Category: Corporate Law


The Most Academic Court

court2004.jpgLast weekend, I attended Wake Forest Law Review’s 20th Annual Symposium on Business Law. The topic was “The Duties of the Modern Corporate Executive,” and in a few weeks, I’ll no doubt shamelessly promote the symposium essay on self-handicapping and managers’ care that I presented. I’ll also be highlighting others’ contributions as well, especially former Conglomerate blogger Joan Heminway (Tennessee Law), who wrote about the disclosure duties of officers dealing with personal problems, a topic I once briefly mentioned here.

But enough pre-puffing. The topic of this post concerns the participation at the symposium by Delaware Supreme Court Justice Randy Holland and Vice Chancellor Stephen Lamb (New Castle County Court of Chancery). Both jurists offered terrific substantive content (Justice Holland summarizing the conference’s themes, and V.C. Lamb on DE’s perspective on managers’ duty of care and loyalty). Listening to them, I was struck at the counterexample offered by Delaware judges to the divide between academics and judges that was the topic of the blogosphere a few weeks back. At the time, it struck me that Liptak’s story was (at best) over-hyped: citation by judges in published opinions of law reviews is a really bad metric for law review influence. Opinions are a biased sample. Even were they not, judges may be avoiding citation of articles they read to protect themselves from charges of activism. Even were they not, the residual of the trend is almost certainly due to harried clerks writing opinions instead of judges.

But whatever we might make of these claims and counterclaims, I think that we’d see a different result in Delaware. The state’s judges are increasingly engaging with the academy, they often claim that they followlaw review debates, and important DE decisions cite multiple articles. At 2007’s AALS, Justice Jacobs clearly explained how and why the Delaware Supreme Court reached the result it did in Disney, and how that result reflected/pushed back against/engaged with academic literature on good faith. It is almost impossible to imagine such frank talk from a federal jurist.

So, I decided to run a quick WL search in the Delaware database, to see if I could find support for the Liptak “declining trend” hypothesis, or my “engagement” hypothesis. Predictably with such noisy data, the results were mixed.

Read More


Larry Cunningham and Henry Paulson March in Time

On the day that Larry Cunningham (B.C. Law to GW Law) posted his article A Prescription to Retire the Rhetoric of “Principles-Based Systems” in Corporate Law, Securities Regulation and Accounting, to SSRN, Henry Paulson, the Secretary of the Treasure, spoke at a conference :

In particular, the Treasury secretary highlighted the U.S.’s regulatory structure, accounting industry and corporate governance structure as areas that may be in need of an overhaul.

“We should also consider whether it would be practically possible and beneficial to move toward a more principles-based regulatory system, as we see working in other parts of the world,” Mr. Paulson said in his speech.

Coincidence? Or a data point suggesting that judges’ citing law reviews is a pretty bad measure of their importance. Who needs a federal district court citation, when the Treasury Secretary is (implicitly) “but cf’ing” you?

Paulson aside, Larry’s article is interesting and well-worth the read.


Supreme Court Justice to Review Executive Compensation

museum.jpgChief Justice Roberts will be ruling on the issue of excessive corporate compensation.

Wearing his non-judicial hat, that is.

The overpaid executive is Lawrence Small, the Smithsonian Institution’s Secretary. His pay: $915,698, which included $90,000 in perks like a “private jet, hotel rooms, use of a private car service, catered meals . . . and a trip by his wife to Cambodia”. According to the Times’ article on the topic

“[T]he Smithsonian spokeswoman . . . said Mr. Small would wait to comment until the results of an independent review committee that Roger W. Sant, chairman of the executive committee of the Smithsonian’s board, announced Monday.

Mr. Sant, the founder of the AES Corporation in Arlington, Va., and a stout defender of Mr. Small, said the committee, to be led by Charles A. Bowsher, a former comptroller general, would review the board’s actions and Mr. Small’s expenses and report back in 60 days.

Other regents, who include Chief Justice John G. Roberts Jr. and Vice President Dick Cheney, have not commented on the compensation issue. In a March 7 response to a letter from Mr. Grassley, Mr. Cheney’s chief of staff, David S. Addington, said the Smithsonian was ‘an uncommon type of organization’ and referred the senator’s queries about its governance to the Smithsonian’s inspector general and general counsel.”

I could imagine quite a few bad stories about Small’s compensation, starting with Board capture, and ending with the lack of market discipline for a non-profit. But it seems unwise to prejudge the issue – the article, unfortunately, does not provide comparables, and I recall a recent Times story about the Met director’s high salary too. Reporters: jealous, much?

In any event, the governance of non-profits is an interesting subject, and one that Supreme Court Justices probably don’t get to think about much in their day jobs. Indeed, they don’t get to think much about ordinary corporate law either, although given SOX, the Court may have to confront such issues in the near future. You have to wonder whether the Chief’s experience with respect to the Smithsonian will make him more, or less, sympathetic to the claims of managers that they were exercising due care. In any event, the story bears watching.


Krispy Kreme Franchising

donut.jpgI’m off in a few minutes to teach the Krispy Kreme franchising case study from Gordon Smith and Cynthia Williams’ corporations casebook. I’ve never taught it before, but I’ve got to imagine that the discussion will be pretty wild given the donut chain’s implosion in recent years, partly as a result of stuffing its franchisees with donut mix. Also, I wonder if folks will blame the collapse on KK’s foolish decision to adhere to the international norms on spelling the word, which adds four three extra letters.

Folks who have had experiences with discussing this particular problem are welcome to share them in the comments. I’ll try to drop by after class and share how it went, assuming it wasn’t a disaster!


“We’re going to buy Manhattan back one hamburger at a time,” – Seminole Tribe of Florida To Buy Hard Rock



Just a quick note. The Seminole Tribe of Florida is in the process of buying a major piece of the Hard Rock empire for $965 million from Rank Group PLC. The quote in the headline for this post is from tribe Vice Chairman Max Osceola (note: The Seminole Tribe was not the tribe who sold the island). The purchase “includes 124 Hard Rock Cafes, four Hard Rock Hotels, two Hard Rock Casino Hotels, two Hard Rock Live! concert venues and stakes in three unbranded hotels.” Curiously although the Seminole Tribe was the first tribe in the U.S. to enter the gambling industry (it started a bingo hall in 1979) and operates two Hard Rock casinos in Florida, the deal does not include the Hard Rock casinos in London or Las Vegas as those were already sold to others prior to this deal. As someone who teaches trademark, this set of affairs promises to foster at least one or two good problems or essay questions for my next class.

Regarding Mr. Osceola’s remarks about buying back Manhattan and comparing the sale of Manhattan to the Dutch to the current deal, the article reports that the Seminole Tribe has 3,300 members who benefit from the Tribe’s gaming activities. My guess is they are doing rather well. In addition, the article states, “U.S. tribes now have more than $22 billion in annual revenues from gambling, according to government figures.” Given that the Stuyvesant Town and Peter Cooper Village in Manhattan, was sold for $5.4 billion recently the Seminole tribe has some progress to make before it could do the buyback but then again I wonder if anyone thought they’d be this close either.


Corporate Law “Reform” in Multiple Dimensions

In an earlier post, I discussed the U.S. Chamber of Commerce’s foray into the growing conflict over the corporate internal affairs doctrine and whether that doctrine rises to the level of a constitutional imperative. Of course, the Chamber’s efforts in this area are but one small piece of a much larger overall strategy in addressing the production and content of American corporate law. In an article in Sunday’s New York Times, other pieces of that strategy now have become apparent.

The Chamber and others reportedly will launch a campaign following the election in which they may seek to scale back requirements imposed under the Sarbanes-Oxley Act, limit liability of accounting firms, make it harder for prosecutors to bring cases against individuals and firms, limit what they view as overzealous state-level enforcement, eliminate the private right of action under Rule 10b-5, and require some investor claims to be arbitrated. According to the article, they intend to achieve most of these objectives though agency action rather than resorting to legislation.

Wow. The “post-post-Enron” backlash cometh. . . .

We will have to see how all of this plays out, but I will offer three tentative impressions.

Read More


A Global Financial Regulator?

Barney Frank, who will likely take over the House Financial Services Committee if the Democratics win next week, has this to say to the Financial Times about regulatory cooperation:

‘Doesn’t that sound like fun,’ Mr Frank said . . . ‘Joint action is theoretically [good] but what does that mean? In American baseball, if the runner and the ball arrive at the base at the same time, the tie goes to the fielder. Who breaks a tie if there is a disagreement over policy between the SEC and FSA?’

Asked if a supra-national regulator would be needed, he told the Financial Times: ‘I don’t know. At this point that’s something to look into.’

Those are some scary words for folks who are already worried about the federalization of corporate law. About SOX itself, Frank said:

[T]he idea that Sarbox could be more widely applied abroad was “not going to happen” because it was being watered down in the US.

Business and financial leaders in Europe continue to fret about the possibility that Sarbox could find its way to the UK and elsewhere through the back door, such as if a stock exchange in the US acquired one in the UK.

Asked if Europeans were justified of such concerns, Mr Frank said: “It’s not going any further. Six months from now it will be less of a burden for companies than it is today.” His view reflects a belief in Washington that Sarbox should not be changed through Congress.

Instead, the two regulators responsible for overseeing how it is implemented – the SEC and Public Company Accounting Oversight Board, the accounting watchdog – should clarify how sections of the law should be implemented.


CEOs, Just Cause, and $$$$

With the Disney case and now Grasso grabbing headlines, disputes over large payouts to former corporate executives have garnered great attention of late. Last week, another such dispute boiled to the surface, this time in the form of an appeal from an arbitration award in favor of Robert J. O’Connell, the terminated former CEO of MassMutual Financial Group. Sample media accounts can be found here, here, and here.

According to these stories, MassMutual’s allegations of O’Connell’s wrongdoing included, among other things, having affairs with several female employees, making $23 million on questionable “shadow” stock trades, intervening to prevent disciplinary actions against family members who held senior positions, and buying a fancy company-owned condo at a below-market price. The arbitration panel found that MassMutual failed to prove some of these allegations, failed to adhere to procedures for termination set forth in O’Connell’s contract, and otherwise failed to demonstrate just cause as defined in that contract. The panel did find that the firm was entitled to a return of the $23 million. Nevertheless, it awarded O’Connell compensation under the agreement worth between $40 and $50 million. MassMutual is now seeking to overturn the award in a Massachusetts court.

Without more information, we can’t tell whether the arbitrators got it right or wrong, but let’s focus instead on the contract itself. Here is how one report described the substantive portion of the just cause provision:

According to O’Connell’s contract he signed in 1998 when he joined MassMutual, he could be fired for a criminal conviction, theft or embezzlement, as well as for “conduct that constitutes willful gross neglect or willful gross misconduct … resulting in material harm to the company.”

Assuming this description is accurate, the term smacks of board of director abandonment of core principles of corporate governance. While there are many just cause provisions in employment contracts that are not the least bit problematic, this is the CEO we are talking about, this is quite a just cause provision, and the compensation at stake is, well, large.

Read More


Sentenced to 24 Years

The news of the day is Jeff Skilling’s 24-year sentence. The outrage level in the blawgosphere is at DEFCON 1.

Ellen Podgor:

But I don’t think we will see sentences like this in the future because people will eventually realize the worthlessness of issuing such draconian sentences in non-violent white collar cases. The bottom line is that these sentences are not likely to deter future criminality, as many who engaged in the conduct just did not see themselves as committing crimes.

Peter Henning:

While Jeffrey Skilling receives 24 years for presiding over the collapse of Enron, former Congressman Randy (Duke) Cunningham sells his office to a string of defense contractors for a bit over $1 million and receives a sentence of 8 years. Soon-to-be former Congressman Bob Ney will likely be sentenced to less than 3 years in prison for selling out his office to lobbyists led by Jack Abramoff. How can there be such a disparity between the sentences for public corruption and the corporate frauds perpetrated by Ebbers and Skilling? The harm from public officials, especially those elected to office, who abuse their positions for personal gain is, in my opinion, nearly as great as that caused by corporate chieftains who preside over collapsing companies.

Larry Ribstein:

Judge Lake may well have correctly applied the law by supposing that Skilling was tied to $80 million in investor losses. But to quote Mr. Bumble, who was told that the law supposed that his wife acted under his direction, “if the law supposes that, the law is a ass—a idiot.”

Christine Hurt:

Judge Lake explained that the sentence was proportionate to the crime because Skilling effectively sentenced “hundreds, if not thousands,” to a “life sentence of poverty.” I think I would quibble with that statement, but I guess that’s for another post.

Note that Skilling gets the pain of a long sentence without even the solace of “one for the record books.” To be known as the holder of the longest white-collar crime sentence, Skilling would have had to receive a sentence of 25 years and a day.

I disagree with much of these laments against the Enron prosecution, for reasons I have already discussed. Twice. To put the sentence itself in perspective, I thought it would be fun to google “sentenced to 24 years” and see what I came up. And the results were, predictably, random. A cop who stole drugs, a Dynergy executive (for accounting fraud, later reduced to six years), a retail level drug dealer, a woman busted (allegedly) for holding merely 2.72 g of cocaine, and the significant other of another large drug dealer, convicted for conspiracy.

The message: federal time is hard time for lots of folks, convicted of many nonviolent offenses, in circumstances where deterrence isn’t (necessarily) a strong argument for punishment. Indeed, I’d bet that most of the time spent in federal prison is for “nonviolent” crime, in that sentence enhancements for possessions of firearms and drugs dominate over bankrobbery.

If we think that violence and responsiveness to punishment are the only way to justify long sentences, why not be outraged about such punishments every day? Moreover, it seems to me that Skilling isn’t being punished for going to a jury (while others took the plea discount). He’s being punished because the jury disbelieved his testimony.