From Joan Heminway.
From Joan Heminway.
Commentators have for years lamented the undue influence of proxy advisory firms in corporate elections. James R. Copland of the Manhattan Institute has observed that an ISS recommendation in favor of a given shareholder proposal increases the approval vote by, on average, fifteen percentage points. In other words, as Copland puts it, “At least when it comes to shareholder proposals, a small, thinly funded outfit with 600 employees in Rockville, Maryland, is acting like an owner of fifteen percent of the total stock market.” In some instances, ISS’s influence can be even greater. In 2014, for example, shareholder proposals related to social and political issues received average support of 29% with ISS’s support, and only 5% if ISS recommended against. That is, ISS directly influenced nearly a quarter of the votes cast on these matters. Because the SEC’s rules for resubmission of a failed proposal by a shareholder in the next year’s proxy statement require that the proposal have received up to 10% of the vote (depending on how many years it has been submitted), the significant voting impact of an ISS recommendation can empower a proponent to resubmit a proposal year after year, imposing costs on the company and creating waste and negative publicity to the detriment of the company and its shareholders.
The problem of waste is exacerbated by the fact that ISS’s voting recommendations, on topics from compensation to social issues, have been dramatically out of line with voting results. One example is cumulative voting: ISS has supported 96% of proposals to adopt cumulative voting; however, out of 107 such proposals at Fortune 200 companies between 2006-2012, only one received majority support. As Copland notes, “The significant influence of ISS on corporate proxy voting—along with the large, systemic gap between its preferences and those observed in shareholders’ actual votes—raises questions about whether shareholder voting is working effectively to improve share value.”
Go read the whole thing, please.
(1) Whether, in a prosecution for insider trading under § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), the relevant inside information must have been a “significant factor” in the defendant's decision to buy or sell, or whether - as the court below held - mere “knowing possession” of inside information suffices for a criminal conviction; (2) whether, in a prosecution for insider trading under § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), the “fiduciary duty” element must be proved under well-established principles of state law, or whether - as the court below held - courts may define and impose the applicable fiduciary duty as a matter of federal common law; and (3) whether exculpatory testimony given by a witness during a deposition in a closely related federal enforcement proceeding is admissible under Federal Rule of Evidence 804(b) in a subsequent criminal trial when the witness is unavailable, or whether - as the court below held - such testimony may be excluded merely because it was given in a civil rather than criminal proceeding.
Hunton & Williams today filed an amicus brief urging the US Supreme Court to grant certiorari in a case involving intersecting issues of federalism and insider trading law. The brief urges the Supreme Court to resolve a circuit split as to definition of the "fiduciary duty" element in a criminal prosecution for insider trading under §10(b) of the Securities Exchange Act. Shawn Patrick Regan is counsel of record, joined on the brief by Patrick Robson,Joseph Saltarelli, Michael Kruse and Joshua Paster. The brief was filed on behalf of Professor Stephen Bainbridge, the William D. Warren Distinguished Professor of Law at UCLA.
“We are pleased to have been called upon to prepare and submit this amicus brief on behalf of Professor Bainbridge, a preeminent scholar of corporate law and governance,” Regan said. “Where, as here, there is a split among the circuit courts implicating core Constitutional principles and making it difficult for analysts to determine in advance the line between lawful competitive research to advise investors and potential criminal charges, the conflict should be resolved.”
It's my first sole amicus brief, as opposed to those in which I was one of a bunch of signatories. As we summarized the argument:
This Petition presents, inter alia, the question of whether the “fiduciary duty” element of securities fraud is to be defined by existing state law or crafted ad hoc as a new area of federal common law. The Second Circuit’s approach—“implicitly assuming” a federal rule shall govern so as to achieve “uniformity”—is squarely contrary to core tenets of federalism and the precedents of this Court, which limit the circumstances in which federal courts may create a common law rule of decision. (See Part I, infra.) The Second Circuit’s approach also conflicts with the law of other circuits, some of which look to state law to define “fiduciary duty” and some of which suggest courts may look to state law to develop federal common law. When, as here, the stakes involve not only livelihoods but also potential loss of liberty turning on unpredictable and inconsistent approaches (and outcomes), the conflict should be resolved. (See Part II, infra.) Finally, because the basis for the federal insider trading prohibition is the protection of property interests in corporate information and because this Court’s precedents have consistently recognized the preeminence of states with respect to corporation law and property rights, absent action by policymaking branches of government, the fiduciary duty element of insider trading should be defined under state law, not by virtue of emergent notions of federal common law. (See Part III, infra.)
The brief builds on my article Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189 (1995).
The US filed an opposition brief. It's not very good on my issue. If I could file a reply brief, I would argue that: The SG argues (22) that "An insider’s duty not to trade on material non-public information or disclose such information to others for trading purposes is a matter of federal law." But what the SG fails to acknowledge is that, as a former SEC's solicitor once observed, ‘[m]odern development of the law of insider trading is a classic example of common law in the federal courts. No statute defines insider trading; no statute expressly makes it unlawful.’ Gonson & Butler, In Wake of ‘Dirks,’ Courts Debate Definition of ‘Insider,’ Legal Times, Apr. 2, 1984, at 16, col. 1. It remains the case today that no statute defines insider trading:
Other nations have proposed and, in some cases, enacted laws of general applicability against insider trading, see, e.g., European Commission, Proposal for a Regulation of the European Parliament and of the Council on Insider Dealing and Market Manipulation (Market Abuse), at 13, 30–33 COM (2011) 651 final (Oct. 20, 2011) (clarifying European Union (“EU”) regulations on insider trading and proposing EU directive for all EU countries to add criminal sanctions for insider trading in addition to existing administrative sanctions). Congress, however, has never done so, partly because the SEC has generally opposed such proposals on the ground that that any statutory definition of illegal insider trading would inevitably create “loopholes” that would be eventually utilized in much the same way that the tax code generates tax “dodges” that are frequently successful. However, as this very case demonstrates, the judge-made law of insider trading, however flexible, can create potential gaps in coverage that are the functional equivalent of legislative loopholes.
Large corporations that are listed on national exchanges, or even regional exchanges, will have shareholders in many States and shares that are traded frequently. The markets that facilitate this national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that a corporation—except in the rarest situations—is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation.
The purposes of the Securities Exchange Act generally and Section 10(b) in particular are usually said to be the protection of investors and the maintenance of public confidence in the securities markets through the imposition of disclosure requirements and prohibitions of fraud.207 If so, the insider trading prohibition seems quite out of place in the federal securities laws. Neither policy justifies a ban on insider trading, nor can either policy explain the state of the law.
Careful examination of the legislative history demonstrates that regulating insider trading was not one of the original purposes of the Exchange Act.168 Neither Section 10(b) nor Rule 10b-5 explicitly regulates insider trading or prohibits nondisclosure of inside information in insider trades. Instead, Congress addressed insider trading in Section 16(b), which permits the issuer of affected securities to recover insider short-swing profits.169 Section 16(b) imposes quite limited restrictions on insider trading. It does not reach transactions occurring more than six months apart, nor does it apply to persons other than those named in the statute or to transactions in securities not registered under Section 12.170 Given that Congress could have struck at insider trading both more directly and forcefully, and given that Congress chose not to do so,171 there is no statutory authority for the creation of a more sweeping *1230 prohibition under Section 10(b).To be sure, Section 10(b) is often described as a “catchall” intended to capture various types of securities fraud not expressly covered by more specific provisions of the Exchange Act.172 What the SEC catches under Section 10(b), however, must not only be fraud, but also within the scope of the authority delegated to it by Congress.173 Nothing in the legislative history suggests that Congress intended Section 10(b) to create a sweeping prohibition of insider trading.174 To the contrary, Section 10(b) received minimal attention during the hearings on the 1934 Act and was apparently seen simply as a grant of authority to the SEC to prohibit manipulative devices not covered by Section 9.175Indeed, if Congress intended in 1934 that the SEC use Section 10(b) to craft a sweeping prohibition on insider trading, the Commission was quite dilatory in doing so. Section 10(b) is not self-executing. It merely proscribes such fraudulent or manipulative devices as the SEC may prohibit by rule. Rule 10b-5, the foundation on which the modern insider trading prohibition rests, was not promulgated until 1942. Nor did the Commission *1231 begin using Rule 10b-5 to regulate insider trading on stock exchanges until the Cady, Roberts decision in 1961.176 Even in Cady, Roberts's wake there were those who thought it did not presage general application of Rule 10b-5 to insider trading.177 As we now know, that short-lived expectation died with SEC v. Texas Gulf Sulphur Co.178 The point remains, however, that the federal insider trading prohibition is a relatively recent administrative and judicial creation lacking any significant statutory basis: “In regulating insider trading under rule 10b-5 the lower federal courts and the SEC have been operating without benefit of support from the legislative history of the 1934 Act or from the language of section 10(b). In plainer words, they have exceeded their authority.”179
John Cunningham writes:
Bennett v. Lally, C.A. 9545-VCN (September 5, 2014) is a recent Court of Chancery case about actions that can result in a person’s being a fiduciary of another person without even knowing it. It’s very relevant to lawyers who give “informal advice” to people. This advice could create a lawyer-client relationship. ... You can read the opinion here.
It's not just lawyer-client relationships, of course. As I explain in my book Agency, Partnerships & LLCs:
An agency relationship comes into existence when there is a manifestation by the principal of consent that the agent act on his behalf and subject to his control, and the agent consents to so act. The requisite manifestation of consent can be implied from the circumstances, which makes it possible for the parties to have formed a legally effective agency relationship without realizing they had done so. The purpose of the relationship need not be a business one; in theory, if you send a friend to the vending machine to get you a soda, you have retained an agent. ...
The requisite consent may exist even where the parties are unaware that their relationship constitutes an agency relationship and did not intend for their relationship to carry with it the legal consequences of creating an agency relationship. To be sure, there is no such thing as an “unwitting agent,” in the sense that every agency relationship requires knowing consent by both parties. What then is it to which the parties must “consent”? The principal must consent that the agent shall act on the principal’s behalf and subject to the principal’s control. The agent must consent to so act. If they do so, they have an agency relationship, even if they did not “consent” to the legal consequences that follow.
 Restatement of Agency (Second) §1.
 See, e.g., A. Gay Jenson Farms Co. v. Cargill, 309 N.W.2d 285, 290 (Minn. 1981) (“An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.”).
 State v. Luster, 295 S.E.2d 421 (N.C. 1982) (“We find the phrase ‘unwitting agent’ to be a contradiction in terms.... An agency relationship must be created by mutual agreement.”).
My dear friend, Georgetown University Professor Anthony Arend interviewed on the legality of USA's strikes against ISIS (or ISIL or IS, as you prefer):
As always, clear and cogent.
There is a must read op-ed in today's WSJ by polic sci/bus admin prof David Primo on efforts by activists to compel additional corporate disclosure of political contributions. The op-ed is based on a paper Primo coauthored with Saumya Prabhat of the Indian School of Business. The abstract of the paper tells us that:
We utilize a quasi-natural experiment to examine whether disclosure and shareholder approval of political expenditures reduces shareholder risk. In particular, we examine the Neill Committee Report (NCR), which led to the passage of the United Kingdom’s Political Parties, Elections and Referendums Act 2000 (PPERA) and strengthened disclosure of and required shareholder approval for campaign contributions. Using a differences-in-differences methodology, we find that politically active firms saw an increase in their stock’s volatility along with negative long-term abnormal stock returns upon the release of the NCR. These results present a challenge to arguments for greater shareholder oversight of corporate political activities.
In the op-ed, Primo makes some key points:
Both Francis Pileggi and Keith Paul Bishop recently addressed an interesting development in LLC law. Pileggi first:
Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al.,C.A. No. 8841-VCL (Del. Ch. Sept. 24, 2014). This decision by the Delaware Court of Chancery highlights a counterintuitive statutory rule. The Delaware LLC Act provides that each LLC member, and the LLC itself, are considered parties to an LLC operating agreement, even if they did not sign the agreement.
He goes on to quote a passage from the opinion explaining the statutory basis for that result.
Meanwhile Bishop explains that California law gets to more or less the same place by the simpler and different route of simply declaring that the LLC is bound by its operating agreement without making the LLC a party to that agreement:
California’s new Revised Uniform Limited Liability Company Act (RULLCA) defines “operating agreement” as “the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in subdivision (a) of Section 17701.10.” Cal. Corp. Code §17701.02(s). Because the statute refers only to an agreement “of all the members” and not an agreement of the members and the LLC, it seems that an LLC need not be a party to its own operating agreement. This conclusion is further reinforced by the fact that the statute also provides that an operating agreement of an LLC having only one member is not be unenforceable by reason of there being only one person who is a party to the operating agreement.
But if the LLC isn’t a party to the operating agreement, what exactly is the relationship of the operating agreement to the LLC? Section 17701.10(a) provides that the operating agreement governs, among other things, “relations among the members as members and between the members and the limited liability company”. Thus, RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties. This result is reinforced by Section 17701.11(a) which provides "A limited liability company is bound by and may enforce the operating agreement.”
Here at the law school at which I'm employed, we've been talking budget issues. And I decided to throw myself under the bus by raising the question of whether administrative bloat is part of the problem.
I wouldn't be surprised if that were the case. After all, it's a widespread problem.
The Chronicle of Higher Education reported in February of this year that:
Thirty-four pages of research, branded with a staid title and rife with complicated graphs, might not seem like a scintillating read, but there’s no doubt that a report released on Wednesday will punch higher education's hot buttons in a big way.The report, "Labor Intensive or Labor Expensive: Changing Staffing and Compensation Patterns in Higher Education," says that new administrative positions—particularly in student services—drove a 28-percent expansion of the higher-ed work force from 2000 to 2012. The report was released by the Delta Cost Project, a nonprofit, nonpartisan social-science organization whose researchers analyze college finances. ...You can’t blame faculty salaries for the rise in tuition. Faculty salaries were "essentially flat" from 2000 to 2012, the report says. And "we didn't see the savings that we would have expected from the shift to part-time faculty," said Donna M. Desrochers, an author of the report.The rise in tuition was probably driven more by the cost of benefits, the addition of nonfaculty positions, and, of course, declines in state support.
So we'll see if any good comes of raising the issue.
In my essay Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010), available at SSRN: http://ssrn.com/abstract=1696303, I explained that:
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.
If you believed the Obama administration and the Democrats' hyoe, the JOBS Act was going to solve the problem. They were wrong, according to a new study by some economists (which I'm more inclined to accept that ones done by law professors masquerading as quants):
We examine the effects of Title I of the Jumpstart Our Business Startups Act (JOBS) for a sample of 213 EGC IPOs issued between April 5, 2012 and April 30, 2014. We show no reduction in the direct costs of issuance, accounting, legal, or underwriting fees, for EGC IPOs. Further, the indirect cost of issuance, underpricing, is significantly higher for EGCs than other IPOs. More importantly, greater underpricing is present only for larger firms that were not previously eligible for scaled disclosure under Regulation S-K. EGCs that are more definitive about their intentions to use the provisions of the Act have lower underpricing than those that are ambiguous. Finally, we find no increase in IPO volume after the Act. Overall, we find little evidence that the Act has initially been effective in achieving its main objectives and conclude that there are significant consequences to extending scaled disclosure to larger issuers.
Interestingly, one of the authors - Kathleen Weiss Hanley - was until very recently an economist at the SEC,
It seems like a lot of journals were announcing on bepress and scholarstica that they were already full for the year this summer and telling us to check back in the spring of 2015. The few law review editors I've had a chance to speak with tell me that they had very few slots left by mid-August. This causes me to wonder -- and I'm guessing other people have speculated on this, too -- whether we're essentially moving to one submission window, in the spring? I would think this would have a lot of negative consequences for people up for retention, promotion, and tenure, because I'm guessing that a lot of people are finishing their capstone piece in the summer and looking to place it in the fall.
I wonder about this too. Fortunately, law reviews aren't the only option any more. Books, book chapters, etc... And maybe someday self-publishing.
Over at The Conglomerate she notes feeling guilty about blowing her own horn:
1. I have a piece up on Slate that summarizes my Essay on campaign finance (guilt because all last week as I wrote it I couldn't shake the feeling I was cheating on the Glom)
2. I am the UGA's new M.E. Kilpatrick Professor of Law (guilt because self-promotion/bragging)
So we'll blow a horn for her.
One agenda item for the upcoming meeting of the Investor Advisory Committee is a “Discussion of Issuer Adoption of Fee-Shifting Bylaws for Intra-Corporate Litigation”. This is indeed an interesting and timely topic in light of the Delaware Supreme Court’s holding in ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. LEXIS 209 (Del. May 8, 2014). But is this within the purview of the Investor Advisory Committee? After all, the question of enforceability of fee-shifting bylaws is a question of state contract, not federal securities, law.
One would have to be either credulous or contumacious to read into [the Dodd-Frank] statute a Congressional intent that the Investor Advisory Committee advise and consult with the Securities and Exchange Commission on matters of state contract law. So why is the Investor Advisory Committee being allowed to exceed its statutory purposes?
Once again, Keith Paul Bishop nails it.