Professor Bainbridge...on law, politics, religion, culture & food

New Paper on Creditor Rights in the Verge of Insolvency

I've posted a new paper to SSRN entitled Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency. Here's the abstract:

Where the contract between a corporation and one of its creditors is silent on some question, should the law invoke fiduciary duties or other extra-contractual rights as a gap filler? In general, the law has declined to do so. There is some precedent, however, for the proposition that directors of a corporation owe fiduciary duties to bondholders and other creditors once the firm is in the vicinity of insolvency.

Courts embracing the zone of insolvency doctrine have characterized the duties of directors as running to the corporate entity rather than any individual constituency. This approach is incoherent in practice and unsupportable in theory. Courts should focus on whether the board has an obligation to give sole concern to the interests of a specific constituency of the corporation. The leading argument for imposing a duty on the board running to creditors when the corporation is in the vicinity of insolvency is the claim that shareholders will gamble with the creditor' money.

This Article demonstrates that this argument is unpersuasive. It is director and manager opportunism, rather than strategic behavior by shareholders that is the real concern. Because bondholders and other creditors are better able to protect themselves against that risk than are creditors, there is no justification for imposing such a duty. This article also argues that the zone debate is much ado about very little. The only cases in which the zone of insolvency debate matters are those to which the business judgment rule does not apply, shareholder and creditor interests conflict, and a recovery could go to directly to those who have standing to sue. In those cases, as this Article explains, there is a strong policy argument that creditors should be limited to whatever rights the contract provides or might be inferred from the implied covenant of good faith.

I'll be presenting the paper at a University of Maryland law school conference next week.

Tags: Business Organizations Research Law

Cowen on CSR: Part 2

The other day, Tyler Cowen weighed in on the corporate social responsibility debate by opining that:

[Milton] Friedman has qualified his social responsibility claim for force and fraud, but what about negative externalities more generally (just ponder Tamiflu licensing if you want the appropriate headache)?

I'm not persuaded that the externalities issue gets us very far. Corporate conduct doubtless generates negative externalities. In appropriate cases, such externalities should be constrained through general welfare legislation, tort litigation, and other forms of regulation. It doesn’t follow, however, that corporate law’s fiduciary duties ought to deviate from the principle of shareholder wealth maximization. Instead, the rule ought to be – and is - that corporate directors are obliged to maximize shareholder wealth within the bounds of law.

Cowen on CSR: Part 1

With respect to the corporate social responsibility debate, Tyler Cowen opines:

No simple rule can sum up what is right to do, for a business or otherwise.

To the contrary, I have argued that a simple rule is exactly what we need.

Corporate Social Responsibility

There's a great debate over at Reason between Milton Friedman, Whole Foods CEO John Mackey, and Cypress Semiconductor’s T.J. Rodgers. I will be blogging about various aspects of the debate over the next several days, but let's start with Mackey's statement that:

I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders—for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

Sound good, you say? Unfortunately, Mackey glides right past the really hard question; namely, what does the board and management do when they are faced with a zero sum decision in which there will be winners and losers? In particular, what decision-making norm should the board adopt when faced with a zero sum decision in a final period transaction, such as when responding to a takeover bid? The answer, of course, is to maximize shareholder wealth. Anything else (a) is incoherent and (b) invites directors and managers to use nonshareholder interests as camouflage for decisions in their own self-interest. See my In Defense of the Shareholder Wealth Maximization Norm.

Howard Stern’s Audience Craters: Duty of Loyalty Issue?

The WaPo reports:

Almost from the minute he announced last October that he would leave conventional radio for Sirius Satellite Radio, Stern has been a) railing against alleged censorship by his employer, Infinity Broadcasting, and by the Federal Communications Commission; and b) promoting his move to satellite radio, which is free of FCC restrictions on "indecent" speech.

So it's no surprise that Michael Hughes, the executive who oversees WJFK and other Infinity-owned stations in Washington, wasn't surprised by the cratering of Stern's audience. "His focus has shifted," Hughes said yesterday, "and the listeners have picked up on that." Of Stern's editorial approach, Hughes commented, "I can't begin to understand his motivation."

The real question may be why Infinity has stuck with Stern as he's repeatedly gnawed on the hand that has fed him. The most important reason is that Stern's bash-Infinity/promote-satellite shtick has held up pretty well in the ratings -- until recently. What's more, Infinity has no one waiting in the wings who is likely to produce the same kinds of regular ratings windfalls as the putative King of All Media.

Suppose Infinity decided enough was enough and sued Stern. Would they have a cause of action? Yes. I addressed that issue in an October 2004 post: More Corporate Law in the Headlines: Howard Stern Blasts Radio.

SOX Not so Good

The Wall Street Journal published a special supplement earlier this week on how corporations are doing in the post-Sarbanes-Oxley environment. From front to back, it was completely one-sided. (So to speak.) Larry Ribstein takes it down a notch or two in a very fine post.

Blogging and Tenure

Our friend Larry Ribstein has three insightful posts on the titular subject:

• The Drezner tenure denial
• Blogging, tenure and the incentives of tenure committees
• Blogging and scholarly productivity

One of Larry's points stuck home with special force:

Productivity includes, in my opinion, impact.  Writing for circular files placed in offices all over the country is not very productive.  My blog advertises my articles.  Some might view this as crass self-promotion, but then they misunderstand the role of advertising generally.  I’m not just publicizing my work, but showing how it addresses the interests and needs of my readers.  No abstract can even adequately summarize a work, let alone show the various ways the work intersects with other ideas.

He's captured, I think, a key function of academic blogging. Certainly, I use the blog to flog my articles. Yet, blogging has another impact-related function, which is to provide a vehicle for being a public intellectual, which is a perfectly legitimate aspect of academic life. Being a modestly successful blogger has raised my profile as a PI in a whole host of ways, such as by making it easier for me to get op-eds placed, getting more MSM exposure, a once and (if Hugh ever forgives me for the whole Miers business) perhaps future radio gig, and the like. Hence, I agree fully with Larry's conclusion that

... blogging will emerge as an important part of every academic’s life.

Plus, as hobbies go, it's way more fun than stamp collecting.

Law School Diversity: No Surprises

Paul Caron blogs:

David Horowitz has published a study (Representation of Political Perspectives in Law and Journalism Faculties) (with Joseph Light at the Center for the Student {Ed.: Sic} of Popular Culture) showing that Democrats outnumber Republicans 8:1 on the faculties of 10 elite law schools (and 9 journalism schools).  The study examined the political party registrations of law faculty at these 10 law schools: 

Political Party Registrations of Law School Faculty
School	Democrats	Republicans	D/R Ratio
Columbia	46	2	23:1
Harvard	45	7	7:1
NYU	68	5	14:1
Northwestern	29	7	4:1
Stanford	28	1	28:1
Cal-Berkeley	55	6	9:1
Chicago	56	8	7:1
Penn	27	8	3:1
USC	30	4	8:1
Yale	46	5	9:1
Total	430	53	8:1

No surprises, except for Penn, which I didn't know was so balanced (3:1 seems awfully reasonable for a top law school). Here at UCLA the ratio is about 11:1, which means we're considerably less politically diverse than the average of the schools we like to think of as peers.

Coincidentally, I recieved today an email from a fellow UCLA faculty member asking that I sign a petition to be submitted to the President of the UC System requesting that the next UCLA Chancellor:

...  have " a proven track record of attracting and maintaining a diverse faculty and student body, and who would strive to achieve a university community that reflects the ethnic, racial, sociocultural, and gender richness of this great state."

How about the political and ideological diversity of our great state?