedia founder Jimmy Wales recently extolled his new phone venture, which has pledged to devote a quarter of its profits to “good causes” selected by an independent foundation. Now, I support good causes as much as the next fellow, and I have nothing negative to say about this initiative. I am compelled, however, to note that in delineating the obligations that corporations must meet, Wales made an error at once so common and so fundamental that it screams for correction.
In his discussion of the ways in which increasingly unpopular big businesses defend themselves against their critics, Wales wrote: “They argue, correctly, that the legal requirement of for-profit companies to maximize returns to shareholders limits their behavior.”
I never sought the opportunity to correct Wikipedia’s founder. Nevertheless, facts are facts, and the fact is that there is no legal requirement for for-profit companies to maximize returns to shareholders. When a company is for sale, its directors are required to do all they can to maximize its value. At any other time, corporate law simply dictates that directors are supposed to help the company prosper and do nothing to benefit themselves at the company’s expense. ...
The idea that corporations exist to reward their shareholders arose not in a body of law but from the work of ideologically driven economists. ...
I suppose he could be more wrong, but it is hard to see how.
Corporate law’s classic answer to the question of the proper objective of the directors famously was articulated in Dodge v. Ford Motor Co. Henry Ford embarked on a plan of retaining earnings, lowering prices, improving quality, and expanding production. The plaintiff Dodge brothers contended an improper altruism towards his workers and customers motivated Ford. The court agreed, strongly rebuking Ford:
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.
Consequently, “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.” Dodge’s theory of shareholder wealth maximization has been widely accepted by courts over an extended period of time. Almost three quarters of a century after Dodge, for example, the Delaware chancery court similarly opined: “It is the obligation for directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.”
To be sure, despite the powerful rhetoric of cases like Dodge, current law allows boards of directors substantial discretion to consider the impact of their decisions on interests other than shareholder wealth maximization. This discretion, however, exists not as the outcome of conscious social policy but rather as an unintended consequence of the business judgment rule. To be sure, some scholars find an inconsistency between the business judgment rule and the shareholder wealth maximization norm. In contrast, I concede that the business judgment rule sometimes has the effect of insulating a board of directors from liability when it puts the interests of nonshareholder constituencies ahead of those of shareholders, but deny that that is the rule’s intent. Instead, as the Delaware supreme court has explained:
Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in [Delaware General Corporation Law] § 141(a), the business and affairs of a Delaware corporation are managed by or under its board of directors.... The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors.
The business judgment rule thus operationalizes the intuition that fiat— i.e., centralization of decision-making authority—is the essential attribute of efficient corporate governance. As Nobel laureate economist Kenneth Arrow explains, however, authority and accountability cannot be reconciled:
[Accountability mechanisms] must be capable of correcting errors but should not be such as to destroy the genuine values of authority. Clearly, a sufficiently strict and continuous organ of [accountability] can easily amount to a denial of authority. If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.
The business judgment rule prevents such a shift in the locus of decision-making authority from boards to judges. It does so by establishing a limited system for case-by-case oversight in which judicial review of the substantive merits of those decisions is avoided. The court begins with a presumption against review. It then reviews the facts to determine not the quality of the decision, but rather whether the decision-making process was tainted by self-dealing and the like. The questions asked are objective and straightforward: Did the board commit fraud? Did the board commit an illegal act? Did the board self-deal? Whether or not the board exercised reasonable care is irrelevant, as well it should be. The business judgment rule thus erects a prophylactic barrier by which courts pre-commit to resisting the temptation to review the merits of the board’s decision.
The business judgment rule, however, has no application where the board of directors is disabled by conflicted interests. In such cases, concern for director accountability trumps protection of their discretionary authority. In corporate takeovers, for example, a well-known conflict of interest taints target company director decision making. Not surprisingly, therefore, the law denies directors discretion to consider the interests of nonshareholder constituencies in the takeover setting. To be sure, the interests of shareholders and nonshareholder may be consistent in takeover fights, just as they are in many settings. In light of the directors’ conflict of interest, however, we can no longer trust them to make an unbiased assessment of those competing interests. The conflict between management and shareholder interests requires skepticism when management claims to be acting in the stakeholders’ best interests. A board decision to resist a hostile offer may have been motivated by concern for potentially affected nonshareholder constituencies, but it may just as easily have been motivated by the directors’ and managers’ concern for their own positions and perquisites. Selfish decisions thus easily could be justified by an appropriate paper trail of tears over the employees’ fate. Consequently, in the takeover setting, rigorous application of the shareholder wealth maximization norm properly becomes the standard of judicial review.
Shareholder wealth maximization is not only the law, it is also a basic feature of corporate practice. Although some scholars claim that directors do not adhere to the shareholder wealth maximization norm, the weight of the evidence long has been to the contrary. A 1995 National Association of Corporate Directors (NACD) report stated: “The primary objective of the corporation is to conduct business activities with a view to enhancing corporate profit and shareholder gain.” A 1996 NACD report on director professionalism set out the same objective, without any qualifying language on nonshareholder constituencies. A 1999 Conference Board survey found that directors of U.S. corporations generally define their role as running the company for the benefit of its shareholders. The 2000 edition of Korn/Ferry International’s well-known director survey found that when making corporate decisions directors consider shareholder interests most frequently, although it also found that a substantial number of directors feel a responsibility towards stakeholders.
What people do arguably matters more than what they say. Director fidelity to shareholder interests has been enhanced in recent years by the market for corporate control and, some say, activism by institutional investors. Hence, for example, the widespread corporate restructurings of the 1990s are commonly attributed to director concern for shareholder wealth maximization. In addition, changes in director compensation have created additional hostages ensuring director fidelity to shareholder interests. Directors have long given shareholders reputational hostages. If the company fails on their watch, after all, the directors’ reputation and thus their future employability is likely to suffer. In addition, it is becoming common to compensate outside directors in stock rather than cash and to establish minimum stock ownership requirements as a qualification for election. Tying up the proportion of the director’s personal wealth in stock of the corporation creates another hostage, further aligning the director’s interests with those of shareholders.
 170 N.W. 668 (Mich. 1919).
 Id. at 684.
 Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1989).
 The business judgment rule, of course, pervades every aspect of corporate law, from allegedly negligent decisions by directors, to self-dealing transactions, to board decisions to seek dismissal of shareholder litigation, and so on. See, e.g., Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (fiduciary duties of controlling shareholder); Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. 1968) (operational decision); Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979) (dismissal of derivative litigation). Two conceptions of the business judgment rule compete in the case law. One treats the rule as having substantive content. In this version, the business judgment rule comes into play only after one has first determined that the directors satisfied some standard of conduct. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993) (holding that plaintiffs rebut the business judgment rule’s presumption of good faith by “providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty—good faith, loyalty or due care”). Alternatively, the business judgment rule is seen as an abstention doctrine. Under this version, the court will abstain from reviewing the substantive merits of the directors’ conduct unless the plaintiff can rebut the business judgment rule’s presumption of good faith. See, e.g., Shlensky v. Wrigley, 237 N.E.2d 776, 779 (Ill. App. 1968) (holding that: “In a purely business corporation ... the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors.”). For the reasons developed below, I find the abstention version more persuasive. See infra notes Error! Bookmark not defined.-11 and accompanying text.
 To be sure, a few cases can be read to suggest that directors need not treat shareholder wealth maximization as their sole normative objective. Upon close examination, however, most of these cases in fact are not inconsistent with the shareholder wealth maximization norm. In Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. 1968), for example, a minority shareholder in the Chicago Cubs sued Wrigley, the team’s majority shareholder, over the latter’s famous refusal to install lights at Wrigley Field. Shlensky claimed the decision against lights was motivated by Wrigley’s beliefs that baseball was a day-time sport and that night baseball might have a deteriorating effect on the neighborhood surrounding Wrigley Field. Id. at 778. Despite Shlensky’s apparently uncontested evidence that Wrigley was more concerned with nonshareholder than with shareholder interests, the Illinois Appellate Court dismissed for failure to state a claim upon which relief could be granted. Id. at 778-80. Although this result on superficial examination may appear to devalue shareholder wealth maximization, on close examination the case involves nothing more than a wholly unproblematic application of the business judgment rule.
 Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985). Cf. Marx v. Akers, 666 N.E.2d 1034, (N.Y. 1996) (noting that “shareholder derivative actions infringe upon the managerial discretion of corporate boards…. Consequently, we have historically been reluctant to permit shareholder derivative suits, noting that the power of courts to direct the management of a corporation's affairs should be ‘exercised with restraint.’”); see also Pogostin v. Rice, 480 A.2d 619, 624 (noting that “the derivative action impinges on the managerial freedom of directors”).
 Kenneth J. Arrow, The Limits of Organization 78 (1974).
 See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (explaining that the rule creates a presumption that the directors or officers of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company).
 See, e.g., Kamin v. American Express Co., 383 N.Y.S.2d 807, 811 (N.Y. Sup. 1976) (stating that absent “fraud, dishonesty, or nonfeasance,” the court would not substitute its judgment for that of the directors).
 See, e.g., Joy v. North, 692 F.2d 880, 885 (2d Cir. 1982) (stating: “While it is often stated that corporate directors and officers will be liable for negligence in carrying out their corporate duties, all seem agreed that such a statement is misleading.... Whatever the terminology, the fact is that liability is rarely imposed upon corporate directors or officers simply for bad judgment and this reluctance to impose liability for unsuccessful business decisions has been doctrinally labeled the business judgment rule.”); Brehm v. Eisner, 746 A.2d 244, 262-64 (Del. 2000) (rejecting plaintiff’s contention that the business judgment rule includes an element of “substantive due care” and holding that the business judgment rule requires only “process due care”).
 See Bayer v. Beran, 49 N.Y.S.2d 2, 6 (Sup. Ct. 1944) (explaining: “The ‘business judgment rule’ . . . yields to the rule of undivided loyalty. This great rule of law is designed ‘to avoid the possibility of fraud and to avoid the temptation of self-interest.’”).
 Under the Delaware supreme court’s decision in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), a target’s board of directors may not protect stakeholder interests at the expense of shareholder interests. Id. at 182. Rather, any management action benefiting stakeholders must produce ancillary shareholder benefits. Id. In addition, once an auction of corporate control begins, stakeholders become entirely irrelevant. In such an auction, shareholder wealth maximization is the board’s only appropriate concern. Id. Indeed, in this context, considering any factors other than shareholder wealth violates the board’s fiduciary duties. Id. at 185.
 National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Director Compensation: Purposes, Principles, and Best Practices 1 (1995) (noting, however, that “long-term shareholder gain” requires “fair treatment” of nonshareholder constituents).
 See National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Director Professionalism 1 (1996).
 The Conference Board, Determining Board Effectiveness: A Handbook for Directors and Officers 7 (1999).
 Korn/ Ferry International, 27th Annual Board of Directors Study 33-34 (2000).
 See, e.g., Michael Useem, Investor Capitalism: How Money Managers Are Changing the Face of Corporate America 137-67 (1996) (discussing corporate restructurings as a consequence of investor pressure).
 Hostages—reciprocal transaction-specific investments—are a central concept in institutional economics. Giving and taking hostages is a mechanism for making credible commitments. I’ll pay the ransom, because I know that you will kill the hostage if I do not. See Williamson, supra note Error! Bookmark not defined., at 75-78 and 124-29 (discussing the hostage model of contracting).
 See generally Charles M. Elson, The Duty of Care, Compensation, and Stock Ownership, 63 U. Cin. L. Rev. 649 (1995) (discussing stock-based director compensation and incentives created thereby).
 See Outside Directors: The Fading Appeal of the Boardroom, The Economist, Feb. 20, 2001, at 67, 69 (relating an anecdote in which one outside director who owned $500,000 worth of corporate stock stated: “If this company faces a challenge, I lose sleep at night”).
Once we equate making people feel bad with actually attacking them, free expression is basically obsolete, since anything a person does, makes or says could be interpreted as abuse....
Since when is it a "civil right" not to feel disturbed by a piece of art? And who gets to decide which art we chuck? You don't like the "Sleepwalker," but I don't like "Winged Victory." It stirs scary thoughts of decapitation. Dear Louvre, please stash that headless gal in the attic.
Where does it stop? Cultural critic Jonathan Rauch coined the term "offendedness sweepstakes" to describe our present condition: We've gotten to the point where almost any group can declare almost anything unnerving or politically incorrect and demand its removal. These censors automatically win because anyone who demurs is criminally callous.
Got my copies today of Insider Trading Law and Policy. From the book description:
This compact text (260 pp) is for use in law school classes on insider trading, securities regulation, or business associations. It offers a clear and direct exposition of the law and policy concerns raised by this important and high-profile area of the law. The author provides sufficient detail for a complete understanding of the subject without getting bogged down in minutiae. Faculty interested in teaching a short course on insider trading or making insider trading a major part of a course in securities or corporate law will find the text highly teachable, while students taking such a course using other materials will find it a useful study aid.
In my essay, Using Reverse Veil Piercing To Vindicate The Free Exercise Rights Of Incorporated Employers, 16 Green Bag 2d 235 (2013), I argue that:
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
In the course of the article, I propose "a three-pronged version of R VP that should be adopted in the mandate cases:"
Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?
How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?
Would reverse piercing this corporation’s veil advance significant public policies?
With respect to the second prong, I argue that:
... the government contends it has an interest in ensuring that Americans have access to the health insurance coverage required by the mandate. Whether or not that interest rises to the level of a compelling one that would justify infringing on free exercise and RFRA rights remains to be deter- mined. In evaluating the government’s interest, however, courts should note that the government has already undermined the man- date by carving out exemptions for grandfathered plans, employers with fewer than 50 employees, “member[s] of a recognized religious sect or division thereof” who have religious objections to the con- cept of health insurance, or religious employers [as defined in the regulations].” As Judge Walton observed, a “law cannot be regarded as protecting an interest of the highest order . . . when it leaves appreciable damage to that supposedly vital interest unprohibited.”
All of which brings us to the announcement that President Obama has unilaterally exempted (purportedly temporarily) a whole new category of employers. The WSJ explains:
ObamaCare requires businesses with 50 or more workers to offer health insurance to their workers or pay a penalty, but last summer the Treasury offered a year-long delay until 2015 despite having no statutory authorization. ...
Under the new Treasury rule, firms with 50 to 99 full-time workers are free from the mandate until 2016. And firms with 100 or more workers now also only need cover 70% of full-time workers in 2015 and 95% in 2016 and after, not the 100% specified in the law.
The new rule also relaxes the mandate for certain occupations and industries that were at particular risk for disruption, like volunteer firefighters, teachers, adjunct faculty members and seasonal employees. Oh, and the Treasury also notes that, "As these limited transition rules take effect, we will consider whether it is necessary to further extend any of them beyond 2015." So the law may be suspended indefinitely if the White House feels like it.
I agree with the Journal that Obama's cavalier attitude towards the Constitutional separation of powers grows ever more troubling:
Changing an unambiguous statutory mandate requires the approval of Congress, but then this President has often decided the law is whatever he says it is. His Administration's cavalier notions about law enforcement are especially notable here for their bias for corporations over people. The White House has refused to suspend the individual insurance mandate, despite the harm caused to millions who are losing their previous coverage.
But I write today mainly to note that Obama's action further eviscerates the argument that the government has a compelling interest in preventing Hobby Lobby and its ilk from following the religious beliefs of their shareholders. To paraphrase Judge Walton, a law cannot be regarded as protecting an interest of the highest order when the President gets to eviscerate that supposedly vital interest anytime he feels like it.
Hayek and Mises perceived little difference between democratic governments that used their power to plan against recessions and dictatorships that did the same thing. In this view, the policies of Franklin Roosevelt led down what Hayek called the “Road to Serfdom” and were thus objectively comparable to those of Hitler or Stalin. ...
Those who follow Hayek ... would also have us overlook that Hayek’s “own historical justification for apolitical market economics was entirely wrong,” as the late Tony Judt put it in “Thinking the Twentieth Century,” his extraordinary dialogue with his fellow historian Timothy Snyder, published in 2012, after Judt’s death.
Hayek believed, Judt said, that “if you begin with welfare policies of any sort — directing individuals, taxing for social ends, engineering the outcomes of market relationships — you will end up with Hitler.”
The implication is that Hayek equated Roosevelt and Hitler. But this is an absurd libel. First, to compare is not to equate. Second, despite Dionne's presumably carefully chosen wording seemingly intended to put words in Hayek's mouth, Hayek never said "you will end up with Hitler.” Tony Judt said that about Hayek.
As Don Boudreaux observes:
Hayek argued (in his 1944 book, The Road to Serfdom) that individual freedom will inevitably be snuffed out if government insists on centrally planning the economy in the way demanded by many socialists of the era, or if government attempts to protect every producer and worker from the forces of market competition. The argument is neither that the slightest overreach by government dooms society to totalitarianism, nor that all unwise interventions such as those of the New Deal are “objectively comparable” to the tyrannies unleashed by Hitler or Stalin.
As for Dionne's claim that gridlock has prevented Keynesian economics from getting a fair trial, I agree with Russ Roberts:
I guess he forget that $820 billion “stimulus” spending. That spending somehow got through the political system despite the obsession conservatives have with Austrian economics. Keynes is dead but somehow, between 2009 and 2012, federal deficits were over a $1 trillion every year. We’ll see about 2013, it may be less. That government spending as a percentage of GDP was only 25% in 2009 and above 24% in 2010 and 2011–the highest levels since WWII–was evidently due to lawmakers being in thrall to Austrian thinking.
I'm off today to Pepperdine University in Malibu to present my paper, Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties, to the Herbert and Elinor Nootbaar Institute on Law, Religion and Ethics Conference on Love and Law. Herewith the abstract:
Jeffrie Murphy has noted that “John Rawls claimed that justice is the first virtue of social institutions,” but Murphy then went on to ask “what if we considered agape to be the first virtue? What would law then be like?” When I was asked to contribute a paper on business organization law to a conference organized around Murphy’s question, the conference call immediately brought to mind then-Judge Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced, however hard the abnegation.” The parallels between Cardozo’s framing of the partner’s duties and a standard definition of agape, which holds that it is a “self-renouncing love,” are obvious and striking.
What then would partnership fiduciary duty law be like if it were organized around the value of agape? This essay concludes that partners need not love one another, at least as a matter of legal obligation. Agape is simultaneously too indeterminate and too demanding a standard to be suitable for business relationships. On the other hand, however, I conclude that partners ought to love one another. An analysis of Cardozo’s rhetoric and the intent behind it suggests that agape has great instrumental value. Partners who love one another can trust one another. In turn, partners who trust one another will expend considerably less time and effort — and thus incur much lower costs — monitoring one another. Agape thus should not be the law, but the law should promote agape as best practice.
To be presented at the Law and Love Conference, to be held at Pepperdine University School of Law, on February 7-8, 2014.
Here's what I intend to say in the 10 minutes I've been allocated (for citations see the draft of the original paper):
The call for our conference brought to mind Benjamin Cardozo’s opinion in Meinhard v. Salmon, which famously held that a managing partner “put himself in a position in which thought of self was to be renounced ….” The parallels between Cardozo’s framing of the partner’s fiduciary duties and common formulations of agape are obvious and striking.
This observation suggests several questions. First, did Cardozo intend the analogy to agape? Second, is agape an appropriate legal standard? Third, if not, does agapic love have any relevance to the governance of partnerships?
In Meinhard, Cardozo cloaked the fiduciary principle in rhetorical finery: “Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. …. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
Somewhat later in the opinion, Cardozo observed that Salmon “was much more than a coadventurer. He was a managing coadventurer.” In that capacity, Salmon owed Meinhard an even higher duty than the one already articulated for equal partners. “Salmon had put himself in a position in which thought of self was to be renounced, however hard the abnegation.”
Agape is often described in ways that strikingly resemble Cardozo’s description of a fiduciary’s duties. Agape, for example, is said to be the “‘perfect love,’ which seeks the good of the beloved beyond thought of self.” It is “a devotion that gives whatever is best for others without thought of self-gain.” Agape thus “is the willingness to let the self be destroyed rather than that the other cease to be; it is the commitment of the self by self-binding will to make the other great.” All of which sounds remarkably like Cardozo’s articulation of the “punctilio principle,” which has been described as requiring “a loyalty that pricks one’s own possible rationalizations of self-interest with the sharp point of selflessness.”
Did Cardozo intend to analogize partnership fiduciary duties to agapic love?
Geoffrey Miller observes that Meinhard is replete with religious imagery: “The image is one of religion, transcendence and mysticism. The connotation is that when it comes to dealings with co-partners, a person must behave with monastic purity, placing always the other’s interests above his own.”
It is plausible, moreover, that Cardozo encountered the concept of agape in his early life. Cardozo’s college studies included philosophy and he had received sufficient religious training to celebrate his bar mitzvah. In his judicial career, as Judge Posner has noted, Cardozo demonstrated a highly “moralistic streak.”
Ultimately, of course, such inquiries are bootless. Although it is interesting to speculate on Cardozo’s intentions, we simply don’t know.
Let me turn then to the more pertinent question: Is agapic love suitable as a legal standard? I am afraid not, even if one sets aside such standard objections as the purported inadmissibility of religious norms in making civil law for a secular society.
First, agape is too indeterminate a standard. In discussing the problem with a broad conception of fiduciary duty, under which the fiduciary has “a duty to act in the best interests of the beneficiary,” Lionel Smith aptly observes that “the indeterminacy of such a duty is such that any lawyer would agree that this cannot be its correct formulation.” When one adds an agape-based duty to renounce thought of self to Smith’s standard, the duty becomes less rather than more determinate.
Second, agapic love is too high of a standard. To see why, suppose we could put the question back to Cardozo by asking whether it is possible for the law to elevate the behavior of the market to some moral pinnacle. We might observe, as a learned economist has done, that “… we bourgeois are neither saints nor heroes. The age is one of mere iron—or aluminum or plastic—not pagan gold or Christian silver.”
Accordingly, no realistic social order can assume “heroic or even consistently virtuous behavior” by its citizens. Everybody puts love of self ahead of love of neighbor at least some of the time.
As Martin Luther King Jr. recognized in a profound commentary, obligations such as agapic love thus are “beyond the reach of the laws of society. They concern inner attitudes, genuine person-to-person relations, and expressions of compassion which law books cannot regulate and jails cannot rectify. Such obligations are met by one's commitment to an inner law, written on the heart.”
What then can the law do? Dr. King famously extended his argument by observing that “the law could not make people love their neighbors, but it could stop their lynching them.” What law does is to provide a “coercive backstop”: “Doubts about the prevalence of [love] in the population can be mitigated by a backstop regime of legal protection that enforces [love].” But the difficulty with of Cardozo’s rhetoric now becomes obvious. Bringing to bear the state’s monopoly on the use of coercive force on those who fall short of the legal standard is the very antithesis of agape.
While the law therefore should not mandate agape, the law can point to it as an aspirational ideal. In other words, if we understand Cardozo’s rhetoric as having a teaching function, we see that what he is really teaching is not the law but morals. Meinhard thus is properly understood as an example of how courts influence best practice.
This is a familiar concept to business lawyers. We frequently see courts seeking to influence not just the minimal standards of law, but also to set aspirational standards of best practice.
If that’s what Cardozo was trying to do, what makes agape an appropriate aspirational ideal? An answer is to be found in the common observation that those who engage each other in agapic love inevitably come to trust each other. This is so because agape promotes and preserves community. “Agape is a willingness to go to any length to restore community.” If one partner knows that his fellow partner will go to such lengths, trust inevitably follows.
This insight is critical because trust has considerable instrumental value in business settings. Just as friction reduces the efficiency of a machine, transaction costs are a dead weight loss making transacting less efficient. Trust lubricates business relationships and thus reduces transaction costs, especially those known as agency costs.
Contracts are a useful, but ultimately imperfect, device for minimizing agency and other transaction costs. Accordingly, parties frequently rely on noncontractual social norms to minimize transaction costs. Trust’s role as a social lubricant is especially important in this context. If I trust you to refrain from opportunistic behavior, I will not invest as many resources in ex ante contracting. After all, “Whoever can be trusted with very little can also be trusted with much ....” If you prove trustworthy, moreover, I also will not need to incur ex post enforcement costs. Trust thus is not only honorable; it is socially useful. In turn, by promoting trust, agape as an aspirational ideal therefore has considerable social value.
I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities. I have written about this before (here, here, and here), but it continues to frustrate me.
One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate. There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company." In her post, she makes a couple references to incorporation in the context of LLC formation. But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.
Courts, however, should be more careful. The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases. Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is: "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ." That is wrong. Washington LLC law provides that an LLC is a limited liability company. Even more significant, Washington LLC law provides specifically that an LLC's name "[m]ust not contain any of the words or phrases: . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,' . . . ." Wash. Stat. 25.15.010(d) (2014).A quick search of Westlaw provides ten more cases using the term "limited liability corporation" in reference to an LLC since January 23, 2014. Maybe it doesn't matter much in most cases, but in cases dealing with new issues under LLC law, it sure can (see, e.g., here). And until courts start getting more precise, from time to time I'll keep reporting on their lack of precision.
In Big guns roll out to defend securities class actions as SCOTUS amici, Alison Frankel comments on the pending SCOTUS case Halliburton v. Erica P. John Fund, in which the fraud on the market theory announced in Basic Inc. v. Levinson is up for grabs:
Erica P. John – and, by extension, the securities class action industry – has received powerful support in amicus briefs from (among many others) the Justice Department; two former chairmen of the Securities and Exchange Commission (one Republican, one Democrat); 11 current and former members of Congress; andscholars of the doctrine of stare decisis, whose filing was authored by Harvard Law professor Charles Fried – the onetime U.S. solicitor general who wrote the Justice Department brief supporting investors in the original Basic case at the Supreme Court.
As a group, these briefs provide compelling legal and policy justifications for leaving Basic alone, arguing, in essence, that this Supreme Court would be overstepping its judicial bounds if it reversed its own precedent, defied Congress, and undermined the regulation and enforcement of the securities laws.
Well, yes, but let's not forget that there are some pretty damn big guns on Halliburton's side, as Wachtell Lipton noted in the CLS Blue Sky Blog:
As we have described in our prior memos (here and here), in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, the Supreme Court will decide whether or not to abandon the “fraud on the market” presumption of reliance that has facilitated class-action treatment of claims brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5. The case will be argued before the Court on March 5, and a decision will likely come by the end of June. As our earlier memos explained, Halliburton is potentially the most important securities case that the Court has heard in a long time.
Last week, various amici curiae supporting the overturning of the fraud-on-the-market presumption filed briefs in the Supreme Court. Our Firm and Stanford law professor Joseph Grundfest filed a brief (available here; printed copies available on request) on behalf of a distinguished group of law professors and former commissioners and officials of the SEC, arguing that, under settled principles of statutory interpretation, the Exchange Act should not be read to permit a presumption of reliance. Our brief argues that the judicially created right of action under Section 10(b) should be construed similarly to the comparable, express right of action established in Section 18(a) of the Exchange Act. Because Section 18(a) requires proof of actual reliance, we argue that Section 10(b) should likewise require it. Our brief also rebuts the argument that the fraud-on-the-market presumption deserves stare decisis effect, as well as the argument that Congress, by failing to overturn the presumption, has acquiesced in it.
Yours truly is one of the amici who signed the brief:
As John Elwood summarized our argument:
[The brief] argues that the Court “need not wade into the complex and highly technical debate over the efficient markets hypothesis to answer the question presented here. Instead, the Court can, and should, decide this case by applying well-established principles of statutory construction.” It argues that, to infer how the 1934 Congress would have addressed the issues had the 10b–5 action been included as an express provision in the 1934 Act, the Court should consult the express causes of action in the securities laws, and borrow from the most analogous one. The brief argues that
that “most analogous” provision is Section 18(a) of the Securities Exchange Act of 1934. Section 18(a) is the only express right of action in existence in 1934 that authorizes damages actions for misrepresentations or omissions that affect secondary, aftermarket trading. It is the only express right that provides a cause of action for damages in favor of openmarket purchasers and sellers against those (such as issuers or their executives) who allegedly made false or misleading statements, but did not transact with the plaintiffs—the quintessential Section 10(b) class claim today.
Section 18(a) explicitly states that plaintiffs must demonstrate that they transacted “in reliance upon such [false or misleading] statement[s].” 15 U.S.C. § 78r(a). They must, in other words, demonstrate actual, “eyeball” reliance.14 Section 18(a)’s legislative history, moreover, underscores the need for plaintiffs to demonstrate actual reliance for aftermarket fraud. As originally drafted, Section 18(a) contained no reliance requirement, but Congress rejected that no reliance version in the face of a torrent of criticism. As enacted, Section 18(a) thus prohibits recovery “unless the buyer bought the security with knowledge of the [false or misleading] statement and relied upon the statement.” 78 CONG. REC. 7701 (1934) (statement of Rep. Sam Rayburn), cited in Basic, 485 U.S. at 258 (White, J., dissenting). The Court should construe the Section 10(b) right accordingly.
As I noted last August, the Delaware Court of Chancery now believes that:
A transaction involving a third party and a company with a controller stockholder is entitled to review under the business judgment rule if the transaction is (1) recommended by a disinterested and independent special committee and (2) approved by stockholders in a non-waivable vote of the majority of all the minority stockholders.
Richard Booth has an excellent new paper on this trend, Majority-of-the-Minority Voting and Fairness in Freezeout Mergers (January 16, 2014), available at SSRN: http://ssrn.com/abstract=2380041, in which he argues that:
In a landmark decision now on appeal, In re MFW Shareholders Litigation, the Delaware Chancery Court ruled that a freezeout merger negotiated by an independent special negotiating committee (SNC) and conditioned in advance on approval by a majority-of-the-minority (MOM) vote should be reviewed under the business judgment rule. Before MFW, the practice was to review all such mergers for entire fairness, albeit with the burden on the plaintiff if the merger is either negotiated by an independent SNC or ratified in a fully-informed MOM vote. In contrast, review under the business judgment rule requires plaintiffs to plead and prove their case – to show that the deal was not the product of good faith bargaining.
The stated rationale for the ruling in MFW is that subjecting a freezeout merger to both conditions is equivalent to the protections afforded to stockholders in an arms-length merger with a third-party buyer. As the MFW court notes, routine fairness review seldom results in any significant increase in consideration and likely decreases stockholder wealth. Moreover, routine fairness review induces deals to be structured as a tender offer followed by a short-form merger, neither step of which is reviewed for fairness – even though such a structure may coerce minority stockholders to accept a lower price for fear of being left with an illiquid stub of shares following the tender offer.
Although these are powerful arguments, the MFW court understates the case for the approach it endorses. As shown here, the MOM vote does more than merely ratify the proposed deal. Rather, it assures that the price to be paid is at least sufficient to satisfy the median price that would be demanded by the minority stockholders in a hypothetical stairstep auction. Since MOM voting permits minority stockholders to register their opinions as to the adequacy of the offered price without the pressure to tender, the vote can be trusted to reflect stockholder opinion free from the distorting effects of the coercion inherent in a tender offer. To be sure, majority rule means that higher valuing stockholders may be under-compensated while lower valuing stockholders will be over-compensated. But the aggregate premium paid by the controlling stockholder will be equal to the aggregate of the premiums that would be demanded individually by the minority stockholders. Since most stockholders are diversified, they will be overcompensated at least as often as they are undercompensated – on the average and over time. Thus, stockholders should favor the MFW approach not only because it assures fair price but also because it assures the maximum number of deals by minimizing the uncertainties inherent in fairness review – if not also assuring controlling stockholders against the danger of over-payment. Finally, negotiation by independent SNC assures that the minority will get any higher price that may result from a bilateral negotiation. In short, the MFW approach assures minority stockholders will get the better of the prices that would result from either approach alone. Thus, the price paid is by definition fair and should be protected by the business judgment rule subject only to review in an appraisal proceeding as is the general rule for mergers not involving a controlling stockholder.
Santa Clara University law professor David Yosifon has a podcast series on Corporate Social Responsibility and I was his most recent interviewee. You can access the podcast here.
As I mentioned a while back, I am working on a project on shareholder versus director primacy in New Zealand company law. In the course of it, I was reading Professor Susan Watson's very helpful article The Board of Directors, in Company and Securities Law in New Zealand 297 (John Farrar & Susan Watson eds., 2d ed. 2013). In it, she observes that "A director must be a natural person." (p. 321). The same thibng is true in the USA, of course, but why?
Professor Todd Henderson and I have an article in press at the Stanford Law Review, entitled Boards-R-Us: Reconceptualizing Corporate Boards, in which we challenge the requirement that bioards be comprised of natural persons:
State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms – we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.