Source: https://www.professorbainbridge.com/professorbainbridgecom/2016/09/index.html
Timestamp: 2019-04-26 09:55:07+00:00

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Helen and I are celebrating our 30th wedding anniversary this weekend, so I'm digging down to the bottom of the cellar for wines from the 1986 vintage. Tonight I made a roasted Rohan duck with duck fat roasted fingerling potatoes and duck fat roasted Brussels sprouts (it was a great sacrifice making the vile veggie, but true love will out and they are one of her favorites, besides which duck fat can make anything taste good).
The Heitz had thrown quite a bit of sediment, but the wine still presented as a deep ruby with remarkably little bricking. The bouquet was immense, filling the entire dining room with aromas of pencil shavings, leather, prunes, and dried currants. On the palate, the flavor associations that came to mind were much the same plus some pepper and oriental spices. The finish was still surprisingly tannic suggesting that this vintage could last at least until our 40th. Sadly, however, this was my only bottle.
Critics of corporate “excesses” have developed an even more fundamental corrective: “concession theory”. Ronald Green of Dartmouth College says that society has a right to demand socially responsible behaviour in return for the privilege of limited liability and the right to impose externalities on society. Will Hutton, a British journalist with a certain following, calls for a new law for firms that would grant them the privileges of incorporation only if they pursue some “noble, moral business purpose”.
In their new book, “Limited Liability”, Stephen Bainbridge of the University of California, Los Angeles and Todd Henderson of the University of Chicago give both arguments short shrift. Veil-piercing is hard to enforce because, in a world where the average holding period for shares is 22 seconds, it is impossible to determine who is liable for what. But even if you can enforce it there is no evidence that veil-piercing produces more responsible behaviour by firms. One reason is judges are unpredictable in when they choose to pierce the corporate veil. There are better ways of disciplining wayward companies, such as prosecuting managers.
Dell and the myth of "intrinsic value"
Vice Chancellor Laster of the Delaware Court of Chancery held that, for purposes of Delaware’s appraisal statute, the fair value of the common stock of Dell Inc. at the time of its sale to a group including the Company’s founder Michael Dell was $17.62 per share, almost a third higher than the $13.75 deal price. The decision has received a good deal of attention from the press and commentators, largely because the Court rejected the use of the transaction price as compelling evidence of fair value, despite several recent Delaware appraisal decisions that have relied heavily or exclusively on the transaction price.
VC Laster cited a number of factors in support of his decision, but, as Paul Weiss observes, one of the major take home lessons seems to be that "target boards may wish to make a record of their focus on the company’s intrinsic value, as opposed to the premium to market represented by the transaction price."
Subsequent Delaware Supreme Court decisions have adhered consistently to this definition of value.
In re Appraisal of Dell Inc., No. CV 9322-VCL, 2016 WL 3186538, at *21 (Del. Ch. May 31, 2016), reargument denied, (Del. Ch. June 16, 2016).
The difficulty, of course, is that there is no such thing as "intrinsic value." As with any other asset, a company is worth only what somebody is willing to pay for it.
Given that the meaning of "fair value" is a product of common law adjudication rather than statutory interpretation, Delaware courts can and should rethink their approach. Instead of focusing on the purported intrinsic value, the court should focus on the fact that while the company's only value is its market value, an asset can have different values in different markets. (Otherwise, arbitrage would never be profitable.) Two distinct markets are implicated in this setting. On the one hand, there is the ordinary stock market in which the company's shares trade. On the other, however, there is the market for corporate control. Prices in the latter market typically exceed those in the former. Hence, we speak of a "control premium" that is paid when someone buys all of the shares of a company's stock.
The relevant inquiry thus is not what is the company's "intrinsic value" but did the board of directors do an adequate job of figuring out the reservation price of the highest realistically credible bidder. In cases where the board's motives are unquestioned, courts should defer to the board's decision in that regard.
There was limited pre-signing competition for the Company, and the effectiveness of the post-signing go-shop period was limited by the size and complexity of the Company.
Limited pre-signing competition can be an impediment to achieving fair value even if a robust post-signing market check is undertaken during a "go-shop" period given numerous disincentives facing would-be topping go-shop bidders, according to the Court. In particular, the ability for the incumbent buyer to make at least one matching bid in the event of a superior proposal from a third party – a common feature of a go-shop – may have a chilling effect on go-shop bids, especially when the target company is large and complex and therefore requires significant and costly due diligence by the go-shop bidder. The chilling effect may be accentuated in the context of a management-led buyout, in which the incumbent buyer presumably has the best knowledge about the company's prospects and therefore presumably has priced the company properly; moreover, a go-shop bidder in this context must overcome the lack of support from management, which support may be an asset impacting valuation in and of itself. Indeed, in the Dell case, evidence showed that only three financial sponsors and no strategic bidders were involved in the pre-signing sale process, and even though 60 potential buyers were contacted during the go-shop phase, the Court still found that the lack of pre-signing competition rendered the merger consideration unreliable.
My friend and UCLAW colleague Sung Hui Kim has written extensively about why we should think of insider trading as a form of corruption, in articles such as The Last Temptation of Congress: Legislator Insider Trading and the Fiduciary Norm Against Corruption http://ssrn.com/abstract=2029322, and nsider Trading as Private Corruption http://ssrn.com/abstract=2326582.
The executive summary continues here.
What's life as a corporate lawyer like?
By Mark Loewenstein: Highly recommended.
Various academic studies suggest that “emotional labour” can bring significant costs. ... But the biggest problem with the cult of happiness is that it is an unacceptable invasion of individual liberty.
Over two decades ago, Nobel economist Kenneth Arrow opined that “the empirical evidence, such as it is, points to very little relation between the morale of workers and their performance.” Kenneth J. Arrow, The Limits of Organization 76 (1974). The intervening years have done little to change that conclusion. A more recent literature review likewise concluded that there is “simply no direct connection between job satisfaction and subsequent productivity.” Edwin A. Locke et al., Participation in Decisionmaking: When Should it be Used?, 14 Org. Dynamics 67, 71 (1986). Accord Thomas A. Kochan et al., The Transformation of American Industrial Relations (rev. ed. 1994) (same); Oliver E. Williamson, The Economic Institutions of Capitalism 270 (1985) (same); Tom Juravich, Empirical Research on Employee Involvement: A Critical Review for Labor, 21 Lab. Stud. J. 51, 56 (1996) (based on research to date no proof that “happy workers are necessarily more productive”); Charles D. Watts, Jr., In Critique of a Reductivist Conception and Examination of “The Just Organization,” 50 Wash. & Lee L. Rev. 1515, 1518 (1993) (“I do not see the propagation of just or participative organizations that one would expect if these benefits [i.e., increased job satisfaction etc...]” were as significant as the proponents of participatory management suggest); cf. Alan Hyde, In Defense of Employee Ownership, 67 Chi-Kent L. Rev. 159, 201 (1991).
Job satisfaction has traditionally been thought of by most business managers to be key in determining job performance. The prevailing thought is if you are satisfied and happy in your work, you will perform better than someone who isn’t happy at work.
Not so, according to a research project by Nathan Bowling, Ph.D., an assistant professor of psychology at Wright State. His findings, which will be published soon in the Journal of Vocational Behavior, show that although satisfaction and performance are related to each other, satisfaction does not cause performance.
“My study shows that a cause and effect relationship does not exist between job satisfaction and performance. Instead, the two are related because both satisfaction and performance are the result of employee personality characteristics, such as self-esteem, emotional stability, extroversion and conscientiousness,” he explained.
Bowling, who specializes in industrial and organizational psychology, said his findings are based on reviewing data from several thousand employees compiled over several decades. His subjects, mostly in the United States, involved several hundred different organizations.
Will a Caremark claim lie in Wells Fargo?
Christine Hunt suspects not. I concur.
The McKinsey Global Institute, the consultancy’s research arm, calculates that 10% of the world’s public companies generate 80% of all profits. Firms with more than $1 billion in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation.
The growth in regulation has also played into the hands of powerful incumbents. The collapse of Enron in 2001 arguably marked the end of the age of deregulation, which began in the late 1970s, and the beginning of re-regulation. The financial crisis of 2008 served to reinforce that trend. The 2002 Sarbanes-Oxley legislation that followed Enron’s demise the previous year reshaped general corporate governance; the 2010 Affordable Care act re-engineered the health-care industry, which accounts for nearly a fifth of the American economy; and in the same year the Dodd-Frank act rejigged the financial-services industry.
Regulatory bodies have got bigger. Between 1995 and 2016 the budget of America’s Securities and Exchange Commission increased from $300m to $1.6 billion. They have also become much more active. America’s Department of Justice has used the Foreign Corrupt Practices act of 1977 to challenge companies that have engaged in questionable behaviour abroad. The average cost of a resolution under this act rose from $7.2m in 2005 to $157m in 2014.
Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost. Nicole and Mark Crain, of Lafayette College, calculate that the cost per employee of federal regulatory compliance is $10,585 for businesses with 19 or fewer employees but only $7,755 for companies with 500 or more. Younger companies also suffer more from regulation because they have less experience of dealing with it. Sarbanes-Oxley imposed a particularly heavy burden on smaller public companies. The share of non-executive directors’ pay at smaller firms increased from $5.91 out of every $1,000 in sales before the legislation to $9.76 afterwards. The JOBS act of 2012 exempted small businesses from some of the more onerous requirements of the legislation, but the number of startups and IPOs in America remains at disappointingly low levels.
The complexity of the American system also serves to penalise small firms. The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax. Smaller companies have to spend money on outside lawyers and constantly worry about falling foul of one of the Inland Revenue Service’s often contradictory rules.
Complexity in regulation leads to complexity in financial structures and systems, particularly in light of the efforts of market participants to mitigate the costs and complications induced by regulation, including attempts to engage in regulatory arbitrage. Consequently, much of the costs of regulation in my view are associated with its intricacies. It also is useful to recognize that complexity in regulation leads to huge entry barriers associated with the cost of regulatory compliance. Instead of addressing “too big to fail,” this can lead to maintaining “too big to fail” institutions. This is a connection that appears to be underappreciated by our financial regulators.
Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.
Id. at 108. The Nevada Supreme Court has not explicitly adopted Jones, but has recognized the possibility that minority stockholders may be able to pursue a breach of fiduciary duty claim against the majority stockholders. Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 11 (2003).
In Jones v. H.F. Ahmanson & Co., 460 P.2d 464 (Cal. 1969), the California supreme court, per Chief Justice Traynor, limited the ability of controlling shareholders to create a market for their shares without providing comparable liquidity for the minority.
The United Savings and Loan Association of California was a closely held financial institution. The defendants owned about 85 percent of United’s shares. Defendants wished to create a public market for their shares, a task that could have been accomplished using any of several methods, most of which would have created a market for all shareholders’ stock. Instead of adopting any of those options, however, the defendants set up a holding company, to which they transferred their shares. The holding company then conducted a public offering of its stock, which created a secondary trading market for that stock. The 15 percent of United’s stock that was not owned by the holding company was thus left without a viable secondary market.
The California supreme court held that when no active trading market for the corporation’s shares exists, the controlling shareholders may not use their power over the corporation to promote a marketing scheme that benefits themselves alone to the exclusion and detriment of the minority.
It once seemed likely that Ahmanson would become an important precedent, perhaps precluding a wide range of transactions including sales of control blocks at a premium. At least outside California, that has not happened. See Nixon v. Blackwell, 626 A.2d 1366 (Del.1993); Toner v. Baltimore Envelope Co., 498 A.2d 642 (Md. 1985); Delahoussaye v. Newhard, 785 S.W.2d 609 (Mo. App. 1990).
Even in California, there seems to be something of a trend towards limiting Ahmanson to its unique facts and procedural posture. See, e.g., Miles, Inc. v. Scripps Clinic and Research Foundation, 810 F. Supp. 1091 (S.D. Cal. 1993) (“The Jones case did give the narrow circumstance in which a fiduciary duty may be imposed: when a majority shareholder usurps a corporate opportunity from or otherwise harms the minority shareholder.”); Kirschner Bros. Oil Co., Inc. v. The Natomas Co., 229 Cal. Rptr. 899 (Cal. App. 1986) (noting that Ahmanson’s sweeping dicta must be “carefully related” to the facts before a violation can be found; hence, plaintiffs must explain with “specificity what they . . . might have been entitled to that they did not receive”). But see Stephenson v. Drever, 16 Cal. 4th 1167, 1178, 947 P.2d 1301, 1307 (1997) (calling Jones a "leading case").
If Ahmanson is to remain on the books, a debatable proposition, it should be so limited. The case was decided on appeal from the trial court’s grant of a motion to dismiss. Interpreting the facts most favorably for the plaintiffs, the defendants went out of their way to deprive the minority shareholders of a market for their shares, reduced the dividend in order to deprive the minority shareholders of any economic return, at least in the short run, and displayed their true objective by offering a low price for the minority shares. In short, this is just a run of the mill squeezeout case. Unfortunately, there is much broader dicta in the opinion—and it is that dicta for which the case is frequently cited.
Read Chapter 1 of Bainbridge & Henderson on Limited Liability free on-line.
Third, the conceit that racial, ethnic, and gender preferences will result in the representation of more diverse views, which indeed could be important in putting out a publication, is often false, as it is in this case.
Walter Effross' video "Nine Approaches to the Business Associations Course"
It's an interesting introduction to the course, especially focused on persuading social justice warriors to take the course.

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