Archives For Uncategorized

Google Search Trends

J.W. Verret —  26 June 2010

I’ve been having some fun with Google Trends lately, which offers unique analysis of search trends.  For example, below is an excerpt from a search on the phrase “law and economics” that shows the top ten cities from which the phrase  has been a search term, along with a graph of volume:

1. Berkeley, CA, USA
2. Stanford, CA, USA
3. New Haven, CT, USA
4. Fairfax, VA, USA
5. Cambridge, MA, USA
6. Ann Arbor, MI, USA
7. Washington, DC, USA
8. Pittsburgh, PA, USA
9. Philadelphia, PA, USA
10. Boston, MA, USA

It also shows 8 big spikes in news volume over the last six years.  Here’s a challenge: how many of our readers can explain the reasons for all 8?

Proxy Access Defense #1

J.W. Verret —  25 June 2010

I’ve been spending my summer trying to get ahead of the ball on proxy access and consider the types of defenses Boards might employ against insurgents making use of the federal proxy access provision in the Dodd Bill.  An article will hopefully be shipped to editors by mid-August.  I first started thinking about the various ways to craft proxy access to limit the influence of special interests in my first academic publication in the Business Lawyer while I was clerking, Pandora’s Ballot Box, or a Proxy with Moxie?  Majority Voting, Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined.

I thought I would share briefly, in the form of a series of posts, some of the defenses I have been tinkering with.  These come straight from the drawing board.  Some of them can be implemented right away, some are a bit out there, and some are completely crazy and would require sweeping amendment to the DGCL.  Then again who cares, academics seem to get props for being a little crazy.  So on to idea #1.

Senator Dodd recently pushed in conference for a requirement that only 5% shareholders will be able to use proxy access as opposed to the 1% threshold previously considered.  Larry recently offered a critique of Lucian Bebchuk’s argument that the 5% threshold will kill proxy access.  Interestingly, the Council of Institutional Investors actually has long favored a 3% threshold holding requirement, but perhaps that extra 2% packs a strong punch.

If the 5% threshold goes through, I doubt we’ll see a rush of subsequent proxy nominations.  But proxy access isn’t going to go away even after the Dodd Bill, as I suspect the appetite for lowering that threshold among institutional investors will continue unabated.  This issue has been discussed for some 40 years after all.

Nevertheless, this brings us to a recent Delaware case that is particularly interesting in light of the recent developments.  In Selectica, summarized by Pileggi here, the Court held valid a poison pill with a 4.99% trigger.  At first glance this seems to be a great twist for those of us who remain skeptical of the federal government’s intrusion into this foundational issue of state law.  Boards could just lower the pill trigger to 4.99%.  Then even to the extent shareholders could afford to obtain a 5% interest in a company, those who did not already own a 5% interest at the time of the pill’s adoption would not be able to obtain an interest sufficient to nominate onto the corporate proxy.  Selectica was heavily dependent on the prospect that the company could lose valuable tax Net Operating Losses if shareholders obtained significant stakes, so maybe its a little early to call the death of this patient.  If however the Delaware Courts chose to expand the reach of that holding, or if boards engaged in strategic structuring of transactions, then the poison pill could become an effective defense against proxy access.

As Ribstein and Bainbridge have both argued, the existence of federal legislation strengthens the case that Delaware’s jurisdiction in this area has been pre-empted.  If they’re right, perhaps a federal court would invalidate a low trigger pill even if Delaware does not.  An interesting thought to consider anyway.

UPDATE: In the final negotiations during the early hours of this morning, Bebchuk and RiskMetrics report that the 5% ownership threshold has been dropped in favor of a wide grant of authority to the SEC.  There’s goes that idea.  But then again maybe it still has value for publicly traded firms under 75 million who would still have a 5% threshold requirement under the existing SEC proposal, or it could have value for all firms if Delaware were willing to accept a still lower threshold pill than that considered in Selectica.  This also means that proxy access defenses will take on added importance, so I should probably get back to scribbling.

The news has just broken that New York State Governor Eliot Spitzer intends to resign on Monday.  This means that Lieutenant Governor, David Paterson, a relative unknown, will become the governor of New York State. More importantly, this means Joe Bruno, New York State Senate Majority Leader, will be tapped to “perform all the duties of lieutenant governor,” as per Article IV, Section 6 of the New York State Constitution.  (Many thanks to Marc Hodak for that most helpful citation (and correction to my earlier posting).)Â

And here’s the rub – Bruno is Republican; Paterson and Spitzer are Democrats.  Moreover, Bruno was been very obviously and very painfully at odds with Spitzer.  Bruno’s ascension, then, is interesting for three reasons:  (1) It splits the Governor’s office power (to the extent that Bruno will be able to exercise some power as acting lieutenant governor, whatever that means) between Dem. and Republican, (2) it forces Bruno and Paterson to work together despite the Bruno-Spitzer animosity, and (3) it relieves the pressure on the very narrowly Republican New York State Senate.  That last point is the most curious one for me, an Albany, NY, native.Â

Bruno, the majority leader in the Senate, has been trying to hold on to the very narrow Republican margin in the Senate.  Paterson, the lieutenant governor, has had the authority to act as a tie-breaker for Senate ties, which put pressure on Bruno’s one person Republican margin in the Senate.  Even just one Republican defector on a vote could force a tie that would give the Dems an extra vote (by Paterson).  That’s a fair amount of Dem. power and Republican tension… that now appears to go away if Paterson is no longer the lieutenant governor.  Right?  (I cannot find the provision of the NYS Constitution or Senate Rules that addresses this point.  I am now sort of waiting to see if Marc Hodak concurs….  (See his helpful comments in the “comments” section.))

Also, in doing research, I see that this is the third time in recent history that our NYS Lieutenant Governor has had to step in for an exiting governor.  Hmmm.  Maybe the back door way to power, then, in New York State, is by becoming Lieutenant Governor and keeping your fingers crossed that your boss will drop the ball.

According to the Associated Press, New York State Governor Eliot Spitzer is reported to be or have been a client of a “high-end prostitution ring called Emperors Club VIP.”  This morning, Governor Spitzer publicly apologized to his family and the public, “but did not not elaborate on a bombshell report that he has been involved in a prostitution ring.”

The story is still breaking, but it forces me to wonder if Governor Spitzer will be prosecuted for patronizing a prostitute, if it turns out that is what he did.  As we all know, both parties involved in prostitution are breaking the law.

More to the point, as the DC Madam, Deborah Jeane Palfrey, is prosecuted in federal court for running a prostitution ring, it will be interesting to see how things develop with Governor Spitzer.  One of the DC Madam’s big gripes is that, though the government has the names and identities of plenty of her customers and *ahem* female contractors, only she – Deborah Jeane Palfrey – is being prosecuted.

Back when I was in law school at Columbia, I did research for the late Professor Curt Berger, who was a property expert.  Professor Berger once asked me to research how many women versus how many men were arrested for prostitution (in New York state, as I recall).  By far, the women outnumbered the men.  Lovely….  Will the Eliot Spitzer situation, when juxtaposed with the DC Madam prosecution, prove the point further?

Stay tuned.

UVA Law School announced today the appointment of esteemed corporate law scholar Paul Mahoney as dean.

Congratulations.  (Corporate law scholar, Sullivan & Cromwell alum, former Second Circuit clerk – it all bodes well…..)

Amateurism Is What We Do!

Paul Gift —  30 January 2008

Yesterday, the NCAA settled a horizontal price fixing class action case initiated by former basketball and football players (here, here, and here).  It’s nice to see the student-athletes get something, but I wish they would have received more.  The suit deals with the difference between the NCAA’s grant-in-aid (GIA) cap and the full cost of attendance (whether they were secretly trying to include the opportunity cost of attendance in their damages, I do not know).  The settlement provides $10 million over three years to cover former student-athletes’ “bona fide educational expenses” over the GIA cap and $218 million through 2012-2013 to “use the available funds for such aid to student-athletes with demonstrated financial and/or academic needs, and to include such assistance in their reports to the NCAA describing their uses of these funds.  Consistent with current practice, those reports will not be disclosed outside the NCAA.”  It will be interesting to see what exactly the latter means.

In my opinion, the NCAA has been one of the most blatant cartels in recent history, and I tend to be pretty free-market.  Colluding to lower an input’s wage is just as anti-competitive as colluding to raise the price of outputs like vitamins or lysine.  When you here NCAA President Miles Brand speak about it, you get the same “Amateurism is what we do” quote (quoting from memory) over and over again.  I bet those vitamin and lysine guys wish they could have had a catch-phrase like that to help keep the law off their backs.

The collusion was so bad that student-athletes weren’t, at a minimum, having their full expenses covered.  It made the lame Reggie Bush story headline news (and I went to UCLA).  And then there’s this part of the settlement:

“Conditioned upon final approval of this Settlement, the NCAA Division I Board of Directors has approved adoption of a rule permitting, but not requiring, Division I member schools to provide year round, comprehensive health insurance to student-athletes.”

I’ll leave that one to the reader.  In summary, I’m happy today but I wish I could be happier.

The Supreme Court’s opinion in Stoneridge Investment Partners v. Scientific-Atlanta was issued today.  This case involved investors in Charter Communications’ common stock who sued under Section 10(b) of the Securities Exchange Act of 1934.  The investors sued Charter’s SUPPLIERS AND CUSTOMERS, including Scientific-Atlanta and Motorola, who had entered into essentially “wash” contracts with Charter for purposes of allowing Charter to inflate its earnings and mislead investors.  The contracts involving Scientific-Atlanta and Motorola obligated Charter to buy set top boxes from Scientific-Atlanta and Motorola, and, in return, both parties would buy advertising from Charter.  The effect of these agreements was technically a wash for Charter, but Charter was using these agreements – specifically the advertising agreements – to inflate its revenues and bolster its financial statements.  Both Scientific-Atlanta and Motorola knew, it is alleged, why Charter wanted to enter into these wash transactions with them.

The trial court, with the 8th Circuit affirming, dismissed this lawsuit in favor of the defendants.  The Supreme Court today affirmed, finding that the complaining Charter investors failed to adequately plead the “reliance” element of a Section 10(b) claim.  (In order to sue in a private action under Section 10(b), a complaining party (other than the SEC) must establish that the defendant (a) made a material misstatement or omission, (b) in connection with the purchase or sale of securities, (c) with the intent to deceive, manipulate or defraud, (d) and the investor relied on this misstatement or omission, and (e)  the investor suffered losses from the misstatement or omission.)

Unfortunately, today is a double teaching day for me (M&A and Business Enterprises II), so I cannot spend a whole lot of time blogging on this case.  But I have several points to make quickly:

1.  Some of the media blurbs I have seen today warn that the Supreme Court’s holding in Stoneridge bodes ill for private securities fraud suits against secondary actors (such as lawyers, bankers, auditors, underwriters).  That is NOT true.  The media folks writing those inflammatory headlines either (a) have not read the Stoneridge opinion, (b) are not familiar with the Stoneridge facts, or (c) are only discussing the case with the corporate defense bar who, I am sure, will likely try to sell the Stoneridge holding as ringing the death knell for any securities fraud cases against anyone other than an issuer.  As a fan of the broad interpretation of Section 10(b), allow me to say that the facts of this case (the facts pertaining to the involvement of Scientific-Atlanta and Motorola in Charter’s securities fraud) troubled even me.  This case – Stoneridge – involved suppliers and customers of an issuer.  Those parties are even further removed from investors and the actual securities market than traditional “secondary actors” such as an issuer’s lawyers, auditors, etc.  Even with my propensity to broadly interpret and apply the elements of a 10(b) cause of action, I might have had a hard time holding S-A and Motorola liable thereunder.  So the Supreme Court opinion in Stoneridge, if anything, should stand for the notion that, the further down the fraud actor chain we go, the harder it is to pull in defendants.

2.  In a related vein, I am stunned that the Supreme Court treated this case as a “reliance” case.  Basically the Court said that the investors could not have relied on Scientific-Atlanta and Motorola b/c those parties had no “duty” to make disclosure to the investors.  Huh?  As I understand the reliance argument that could be made by the investors in this case, it is that the investors relied on the fact that the contracts with Scientific-Atlanta and Motorola were legitimate, business-justified, economically defensible contracts.  Which wasn’t true –they were wash contracts, designed to be wash contracts.  If an investor walked into court and could prove that she bought stock in Charter because she saw on Charter’s books the contracts with S-A and Motorola, and she relied on the economic value of those contracts (that they were positive contracts benefiting Charter), why *couldn’t* the investor establish reliance as it pertains to S-A and Motorola?  The fact that S-A and Motorola had no “duty” to the Charter investors is irrelevant.  “Duty” is not an element to a Section 10(b) violation.  Reliance is, and if an investor could prove that she “relied” on the true economic value of those contracts (to wit, that they weren’t sham “wash” contracts), why couldn’t she prove reliance?

3.  To that end, this opinion re-affirms that the Supreme Court is often totally confused when it tries to discuss securities fraud.  First Dura, now Stoneridge.  With due respect to the Justices who signed on to the majority opinion in this case, the law isn’t particularly challenging in this area– either a plaintiff establishes the five/six elements necessary to prove securities fraud or she does not.  Were I writing the Stoneridge opinion, and I wanted, for policy reasons, to affirm dismissal of the suit, I would have done it on the “in connection with” element.  One could argue with a straight face that S-A’s and Motorola’s “lies” (to wit, the fraudulent wash contracts) were not lies told “in connection with the purchase or sale of securities.”  Reliance, not so much.

4.  Justice Kennedy, in his majority opinion, made clear that he really *wanted* to cut off investors at the knees in terms of their ability to sue “secondary actors.”  His opinion gave us a stream of dicta regarding aiding and abetting and federalism and the problem with expansive interpretations of 10(b).  At the end of the day, he didn’t *need* to give us that monologue in order to decide the case, but he clearly wanted us to know that he’s not a big fan of broadly interpreting Section 10(b).  Duly noted.

5.  To that end, Kennedy includes some ramblings about common law fraud in his majority opinion, but he gets the story wrong.  (See point “3,” above.)  Section 10(b) was adopted on the heels of the stock market collapse in the 1920’s, and Section 10(b) was therefore specifically designed to address fraud in the securities markets that the common law was insufficient to reach.  Common law fraud doctrine was viewed as not broad enough – that’s why we needed an expansive federal scheme.  So, if anything, as we look at the elements of a 10(b) claim, we need to interpret these elements more BROADLY than they have been interpreted at common law.  With due respect to Justice Kennedy, when he says “Section 10(b) does not incorporate common-law fraud into federal law,” he should have been using that as his launching point to justify interpreting “reliance” in the 10(b) context more broadly than reliance in the plain vanilla common law context.  Instead, he used that as his launching point to have a discussion about the need to limit who we can reach under a Section 10(b) private action.  (How could Kennedy’s law clerk have missed this point about common law fraud and the history of 10(b)’s adoption?)

6.  The majority opinion makes clear that the SEC can go after S-A and Motorola for aiding and abetting securities fraud.  I have no idea if the SEC has already undertaken to so do.  If they have not, I would urge the SEC to get on that task now.  The last thing the investing public needs is an invitation like that from the Supreme Court to be ignored.

7.  One more thing:  Justice Kennedy writes in his opinion that, if the Court is too broad with its interpretation of Section 10(b), “[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here.”  In the margin of the opinion next to that language, I wrote “huh?”  For the love of all things good and holy, why would Kennedy include that kind of needless hyperbolic dicta in an opinion that is already anti-investor?  I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years.  The reality is that overseas firms aren’t going to be deterred from doing business here, because they KNOW that the sort of facts we see in Stoneridge usually don’t make it to court due to problems with the “in connection with” element of Section 10(b).  Kennedy’s “overseas firms” comment strikes me as a bizarre attempt to get on the “capital is going overseas” band wagon some anti-regulation wonks have recently been driving around blindly.  The “capital is going overseas” cry, even if we assume its truth, is not a reason to stop enforcing Section 10(b).  Reading Justice Kennedy’s nod to the overseas market hysteria made me feel so… cheap and dirty.  Trendy doomsday rhetoric from the Supreme Court is, in my mind, equivalent to the Justices ending an opinion with “woot” or something.

One of my favorite intellectual puzzles is figuring out what deep conceptual presuppositions cause some people to be conservatives, others to be liberals. That is, on a range of issues that would seem largely unrelated—say, abortion, affirmative action, and gun control—it turns that people’s positions are highly correlated. For instance, people who are pro-life tend also to be against affirmative action and against gun control, whereas people who are pro-choice tend also to be in favor of affirmative action and in favor of gun control. Why is this?

I’m still working on a general solution, but one thing is pretty clear. Conservatives tend to think that demand curves are elastic, liberals that they’re inelastic. Economists talk about demand for a product or service as being elastic if a 1% increase in price produces more than 1% decrease in quantity sold, inelastic if a 1% increase in price produces less than a 1% decrease in quantity sold. Elasticity is a precisely defined concept, but the basic idea is easy enough to understand: roughly, demand is inelastic if, when you raise the price, people keep buying the product at the higher price, but elastic if, when you raise the price, people cut back on their purchases of the product and do something else with their money.

So, for example, conservatives think the demand for crime is elastic: if you raise the price of crime to the criminal by increasing prison sentences, you’ll get a lot less crime. Liberals, on the other hand, tend to think that increasing prison sentences will have little effect on crime rates: in other words, they think the demand for crime is inelastic relative to prison sentences. Similarly for taxes. Conservatives tend to think that if you raise income taxes, people will work a lot less, whereas liberals tend to think that if you can raise income taxes, people will generally work as much as they did before the tax increase.

A fascinating role-reversal is thus at work in the voting rights cases that the United States Supreme Court heard earlier this week. As this story in the Legal Times explains, the Court is considering a constitutional challenge to an Indiana statute that requires citizens who want to vote to show at the polling place a state-issued photo identification such as a drivers license. Conservatives generally favor the law, and liberals generally oppose it, perhaps because the law is generally perceived as helping Republicans and hurting Democrats.

Whatever may be the real motives on either side, the Indiana Democratic Party and the ACLU say that the law is unconstitutional because it will deter people—especially old people, the poor, and minorities—from voting. They are thus in effect saying that the demand for voting is very elastic: make it even a little more difficult for people to vote, and many people will stay away from the polls. The conservative supporters of the law, on the other hand, are saying just the opposite: raising the effective cost of voting will not affect how many people vote because the demand for voting is inelastic.

Where does the truth lie? As a political conservative, I usually think that demand curves are pretty elastic. Nevertheless, all my intuitions run in favor of the view that the Indiana statute would not deter many people from voting. If I ask myself why my intuitions run in this direction, however, and if I’m being completely honest, I would have to say that I don’t really know.

Prediction Markets & XM/Sirius

Paul Gift —  28 November 2007

I had never heard of Intrade before.  Maybe I live in a hole.

Let’s see here:  I’d love to short the bid for Dec. 07 if it wasn’t at zero.  No way I’d touch the 10 ask.  I think there’s over a 90% chance this goes into next year.  The bid/ask spread is so big for Mar. 08 and Jun. 08 (40/60 and 60/80, respectively) as to make them unattractive too.  However, if my hand were forced, I’d short the bid of 40 for Mar. 08.  I guess another way of framing that is to say I’m more likely to believe there’s at least a 60% chance this extends past Mar. 08 as opposed to the other “break even” alternatives of a 60% chance it doesn’t, a 40% chance it extends past Jun. 08, or an 80% chance it doesn’t.  This is all assuming a “buy and hold” strategy.

My actual strategy is…………………no purchase…………………..secret answer C.

George Washington University Law School Professor Larry Mitchell’s new book, The Speculation Economy, is a worthwhile read, and anyone with an interest in corporate law, securities regulation, stock market evolution, the rise of big business, legal history, antitrust, and other related topics should consider putting the book on his or her holiday wish-list

More specifically, The Speculation Economy is a valuable book for anyone wanting to understand how the legal, regulatory, financial, and legislative climate of big business evolved through the late 1800s into the early 1900s, laying the foundation for today’s modern publicly-held corporations and giving rise to what Mitchell calls “American corporate capitalism.”  Though the time period covered in the book is narrow, the developments during this period are far-reaching and important.  To that end, Mitchell fearlessly deconstructs the antitrust, corporate law, securities law, and the related federalism and state competition events over these three decades, describing, blow-by-blow, the move from a large business entity world dominated by major individual players focused on building an industrial enterprise to a business environment where business entities – trusts turned conglomerates turned corporations – were no longer a means to an end but rather an end in and of themselves.Â

And Mitchell’s attention to detail is actually where I found the true value in the book.  Based on the book’s subtitle – “How Finance Triumphed Over Industry” – and based on various reviewers’ comments on the jacket and otherwise, I thought the book would be valuable because it explains why finance came to dominate industry.  The reality, however, is that the book basically dispenses with that issue in its first two chapters.  The rest of the book is spent on an a journey through the regulatory, legislative, state, political, and federal struggling and machinating in response to this capital market paradigm shift.  It is this rich discussion and description that I found most valuable and wonderfully edifying.  Mitchell takes us from New Jersey’s appearance as the first winner of the real race to the bottom to the Panic of 1907 to early attempts to federalize corporate law to the Owen Bill, the Pujo Committee, the Hepburn Act, the Mann-Elkins Act, and the Littlefield Bill to the sunset of Woodrow Wilson’s economic progressivism (covering, on the way, a whole host of other relevant material).  The Speculation Economy is a solid historical read highlighting a critical time in corporate and capitalism history.Â

Columbia Professor Harvey Goldschmid’s comment on The Speculation Economy book jacket promises that “[a]nyone interested in the development of our modern financial markets will be richly rewarded by a careful reading.”  Harvey was right.  The Speculation Economy, while requiring an attentive, slower read due to its factual density, delivered, in return, a wealth of information, coherently explained and colorfully detailed, about a pivotal time in corporate history.  The book earned its rightful place on my office bookshelf of corporate and securities law tomes, and, for only 279 pages of text (excluding the endnotes), The Speculation Economy is must-read contribution to the legal history, corporate law, securities regulation, and big business scholarship.

** Look for the Conglomerate’s book review session on The Speculation Economy in a few weeks!

The New York Times reports that five independent ACS directors have resigned, after the CEO seems to have demanded their resignations.  The resignations appear to hinge on the directors’ objections to the manner in which ACS Founder and Chairman Darwin Deason wanted to buy out ACS.  (The NYT article indicates Deason was trying to favor himself by precluding management talks with other potential buyers, among other things.)

 Two points strike me as particularly interesting:

First, the resigning directors allege Cravath acted improperly as both Deason’s counsel in connection with his bid and counsel to corporation in responding to the bid.  (The directors said in a letter to Deason “We also find it curious that your counsel in connection with your [purchase] proposal, Cravath, Swaine & Moore, is now serving as the company’s outside counsel.”  Cravath’s response to the NYT was “We had no conflict. We represent Mr. Deason, the chairman of the board of directors.”  Uhm, what?

Second, Marc Baylin, a portfolio manager with OppenheimerFunds, which holds 7% of the ACS stock, appears to side with Deason, saying the board’s lack of favorable action on Deason’s proposal “has actually lowered the current market value of A.C.S. stock.”  My response:  So what?  What does that tell us about whether Deason’s proposal was the best possible proposal?  Almost nothing.  A short-term stock drop tells us only a bit about the short-term view of perhaps short-term holders of ACS stock, but those interests do not and should not control the board of directors when responding to an actual control bid.

So, the $50,000 going private transaction question again rears its ugly head, as I ask:  When a founder such as Deason starts to make a bid for a firm, when, if at all, is the obligation to actually auction the firm ala Revlon triggered?Â

I’ve been watching the news coverage of the San Diego fires this evening hoping for any bit of good news. It hasn’t come yet (a map of the San Diego fires, evacuation centers, and some photos is available here). I was born and raised in San Diego and many family members still live there. At least one family member and several friends have been evacuated. It appears that the total number of San Diegans displaced by the fires thus far has exceeded 500,000 (and does not include the other fires across southern California). My thoughts and prayers go out to all of those affected by the fires.

For those who are interested, donations can be made to the San Diego Red Cross here.

UPDATE: Professor Bainbridge adds links to Catholic Charities in Los Angeles and San Diego.