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

Shareholder Activists Undermine National Security

At least that’s what Martin Litpon thinks:

At its core, the board-centric model of governance is premised on the notion that boards merit the vote of confidence of shareholders and the public markets, and notwithstanding the strong current of distrust that runs through many corporate-governance reforms, history has proven this vote of confidence to be well deserved. I believe it is the only way to assure that public corporations will be able to compete with the state corporatism that is transforming the economies of China, Russia and other rapidly industrializing countries, cope with the demands for short-term (and short-sighted) stock gains by activist hedge funds and make the longterm investments in the future of their businesses that are essential for future prosperity of our nation.

Help: Second Edition of Mergers & Acquisitions Needs Your Input

I am hard at work on the second edition of my Mergers and Acquisitions treatise. In hopes of boosting sales (I’m a capitalist, after all), the decision has been made to radically rework the book to eliminate most of the economic analysis, especially the analysis that is idiosyncatic to yours truly. If you’ve read or used the book, I would very much welcome suggestions, corrections, criticism, and even brickbats.

Help: Second Edition of Corporation Law & Econ Needs Your Input

I am hard at work on the second edition of my Corporation Law and Economics text. For various reasons (well, actually to boost sales) the decision has been made to radically rework the book to eliminate most of the economic analysis, especially the analysis that is idiosyncatic to yours truly. If you’ve read or used the book, I would very much welcome suggestions, corrections, criticism, and even brickbats. 

Theophobia

Rick Hills calls it the “irrational fear of, or intense discomfort around, theist and, in particular, Christian, beliefs.”

How widespread is theophobia among academics? I cannot say for sure—I’ve only casual anecdotes to guide me—but I suspect that, whatever its prevalence, it is on the decline. Atheism’s fatal error was to go middlebrow. When the books of Dawkins and Hitchens became bestsellers, their ideas lost several points in the academics’ stockmarket. Intellectual pride is the academic’s signature sin (oops – I mean failing), and few academics want to be associated with an ideology tied to the vulgar laity. Moreover, I think that there is a powerful case that God, whether He exists or not, has historically had the better writers on His side: Who would you rather read, after all – Dawkins, Hitchens, Bradlaugh, Paine, d’Holbach and other (semi-)atheist writers, or Pascal, Kierkegaard, Locke, Unamuno, Donne, Dante, Milton, and Flannery O’Connor?

Of course, I might be wrong about the prevalence of theophobia among academics: I’ve only my very anecdotal experience to go by. (If anyone out there can confirm or disconfirm my sketchy suspicions, I’d be grateful). But even if theophobia is on the wane, it is still worthwhile to hasten its demise. After all, change is difficult, and you have to want to change.

Meinhard v Salmon

In a comment to a post over at CO, Jeff Lipshaw writes:

I’ve always thought Judge Andrews dissent in Meinhard v. Salmon was far more sensible (and in accord with common understandings) than Cardozo’s overwrought opinion.

He’s got a point. On the narrow legal issue of the duties of one joint venturer to another as the joint venture comes to an end, Andrews probably had the better analysis. Yet, as both a precedent for general partnerships and a teaching tool, Cardozo’s opinion is wonderful.

First, as background, you really need to read Geoffrey Miller’s wonderful essay on the case, which “offers a legal history of the northwest corner of 42nd Street and Fifth Avenue, the plot of land that, among other things, was the source of dispute in Meinhard v. Salmon, one of the leading business law cases in American history. Using the Meinhard case as a lens, the paper explores New York’s changing ethnic, social, and economic environment - the rise and fall of industries, the booms and busts of business conditions, the dispersal and commercialization of landed estates, the influence of immigrants, the role of yachting, horse racing, art collecting and charitable work in establishing social standing, and the importance of family and heritage in the development of New York City during the late Nineteenth and early Twentieth Centuries.” It’s a wonderful work of legal history and a brilliant exegesis of the case.

In my book, Agency, Partnership & Liabilitiy Companies, I wrote that:

If partners can withhold new information—such as the discovery of a new business opportunity—from each other, then each has an incentive to drive the other out so as to take full advantage of the information. As each incurs costs to exclude the other, or to take precautions against being excluded, the value of the firm declines. Accordingly, a legal rule vesting the firm with a property right to the information and requiring disclosure is more efficient than forcing the partners to draft disclosure agreements and monitor one another’s behavior. Note that this rule does not discourage the production of new information; the partners still have incentives to produce information because they share in its value to the firm. As no one will withhold information, however, the firm’s productivity is maximized.  As a result, we can confidently predict that the partners would agree ex ante to bar any one partner from taking an organizational opportunity for his personal gain.

While some such prohibition thus emerges from our hypothetical bargain as a majoritarian default, the form such a prohibition ought to take is less obvious. Does it matter if one partner is actively managing the business (as was Salmon) while the other is passive (as was Meinhard)? Should all outside business ventures be proscribed or only some? If the latter, how do we decide which are proscribed? Should we adopt a bright line rule or a flexible standard? What should be the remedy?

In a justly famous passage, Judge Cardozo adopted a wonderfully vague standard to govern these problems:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.

In applying this standard, Cardozo focused closely on the specific circumstances of the case. As such, he converted the vague default rule into one specifically tailored for the parties at bar. Hence, for example, Cardozo emphasized that Salmon was “in control with exclusive powers of direction....” Salmon “was much more than a coadventurer. He was a managing coadventurer.” Cardozo further acknowledged that:

A different question would be here if there were lacking any nexus of relation between the business conducted by the manager and the opportunity brought to him as an incident of management.... For this problem, as for most, there are distinctions of degree. If Salmon had received from Gerry a proposition to lease a building at a location far removed, he might have held for himself the privilege thus acquired, or so we shall assume. Here the subject matter of the new lease was an extension and enlargement of the subject matter of the old one. A managing coadventurer appropriating the benefit of such a lease without warning to his partner might fairly expect to be reproached with conduct that was underhand, or lacking, to say the least, in reasonable candor, if the partner were to surprise him in the act of signing the new instrument. Conduct subject to that reproach does not receive from equity a healing benediction.

One of the difficult questions about this case is how seriously we ought to take Cardozo’s high-flying language. Much of the opinion is devoted to lofty statements of a partner’s duties. One in particular springs to mind: “the thought of self was to be renounced.” What does that mean? Taken literally, this suggests that Salmon had a duty to let Meinhard share in the new opportunity. Indeed, this notion of renouncing self easily can be taken to rather silly extremes. Note the problem: Each of the partners must renounce thought of self. So Salmon says to Meinhard, “You first,” and Meinhard replies, “No, no, after you,” and so forth.

Cardozo’s rhetoric had two useful functions. First, the moralistic tone seems intended to invoke shame as a social sanction. Second, when the law is set out as a bright-line rule, people know exactly what they can get away with. This inevitably tempts them to go right up to the line. The strong judicial rhetoric found in these opinions serves to obscure the actual parameters of the law, depriving market actors of the guidance that a bright line rule would offer. By fudging the line, and by imposing severe consequences on those who skate across it, courts have sought to deter cheating. Having said all that, however, it remain true that Cardozo’s deliberate ambiguities strongly suggest the need for ex ante planning and resolution through contract.

Assuming we have a partnership opportunity at hand, what should Salmon have done? Despite Cardozo’s rhetorical flourishes, the emphasis seems to be on the duty to give notice. He emphasized, for example, that “only through disclosure could opportunity be equalized.” On the other hand, even here he is quite vague. Cardozo is careful not to foreclose an obligation to do more than simply provide notice: “we need not say” whether liability would still ensure if Salmon had given notice and, moreover, Salmon had a duty, “if nothing more,” to disclose the opportunity.

The idea that a partner could abscond with a new business opportunity simply by making disclosure seems inconsistent with notions of trust that are essential to a partnership. It would lead to lots of wasteful precautions. Requiring something more than disclosure—i.e., consent—is consistent with the closely related corporate opportunity doctrine. Under the prevailing view, mere disclosure of a corporate opportunity is not enough. Consent by the board of directors is required. The comments to UPA (1997) § 404(b) indicate that that statute requires consent by the other partners to the taking of a partnership opportunity rather than mere disclosure by the taking partner.

There’s a ton of great teaching questions in that passage: Might there be a method to Cardozo’s rhetorical madness? What would the majoritarian default be in these cases? Then tweak the nature of the case. Should disclosure be enough? What is the appropriate remedy?

So I love teaching Cardozo’s opinion. It’s one of the best teaching tools in my case book. 

There Still is Nothing New Under the CSR Sun

Dave Hoffman thinks he’s found something new in the corporate social responsibility debate:

Recently, I’ve read several articles and book chapters asserting that corporate law places undue emphasis on Dodge v. Ford. Dodge is traditionally understood to hold that corporations have a exclusive duty to maximize shareholder welfare. The basic argument runs as follows. Courts (Delaware and others) often defer to management’s decisions despite weak claims of shareholder benefit, and permit the consideration of other constituencies. This is true in part because shareholder welfare is a malleable concept, and there are almost no short term considered decisions a Board can make that can’t be justified in the long-term. And, of course, courts are institutionally ill-placed to second guess this kind of nuanced long-term calculus. To the extent that Dodge is the antipode of how courts ordinarily treat claims of waste, the Dodge rule either shouldn’t be taught to students or should be highlighted as, at best, a piece of exceptional dicta.

I am pretty sure I disagree with this critique of teaching Dodge. ...

The question now being batted around in the law reviews thus seems to me like the old CSR problem re-dressed in a debate about what the doctrine looks like. Should we teach Dodge? Certainly, because it provides one view of how courts think about directors’ duties. Not teaching Dodge would expose students to only one side of the contest going on every day in boardrooms and partners’ suites.

And Bainbridge thought that there was nothing new under the CSR-sun.

Um, Dave, if it’s “the old CSR problem re-dressed,” it ain’t new. Or perhaps you’re being ironic?

Anyway, debates over Dodge’s meaning and importance aren’t exactly new. In 1998, for example, Gordon Smith wrote a seminal article arguing the case was really about how tp “resolve disputes among majority and minority shareholders.” In 1999, Margaret Blair and Lynn Stout (85 Va. L. Rev. 247) likewise argued that Dodge is merely a close corporation shareholder dispute case. If Dave and I are thinking about the same articles, they’re mostly just recycling a lot of those arguments.

Is Economics Dominated by Chicago?

Josh Wright thinks that “the evidence that the economics profession exhibits a pro-market bias is suspect.” My own take is that economic analysis’ association with the right in the mind of legal academics, at least, derives from two sources: (1) many of law and economics most prominent practitioners are to be found on the political right (Posner, Easterbrook, me ); and (2) some the philosophical underpinnings of economic analysis resemble principles of classical liberalism that the left has long since disavowed, most notably a belief in the efficiency and justice of organizing society on the basis of voluntary market transactions, rather than by state fiat.

Update: Via email, Josh writes:

I think there is an important distinction to be made between pro-market bias in law and economics and the issue of such a bias in economics as a stand-alone discipline.  For the reasons you state, and a few others (e.g. in my own area of antitrust the Roberts Court has consistently favored Chicago School positions and ignored more “modern” and formal economics literature), I think it is quite clear that law and economics & courts are perceived to lean right.

It is no longer clear, at least to me, that economics itself leans right --- which was my point in the post.  It certainly does not in antitrust economics and IO.  Whether and how this shift will ultimately impact the L&E movement is yet to be seen.  I hope not. But as a former Klein, Demsetz and Alchian student, I am a bit biased about what I perceive to useful economics.

Gender Differences in Competitive Environments

Here’s a provocative abstract of a new paper by Daniele Paserman of the Boston University - Department of Economics:

This paper uses data from nine tennis Grand Slam tournaments played between 2005 and 2007 to assess whether men and women respond differently to competitive pressure in a setting with large monetary rewards. In particular, it asks whether the quality of the game deteriorates as the stakes become higher. The paper conducts two parallel analyses, one based on aggregate set-level data, and one based on detailed point-by-point data, which is available for a selected subsample of matches in four of the nine tournaments under examination.

The set-level analysis indicates that both men and women perform less well in the final and decisive set of the match. This result is robust to controls for the length of the match and to the inclusion of match and player-specific fixed effects. The drop in performance of women in the decisive set is slightly larger than that of men, but the difference is not statistically significant at conventional levels. On the other hand, the detailed point-by-point analysis reveals that, relative to men, women are substantially more likely to make unforced errors at crucial junctures of the match. Data on serve speed, on first serve percentages and on rally length suggest that women play a more conservative and less aggressive strategy as points become more important. I present a simple game-theoretic model that shows that a less aggressive strategy may be a player‘s best response to an increase in the intrinsic probability of making unforced errors.

Does this help explain the dearth of female CEOs?