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

The Shifting Balance of Power between Shareholders and the Board

I commend to your attention Jennifer Hill’s new article, The Shifting Balance of Power between Shareholders and the Board: News Corp’s Exodus to Delaware and Other Antipodean Tales, which contrasts the policy arguments of shareholder primacists (like Lucian Benchuk) to those of director primacists (like yours truly). I particularly direct your attention to her discussion of “the events at Boral” Ltd., which she says “reflect Bainbridge‟s concern that the conferral of greater shareholder participatory rights could empower classes of shareholders who might misuse those powers and Justice Strine‟s argument that, in certain circumstances, even investors themselves might not favor strong shareholder rights.”

A Fun New Efficient Capital Markets Anomaly

Dealbreaker:

The markets have been off to a rocky start this year but maybe the bulls can breath a sigh of relief now that the Sports Illustrated Swimsuit issue is on the newsstands with Marisa Miller on the cover. The folks over at Bespoke Investment have run the numbers and created a Sports Illustrated Swimsuit Issue Indicator. As it turns out, having an American on the cover is a bullish indicator.

“Over the last 30 years, an American has appeared on the cover of the annual Sports Illustrated Swimsuit Issue in 15 different years,” the Bespoken write. “The average performance of the S&P 500 during those 15 years is a gain of 13.9% with 13 positive years (87%). Of the fifteen years where no American appeared on the cover, the S&P 500 has averaged a gain of only 7.2% with 11 positive years (73%).”

Not that I condone it, of course.

Hostile Takeovers by the Numbers

Dealbook reports:

Since 1998, there have been 44 bids valued at more than $10 billion that were initially considered hostile by the board of the target company. Of those, 18 bids, or 41 percent, led to a completed transaction. But 20 of them, or 45 percent, were withdrawn without a deal. ...

At first glance, those figures might not bode well for Microsoft’s $44.6 billion Yahoo bid. But the results skew the other way when you focus on the biggest of the big hostile bids.

Among the top 10 hostile bids in the last decade, 6 have led to completed deals, 2 were withdrawn and 2 are still pending. One of the withdrawn bids was Elf Aquitaine’s failed attempt to mount a “Pac-Man” defense by offering to buy its hostile suitor, the oil conglomerate TotalFina, whose bid succeeded.

It would be interesting to know why the deals that failed did so. Did the target have a posion pill (or poison pill/classified board combo?)? Was there an effective state anti-takeover law in the way? Antitrust obstacles? Financial problems?

Nicole Gelinas on Criminalizing Capitalism

From the latest City Journal comes an article arguing that “Six years after Enron, executives face greater risks—but investors are no safer.”

… in the end, Sarbanes-Oxley has just made it easier for ambitious government attorneys to criminalize bad business judgment and complex accounting in hindsight. Further, in their focus on strengthening legal enforcement, the feds have passed up opportunities to create commonsense protections for investors. Worse still, the government has instilled investors with false confidence by implying that they can rely on prosecutors, not prudence, to protect their market holdings. Now the housing and mortgage meltdown—which could hurt the economy far more than Enron did—is reminding investors that no law or regulation can protect them from economic disruption.

Congratulations to John Coates

Kudos to John Coates, who has been named the John F. Cogan, Jr. Professor of Law and Economics at HLS. His inaugural lecture can be viewed here.

Too many law reviews? With thoughts on the interdisciplinary demographic trend

From the Law Blog:

The institution of law reviews has always been a great source of puzzlement to the Law Blog. As a 2L, the sunny afternoons we labored away blue-booking articles were — we’re pretty certain — among the most ill-spent hours of our law-school career. And yet we can’t deny the symbolic importance of law-review membership. Just look at the on-campus interview guide of any non-tier-one law school. Many employers are clear: No law review? No thanks.

So opening up our February issue of The National Jurist we were relieved to discover that these questions plague others, too. The article, entitled “100 Best Law Reviews,” focuses mostly on two methods of ranking reviews. Robert Jarvis, a professor at Nova Southeastern University Law Center, does his ranking based on prominence of the authors. John Doyle, a librarian at Washington & Lee University School of Law, uses number of citations in other articles and judicial opinions as the main metric of importance. Not surprisingly, both methods get you to the same result: the law reviews at Columbia, Harvard and Yale rule the law review roost.

But here’s the commentary that caught our eye: Jarvis said that most law reviews are so desperate that he could publish his grocery list. “The writing in law reviews is atrocious. The question is: Why does this institution continue even if it’s a product no one wants and no one needs?”

Well, why does it continue? Jarvis explains: “Many schools won’t have just one. They have five or six. That’s because they’re relatively cheap to operate and some people believe working on any law review will enhance a student’s job prospects. These days, you look with great suspicion on a student without a journal on their resume.”

Law Blog loyals, two questions for you. First, does law review experience actually make better law students and lawyers, or does membership merely mean that you got good grades as a 1L? Second, do you agree with Professor Jarvis that the importance of law review in the job search process is leading to shoddy scholarship and academic waste?

UCLA has an appalling impressive total of 12 student-edited journals. Indeed, I’m told there are so many law journals that some are having trouble filling their ranks, especially the 7 “identity” journals.

Scott Dodson opines:

I think journal experience is beneficial.  Journal members learn at least two skills: how to Bluebook and how to edit.  Granted, journal Bluebooking is different than brief Bluebooking, and scholarly editing is different than brief editing, but there are also similarities, and I think those similarities end up enhancing lawyerly skills.  Obviously, the level of benefit depends upon the journal, but I think it is a benefit in any case.  I was on two journals at Duke (yes, I was not very bright back then)—Duke Law Journal and Duke Environmental Law & Policy Forum.  I got more out of my experience on Duke Law Journal, but I benefitted from my experience on DELPF, too.  A third skill that many journal members develop is writing, if they have the opportunity to publish a student note or comment.  Not every journal member does that, but those that do usually gain valuable writing experience.  And I have seen some excellent student notes, even from relatively lower-ranked journals.

I do think that the abundance of journals can lead to shoddy scholarship and academic waste in some cases.  But my guess is that most cases of shoddy scholarship and academic waste would have been done anyway and still have found its way into some publication medium even without such an abundance of journals.  And, I think there is real value in most journal writing, even those that have little name recognition.  Practitioners are often relegated to more obscure journals, and although sometimes those articles are less scholarly and more doctrinal (or even patently advocacy pieces), they can still add positive value to the overall discussion.  And, finally, I think that there are some real niches that secondary journals fill even if the supply of articles is low.  The University of Arkansas has three journals, for example.  The Law Review, the Journal of Food Law & Policy, and the Journal of Islamic Law & Culture.  The latter two may struggle to fill volumes, but they are also fairly valuable products in niche markets.

As somebody who served on two law reviews during his law school days, it ill-behooves me to disagree. In my case, writing student notes was valuable training for my later academic career. law review membership also provided a useful credential in the teaching market.

Yet, I wonder whether the plethora of law reviews can survive certain trends in legal education. I’m more or less resigned to the trend towards interdisciplinary scholarship. As long as law schools pay significantly higher than most humanities disciplines, there will be plenty of economists, philosophers, and other social scientists who are attracted to law teaching for pecuniary reasons. Because law faculties tend to replicate themselves, the growing numbers of JD/PhD faculty members will help tilt the hiring process even further towards hiring their ilk (usually from their old boy/girl network). There’s both demand and supply forces trying to turn law schools into quasi-graduate schools. If this trend continues, as I begrudgingly believe it will, there will be growing pressure for faculty to publish academic press monographs and articles for faculty-edited journals.

If I’m right about the demographic trends, the supply of high quality articles targeted to student-edited law review will shrink as the work that would have gone into them goes into books and peer-reviewed articles. If so, the trend towards “shoddy scholarship and academic waste” is likely to accelerate. In particular, the niche journals are likely to be hit hardest.

Lerach Gets 2 Years

From the WSJ Law Blog:

Famed plaintiffs lawyer Bill Lerach received a two-year sentence today for his role in the alleged kickback scheme at Milberg Weiss. Lerach, 61, was also sentenced to two years probation, fined $250,000 and ordered to complete 1,000 hours of community service. “This whole conspiracy corrupted the law firm and it corrupted it in the most evil way,” U.S. District Judge John Walter said during the hearing. Here’s the AP story.

Lerach pleaded guilty last fall to a felony count of conspiring to obstruct justice and to submit false testimony in federal judicial proceedings.

To recap, prosecutors have claimed that Milberg shared legal fees with clients to induce them to quickly file securities class actions. Lerach has acknowledged making secret payments to former client Steven Cooperman. For an overview of the case and its players, click here.

Under the plea bargain, two years was the maximum amount prosecutors could request. Lerach had proposed 6 months jail and 6 months home confinement.

The post continues:

Here’s how a couple prominent folks are summing up the Lerach saga. First, T.J. Rodgers, the founder and chief executive of Cypress Semiconductor: “He’s getting what he deserves,” Mr. Rodgers said from a speaker phone on his floating desk in his outdoor hot tub overlooking his Silicon Valley vineyard. “I once likened Lerach to low life form, somewhat below pond scum. Thank goodness he’s met my highest expectations.”

On the flip side, here’s the take of Ralph Nader: “Given the corporate crimes that Mr. Lerach has brought to justice during his long career, his crimes pale by comparison. His success is partially a reflection of the repeated failure of government enforcement agencies to protect millions of defenseless investors from fraud.”

A floating desk in a hot tub overlooking a vineyeard? If I had any populist blood, it’d be boiling.

Anyway, more here.

Governance and Performance: The Direction of the Causation Arrow

Here is a provocative paper that argues the causation arrow runs in the opposite direction of what one might assume:

A common view, seemingly supported by empirical findings, is that better corporate governance leads to better corporate performance. But, if true, why do firms then leave money on the table by having poor governance? This paper builds a model that explains the empirical findings, but which doesn’t suffer from this money-on-the-table critique. The paper argues that the common view essentially gets causality backward. Firms that have the best potential to perform well are the ones that have the most to lose from poor governance, so they are the ones that have strong governance. Strong governance and performance are positively correlated, but the former does not drive the latter. This perspective can explain a number of real-world phenomena, such as the correlation between firm size and executive compensation, the growth in executive compensation, and why measured incentives for executives often seem too low, among others.

The policy implication seems to be that governance reform isn’t worth the price and that firms with poor governance ought to be allowed to stew in their own juices as they slide slowly into senescence.