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Open Access Publications from the University of California

Corporate Directors in the United Kingdom

(2017)

Abstract: In the United States, state corporation law uniformly provides that only natural persons may serve as directors of corporations. Corporations, limited liability companies, and other entities otherwise recognized in the law as legal persons are prohibited from so serving. In contrast, the United Kingdom allowed legal entities to serve as directors of a company. In 2015, however, legislation came into force adopting a general prohibition of these so-called corporate directors, albeit while contemplating some exemptions. This article argues that there are legitimate reasons companies may wish to appoint corporate directors. It also argues that the transparency and accountability concerns that motivated the legislation are overstated. The requisite enhancement of transparency and accountability can be achieved without a sweeping ban. Accordingly, this article proposes that Parliament either repeal the ban or, at least, authorize liberal exemptions.

Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker

(2016)

Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.

The Parable of the Talents

(2016)

On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished. Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship.

Ethics for Examiners

(2016)

“Litigate or settle” is the choice generally available to disputants in American courts, including federal bankruptcy courts. In authorizing examiners, however, the Bankruptcy Code provides one very specific procedural device peculiarly suited to introduce inquisitorial process into a chapter 11 case. Until recently, examiners were seldom employed, and even when employed were not a true inquisitorial alternative to “litigate or settle.” Rather, examiners would determine the legal sufficiency of a disputed claim but not opine on the merits or undertake to resolve factual disputes. In "A Third Way: Examiners As Inquisitors," 90 Am. Bankr. L. J. 59 (2016), I identify and assess an emerging new approach to the bankruptcy examiner’s role. While not quite fully embracing an inquisitorial alternative to traditional bankruptcy dispute resolution, In re Tribune Co. and a series of post-Tribune investigations show that inquisitorial methods may be productively employed in certain large bankruptcy cases to resolve complex legal disputes. It may well be that chapter 11 examiners are the perfect persons to launch the inquisitorial experiment in American civil process. This Symposium Article discusses the professional responsibility implications of conducting an inquisitorial-style bankruptcy examination. The inquisitorial bankruptcy examiner faces unique ethical quandaries and considerations, and requires a code of ethics tailored to his role if he is to fully achieve the promise of improving chapter 11 through the introduction of inquisitorial investigative methods. This Article points the way towards developing guidelines to regulate the conduct of examiners that mitigate real, potential and perceived abuses, and further the legitimacy of such investigations.

Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal

(2016)

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.

The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion in Rule 14a-8(i)(7) of proposals relating to ordinary business operations is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements.

This article proposes an alternative standard that is grounded in relevant state corporate law principles, while also being easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.

Opinions First - Argument Afterwards

(2016)

For twenty-five years, the California Supreme Court has operated under a bizarre internal operating procedure that requires majority opinions to be written and agreed to prior to oral argument. This procedure squanders and demeans the parties’ formal opportunity for appellate argument, is inconsistent with traditional common law appellate process, and violates the state and federal Constitutions.

A Third Way: Examiners as Inquisitors

(2016)

“Litigate or settle” is the choice generally available to disputants in American courts, including bankruptcy courts. In authorizing examiners, however, the Bankruptcy Code provides one very specific procedural device peculiarly suited to introduce inquisitorial process into a chapter 11 case. Until recently, examiners were seldom employed, and even when employed were not a true inquisitorial alternative to “litigate or settle.” Rather, examiners would determine the legal sufficiency of a disputed claim but not opine on the merits or undertake to resolve factual disputes. The Tribune chapter 11 case, however, took a different approach to the examiner’s role. While not quite fully embracing an inquisitorial alternative to traditional bankruptcy dispute resolution, Tribune and a series of post-Tribune investigations have shown that inquisitorial methods make sense in certain large bankruptcy cases involving complex legal disputes. It may well be that chapter 11 examiners are the perfect persons to launch the inquisitorial experiment in the United States.

Part I introduces the thesis. Parts II and III set out the historical and comparative law inquisitorial alternatives to adversary litigation looking at English Chancery, European civil law systems and pre-Tribune examiner practices in US bankruptcy law. Parts IV and V contain the qualitative empirical analysis starting with a detailed look at Tribune and then discussing the small universe of post-Tribune cases in which examiners have been appointed. Part VI is the policy analysis of when and how Tribune-style inquisitorial examinations should be conducted.

Fee Shifting: Delaware's Self-Inflicted Wound

(2016)

In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.

In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.

This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the state’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.

Cover page of Bondholders and Securities Class Actions

Bondholders and Securities Class Actions

(2015)

Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance leading to fraud. This Article challenges this conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions. From 1996 through 2000, about 3% of securities class action settlements involved a bondholder recovery. From 2001 through 2005, the percentage of bondholder recoveries increased to about 8% of all securities class action settlements. Bondholders were involved in 4 of the 5 and 19 of the 30 largest securities class action settlements, and tended to recover in frauds associated with a credit downgrade. By 2005, almost half of all securities class actions alleged claims on behalf of all public investors, not just shareholders. The rise in bondholder recoveries is evidence that securities fraud has increased in severity over time, causing harm to a broader range of corporate stakeholders. Certain frauds can be understood as transferring wealth from bondholders to shareholders. In providing a remedy for such transfers, bondholder class actions are an example of the continuing evolution of the securities class action.

Comments on the HHS' Flawed Post-Hobby Lobby Rules

(2014)

In late August 2014, after suffering a defeat in the Supreme Court Hobby Lobby decision when the Court held that business corporations are "persons" that can "exercise religion," the Department of Health and Human Services ("HHS") proposed new rules defining "eligible organizations." Purportedly designed to accommodate the Hobby Lobby ruling, the proposed rules do not comport with the reasoning of that important decision and they unjustifiably seek to permit only a small group of business corporations to be exempt from providing contraceptive coverage on religious grounds. This comment letter to the HHS about its proposed rules makes several theoretical and practical points about the Hobby Lobby holding and how the proposed rules fail to reflect the Court’s reasoning. The letter also addresses other approaches to avoid in the rulemaking process and argues for rules that, unlike what the HHS has proposed, align with the Supreme Court’s reasoning while being consonant with generally applicable precepts of state law and principles of federalism.