LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Your donation keeps us advertisement free


Central States Law Schools Association 2012 Scholarship Conference

The Central States Law Schools Association 2012 Scholarship Conference will be held October 19 and 20, 2012, at the Cleveland-Marshall College of Law, in Cleveland, Ohio.  I've attended the conference multiple times and highly recommend it for anyone interested in getting helpful feedback on a work-in-progress in a very supportive environment.  Abstracts are due September 22, 2012.  For more information, go here.


Independent Agency Regulatory Analysis Act of 2012: S 3468 (Part 3)

There is another critically important issue raised by the Independent Agency Regulatory Analysis Act that represents a significant and historical shift in the treatment of independent agencies.

The term "independent agency" has multiple definitions.  Sometimes it is used to mean a free standing agency.  Under that definition, the EPA is an independent agency because it is not buried in another department.  The IRS is not an independent agency because it is in the Department of Treasury.  This definition is mostly a matter of geography and says nothing about the powers of the particular agency.

The term also, however, has a constitutional significance.  There are agencies that are "independent" because they are "independent" of the President.  Independence can come from a variety of powers given to an agency that allow them to act without consulting those in the White House (Justice Breyer lists some of them in his dissent in the PCAOB case).

But in truth there is only one attribute that truly matters for purposes of independence and that is the limitation on the President's ability to remove agency heads "for cause."  To the extent that an agency head cannot be removed at will, the agency head has greater independence and at least sometimes can deflect political considerations in making policy. 

The Independent Agency Regulatory Analysis Act of 2012 provides that the President can, by executive order, regulate the rulemaking process of "independent" agencies.  Independent is defined as those agencies listed in 44 USC 3502(5). The agencies listed in this section include:

  • the Commodity Futures Trading Commission, the Consumer Product Safety Commission, the Federal Communications Commission, the Federal Deposit Insurance Corporation, the Federal Energy Regulatory Commission, the Federal Housing Finance Agency, the Federal Maritime Commission, the Federal Trade Commission, the Interstate Commerce Commission, the Mine Enforcement Safety and Health Review Commission, the National Labor Relations Board, the Nuclear Regulatory Commission, the Occupational Safety and Health Review Commission, the Postal Regulatory Commission, the Securities and Exchange Commission, the Bureau of Consumer Financial Protection, the Office of Financial Research, Office of the Comptroller of the Currency, and any other similar agency designated by statute as a Federal independent regulatory agency or commission;

The definition also includes the Federal Reserve Board but the legislation specifically exempts the Fed from its requirements. 

For the most part, these agencies have commissions or agency heads that can only be removed for cause, although there is considerable variation.  The OCC enabling act, for example, provides that the Comptroller may be removed "upon the reasons" communicated by the President to the Senate.  See 12 USC 2.  The SEC commissioners are treated as removable only for cause but the enabling statute does not actually say that (it does provide for five year terms).  See Section 4 of the Exchange Act, 15 USC 78d (also requiring that no more than three commissioners be from the same political party). 

As a result of this limitation on presidential removal authority, the general view is that these agencies are less subject to political influence.   Moreover, in the folklore of administrative law, there is a view that Congress has a greater proprietary interest in the independent agencies.  Commissions (like the SEC) must have representation from more than one political party.  And the parties in Congress are keen to make sure that, in appointing commissioners, their views are represented.  The presence of genuine representatives of both parties can reduce the influence of the President.   

The Independent Agency Regulatory Analysis Act of 2012, therefore, does two things.  First, it increases the potential for politicizing the rulemaking (and policy making) process of the listed agencies.  Whether the SEC and the securities markets, or the OCC/FDIC and banking policy, or the NRC and nuclear power policy, these matters will be susceptible to greater political intrusion.  OIRA and its so called "nonbinding" assessments will provide plenty of room for interference.  Moreover, the exception in the legislation for the Fed shows that the sponsors understood that this could occur and at least sometimes thought it a bad idea.  There is no explanation, however, why this exception was applied only to one agency. 

Second, it is, frankly, a give away of authority from Congress to the President.  In truth, the President can probably already subject independent agencies to rulemaking oversight.  The issue is constitutional.  In the past, the courts viewed the independent agencies as outside the executive branch (in the interstices between the branches if you can believe that). 

After Morrison v. Olson, 487 US 654 (1988), it is relatively clear that the independent agencies are in fact in the executive branch.  As a result, there is a very strong argument (but not one completely free from doubt) that the President can, absent affirmative prohibitions in the statute, subject all executive branch agencies to a common set of rulemaking policies, including those designated as independent.  

Indeed, past Presidents have concluded that they have the authority to do so.  See Richard H. Pildes & Cass R. Sunstein, Reinventing the Regulatory State, 62 U. Chi. L. Rev. 1, 28 (1995) ("Under President Reagan, the Department of Justice concluded that the President had the legal authority to extend the orders [imposing centralized control over the regulatory process of independent agencies]").  They have not done so, however, at least in part for political reasons.  See Id. ("President Reagan declined to include the independent agencies within the requirements of his two executive orders. In part, this appears to have been a political judgment. The Democratic Congress, skeptical of the executive orders in general, might well have been outraged by an assertion of presidential authority over the independent agencies, which Congress often considers 'its own.'").

This legislation will resolve the issue.  It is true that the legislation removes any remaining legal uncertainty about the President's authority to subject these agencies to rulemaking oversight.  But mostly what it does is give the President permission to exercise the same level of control over independent agencies that it does over traditional executive branch agencies.  In exercising the judgment, Presidents will not need to worry any more about legislative outrage in asserting increased control over these agencies. 


Independent Agency Regulatory Analysis Act of 2012: S 3468 (Part 2)

The Independent Agency Regulatory Analysis Act raises some significant concerns and reflects an effort to make even more difficult the rulemaking process for independent agencies like the SEC. 

The additional procedures that can be imposed on independent agencies under the legislation are triggered by executive orders issued by the President.  In other words, every time the presidency changes, a new president can effectively impose additional rulemaking procedures on independent agencies.  Moreover, the OIRA can be given 90 days to conduct an assessment of the independent agency's compliance with applicable "regulatory analysis requirements."   All of this allows for shifting standards and increased delay.  

What are the consequences of delay?  The SEC's proposal to repeal the ban on general solicitations was sharply criticized in some quarters because it was issued as a proposal rather than an interim final rule.  In other words, the SEC was criticized for delay.  Yet had this Act been in place and the SEC was required to submit the proposal to OIRA, there would have been additional delay.

The assessment by OIRA is described as "nonbinding."  To the extent that OIRA finds that the independent agency did not follow the required procedures, however, the head of the agency must provide "an explanation" for the noncompliance.  Rather than acknowledge noncompliance as part of the rulemaking process, an agency head is likely to "comply" with any issue raised by OIRA.  As a practical matter, therefore, the so called "nonbinding" review by OIRA will in fact be "binding."

Finally, the approach will simply discourage rulemaking, a trend already underway as a result of decisions like Business Roundtable v. SEC (see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC).  The consequence is not necessarily less regulation.  Agencies may not be willing to update their regulatory framework, leading to an ossified regulatory structure, or may rely on more informal methods of implementing regulations.  The SEC can use no action letters, enforcement proceedings, phone advice, and other informal mechanisms to set out regulatory positions.  The integration of the Internet into the private offering process (through password protected web sites) was, for example, done as part of an informal process mostly through the mechanism of no action letters. 

Informal positions are less transparent and do not have to go through notice and comment.  Nor do they necessarily result in better outcomes.  Nonetheless, informal positions will not need to go through OIRA. 


Independent Agency Regulatory Analysis Act of 2012: S 3468 (Part 1)

Legislation is being taken up in the Senate to further impose limits on rulemaking by the SEC (and other independent agencies).  The Independent Agency Regulatory Analysis Act of 2012 would subject "independent regulatory agencies" to the "regulatory analysis"  requirements applicable to executive agencies."  The legislation is sponsored by Senators Portman, Warner, and Collins.  

Under the provision, independent agencies can be subject to an executive order that requires the "regulatory analysis" otherwise imposed on traditional executive branch agencies.  In addition, the President can require that an independent agency submit a proposed or final rule to the Office of Information and Regulatory Affairs for "review."  OIRA can take up to 90 days to determine whether "the agency has complied with the regulatory analysis requirements made applicable by Executive order." 

To the extent OIRA determines that the independent agency has not met the requirements, the Agency head is obligated to address the findings in the rulemaking record.  The Agency must include a "clear statement" of the issues engendering agreement and disagreement with OIRA.  To the extent that the head of the agency determines that, in fact, the rule complies with the relevant executive order but must include "an explanation of that determination."  Alternatively, there must be an explanation "why the independent agency did not comply" with the relevant requirements.

The legislation has a number of implications.  We will discuss them in the next post. 


Proxy Statements: Part 1 & Part 2

One of the issues that has arisen in the corporate governance area is the concern over information overload.  The Proxy Statement has become increasingly crowded with disclosure that is relevant to shareholders but adds to the length and complexity of the document. 

Proxy statements are already long.  Take the one filed by Apple.  The document was 51 pages long.  Executive compensation took up 14 pages (pp. 21-35), with another page devoted to equity compensation plans. 

Each time the Commission proposes a new disclosure requirement for the proxy statement, one of the criticisms invariably involves the added length and complexity.  In adopting Rule 10C-1, for example, the Commission noted that commentators raised:  

concerns about extending already lengthy proxy statement discussions of executive compensation and expressing doubt that additional disclosure of the process for selecting advisers would provide any useful information to investors.

Exchange Act Release No. 67220  (June 20, 2012).  The concerns apparently had an effect on the final rule.  As the Commission concluded:  

Consistent with the proposed rule, the final rule does not require listed issuers to describe the compensation committee's process for selecting compensation advisers pursuant to the new listing standards. We are sensitive to the concerns of commentators that adding such disclosure would increase the length of proxy statement disclosures on executive compensation without necessarily providing additional material information to investors.

Pressure for additional disclosure in the proxy statement will only continue. The Commission has been called upon to require increased disclosure on a number of corporate governance issues, including political contributions, sustainability reporting, shareholder approval of auditors, and global warming.  Whatever the merits of each of these proposals, they will presumably add to the length and complexity of the proxy statement.

It is, therefore, time to consider a Part 1 and Part 2 of a proxy statement, much the way the Commission already divides registration statements.  Part 1 could be the material that had to be distributed directly to shareholders.  It could be formatted in XBRL and written in plain English. 

Part 2 could include some of the more complicated disclosure mandated by the proxy rules but of interest only to a small minority of investors.  Part 2 could then be posted on the Internet.  One suspects, for example, that much of the disclosure in the Apple Proxy Statement on executive compensation could be in the Part 2.    

The approach would allow for the distribution of a simpler proxy statement while making the full disclosure easily available to anyone interested.  A shorter proxy statement would entail costs savings, reducing the distribution expenses.  At the same time,  it would hold out the promise of a proxy statement that retail investors might actually read, potentially increasing the possibility that they would return their voting instructions.   


An Expanded Role in Governance for the SEC: Iran Threat Reduction and Syria Human Rights Act

In the realm of corporate governance, the SEC has traditionally been responsible for disclosure while substance fell to the states.  The basic separation forced the Commission to use disclosure in order to change substantive behavior, an approach that worked with varying levels of success (or lack of success).  See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure

The neat division, however, no longer exists.  Congress has increasingly given the SEC a much more substantive role in the corporate governance process.  The authority ranges from drafting listing standards for audit committees (see Rule 10a-3) and compensation committees (see Rule 10C-1) to seeking clawbacks of executive compensation.  It is the SEC, not the states, that oversees the advisory vote by shareholders on compensation (say on pay). 

Congress, however, has gone further and injected the Commission into the area of corporate social responsibility.  In Dodd-Frank, the SEC was assigned the task of implementing disclosure requirements for conflict minerals.  Some have described the information as important to investors but for the most part the disclosure requirements were designed to affect corporate behavior.  The approach likely would reduce the willingness of companies to purchase conflict minerals and reduce funding for military groups in and around the Democratic Republic of the Congo.  Disclosure imposed on resource extraction companies also has goals consonant with corporate social responsibility. 

The recent adoption of the Iran Threat Reduction and Syria Human Rights Act has pushed the SEC in yet another direction. The legislation was designed to, among other things, impose sanctions on Iran in order to stop the development of nuclear weapons.  Section 219 of the Act added a new subsection (r) to Section 13 to the Exchange Act and imposed disclosure requirements on public companies with respect to compliance with the Act.   Like the conflicts mineral requirements, the disclosure is less about investor information and more about ensuring substantive compliance. 

The provision went further, however, and required the Commission to post information about non-compliance on its web site.  Companies subject to the Act must provide the Commission with a separate notice whenever they report activity under the Act.  The Commission is then required to transmit the relevant report to the President and Congress.  In addition, however, the Commission must "make the information provided in the disclosure and the notice available to the public by posting the information on the Internet website of the Commission."

Presumably this means something other than disclosure through Edgar.  The SEC will likely have to set up a separate page that discloses reports filed pursuant to the Act.  The idea of disclosure on the SEC website has been tried before.  A number of problems arose.  Because circumstances changed, there were concerns over the timeliness of the information.  Moreover, it raised a fundamental question about the role of the SEC in publicizing these types of activities, particularly given the public nature of the disclosure.  Some of these issues may resurface in the implementation of this provision. 

The prior example was voluntary and, when confronted with all of the difficulties, abandoned.  This one, however, is mandated by Congress.  It puts the SEC into the job of disclosing on its web site certain types of corporate behavior.  Its not clear why the SEC needs to have this role but one suspects the instances of this type of requirement will increase. 


Barry, Hatfield & Kominers on Derivatives Markets and Social Welfare

Jordan M. Barry,  John William Hatfield, and Scott Duke Kominers have posted On Derivatives Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership on SSRN with the following abstract:

The prevailing view among many economists is that derivatives markets simply enable financial markets to incorporate information better and faster. Under this view, increasing the size of derivatives markets only increases the efficiency of financial markets. 

We present formal economic analysis that contradicts this view. Derivatives allow investors to hold economic interests in a corporation without owning voting rights, or vice versa. This leads to both empty voters — investors whose voting rights in a corporation exceed their economic interests — and hidden owners — investors whose economic interests exceed their voting rights. We show how, when financial markets are opaque, empty voting and hidden ownership can render financial markets unpredictable, unstable, and inefficient. By contrast, we show that when financial markets are transparent, empty voting and hidden ownership have dramatically different effects. They cause financial markets to follow predictable patterns, encourage stable outcomes, and can improve efficiency. Our analysis lends insight into the operation of securities markets in general and derivatives markets in particular. It provides a new justification for a robust mandatory disclosure regime and facilitates analysis of proposed substantive securities regulations.


AALS Section Transactional Law and Skills Call for Posters

Eric Gouvin from Western New England University School of Law sent me the following call for posters for the 2013 AALS meeting:

The AALS Section on Transactional Law and Skills invites faculty at AALS member law schools to submit poster presentation proposals for the 2013 AALS Annual Meeting in New Orleans (January 4-7, 2013).  The Section will consider all proposals relating to the teaching of, or scholarship focusing on, transactional law and skills.  Proposals consistent with this year’s Section panel on international transactions will be given a slight preference.

Posters are intended to provide authors an opportunity to present in clear and succinct fashion the thesis and conclusion of their research or to describe teaching innovations outside formal program presentations.  Because the focus should be on the content of the research and innovative teaching, posters that were primarily promoting a particular school program, project, book or materials are not eligible for poster display. Other advertising or fliers are not permitted with posters.

Please send your proposal by e-mail to sections@aals.org by September 28, 2012. The proposal should state your name, the name of your law school, the Section for which you are submitting, the title of the poster, an actual electronic copy of the poster itself and a description of what you will be presenting. Your proposal and poster will be sent to the Section Chair and Chair-Elect who will form a Section review committee to determine what posters should be recommended to the AALS Committee on Sections and Annual Meeting, which will make the final selection of all posters.

This is an opportunity to share your work with the larger academic community.   If your Section is not sponsoring posters, you may still submit a poster proposal; the AALS Committee on Sections and Annual Meeting will review it. AALS will notify all posters proposers by November 9th, 2012 if the poster has been selected, and if so, the date, time and location of the poster presentation at the Annual Meeting.

If you have any questions about the Transactional Law and Skills Call for Posters, please contact either:

Joan MacLeod Heminway, Chair, University of Tennessee, jheminwa@tennessee.edu

Eric Gouvin, Chair-elect, Western New England University, eric.gouvin@law.wne.edu

All of the AALS details for submission can be found at the Section’s website:


The AALS Section on Transactional Law and Skills has been doing some wonderful work in promoting experiential learning and preparing students for practice.  Hopefully, some of our readers will consider submitting.


Another Crisis, Another Prophetic Woman Ignored

By now, most people are familiar with the story of Brooksley Born, who essentially predicted the financial crisis of 2008 while she was head of the Commodity Futures Trading Commission (CFTC)—only to be rebuffed by Alan Greenspan, Robert Rubin and Larry Summers.  Other women, like Sheila Bair and Susan Bies also apparently sounded alarms that were ignored.   Now we learn that another woman, Angela Knight, gave unheeded warnings related to the Libor scandal.  As the Wall Street Journal puts it (here):

At an April 25, 2008, meeting with officials at the Bank of England, Angela Knight, head of the British Bankers' Association, argued that the London interbank offered rate, or Libor, which serves as the basis for interest rates on trillions of dollars of loans and financial contracts, had become too big for her organization to manage, according to minutes of the meeting and a person who was there. Her suggestion went nowhere.

As I have noted previously, one may well ponder the gender implications of financial crisis in light of all of this.  The money quote from that post:

In a fascinating and innovative study, Coates and Herbert (2008) advance the notion that steroid feedback loops may help explain why male bankers behave irrationally when caught up in bubbles.


Tomer on a More Human Economics

John F. Tomer has published “Brain Physiology, Egoistic and Empathic Motivation, and Brain Plasticity: Toward a More Human Economics” in the World Economic Review.  Here is the abstract:

The brain physiology research of leading evolutionary neuroscientist, Paul MacLean, has important implications for human economic motivation. Gerald Cory in his research has admirably utilized MacLean’s findings and has persuasively explained that humans have two dominant motivations: 1) ego or self-interest and 2) empathy or other-interest, which our brains attempt to balance. This view is clearly important and at odds with mainstream economics in which self-interest is the dominant motivation. The MacLean-Cory view, also known as Dual Motive Theory (DMT), represents a serious challenge to mainstream economics. However, the DMT leaves something to be desired. While understanding the promise of the perspective deriving from brain physiology, some scholars have expressed dissatisfaction with it. Accordingly, the purpose of this paper is to revise DMT utilizing the concept of brain plasticity and argue that the mainstream economic image of the brain is not supported by current knowledge of brain science. Brain plasticity refers to the ability of the brain to change structurally and functionally as a result of input from the environment. Some of this plasticity is no doubt genetically determined but some brain change is a product of individual effort and represents the individual’s investment in intangible capital (standard human capital, social capital, personal capital, and so on). In this revised view, the balance that individuals, groups, and societies strike between ego and empathy orientation is to a great extent determined by these intangible investments, not simply by brain physiology.


O'Kelley on the Evolution of the Modern Corporation

Charles R.T. O'Kelley has posted “The Evolution of the Modern Corporation: Corporate Governance Reform in Context” on SSRN. Here is the abstract:

This article traces the evolution of the modern corporation from the American Civil War to the present. I begin with a focus on the period from 1865 to the Great Depression. This was the era of the Great Tycoon, the time of the second industrial revolution and the transformation of America’s economy from small proprietorships and partnerships to the forerunner of the modern corporation. I then detail the transformational crisis of the Great Depression and Adolf Berle’s central role in shaping America’s changed understanding of the proper relationship between government and the modern corporation. It was Berle, both as a scholar and key advisor to Franklin Roosevelt, who recast America’s history so that the New Deal seemed a natural extension of individualism. The following part details the period encompassing the New Deal and the Second World War. It is this period in which the United States develop into a modern, Keynesian social democracy. It is this period when the United States, in partnership with the modern corporation, assumes the mantle of world hegemon. I then examine the modern corporation during heyday of American hegemony and the so-called “golden age of American capitalism;” the period runs roughly from 1950 to 1973 and is characterized by the Galbraithian corporation, with power devolved to the technocracy of the firm. I conclude with tentative intuitions as to the nature of the modern corporation and the CEO in recent times. The tentativeness of this final section is purposive. We are too close in time to the “present” to agree on what has transpired, much less what is about to transpire. Thus, my effort is to provide a common backdrop for understanding the slightly more distant past, in hopes that conversation about the near present and near future will be more fruitful.


Nation v. American Capital, Ltd.: Seventh Circuit Upholds Summary Judgment on Conditional Privilege Grounds

In Nation v. Am. Capital, Ltd., 2012 U.S. App. LEXIS 11214 (7th Cir., June 4, 2012), the Seventh Circuit Court of Appeals affirmed the district court’s grant of summary judgment against James Nation (“Plaintiff”) on his claim that American Capital, Ltd., (“Defendant”) tortiously interfered with a settlement contract between Plaintiff and his former employer, Spring Air.

Plaintiff had been Spring Air’s president and chief executive officer since 1995.  In 2007, Defendant helped finance Spring Air’s acquisition by HIG Capital (“HIG”) and, in the process, Defendant acquired a minority interest in Spring Air and a seat on the board of directors.  Shortly after acquiring Spring Air, HIG replaced Plaintiff as president and CEO and granted him a severance package of $1.2 million in return for his agreement not to work for any competitor through 2008.  Payments under this severance arrangement were spread over a period of fifteen months.  In 2008, Spring Air encountered severe financial difficulty, and Defendant agreed to provide additional cash to Spring Air in exchange for additional board seats.  By June 2008, Defendant “was the majority equity holder and controlled four of the seven seats on the Spring Air board.”

In August 2008, Spring Air stopped severance payments to Plaintiff and three other former employees.  In response, Plaintiff filed suit against Spring Air for the remaining severance payments.  When Spring Air filed for Chapter 7 bankruptcy in May 2009, Plaintiff brought a separate action against Defendant that alleged tortious interference with contract.  Plaintiff argued that Defendant, by virtue of its controlling position,  induced Spring Air to breach the severance agreement.

The district court granted summary judgment,  finding that Defendant “was conditionally privileged to interfere with [Plaintiff’s] contract based on [Defendant’s] status as Spring Air’s majority shareholder” and that Plaintiff had failed to present sufficient evidence to overcome this conditional privilege.

Under Illinois law, conditional privilege is an arm of the business judgment rule that allows a defendant “to protect an interest which the law deems to be of equal or greater value than the plaintiff’s contractual rights.”  The conditional privilege theory is based on the premise that the interests of a corporation and its officers, directors, and shareholders are sufficiently aligned such that officers, directors, and shareholders cannot be liable for tortious interference with the company’s contracts when that interference benefits the company.

In this case, the court held that Defendant’s position as Spring Air’s majority investor gave it the right to “lawfully influence the actions of the company in pursuit of the company’s affairs,” as well as a legitimate interest in protecting Spring Air’s value for shareholders.  The court also noted that Defendant likely had further privileges by virtue of its status as Spring Air’s major creditor; ultimately, the court rested its conditional privilege decision on Defendant’s status as Spring Air’s majority shareholder.

Finally, the court held that Plaintiff failed to overcome Defendant’s claim of conditional privilege because Plaintiff did not show that Defendant “induced the breach to further [its] personal goals or to injure [the plaintiff], and acted contrary to the best interests of the corporation.”  The court affirmed the trial court’s finding that Plaintiff offered no evidence indicating either that Defendant induced the breach of the severance agreement “for any reason other than to protect its investment and to preserve [shareholder value]” or to injure Plaintiff.  To the contrary, the court found Defendant’s interference with the severance agreement to be “amply justified” and warranting a grant of summary judgment in Defendant’s favor based upon the theory of conditional privilege.

The primary materials for this case may be found at the DU Corporate Governance website.


Deborah G. Mallow IRA SEP Investment Plan v. McClendon: Failure to Disclose is not Irreparable Injury

In Deborah G. Mallow IRA SEP Investment Plan v. McClendon, No. 5:12-cv-00436-M, 2012 2012 WL 1985903 (W.D. Okla.)  Jun. 6, 2012), the United States District Court for the Western District of Oklahoma denied Deborah G. Mallow IRA SEP Investment Plan, Christopher Snyder, Dolezal Family Limited Partnership, Brian F. Leonard, David A. Kroll, Inc. Employees’ Profit-Sharing Plan and Trust, and Norman Spiegel’s (collectively “Plaintiff’s”) Motion for Preliminary Injunction. 

Defendant Aubrey K. McClendon (“McClendon” or “Defendant”) is the co-founder of Chesapeake Energy Corporation, one of the largest natural gas producers in the nation. Shareholders voted to give McClendon rights to purchase up to a 2.5% interest in each new well Chesapeake drilled. McClendon was required to invest in either all of the wells drilled in a calendar year or none at all and to pay his proportionate share of costs. In 2012, a Reuters article revealed that McClendon had borrowed upwards of $1.1 billion over a three-year period against his personal interests in the Chesapeake wells, and these loans were financed to pay McClendon’s obligations to Chesapeake. The company’s stock fell 5.5% after the publication appeared.

After the article was published, Chesapeake filed a preliminary proxy statement that provided additional information regarding McClendon’s well interests and transactions. The Securities and Exchange Commission (“SEC”) conducted a review of the proxy that Chesapeake then finalized. Plaintiffs asserted that Chesapeake failed to disclose material information necessary for shareholders to cast fully informed votes, and Plaintiffs asked the Court to enjoin the annual shareholders meeting.

For a party to succeed in seeking a preliminary injunction it must show: “(1) a substantial likelihood of success on the merits; (2) irreparable injury to the movant if the injunction is denied; (3) the threatened injury to the movant outweighs the injury to the party opposing the preliminary injunction; and (4) the injunction would not be adverse to the public interest.” The decision to grant a preliminary injunction is entirely discretionary.

To show an irreparable injury, a movant must show the injury to be both “certain and great,” and not merely “serious or substantial.” A showing of a material false solicitation is insufficient to prove irreparable harm. The court held that Plaintiffs did not show irreparable injury and that Plaintiffs had an adequate remedy if the injunction failed; the court could void the shareholders votes related to items of material information, and the items could be resubmitted to a shareholder’ vote if the court ultimately found a failure to disclose material information in the proxy statement.

The court also noted that this instance did not involve a merger or corporate activity that has a higher potential for irreparable injury. The court gave weight to the SEC’s review and clearance of the preliminary proxy.

Because the court found Plaintiffs failed to prove an irreparable injury, it did not reach the other elements of a preliminary injunction, and it denied Plaintiffs’ request for a preliminary injunction for the shareholder vote.

The primary materials for this case may be found on the DU Corporate Governance website.


EMAK Worldwide, Inc. v. Kurz: Attorneys Receive $2.5 Million Award for Providing Benefits to a Delaware Corporation

In EMAK Worldwide, Inc. v. Kurz, No. 512, 2011, 2012 WL 1319771 (Del. Apr. 17, 2012), the Delaware Supreme Court affirmed the Court of Chancery’s judgment awarding $2.5 million in fees to Donald A. Kurz’s attorneys.  In Delaware, courts reward plaintiffs’ attorneys for providing “a benefit to a Delaware corporation, even if the benefit does not produce immediate monetary rewards.”  The Court of Chancery based the judgment on the finding that the voting rights preserved in Kurz v. Holbrook, 989 A.2d 140 (Del. Ch. 2010) and Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010) were meaningful. 

Crown and Kurz, previously discussed here, involved a fight for control of EMAK’s board between the common and preferred shareholders.  Kurz was the largest common shareholder and Crown held all of the preferred shares.  Crown was able to unilaterally appoint two directors to the seven-director board.  When Kurz attempted to re-take control of EMAK in 2008, Crown began negotiations with EMAK to exchange its preferred shares for new preferred shares with voting power in director elections (“Exchange Transaction”).  Kurz filed a complaint seeking to enjoin the transaction, but Crown rescinded the transaction prior to court action.  Kurz subsequently amended the complaint to challenge the consent disclosures (“Ratification Consent”) of EMAK.  The court unsealed the record filings to correct the disclosures because of Kurz’s action.  Crown, in response to Kurz’s proxy contest in late 2009, then began gathering consents to shrink the board from seven to three directors (“Crown Consent”); however, the court found that the Crown Consent violated Delaware law. 

The long fight for control of EMAK ended in the $2.5 million judgment awarding Kurz’s attorneys “$1.7 million for rescinding the Exchange Transaction, $400,000 for correcting the Ratification Consent disclosures, and $400,000 for invalidating the Crown Consent.”  EMAK appealed and the court applied an abuse of discretion standard, meaning a judgment will not be vacated unless the lower court’s “factual findings…are clearly wrong and justice requires it, or they are not the product of an orderly and logical deductive process.” 

The court affirmed the award connected to the rescission of the Exchange Transaction based on the corporate benefit doctrine and the mootness rule.  The doctrine allows a court to reimburse plaintiffs for fees and expenses if “(1) the suit was meritorious when filed, (2) the defendants took an action that produced a corporate benefit before the plaintiffs obtained a judicial resolution, and (3) the suit and the corporate benefit were causally related.”  The appeal did not call into question the first element.  The court explained the second element was met because protecting shareholder rights is an enormous corporate benefit and the rescission of the Exchange Transaction achieved this.  In addition, the mootness rule satisfied the third requirement since the rule created a rebuttable presumption that a suit and corporate benefit were causally related in situations where the defendant’s actions after suit was filed make the claim moot.  

The court also affirmed the award for correcting the Ratification Consent disclosures.  The lower court used the following factors to determine the award:  “(1) the results achieved, (2) the time and effort of counsel, (3) the complexity of the issues, (4) whether counsel [worked] on a contingency fee basis, and (5) counsel’s standing and ability.”  Since the benefits were sizable, the case involved complex and novel legal issues, counsel worked on a contingency basis, and counsel had good standing and ability, the Delaware Supreme Court determined the award should stand. 

Finally, the Delaware Supreme Court affirmed the award for invalidating the Crown Consent because the finding that Crown’s control of EMAK was not inevitable is supported in the record.  Crown expressed concern that Kurz might win the proxy contest which indicates Crown was not the inevitable controller of EMAK. 

The primary materials for this case may be found on the DU Corporate Governance website.


Paul v. Delaware Coastal Anesthesia: Silence of LLC Operating Agreement Activates Statutory Default Provision allowing Voting by Written Consent

In Paul v. Delaware Coastal Anesthesia, LLC, No. 7084-VCG, 2012 WL 1934469 (Del. Ch. May 29, 2012), the Court of Chancery of the State of Delaware granted defendants’ motion to dismiss plaintiff’s breach of contract claim, finding that there was “no conceivable set of facts under which [the plaintiff] could recover.” The court found that the LLC’s operating agreement was silent about the voting method used by members to terminate another member. As a result, section 18-302 of the Delaware Limited Liability Company Act (the “Act”) applied, and the vote by written consent to terminate the plaintiff’s membership was valid.

According to the complaint, the plaintiff, Dr. Leena Paul, held a 25 percent membership in Delaware Coastal Anesthesia, LLC (the “LLC”) while the three defendants each held 25 percent. The defendants agreed by written consent to terminate Plaintiff’s membership in the LLC, without holding a membership meeting or providing notice of the meeting to all the members. Plaintiff contended that the LLC’s operating agreement limited voting of shares to member meetings only, and therefore, the defendants’ vote was invalid. Plaintiff argued that two provisions of the operating agreement established the procedure that members must follow to schedule and provide notice of meetings. In contrast, the defendants asserted that the LLC’s operating agreement contained provisions allowing members to vote on company business through written consent.

The court began its analysis by establishing that the sole question in the case was whether the termination vote was effective under state contract law and the Act. The court acknowledged that the pleading standard for a motion to dismiss was minimal and, following Delaware case law, the court would consider all documents “‘integral to [the p]laintiff’s claim and incorporated into the complaint.’”

To assess the parties’ competing claims, the court evaluated the proper relationship between the Act and an LLC’s operating agreement. The relevant portion of section 18-302 stated that

unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote.

The court noted that while Delaware law provided LLCs broad discretion in formulating their policies, the Act was intended to function as a default provision anywhere the agreement is silent or ambiguous. The court also recognized that should a conflict arise between the two, the LLC’s agreement generally prevailed.

Plaintiff’s termination occurred under a section of the operating agreement that allowed termination of an LLC member by a 75 percent vote of company shareholders for any reason. The provision merely required 90 days written notice to that member. Because this provision was silent about the voting method members could use, the statutory default was activated to fill this “gap” in the agreement. Applying section 18-302, the court held that voting by written consent was permissible, and thus, the vote to terminate Dr. Paul’s membership was valid.

The court concluded that the LLC’s operating agreement did not “otherwise provide” for a specific voting method and there was “no conceivable set of facts under which Dr. Paul could recover.” Therefore, the court granted the defendants’ motion to dismiss, upholding Dr. Paul’s termination.

The primary materials for this case may be found on the DU Corporate Governance website.


Staffenberg v. Fairfield Pagma Assoc.: The Periphery of the Bernie Madoff Collapse 

In Staffenberg v. Fairfield Pagma Assoc., 95 A.D.3d 873 (N.Y. App. Div. 2012), the Appellate Division of the New York Supreme Court held there were no triable issues of fact and affirmed the trial court’s grant of summary judgment to all defendants.

This case is ancillary to the pending Bernie Madoff Ponzi scheme debacle. According to the allegations in the case, Eugene Staffenberg, on the advice of his accountant, invested $500,000 in Fairfield Pagma Associates (“Fairfield Pagma”), which was a limited partnership that pooled funds for the purpose of investing in Bernard L. Madoff Investment Securities (“BLMIS”). When federal authorities revealed Madoff’s scheme in a highly publicized event in late 2008, Staffenberg lost nearly all of his investment. Staffenberg commenced an action against his accountant and accounting firm (collectively, the “Sejour Defendants”) and Fairfield Pagma and its partners and managers for “professional malpractice, breach of fiduciary duties, breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud.” After the trial court granted summary judgment on all claims, Staffenberg appealed the claims of breach of fiduciary duty against both Sejour and Fairfield Pagma and breach of contract and the implied covenant of good faith and fair dealing against Fairfield Pagma. 

In addressing the fiduciary duty claims, the court held there was no fiduciary relationship between Staffenberg and the Sejour Defendants. The court noted that Staffenberg only “sought investment advice from [the Sejour Defendants], at most, only once per decade.” The court explained this “intermittent communication” cannot transform a simple business relationship to a fiduciary relationship. As for Fairfield Pagma, the court acknowledged that Fairfield Pagma had a fiduciary relationship with Staffenberg; however, the court held there was no plausible misconduct by Fairfield Pagma leading to Staffenberg’s damages which would justify reversing the trial court.    

 Next, the court struck down both of Staffenberg’s contract claims against Fairfield Pagma. For the breach of contract claim, the court found there were no triable issues of fact. Despite Staffenberg’s assertion that Fairfield Pagma breached the Limited Partnership Agreement by not investing a 100% of his initial $500,000 contribution, the court noted to the contrary, that the agreement expressly permitted the retention of funds deemed “required for partnership purposes.” Further, the court explained that any failure to transfer the entirety of Staffenberg’s investment to BLMIS did not cause Staffenberg sustainable damages.

Lastly, the court recognized that a covenant of good faith and fair dealing was  implicit in every contract. Nevertheless, the court explained the partnership agreement required funds invested into Fairfield Pagma be directed to BLMIS. Therefore, as the court noted, any implied obligation to invest contrary to the explicit language of the contract was unenforceable.

The primary materials for this case may be found on the DU Corporate Governance website.


Michelman on Poverty in Liberalism

Frank I. Michelman has posted his paper Poverty in Liberalism: A Comment on the Constitutional Essentials on SSRN.  Here is part of the abstract:

Does a political culture’s embrace of liberal constitutionalism – or does liberal political thought more generally – come laden with a deep-seated resistance to recognition of the injustice of structural poverty within a broadly affluent society, or to getting done politically whatever is required in order to abolish that injustice? For those inclined to say so, the philosophy of John Rawls might seem to pose a testing case. In our time, Rawls’s philosophical excavations of liberalism are the ones we might well regard as the most dedicatedly antipoverty of all, and so his works would seemingly be the last place to go hunting for evidence of an ineluctable resistance in liberalism to the subjugation of poverty by political means. If we find such evidence there, where in liberalism will we not?


This paper asks whether the Rawlsian exclusion of fair equality of opportunity from the constitutional essentials should be taken as a sign, even within the thought of Rawls, of the incapacity of liberal constitutionalism, with its prioritized commitment to individual rights and liberties, to grasp and respond fully to the injustice of avoidable structural poverty. The paper answers “no.”


Oddo Asset Management v. Barclays Bank PLC: N.Y. Court of Appeals Affirms Lack of Fiduciary Duty to Debt Holders

In Oddo Asset Management v. Barclays Bank PLC, the Court of Appeals of New York ruled that the defendants did not owe Oddo Asset Management (“Oddo”) a fiduciary duty and that Oddo failed to state a cognizable claim for tortious interference with contract.  Therefore, the court affirmed the dismissal of Oddo’s claims.  2012 WL 2399815 (N.Y. Jun. 27, 2012). 

According to the allegations in the Complaint, Oddo purchased $50 million in promissory notes issued by Golden Key and Mainsail.  Golden Key and Mainsail were SIV-Lites, a type of structured investment vehicle that borrowed money by issuing promissory notes in order to purchase asset-backed securities, which in this case were mortgage-backed securities.  The defendants, Barclays Bank PLC and Barclays Capital Inc. (“Barclays”) created the Golden Key and Mainsail investment vehicles, determined their size and leverage, and selected Avendis Financial Services Limited ("Avendis") and Solent Capital (Jersey) Limited ("Solent") to act as collateral managers.  Barclays also agreed to warehouse (i.e., hold) mortgage-backed securities for eventual transfer to Golden Key and Mainsail.

Through a series of transactions in 2007, Golden Key and Mainsail acquired $1.6 billion in mortgage-backed securities, which Barclays warehoused.  Per the terms of the warehousing agreement, Golden Key and Mainsail purchased the mortgage-backed securities at the price that Barclays had paid for them, despite the fact that at least some of the securities had declined in value significantly.  Shortly after the transfers, Standard & Poor’s (“S&P”) downgraded the ratings of both Golden Key and Mainsail from AAA to CCC, and both investment vehicles ultimately collapsed.

Oddo then sued Barclays and The McGraw-Hill Companies, Inc. (“McGraw-Hill”), the parent company of S&P, for aiding and abetting Golden Key and Mainsail’s breaches of fiduciary duty. According to the allegations made by Oddo, Barclays and the collateral managers conspired to transfer mortgage-backed securities at inflated prices to shift losses from Barclays to the investment vehicles.  Oddo alleged that S&P was complicit in the collateral management companies’ breaches of fiduciary duty by knowingly issuing inflated ratings for the notes issued by Golden Key and Mainsail.  

A fiduciary relationship exists between two parties when one is “under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation”; on the other hand, there is no fiduciary relationship “between a debtor and a note-holding creditor."  The court ruled that because Oddo was “essentially a lender” and not a shareholder of Golden Key and Mainsail, the investment vehicles did not owe Oddo a fiduciary duty.  Therefore, the court affirmed the dismissal of Oddo’s breach of fiduciary claims.  

Oddo also sued Barclays for tortiously interfering with Oddo's contract with Golden Key and Mainsail.  A claim of tortious interference requires an “underlying breach of contract.”  The court ruled that Golden Key and Mainsail had not breached their contract with Oddo when the investment vehicles purchased the warehoused securities above market price because that risk was “included in the information memoranda and known by Oddo” at the time it purchased the promissory notes.  Because there was no underlying breach, the court affirmed the dismissal of Oddo’s tortious interference claim against Barclays. 

The primary materials for this case may be found on the DU Corporate Governance website.


Rosenthal v. New York University: No Legal Obligation to Award MBA after Student Pled Guilty to Insider Trading

In Rosenthal v. New York University, No. 10-4168-cv., 2012 WL 1700843 (2nd Cir. May 16, 2012), the Second Circuit Court of Appeals affirmed the district court’s dismissal of Ayal Rosenthal’s claims for relief. The court also held that New York University (“NYU”) did not have a “legal obligation” to confer a Master of Business Administration (“MBA”) to Rosenthal after he pled guilty to insider trading while attending NYU.

According to the Complaint, Rosenthal was a certified public accountant at Pricewaterhouse Coopers (“PwC”) while attending NYU’s Stern School of Business (“Stern”) as an MBA candidate. Through his employment at PwC, Rosenthal learned of “material non-public information” concerning a transaction between two publicly traded companies; he provided this information to his brother, who subsequently traded on this tip. Rosenthal completed the academic requirements for an MBA in December 2006; he pled guilty to insider trading in February 2007. He never disclosed to Stern that he was the subject of a criminal securities investigation, but somehow Stern discovered Rosenthal’s guilty plea in February 2007 and commenced a disciplinary review. In October 2007, Stern informed Rosenthal that he would not be awarded the MBA.

Rosenthal asserted that his implied contract with Stern prohibited the university “from punishing him for off-campus conduct, however egregious the conduct or connected it may be to his academic pursuits.” However, the court reasoned that Stern’s Code of Conduct provided notice to students that they must act with “personal honesty, integrity, and respect for others,” and Stern informed students that the faculty’s disciplinary jurisdiction includes “[v]iolation of federal, state and local laws.”

Rosenthal also argued that Stern’s policies contradicted  “general [NYU] policy” which prohibited disciplinary action for violations outside the academic context; therefore, according to Rosenthal, Stern’s policies that were “inconsistent with that [NYU] policy are themselves without force.” After noting that NYU’s policies were confusing, the court held that under New York law, courts give great deference to a university’s decision, and courts “will disturb [universities’] decisions only if their actions are arbitrary, irrational, or in bad faith.” The court reasoned that, “[w]ithout question, a business school faculty could reasonably believe such [criminal] conduct is not befitting of a member of the academic business community . . . .” Accordingly, the conflicting interpretations were left to the university to reconcile, and neither NYU nor Stern was found to have “acted arbitrarily, irrationally, or in bad faith.”

The primary materials for this case may be found on the DU Corporate Governance website.


Law Faculty Blogs and Disruptive Innovation: A Conclusion

Where does this leave blogging by law faculty?

First, law blogging is a disruptive innovation that has the capacity to affect faculty reputation, law school rankings, and the continuum of legal scholarship.

Second, a class of widely recognized and widely cited faculty law blogs has emerged.  These blogs reflect some level of intermediation and have become a trusted source of legal authority.

Third, faculty law blogs, at least those that are widely recognized and widely cited, represent a form of scholarship.  They address a gap left in the scholarship continuum left over by traditional law reviews.  Moreover, the effort to reduce this role through the implementation of online supplements has so far failed. 

Fourth, as a disruptive technology, faculty law blogging represents a mechanism for challenging the status quo with respect to faculty reputation.  The evidence indicates that blogging can lead to an increase in faculty reputation (evidenced by a correlation with SSRN rankings).  Moreover, other evidence of faculty reputation comes from surveys of the number of citations in legal periodicals by faculty.  Blog posts written by faculty that are cited in legal publications are counted as citations in these surveys.  Thus, blogging may elevate a faculty member's ranking in this metric as well.  

Fifth, as a disruptive innovation, faculty law blogs provide a mechanism that can be used by non-elite law schools to improve their reputation and their rankings.  With few barriers to entry, faculty law blogs can increase the awareness of a law school.  Moreover, the very top schools have not targeted faculty law blogging.  As a result, it provides a unique opportunity for faculty at less elite law schools.  The evidence suggests that in fact these schools are taking advantage of this opportunity.   

Sixth, the most significant barrier to blogging is time.  Law schools using blogging as a means of increasing awareness would rationally want to create an internal system of rewards designed to promote the practice.  In addition to rewarding the practice in the context of salary determinations (not to mention tenure and promotion), law schools presumably could encourage blogging at the expense of other activities. 

The full paper, Essay:  Law Faculty Blogs and Disruptive Innovation is here; the underlying data is posted here.