Source: https://www.professorbainbridge.com/professorbainbridgecom/2014/09/index.html
Timestamp: 2019-04-26 10:02:18+00:00

Document:
"More on LLCs as Non-Signatories of Operating Agreements . . ."
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.
Go read the whole thing, please.
Are people organized as corporations entitled to constitutional rights?
Ilya Somin discusses the titular question.
(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.
The brief builds on my article Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189 (1995).
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.
United States v. Whitman, 904 F. Supp. 2d 363, 367 (S.D.N.Y. 2012), as corrected (Nov. 19, 2012), aff'd, 555 F. App'x 98 (2d Cir. 2014).
As a result, we are dealing here with a species of federal common law. See, e.g., Steginsky v. Xcelera Inc., 741 F.3d 365, 367 (2d Cir. 2014) ("We hold that the duty of corporate insiders to either disclose material nonpublic information or abstain from trading is defined by federal common law ....").
"Once the problem is seen as one to be solved by application of federal common law, a choice of law question arises. Federal common law often is influenced by, and not infrequently incorporates, state law." Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189, 1207 (1995). So there is nothing per se impermissible about looking to state law here. In fact, contrary to the SG's argument, state law is the correct source of the duty for the reasons I lay out at great length at id. at 1212-45. As I demonstrate therein, "insider trading significantly implicates none of the principal purposes of the federal securities laws and, therefore, it cannot be said that important federal policies would be frustrated if state law were incorporated into the prohibition." Id. at 1245.
The SG argues that "Petitioner’s contrary approach, which would make the application of the insider-trading laws wholly dependent on “idiosyncratic differences in state law,” “would thwart the goal of promoting national uniformity in securities markets.” (24-25) But the Supreme Court has long recognized that "So long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State. No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders." CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89, 107 S. Ct. 1637, 1649, 95 L. Ed. 2d 67 (1987). The same would be true of insider trading.
In addition, as the Supreme Court has also recognized, those markets with which the SG is concerned are markets in which shares of entities created by state--not federal law--are bought and sold.
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.
CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90, 107 S. Ct. 1637, 1650, 95 L. Ed. 2d 67 (1987).
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.
Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52 Wash. & Lee L. Rev. 1189, 1238 (1995). I go on to explain at length why that is the case.
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).
It is true that I have written that, as the SG points out, "the state-law inquiry that petitioner advocates 'is essentially unheard of in federal insider trading jurisprudence.'" But that's in the context of arguing that courts have been getting it wrong!
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.
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.”).
As always, clear and cogent.
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.
"disclosure and approval requirements tend to hurt shareholders"
"Disclosure proponents are expressing concern for shareholders as a pretext for restricting corporate activity in politics."
"'Activist' investors are often more concerned with their ideological goals than with stock returns."
"the progressive nonprofit Media Matters has developed an entire strategy built on existing disclosure requirements to "provoke backlashes among companies' shareholders, employees, and customers, and the public-at-large," according to a 2012 leaked strategy memo. Imagine what Media Matters could do with more disclosure requirements."
Didn't sign your LLC operating agreement? Think that'll get you off? Think again.
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.
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.
Delaware unincorporated entity law: Fiduciary duties via the back food of the implied covenant?
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.
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.
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.
The UC System has not been immune to this problem. According to one review of the data, "the management cadre (defined as the employees classified in Senior Management Group and Management & Senior Professionals) ... grew by 252% over the 21 year period while total [UC] employee numbers grew by a mere 51%."
Law schools have been a big part of the problem. According to Paul Campos (admittedly a source I take with a grain of salt), "law school administrative staffs have grown at a far faster pace than even the rapidly expanding tenure-track faculties of schools accredited by the ABA.' The number of full-time administrators who also teach--deans, librarians, and other law school personnel--more than tripled from 1998 to 2008, increasing from 528 to 1,659." That number, of course, excludes non-teaching administrators, where we at UCLAW have seen significant growth.
So we'll see if any good comes of raising the issue.
Because I agree with David Post's excellent analysis, which you should go read.
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.
"Is there still a fall submission season for law reviews?"
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.
So we'll blow a horn for her.
"SEC Advisory Committee To Consider Fee-Shifting Bylaws, But Why? "
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.
I just came across an excellent article on the pressing need for reform of the proxy advisor business.

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