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corporate governance

Six months ago the Delaware Supreme Court upheld the right of an enterprise to include a loser-pays provision in its bylaws, specifying that losing shareholder-litigants would have to contribute reasonable legal fees to compensate what would otherwise be loss to other owners. Since then there’s been a concerted campaign to overturn the ruling, either in the Delaware legislature or if necessary elsewhere. But as I argue in a new Cato post, allowing scope for freedom of contract of this sort is one of the best and most promising ways to avert an ever-rising toll of litigation. Contractually specified alternatives to courtroom wrangling have played a vital role, and are under attack for that very reason, in curbing litigation areas like workplace and consumer arbitration, shrinkwrap and click-through disclaimers of liability, and risk disclaimers at ballparks and elsewhere. (& Stephen Bainbridge).

To the extent America has made progress in recent years in rolling back the extreme litigiousness of earlier years, one main reason has been the courts’ increased willingness to respect the libertarian and classical liberal principle of freedom of contract. Most legal disputes arise between parties with prior dealings, and if they have been left free in those dealings to specify who bears the risks when things go wrong, the result will often be to cut off the need for expensive and open-ended litigation afterward.

More on the Delaware bylaw controversy: D & O Diary (scroll), Andrew Trask on state of the merger class action, WSJ Law Blog first and second, Daniel Fisher, and ABA Journal in June, Alison Frankel/Reuters (forum selection bylaws).

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Steve Bainbridge has a wish list for reforms to financial and securities law in the new Congress, especially the damaging Dodd-Frank and Sarbanes-Oxley laws. Included: repeal of conflicts minerals disclosure, “say on pay,” and pay ratio disclosure; more leeway for public companies to opt out of various regulatory obligations to shareholders that their own shareholders have not contractually seen fit to impose; and litigation reform.

Meanwhile, my Cato colleague Mark Calabria points out that there “are numerous protectors of the status quo in both major political parties,” which may frustrate the relatively free-market instincts of the responsible committee chairs, Sen. Richard Shelby and Rep. Jeb Hensarling. “But at least financial regulation is unlikely to get any worse.”

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CALPERS, the giant California public-sector pension fund, is among the nation’s leading scolds of corporate governance. So as Ira Stoll points out, it’s kind of newsworthy that its CEO over most of the 2000s just pled guilty to taking $200,000 in bribes from a contractor, the money handed over in paper bags and a shoebox. [New York Sun]

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Commenter Eric Rasmusen at Prof. Bainbridge, via Maitland, quotes Sir Frederick Pollock, Principles of Contract, originally published in 1876:

…the Roman invention, adopted and largely developed in modern systems of law, of constituting the official character of the holders for the time being of the same office, or the common interest of the persons who for the time being are adventurers in the same undertaking, into an artificial person or ideal subject of legal capacities and duties.

To put it differently, the law’s handling of enterprises as people was old news in Roman times. More on the misguided attack on rights-bearing by business organizations: Josiah Neeley, Matt Yglesias (“5 mistakes liberals make about corporate personhood and Hobby Lobby”).

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“Delaware’s Supreme Court has ruled that corporations can adopt bylaws requiring an investor who sues and loses to pay the company’s legal costs, potentially upending the economics of a booming type of shareholder litigation.” [Tom Hals, Reuters via Federalist Society Blog]

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The Cato Institute has submitted an amicus brief in the Hobby Lobby and Conestoga cases, which test the extent to which the Religious Freedom Restoration Act (RFRA) and the First Amendment restrain the federal government from requiring employers to participate in employee benefit arrangements that violate the conscience of the individuals who own and run the company. More on the other amicus briefs from Rick Garnett at PrawfsBlawg and commenters. Prof. Bainbridge takes issue with a brief signed by a group of law professors on whether a corporate enterprise can be treated as an alter ego for its owners for purposes of imputing to it their rights (“reverse veil piercing”), and has some further thoughts on the legal principle — sometimes ideologically contested, but seldom in a consistent way — of corporate personhood. Related earlier here.

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  • Still money left in that piggy bank: Justice Department shakes $1.7 billion out of J.P. Morgan because its custody wing kept handling a primary Bernie Madoff account while a distant equity desk grew suspicious of him, in what “looks a bit like a tax on bigness and integration” [Matt Levine, Bloomberg; NPR].
  • Legacy of TARP one of cronyism and lawlessness [Mark Calabria, USA Today]
  • NYT assails a couple of academics as mouthpieces for Wall Street, Felix Salmon has a bit to say about that [Reuters, EconBrowser, Bainbridge, Pirrong] Daniel Fisher on a possible tie-in with Times reporter David Kocieniewski’s earlier piece flaying Goldman Sachs over aluminum warehousing [Forbes]
  • “Court Receptive to Overturning SEC’s Conflict Minerals Disclosure Rule” [Fed Soc Blog]
  • “Target Breach — Are Dodd-Frank ‘Swipe Fee’ Price Controls to Blame?” [John Berlau, CEI "Open Market"] “Volcker Rule Overshoots Wall Street to Hit Utah” [same]
  • “CFPB and Disparate Impact” [Hester Peirce, Point of Law]
  • “It might cost you $39K to crowdfund $100K under the SEC’s new rules” [Sherwood Neiss, VentureBeat via @jerrybrito]
  • Here’s a novel proposal for corporate governance: use the rules agreed upon by the original parties to the transaction [Hodak]

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Gender governance quotas [Darren Rosenblum, Prawfs]

On a practical level, corporate and organizational “personhood” has worked coherently for more than a century. Will this? [Reuters, Science; earlier on corporate personhood ("established and relatively uncontroversial," and progressive in its legal implications)] A Twitter reaction: “If they get the right to air political ads they can only improve the discourse.” [@jacobgrier]

More seriously, Prof. Bainbridge provided an answer to the question both on Twitter (“We treat corporations as people because it is a useful fiction. Animals as persons is not useful.”) and then in a longer blog post, which concludes:

The problem, I believe, is that attempts to define the debate in moral or philosophical terms ignores the basic fact that the rationale for corporate personhood sounds in neither. Instead, it is based on practicality and utility. Put another way, we treat the corporation as a legal person because doing so has proven to be a highly efficient way for real people to organize their business activities and to vindicate their rights. Put yet another way, we treat the corporation as a legal person because it is a nexus of contracts between real persons. Which is something no animal can ever be.

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Marc Hodak: “The golden parachute became popular after passage of the Williams Act [of 1968, which insulated managements against "hostile" takeover offers] because the Act effectively gave CEOs a veto over the acquisition of their firm. … Note that this ‘rent extraction,’ as it’s termed by economists, was not the result of managerial power granted by a lazy or corrupt board to a greedy CEO. This was managerial power created by law.”

Law professor Kaimipono David Wenger, who’s ordinarily found on the opposite side of issues from us, explains why “Corporations aren’t people!” is a vacant slogan and when rightly understood not even a progressive one. [Concurring Opinions]

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