Category: Corporate Finance


Veil Piercing Is Probably Not the Most Litigated Issue in Corporate Law

I was reading through Bob Thompson’s excellent year-in-review list of corporate law scholarship, and was struck the number of articles discussing veil piercing.  With a few exceptions, each of those articles claims, based on Bob’s opus, that veil piercing is the “most litigated issue in corporate law.”  Heck, even Wikipedia’s page on the veil makes that assertion.

In Disputing Limited Liability,* Christy Boyd and I disagree that veil piercing is really dominates corporate litigation.  As we noted:

“[Robert] Thompson [in his Cornell Law Review Article] compared the incidence of the term “veil piercing” in opinions to the incidence of terms like “hostile takeover,” declining to broaden the search to more common terms like “fiduciary duty” Id. at 1036 n.1. But, as this Article will show, “litigated” cases begin with complaints. Westlaw‘s pleadings database contains 2071 federal and state complaints potentially making veil piercing allegations between 2000 and 2005. A similar search for “(loyalty disloyalty) /s (director* officer)” returned 2405 complaints.”

Now, as Bob kindly wrote me in response, our argument is somewhat unfair.  After all,we’re counting different things, at different times, before different courts.  But still, I don’t think there’s much evidence at all that the veil is really the most litigated issue in cases that generally deal with corporate law problems.  (I say “generally” because a truly narrow definition of “corporate law” would, in my view, be limited to problems that the internal affairs doctrine covers, and in some states would consequently would exclude veil piercing altogether).  On the other hand, I don’t think Christy and I have made the case that classic loyalty claims are the most commonly litigated issue either.  The problem of generalizing to find the “most litigated issue” turns out to be complex.

The problem, as always, turns on sample selection. Most state court dockets are plainly inaccessible – and state court opinions are collected in a much more biased way than federal opinions.  As a Westlaw representative told me in 2009, they tend to collect non-Supreme state court opinions from urban centers, focusing on material that they believe will be of interest to lawyers, or when the court clerk has brought an opinion to their attention. The result is that our understanding of the practice of an individual state’s corporate law are biased by the black-sheep opinions we can see.  Why would we think that drawing any inferences from that dataset could let us answer the question of “what is the most litigated corporate law issue”?  I’d prefer to trust practice bulletins – trying to track what corporate lawyers believe to be common problems.  In those materials, veil piercing is relatively rarely discussed.  However, since practice bulletins may be dominated by the defense bar, one has to account for the fact that most veil piercing cases are actually brought against very small companies, who might not be represented, and certainly are unlikely to be represented by an attorney with sufficient time on her hands to contribute to a Bar newsletter.  Thus, in general I think we can learn very little from veil piercing’s relative presence in opinions, or relative absence in the Bar literature.

An exception is Delaware, which has a robust docketing system, a court practice of writing opinions in almost every case, and thorough Westlaw coverage of both the Chancery’s and Supreme Court’s outputs.  Now I’m not the most attentive reader of that stream of data, but my sense is that corporate litigation in Delaware is heavily biased toward fiduciary & M&A claims, while veil piercing almost never comes up.  Here again we have to be careful about generalizing: Delaware, being notoriously hostile to veil piercing allegations, probably isn’t the place we’d want to go to know how most state courts act.  But if Delaware & Nevada host the majority of corporations in this country which will generate corporate litigation (arguably, they do), and if both jurisdictions are veil friendly, I don’t see how it’s possible to conclude that veil piercing litigation is all that common.  Or to put it another way: we have no idea what the most common litigated corporate law issue is, but it probably is not veil piercing.

Veil piercing cases are, however, highly colorful, which may explain the doctrine’s continuing attraction for scholars.


[Update: Steve Bainbridge writes about this post “A better question might be “who gives a sh*t?”.  Nice.  Very nice. I suppose I care, mildly, because it might be that attention better spent on other issues in corporate law, like someone’s … nontraditional … theories of director primacy, has instead been diverted to veil piercing on the theory that piercing is more practically important than it is.  And because if if you search the web, you’ll find dozens of companies puffing this exact claim to sell you their incorporation products and advice.  Or it might be that the question is worth asking simply for love of the game.]

* DLL happens to be on Bob’s corporate law articles of 2011 list.  In case you were wondering if I am trying to bias the electoral pool by blogging about the article, shame on you. I would never stoop so low.


Does the Secured Transactions Course Make Sense?

I’ve never taught Secured Transactions, so I’ll start by saying that the following is purely speculative and subject to correction.

We had a job candidate come through at some point this Fall who generally is interested in the field of commercial law.  That person mentioned in passing that although they were more than willing to teach the traditional secured transactions course, in their opinion it wasn’t well structured.  Why? Not, as the navel-gazer might imagine, because the field of commercial law is supposedly intellectually dead.  Rather because the traditional secured transaction course is too narrowly conceived — it usually is limited in coverage to personal property security interests under Article 9.  But many security interests that matter to lawyers aren’t held on movable property.  Since secured is ordinarily the foundational course for the commercial curriculum, students are left starting on too narrow a footing in understanding bankruptcy and bank regulation.  It’s even worse than having a corporations course that excludes LLCs.  Because of its technicality, ST is traditionally so difficult to teach that many students are turned off to the idea of commercial law practice at all.

Again, I don’t know much about this area of law.  I never took ST in law school, I haven’t taught it, and (worse) I haven’t even read a ST syllabus at my current institution.  But it struck me as an interesting thought, at least worth airing.  It’s related to concerns I have about the general corporate curriculum — is “corporations” really a subject that ought to be taught in a single course, or is it really a merger of too many (or too few) legal principles that have glommed together over time.  It’s also related to concerns that one might have about continuing to use the increasingly outdated, purportedly uniform, UCC to teach when States’ adopted versions are moving ever-further-away from that ideal.


Buffett and B of A

In today’s Financial Times, Dan McCrum cites one of my books and quotes me when portraying Warren Buffett as the investor of last resort in the US.  Inspired by Buffett’s investment in preferred stock and warrants of Bank of America (in which I have owned stock for 20 years, through predecessors), it is interesting to think of Buffett as rescuer of troubled American financial institutions: from Salomon Brothers in the late 1980s through Goldman Sachs in the 2008 crisis and B of A today. 

But please note that it is not altruism or patriotism that induces the rescues.  Instead, Buffett’s value investing philosophy leads him to show up when the chips are down.  Value investing means to commit private capital only when the price you may is substantially below the value you get.  “Be greedy when others are fearful and fearful when others are greedy,” Buffett has written.

In the depths of the 2008 crisis, Buffett shrewdly negotiated great investment deals at Goldman Sachs, with a 10% dividend rate, and at General Electric. He made a calculation that what he paid was way less than what he got. (And he was correct.)

Buffett, a friend of mine for 15 years whom I admire greatly,  also turned down other opportunities presented to him during the crisis, including at AIG. He found the price insufficiently below the value.

He also proposed an investment opportunity in 1997 in Long Term Capital Management, giving the firm an hour to accept, but they balked. He offered a steep discount, which he insisted on and they could not accept.

The Bank of America position today is likewise a shrewd value proposition: preferred stock with a hefty 6% dividend, along with warrants (options) to buy common shares at the bargain basement price of $7.14.  Notably, that price was above the trading price when the deal was inked but, foreseeably, the market shot up on news of Buffett’s investment and is now in the money—an instant profit.

So Berkshire is certainly a fortress (a kind of Fort Knox in American folklore) and Buffett, a patriot and altruist, is as beloved as Will Rogers for all his folksy home-spun wisdom and “tax me and other billionaires” populism. But Buffett is an investor first and foremost and you see him stepping up in these big ways in times of stress because that’s where value investing takes him.

Photo Credit: Cardozo Law School (Buffett guest teaching my class in 1998).


Treasury’s AIG Gag Order

Top business executives in the United States regularly contact Members of Congress to lobby on legislation and other matters of public policy. But since the September 2008 government takeover of AIG, executives of that company have been forbidden to do so, unless they first get the Treasury Department’s permission, and the Treasury Department refuses to grant it.

Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.

This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for their takeover actions, the successive Treasury Secretaries tried to keep from the public how the government funds injected into AIG did not support it or its shareholders or employees but were funneled as a backdoor bailout of Goldman Sachs and other Wall Street firms.

It is thus par for the course—but equally outrageous—that we now learn that when Paulson and Geithner imposed this straightjacket on AIG, they also made the company (a) adopt a policy suspending all lobbying and then (b) sign a loan agreement prohibiting it from changing that policy without Treasury’s consent—which apparently may be withheld for any reason or no reason. Read More


Call for Papers: Dodd-Frank

Call for Papers:

Financial Institutions and Consumer Financial Services Section

AALS Annual Meeting – January 2012

Rubber Hits Road: Implementing Dodd-Frank amid Reform Fatigue

This program will take place one and a half years after the Dodd-Frank Act was signed into law. The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture. Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress.

What lessons can we draw from the implementation of Dodd-Frank so far? What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative? What devils have lain hidden in the details of the Federal Register? What aspects of reform have been largely forgotten? What does the path of financial reform say about legislative and regulatory process? What lessons can be drawn from the reform efforts in Europe and elsewhere? Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks?

More ominously, is the crisis truly over? Are we at grave risk of fighting the last war? Has reform missed the mark altogether? This meeting is part of a project to engage the legal academy in sustained theoretical and policy contributions to financial regulation. It also presents an opportunity to look at specific rulemakings in detail, as well as to address larger questions about the course of reform after laws are made.

Call for papers:

Law teachers and other scholars are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Junior faculty members are particularly encouraged to submit manuscripts or abstracts. A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to present their work at the program session in Washington, D.C. in January 2012.

Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Please send manuscripts or abstracts to the Program Chair (Erik Gerding, University of Colorado) at no later than August 30, 2010. Please place the name and contact information of authors only on the cover page of submissions.

Please forward this Call for Papers to anyone who might be interested.

Deceptive by Design: Derivatives as Secret Liens

Secretive practices and institutions are common in contemporary finance. For those who’ve ceased the search for long-term value creation, temporary information advantage is key. Even commonplace practices can be reinterpreted as havens of hiddenness. My colleague Michael Simkovic’s article “Secret Liens and the Financial Crisis of 2008” exposes the role of derivatives and securitization as secretive borrowing strategies, designed to keep the naive or trusting from discovering the fragility of the institutions they loan funds to. His work has been presented to the World Bank Task Force on the Bankruptcy Treatment of Financial Contracts, and is relevant to both private and sovereign debt risks.

Simkovic argues that 80 years of erosion of classic commercial law doctrine ensured that “complex and opaque financial products received the highest priority in bankruptcy.” Products like swaps and over-the-counter derivatives were not adequately disclosed (either by banks in their consolidated financial statements or by their counterparties in publicly accessible transaction registries). By concealing those debts, these already overleveraged financial institutions were able to attract ever more credit and investment, at better rates than those who reported their overall financial health more accurately. (All other things being equal, it’s safer to lend to an entity that owes 10 billion rather than 100 billion dollars.) The genius of Simkovic’s article is to show how “fundamental causes of the financial crisis are relatively old and simple,” even as an alphabet soup of instrument acronyms (CDO, CDS, MBS, ad nauseam) and government programs (TARP, TALF, PPIP, et al.) makes our time seem unique.
Read More


Transactional Lawyering at the Movies

I’m looking for some good examples of movie clips from recent films in which the presence (or absence) of transactional lawyering is key to the action.  The best example I’ve got so far is from the Social Network.  Recognizing that showing clips of business lawyering isn’t for everyone, I’d still appreciate your tips.  Negotiation scenes, drafting discussions, closings — anything that would motivate student excitement about transactional practice.

Invisible Hand or Hidden Fist?

In his press conference last week, Ben Bernanke concluded on an upbeat note. He had high hopes for a US recovery, since he believed that the Great Financial Crisis (GFC) of 2008 hadn’t taken from the US any of its basic productive capacity.

Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:

During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. . . . The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. . . . The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, [etc]), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

Read More


Targeting Odious Top Pay Contracts

Cross-posted at Harvard Law School’s Corporate Governance blog, this summarizes in some detail my new paper on applying simple contract principles to police odioius executive pay contracts:

Executive pay has skyrocketed in recent decades, in absolute terms and compared to average wages. The area of largest growth has been in stock-based components, including stock options, often tending to focus on the short-term, with associated risks we’ve seen. A vigorous academic debate has run for more than a decade, becoming a popular political discussion amid the financial crisis exposing arcane debate to public scrutiny.

Growth could be laudable, explained as creating proper incentives to align manager interests with shareholder interests and to promote optimal risk taking. In this view, if there is a problem, it is narrow and limited. Critics are skeptical whether this story holds up. They worry that managerial power has strengthened to enable top executives to control setting their own compensation. In this view, the problem is pervasive and warrants a comprehensive response—and proposals abound.

I come down in the middle. There are problems in at least an important number of cases, and current proposals to redress them are unlikely to work. So I seek a new approach—contract unconscionability—to police extreme cases. The proposal must surmount some hurdles but isn’t as radical as it sounds.

A good way to summarize the debate highlights a three-pronged theory that promotes much of prevailing executive compensation, especially stock-based components, and contrasts it with limits on each prong.

First: in optimal contracting theory, boards design manager contracts to minimize agency costs. But when managers dominate the process, the managerial power thesis suggests this ideal may not be met.

Second: with efficient stock markets, stock price is a good proxy for the shareholder interest and a mirror of managerial performance. But stock price can differ from business value for sustained periods, fogging both.

Third: stock-based pay could align managerial incentives with shareholder interests if designed right and markets work well. But otherwise they create perverse effects. Read More


Law & Econ’s Influence on Law & Accounting

The hottest book of the century, on corporate law, is in production, thanks to editors Brett McDonnell and Claire Hill, both of Minnesota. As part of a series investigating the economics of particular legal subjects, overseen by Richard Posner and Francesco Perisi, this Research Handbook on the Economics of Corporate Law, promises a comprehensive canvass of the broadest definition of this field of law as it has been structured by economic theories over the past forty years.

My contribution addresses the influence of law and economics on the sub-field of law and accounting, which I suggest takes the form of “two steps forward one step back.”  You can read a draft of my chapter (comments welcome!), available free here, accompanied by the following abstract:

Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That’s the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.

Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable.  Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That’s vital since the effects of law and economics on law and accounting remain debated in many contexts.

Other contributions to the book similarly available in draft form are by Matt Bodie (St. Louis), David Walker (BU) and Charles Whitehead (Cornell).  The following scholars are also contributing chapters: Bobby Ahdieh (Emory), Steve Bainbridge (UCLA), Margaret Blair (Vandy), Rob Daines (Stanford), Steve Davidoff (Ohio State), Jill Fisch (Penn), Tamar Frankel (BU), Ron Gilson (Stanford/Columbia), Jeff Gordon (Columbia), Sean Griffith (Fordham), Don Langevoort (GT), Ian Lee (Toronto), Richard Painter (Minnesota), Frank Partnoy (SD), Gordon Smith (BYU), Randall Thomas (Vandy), and Bob Thompson (GT).