Category: Corporate Law


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.

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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.

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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.


Legal Scholarship and the Nixon Effect

nixon.jpgLegal thinking often seems to be cyclical. Constitutional law scholarship provides (to my ignorant outsiders perspective) a clear example of this. In the 1960s and 1970s the law reviews were filled with articles exalting the role of the courts as guardians of liberty and searching for various jurisprudential philosophers’ stones that would allow the courts to bestow items from the liberal wish list upon the nation e.g. constitutionally mandated rights to welfare payments, etc. The country, however, had the bad manners to proceed along its own political path without reference to the concerns of the legal academy and five GOP presidents to two Democratic presidents later, the federal judiciary is filled with conservatives. Academic panegyrics to judicial modesty and minimalism according sprout like mushrooms. There is, of course, the temptation to see such a cycle in crassly political terms, and perhaps have the bad manners to suggest that left-of-center constitutional law professors are simply modifying their jurisprudential theories in the face of right-of-center election results.

Private law scholarship is also prone to its own intellectual cycles. In the 1970s, Grant Gilmore was confidently predicting the Death of Contract and Farnsworth and his associates were putting the finishing touches on the second Restatement, which confidently set out to deliver us from the horrid formalism of Williston’s work. The gentle establishment liberal sanity of the Legal Process movement seemed to reign supreme, troubled only by the pesky legal economists, whose influence Morton Horton Horwitz assured us peaked in about 1980. Fast forward twenty-five years, and one can read defenses in the Yale Law Journal of formalistic contract interpretation that Williston never imagined of in his headiest pre-Realist dreams. Of course here too, there are crassly political explanations. Flinty-hearted Chicago-school economists are no doubt more attracted to private law subjects like contracts or corporations rather than the intricacies of substantive due process. Furthermore, more than one aspiring conservative legal academic has been advised to go into business law by Federalist Society elders on the grounds that it constitutes a kind of safe preserve for right wingers. Finally, the results at the elections have given ambitious projects for say consumer protection the same surreal feel as articles arguing that the courts should announce a constitutional right to welfare payments. It ain’t going to happen, so why bother?

For all of the fun involved in spinning out political stories to account for the cycles of legal thought, however, there is a simpler academic imperative at work. There is a sense in which young scholars have no choice but to slay their elders. Writing an article saying “amen” to the reigning theoretical consensus is probably not the route to tenure and academic fame. Hence, the discredited ideas of one generation are going to inevitably find their champions in the next generation for the simple reason that no scholar wants to write articles saying “Me too.”

Think of it as the Nixon effect. When he left office the intellectual consensus on Nixon was overwhelmingly negative. Not surprisingly, Nixon’s reputation has risen with time for the simple reason that no one is interested in a new book suggesting that Nixon is a crook, but a book suggesting that Nixon wasn’t so bad after all will get some attention. Not to worry. In the fullness of time, a consensus in favor of a more positive view of Nixon will develop, and some young Turk historian will make his reputation by pointing out that at the end of the day Nixon was a lying, paranoid, un-indicted co-conspirator.