Category: Corporate Law


Five Reasons to Cheer for Starr v. United States (AIG Nationalization Case)

AIG coverYesterday, the US Federal Court of Claims ruled that the US government and its leaders acted illegally in nationalizing AIG during the 2008 financial crisis, in a shareholder suit led by Hank Greenberg, the man who built AIG until his departure in 2005. But the judge (Wheeler) also ruled against awarding any damages, saying AIG shareholders were not harmed.

A top journalist at a major financial magazine asked me the following five questions, and I gave the answers indicated–being five reasons you should celebrate the ruling. Please note that I wrote the book, The AIG Story (Wiley 2013), with Greenberg, where we laid out the legal basis for Wheeler’s ruling on illegality.

1) Is this a moral victory for Hank Greenberg? Do you think he sees it that way? 
Yes, it is a moral victory for Greenberg and for everyone else who cares about the rule of law.  I can’t speak for Hank other than to say he cares deeply about the rule of law.

2) Andrew Ross Sorkin calls this a split decision in today’s New York Times. Is that true and if not who won?
It is a Solomonic split decision but designed to invite an appeal by Greenberg and not by the government, so Hank gets a second bite at the apple on appeal.

3) Given the collateral calls that were pending and the certainty of an AIG bankruptcy, did Greenberg ever have a real chance to recover $40 billion?
No, but given the possibility of hiving off the insurance companies outside of bankruptcy, Judge Wheeler’s conclusion on no damages is vulnerable to reversal on appeal.

4) What will this ruling mean for government intervention in future financial crises? Is that good or bad?
No more violating the law or the rule of law by government officials, whatever they may think at the time. Very good–a win for justice and true American legal values.

5) The judge says that government broke the law in taking over AIG. Do you agree with that assessment?
Yes. Virtually every major figure in the takeover violated the law, certainly fiscal authorities such as Bernanke and Geithner, and maybe cabinet secretaries such as Paulson, and many of their bankers and lawyers, including those from Davis Polk, Goldman Sachs and Sullivan & Cromwell. They should all feel disgraced.


A Berkshire Opportunity Cost: Listed Family Firms

aaaaaThe following is adapted from “Berkshire’s Blemishes,” a working paper delineating the costs, rather than the vaunted benefits, of Warren Buffett’s Berkshire Hathaway as a management model.  

Warren Buffett loves family businesses whose owner-managers care more about their constituents than about profits, recognizing instead that customer care tends to translate into economic gain. Those entrepreneurs, in turn, love Berkshire Hathaway, Buffett’s company, because it offers intangible benefits such as managerial autonomy and a permanent home. When family businesses sell to Berkshire, they know they can still run them as they see fit and will not be sold if prospects falter: Berkshire has not sold a subsidiary in forty years and promises not to.

Buffett hates using Berkshire stock to pay for acquisitions, however, since few companies can match the time-tested premium currency Berkshire has come to represent. In fact, Berkshire’s worst acquisition was paid for in stock and Buffett still translates the cost into current values: $443 million paid in 1993, equivalent to more than $5 billion in Berkshire stock now. Preferring to pay cash, Berkshire is often able to acquire family businesses at a discount because selling shareholders value Berkshire culture. Buffett also hates auctions, plagued by frightful dangers like the winner’s curse, which can push bids well above value, rationally calculated.

Sensible as these tenets are, there is always an opportunity cost, in this case forsaking listed family firms–publicly traded companies controlled by a family. Unlike those owned solely by close-knit groups who all wish to sell to Berkshire, directors of listed family businesses owe duties to non-family shareholders when selling control. In most states, led by Delaware, they are duty-bound to get the best value for shareholders.  (The doctrine is known by famous cases illustrating it, including Revlon and Paramount v. QVC.)

In a stock deal where all holders share gains in future business value, directors could consider Berkshire’s special culture in valuing the transaction. But with cash, all such future value goes to Berkshire’s shareholders, not selling public stockholders, who would also gain nothing from the autonomy or permanence that family members prize in a sale to Berkshire. So directors resist an all cash sale at a discount and seek rival suitors at higher prices, even stimulating an auction to drive price up—repelling Berkshire’s interest.

An example can be drawn from Berkshire’s 2003 acquisition of Clayton Homes, a publicly traded family business bought for a modest (seven percent) premium to market. Many Clayton shareholders objected; one, Cerberus Capital Management, told Clayton it wanted the chance to make a competing bid; another sued. The result was a six-month delay in getting to a shareholder vote, which narrowly approved the Berkshire deal. Many Clayton shareholders were disappointed, but Cerberus opted not to outbid Berkshire, and the court dismissed the lawsuit.

The scenario remains unattractive to Berkshire, however, given the risk of litigation, delay and rival bids. After all, courts might require directors to take affirmative steps, presenting the risk of an auction, which in itself suffices to deter Berkshire from bidding in the first place. The upshot: the publicly traded family business is outside Berkshire’s acquisition model, amounting to an opportunity cost for what would otherwise be a sweet spot. On balance, it is probably a price worth paying, but it’s useful to know the price.

Lawrence A. Cunningham, a professor at George Washington University,  has written numerous books on a wide range of subjects relating to business and law. 


Berkshire’s Disintermediation

aaaaaDisintermediation” is the business phenomenon of the technology era, when consumers go straight to the source for everything from accommodations to crowdfunding. Yet the greatest exemplar of the practice is the era’s least technologically savvy company, Berkshire Hathaway. Berkshire, 50 years old as a conglomerate and now one of America’s largest public companies, almost never uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies. There are lessons in the model for the rest of corporate America, as well as investors, and it is an honor to be including a full length piece on the broad topic of disintermediation in the Wake Forest U. symposium on the subject hosted by Alan Palmiter and Andrew Verstein.

While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money. It generates abundant earnings and retains 100 percent, having not paid a dividend in nearly 50 years. In 2014, Berkshire earned $20 billion — all available for reinvestment.  In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now totaling $60 billion. These amount to interest-free government loans without conditions. The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all. Provided insurance is underwritten with discipline, float is akin to borrowed money but cheaper. At Berkshire, float now totals $72 billion, which it uses to buy businesses that continue to multiply Berkshire’s value.

American corporations tend to design acquisition programs using strategic plans administrated by an acquisitions department. They rely heavily on intermediaries such as business brokers and investment bankers, who charge fees and have incentives to get deals done; firms also use consultants, accountants and lawyers to conduct due diligence before closing. erkshire has never had any such plans or departments, rarely uses bankers or brokers, and does limited due diligence. In the early days, Berkshire took out a newspaper ad announcing its interest in acquisitions and stating its criteria — which it has reprinted in every annual report. Berkshire now relies on a network of relationships, including previous sellers of businesses.

Today, corporate America’s boards are intermediaries between shareholders and management. Directors are monitors involved in specific strategic decision-making. They meet monthly, using many committees, which in turn hire consultants, accountants and lawyers. American directors are well-paid — averaging $250,000 annually — including considerable stock compensation plus company-purchased liability insurance.  Berkshire’s board, in contrast, follows the old-fashioned advisory model. Composed of friends and family, they are directors because they are interested in Berkshire. They do not oversee management but provide support and advice. There are few committees, no hired advisers, and only two or three meetings a year. Berkshire pays its directors essentially nothing and provides no insurance. Berkshire’s directors are significant shareholders and bought the stock with their own cash — which is why they are there.

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FAN 53.1 (First Amendment News) U. Maryland Law to Host Conference: “The Impact of the First Amendment on American Business”

e5eb96fc377fcf9f7e18eb56d245dca1The 2015 Symposium (March 27th), “The Impact of the First Amendment on American Businesses,” will facilitate a discussion on the effects and consequences of First Amendment jurisprudence on businesses. The symposium will specifically cover the areas of commercial speech, religious exemptions for businesses, and rights of businesses to use technology appropriately. This event will be located at University of Maryland Francis King Carey School of Law, and is open to anyone interested in attending, including students, lawyers, and scholars.

Welcome and Introductory Remarks
Dean Donald TobinUniversity of Maryland Francis King Carey School of Law

Keynote Speaker 1
Travis LeBlanc, Federal Communications Commission

Panel 1: First Amendment and Commercial Speech Relating to Health

Jane Bambauer, University of Arizona School of Law
Adam Candeub, Michigan State University College of Law
Stephanie Greene, Boston College & Greene LLP
Kathleen Hoke, University of Maryland Francis King Carey School of Law
Wendy Wagner, University of Texas at Austin School of Law

Panel 2: First Amendment and Technology

Hillary Greene,  University of Connecticut School of Law
James Grimmelmann, University of Maryland Francis King Carey School of Law
Glenn Kaleta, Microsoft Corporation
Renee Knake, Michigan State University College of Law
Neil Richards, Washington University School of Law
Felix Wu, Yeshiva University Benjamin N. Cardozo School of Law

Panel 3: Religious Exemptions for Corporations

Caroline Corbin, University of Miami School of Law
Michelle Harner, University of Maryland Francis King Carey School of Law
Louise Melling, American Civil Liberties Union
Jennifer Taub, Vermont Law School
Nelson Tebbe, Brooklyn Law School

Keynote Speaker 2

Tamara PietyUniversity of Tulsa School of Law

Closing Remarks

Danielle CitronUniversity of Maryland Francis King Carey School of Law

For additional information, please contact Joella Roland, Executive Symposium & Manuscripts Editor, via email at

ht: Neil Richards 


Fed Officials Accused of Perjury in AIG Bailout Trial

In the financial trial of the century, the most important document is missing. The document is the term sheet that the government says it gave AIG’s board right before taking the company over in Sept. 2008.  The government says the AIG board thus approved the Draconian terms that benefited Goldman Sachs and other rivals. But other evidence, including  AIG’s contemporaneous securities filings, suggests the board was agreeing only to sell the government warrants not transfer 80% of the common stock to it for a song.  The missing document would prove which side is telling the truth.

That’s one of many amazing points of contention noted by Yves Smith of Naked Capitalism in her relentless digging into what government really did during the financial crisis. Most recently, she alleges and documents perjury and obstruction of justice by top federal officials in the pending case of former AIG shareholders against the US. The case alleges that the government trampled on corporate law rights and that the Fed exceeded its authority—allegations that I document in my book, The AIG Story, written with Hank Greenberg, lead plaintiff in the case.

Smith lays out her claims in an extensive blog post at Naked Capitalism, accompanied by reams of additional documents and examples. For those looking for a skinny version, here is an abridged adaptation. Most examples concern Scott Alvarez, general counsel of the Board of Governors of the Federal Reserve; there is one with with Tom Baxter, general counsel of the New York Fed, who worked with Tim Geithner. The shareholders are represented by the noted trial lawyer, David Boies. The point about the term sheet is at the end.

Example 1

Boies: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?

Alvarez: I don’t know.


Example 2

Boies: [Presents a copy of the Financial Crisis Inquiry Commission report stating that the Fed had lowered the standards it applied for the quality of collateral for its loans under two programs then devised to support lending and asks] Do you see that?

Alvarez: I see that. . .

Boies: . . . [W]ould you agree that the Federal Reserve had lowered its standards regarding the quality of the collateral that investment banks and other primary dealers could use while borrowing. . . ?

Alvarez: No.

Boies: You would not agree with that?

Alvarez: Right.


Example 3 Read More


Buffett on Family Business: Beat the Third Generation Curse

warren buffettWarren Buffett is very good at spotting great family businesses. What does he look for? How can his filters help family businesses prosper?

For one, they can mitigate one of the greatest dangers: the third generation “curse.” This refers to how few family businesses survive beyond the third generation, let alone prosper.

An under-appreciated fact about Berkshire Hathaway, the conglomerate Buffett built: virtually all its family businesses boast second or third generation descendants who rival or outshine previous generations. That is rare among family businesses.

So while every family and business situation differs, Berkshire’s two dozen family companies are a good place to look for insight about multi-generational prosperity in the family business.

Studying Berkshire’s family businesses, I found that they are united by the following values. These values are important factors in their success, in the founding generation and subsequent ones.

Family business members, and their professional advisors, whether in law, accounting, or other fields, would do well to ponder these points.

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Walmart versus Apple aka Revenue versus Profit

Which business would you want to be? The Economist Espresso reports that Walmart takes “about 65 seconds to collect $1m in revenue,” but Apple needs “very nearly three minutes.” Looks like Walmart is where the money is. And it is, but when it comes to profit, “Apple, with its high margins, is fastest in the profit stakes: chalking up $1m takes it less than 13 minutes and 20 seconds, whereas Walmart needs more than half an hour.” Looking at the chart, Apple and Google have good profit margins but banks like JPMorgan Chase and Goldman Sachs do even better (all above 20%). Coke (17.4) and Pepsi (10.4) are quite good too. So how much does the law affect these sectors and which the best to be in? Hard to tell.

No matter what, any regulation be it about disclosures about practices or nutrition or oversight or safety or labor or where a good is made or liability for property rights or ability to weather an economic downturn, can shape a sector. Given the high profits in some of these sectors, you will see some arguing that they are getting away with too much and others saying that any regulation will kill the sector. Both positions are likely incorrect. That said, watching where new money, new offices (for old and new ventures), and start ups go may tell us something about where people believe they can do well.

One thing I am thinking about is how much state-by-state regulations and barriers to labor mobility influence business decisions. Although work on intellectual capital and noncompetes is quite strong that lower restrictions help business overall, alleged protection of voting systems and other entry barriers matter too. Someone may have studied this point. If so, please share. But my guess is that a company that has trouble getting people (and I mean U.S. citizens) to their headquarters won’t be happy about that cost.


An Important New Paper on Veil Piercing Procedure

Sam Halabi (Tulsa) has written an important and interesting new paper on veil piercing, titled Veil-Piercing’s Procedure.

“With the lines between shareholders and corporations blurring over constitutional rights like free exercise of religion and political speech, questions as to how and under what circumstances the law respects or disregards the separation between shareholders and their corporations have never been more urgent. In the corporate law literature, these inquiries have overwhelmingly focused on the doctrine of piercing the corporate veil, a judicial mechanism normally applied to hold shareholders responsible for the obligations of corporations. The last twenty years of veil-piercing scholarship has been largely devoted to empirical analyses of veil-piercing cases collected from Lexis and Westlaw searches. Since 1991, scholars have been trying to mine cases for ever more variables that might predict when and under what circumstances judges disregard the separation between shareholders and their corporations. This Article argues that these scholars have focused on the substance of veil-piercing law to the detriment of another factor: civil procedure. This Article is the first to survey civil procedure and evidentiary rules that affect existing veil-piercing studies including pleading standards, threshold presumptions, burdens of proof, jury access and waiver. The Article ultimately argues that phenomena scholars now ascribe to the “incoherence” of veil-piercing law are explicable in the context of veil-piercing’s procedural fluidity.”
The paper breaks new ground on a very, very well trodden field.  (Full disclosure: Sam critiques my work with Christy Boyd on this topic, and we’re mostly guilty as charged.)  I continue to think that veil piercing is a vastly over-written topic, but this paper makes a real contribution and is worth reading. Check it out.



Chapter 8 of Berkshire Beyond Buffett: An Excerpt and Link

untitledThe following is an excerpt from Chapter 8, Autonomy, from Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free from SSRN here.

. . . Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

 Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock. . . .

[To read the full chapter, which can be downloaded for free, click here and hit download]