October 03, 2007
Yesterday I blogged about the Sprint advertisement for "the first $10.5 million cell phone." Remember: "For a limited time, buy a Blackberry 8830 World Edition Smartphone for $10.5 million, and we'll throw in your very own private island." As noted in that earlier post, I felt that the advertisement was structured in a manner that would allow Sprint to actually deliver on its offer. But one of my students (Adam Pomeroy) wasn't content with speculation. He emailed Sprint and asked: would you uphold the offer? This was Sprint's response:
Thank you for your inquiry regarding the $10.5 million smartphone with island. Regarding your question on the legal issues, this is actually a real offer and if someone is interested in purchasing an island, a island broker will contact them for further details.
Kind regards,
The Private Island Offer Team
The Private Island Offer Team? That's pretty funny, especially since the offer was expressly limited to the "100 wealthiest people on planet earth." If one of those people called, you would definitely want to have a team waiting for them.
My interview with Andrew Ross Sorkin appears in the NYT Dealbook print section today, or click through to Dealbook.
The carried interest buzz today is all about Senator Schumer, who has announced that he'll be introducing a broader carried interest bill very soon. From here on out, I think the serious carried interest debate is about scope and timing, as well as the mechanics of the reform.
At one extreme, you could see a very broad carried interest bill, hitting all industries, enacted in November. At the other extreme, you could see the Baucus-Grassley PTP bill enacted, which would hit only a handful of PE firms, and that bill might be coupled with long transition relief rules. Broader carried interest reform would have to wait. (For more, see Taxing Blackstone.)
I would have thought that the narrower PTP bill would be more likely to succeed in the short run, but Schumer's bill could certainly change the dynamics. Any predictions?
Permalink | Corporate Social Responsibility, Wal-Mart | Comments (2) | TrackBack (0)
This weekend I heard an ad on the radio that began by pointing out that it was possible to purchase a house for as little as $199 a month in mortgage payments—a possibility that made purchasing a house a much more attractive proposition than renting, especially in the DC area. So how was such a low payment possible? The increased number of foreclosures, which means not only that there are many homes available at reduced prices, but also that lending entities (apparently desperate for sales) are willing to structure affordable loan packages for willing buyers. The ad struck me as both interesting and ironic. Interesting because it reveals that some people and institutions will be able to capitalize on the downturn in the housing market. Indeed, the ad underscores the fact that lenders and homeowners are not suffering in the same way. To be sure, by selling homes through a foreclosure process, lenders may not be able to recoup the value of the loans they have extended. Nevertheless, the ad suggests that lenders have may find some relief through the foreclosure process. By contrast, the very fact of foreclosure means that homeowners were not able to hold on to their investment. Moreover, the ad reveals that the current crisis may present opportunities for both new buyers and investors to gain easy entrance into the housing market. Yet by emphasizing the notion that owning a home can occur with very little money down and very small monthly payments, the ad seemed to be repeating the mistakes that led to the current crisis; that is, encouraging people to develop unrealistic expectations about the financial commitment involved with home ownership. Indeed, it seems that one of the only ways someone can buy a house in the DC area and obtain such a small mortgage payment would be to enter into one of the so-called “exotic” adjustable mortgages. And of course, the reason why there are so many foreclosure homes for sale is because once the adjustments occur, people tend to find themselves unable to make their new payments. I found it ironic that, even in the midst of the current crisis, the industry continues to market in a way that downplays the financial risks and commitments involved with home ownership. From that perspective, the ad seemed to be paving the way for the next group of homebuyers while simultaneously paving the way for the next group of foreclosure victims.
Yesterday I noticed this article from Law.com that reports that the number of women both applying to law school (larger decreases than the male applicant pool, which has decline also) and enrolling (46.9%, down from 49% five years ago) in is in decline. The article attempts to explain these numbers with several theories, the most intiguing one that women are turning their backs on the legal profession because of recent reports on the lack of family-friendly policies in law firms. Because of the high billable hour requirements and low probability of making partner, the theory goes, women are choosing not to begin a legal career and choosing other professions.
Although this hypothesis may be true for some would-be applicants, the example the story uses is not compelling for that explanation. The article focuses on the choice by a recent college graduate to forego law school to become an analyst at Morgan Stanley in New York. That does not seem like a lifestyle choice to me! The job appears to be in the 2-year analyst, investment banker grooming vein. (These young professionals were the subject of a NYT article a few weeks ago because they are no longer going to business school after their 2 year stint, but staying in the workforce and going directly into higher-level finance positions.) The decision of the young woman depicted in the article seemed to be based on opportunity cost more than a choice to lead a more family-friendly lifestyle.
I do think that a hybrid theory that factors in both opportunity cost and work/life balance could be plausible, though. Say a savvy female college graduate were weighing the decision to go into law or finance. The graduate has read all the media reports that few women make partner at law firms and also rise to the top ranks of investment banking, particularly women that have children. The graduate contemplates having a child sometime in her 30s (10 to 15 years down the road) and wants to maximize her earning potential during that 10-15 year span in the event that she exits the workforce at that time. Going into finance, where she will start collecting a salary immediately and be eligible for bonuses, etc. without incurring any more educational expenses/debt, may be the wise choice. All of this assumes that she will enjoy both careers equally and that her opportunities to re-enter the workforce at some time are the same. All of this is speculation, of course, but I think the decision model is more complicated than the article describes.
Under Rule 14a-8 of the Securities Exchange Act of 1934, shareholders can have their proposals included on company proxy ballots, as long as those proposals are not excluded by the company. One of the bases for exclusion appears in Rule 14a-8(i)(8), which holds that a proposal may be excluded if it "relates to an election for membership on the company's board of directors or analogous governing body."
We have encountered this subject before (many times). It arises again now because the SEC has proposed two releases in connection with shareholder proposals. One would allow companies to exclude proposals that relate "to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election," and the other would allow shareholder proposals for shareholder nomination procedures, but by a shareholder or group of shareholders owning more than 5% of the company's securities and eligible to file a Schedule 13G.
Comments on the proposals were due yesterday, and I was one of 39 law professors who signed a comment letter prepared by Lucian Bebchuk of Harvard Law School. You can find the letter here. We admonish the SEC to reject both releases on the following grounds:
- With respect to the release amending the election exclusion, we argue that "the election exclusion of Rule 14a-8(i)(8) should be limited to proposals that relate to a particular election over particular candidates."
- With respect to the release relating to shareholder nomination procedures, we conclude that "shareholders wishing to exercise their state law right to initiate bylaw amendments concerning director nomination should not face higher hurdles than shareholder wishing to initiate other governance bylaws."
If this topic interests you, Jay Brown at Race to the Bottom has a comment letter to the SEC here, and a series of detailed posts here, here, here, here, here, here, and here.
Permalink | Corporate Governance, Securities Regulation | Comments (0) | TrackBack (1)
October 02, 2007
The regulation-skeptical judges Henderson, Randolph, and Brown today claimed the first victim of the D.C. Circuit's new year, in a super-unthrilling case that at least included a reasonable standing ruling.
Poor FERC. That agency loses a lot in the court of appeals, and today in Southern California Edison v. FERC, it lost a case worth less than 20,000 dollars. Why'd SCE bother suing for that kind of money? The utility was miffed that FERC hadn't applied California law, which was the law of a service contract with the City of Corona, to its failure to invoice Corona for some higher than expected interconnection charges within a year. In other words, SCE wanted to be reimbursed for the late-filed charges, and thought its delay in filing the charges was immaterial under California law. FERC applied federal law in rejecting the reimbursement request, because, it noted, SCE eventually invoiced Corona for the charges on its FERC-filed rates. And FERC-filed rates are federal documents. Because "accepting FERC's choice of law argument would permit FERC to disregard a choice of law provision in any FERC-approved contract," the court ruled that FERC had to evaluate SCE's reimbursement claim under California law.
Thrillsville, right? No one ever said government contracting rocked at all times. In my view, the opinion is notable mostly for the nuts standing argument that FERC made. FERC argued that because SCE had delayed invoicing Corona beyond the contractual term, it didn't have standing to sue; SCE's injury was not traceable to FERC's interpretation of the contract, in other words, but to SCE's delay in invoicing. To me, that sounds like an effort to convert a merits defense (SCE billed too late to be paid) into a jurisdictional question. It's the sort of argument that, if credited, would keep a variety of basic breach of contract claims - the bread and butter of the first year of law school - out of court. And thankfully, the court rejected the claim, noting that "in reviewing the standing question, the court must be careful not to decide the questions on the merits."
Crazy standing argument, right? But don't blame FERC. Every government lawyer is contractually obligated to challenge the standing of the plaintiff in every DC Circuit case. And they're only obligated to do so because that court gets seduced by standing so frequently.
The opinion may be found here.
Permalink | Rules & Standards | Comments (0) | TrackBack (0)
Catalyst, a research and advisory organization whose mission is to "expand opportunities for women and business" issued a "report" (wall chart?) today entitled The Bottom Line: Corporate Performance and Women’s Representation on Boards, which purports to show a "very strong correlation between corporate financial performance and gender diversity." The President of Catalyst is quoted as follows: "We know that diversity, well managed, produces better results. And smart companies appreciate that diversifying their boards with women can lead to more independence, innovation, and good governance and maximize their company’s performance."
A study is hard to evaluate when all we get is a few graphics and a soundbite. In preparing my forthcoming article, The Dystopian Potential of Corporate Law, 56 EMORY L. J. __ (forthcoming 2007), I looked at other studies of diversity and firm performance while responding to Kent Greenfield's claim that "adding perspectives other than those of rich, white men will almost certainly improve the quality of business decisions made by the board." One way to approach this is to ask: how is it that we all know this when evidence is so scant?
After reviewing the then-extant studies, our own Lisa Fairfax -- certainly a sympathetic commentator on diversity -- expressed skepticism for the "governance rationale" for diversity on corporate boards. See Lisa M. Fairfax, The Bottom Line On Board Diversity: A Cost-Benefit Analysis Of The Business Rationales For Diversity On Corporate Boards, 2005 WIS. L. REV. 795, 831-37. I agree with Lisa that the case for diversity has not been made on governance grounds.
Do we even have a plausible story for the connection between diversity and value creation? You have to believe not only that business-experienced women and minorities would pursue materially different strategies from those pursued by "rich, white men," but also that the women and minority directors would influence enough of their other-thinking colleagues to carry the day at the board level. Of course, we are presuming that boards even engage in these sorts of discussions rather than relying on executives to develop corporate strategies. It just all seems too much of a fairy tale to me.
Permalink | Corporate Governance | Comments (5) | TrackBack (0)
Did you know that our credit scores affect our insurance rates? The Subcommittee on Oversight and Investigations of the House Committee on Financial Services is holding hearings on credit-based insurance rates. The FTC released a report this past July that, according to an FTC press release,
found that [credit] scores are effective predictors of the claims that consumers will file and that, on average, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians, and so the use of scores is likely to increase the amount they pay for automobile insurance relative to the amount that non-Hispanic whites and Asians pay.
The methodology of that study as been questioned, including by dissenting commissioner Pamela Jones Harbour. The gist of the methodological challenge is that the FTC used data supplied by the industry, and those data are not reliable. Today Commissioner J. Thomas Rosch of the FTC is testifying on the issue and defending the July report. Among other things, Commissioner Rosch notes that other studies also correlated low credit scores and high numbers and amounts of insurance claims. But are credit scores merely a proxy for race? Rosch says no. The bottom line, he claims, is that "the use of effective risk prediction techniques, including credit-based insurance scores, decreases premiums for less risky consumers and increases premiums for more risky consumers."
This practice is part of a wider set of practices in which credit reports are used for "off-label" purposes. As noted by Katie Porter at Credit Slips:
Credit reports are also widely used as a screen for employment. Again, employees won't generally be loaning their employers money. Instead, the report is used as a rough measure of whether the potential employee is under financial strain, since this is perceived to increase the likelihood that the employee engaging in theft. (I suspect the real harm to an employer is actually that the stress and anxiety that the employee suffers that distracts them from their job duties). What's next? Using credit reports as part of college admissions? As part of E-Harmony's 20 gazillion point matching process? I predict "off-label" use of credit reports will become increasingly common and contentious in the next few years. The practice raises many of the same ethical and practical issues that trouble this practice in the pharmaceutical context. The existing legal regime, FCRA, wasn't designed to prevent the potential harms from this practice, and it may not be reasonable to expect consumers to understand the myriad impacts of their credit behavior on their life. Further, the only way that new uses for credit reports are discovered is by "experimenting" and looking for correlations. Who wants to be a guinea pig for this practice? Are there privacy concerns implicated in sharing a credit report--say with a bunch of delinquencies to hospitals reported--with Blue Cross and Blue Shield?
Food for thought.
Today in Contracts, having just finished the chapter on remedies, we finally reached the discussion of contract formation. One of the discussion problems in my book is based on the famous Kimba Wood opinion, Leonard v. Pepsico, in which the plaintiff attempted to claim a harrier jet based on this television commercial. (Thanks to Val Ricks for providing the videos.)
The plaintiff lost and was subjected to Judge Wood's barb: "Plaintiff's insistence that the commercial appears to be a serious offer requires the Court to explain why the commercial is funny."
A few weeks back, this case prompted a discussion on the contracts listserv regarding this more recent advertisement from Sprint. Is that an offer?
The usual citation in cases like these is Lefkowitz v. Great Minneapolis Surplus Store, 86 N.W.2d 689, 691 (Minn.1957), in which the Minnesota Supreme Court held that an advertisement is an offer when it is "clear, definite, and explicit, and leaves nothing open for negotiation." (In Lefkowitz the plaintiff, Morris Lefkowitz, prevailed in a lawsuit alleging that the following newspaper advertisement was an offer: "Saturday 9 AM Sharp, 3 Brand New Fur Coats, Worth to $100 .00, First Come First Served $1 Each.")
The Sprint advertisement looks like an easy case under Lefkowitz. While the advertisement is obviously intended to be humorous, the terms are "clear, definite, and explicit," and the advertisement "leaves nothing open for negotiation." [UPDATE: We continued our discussion today in class, and I am less enthusiastic about the definiteness of the offer. Among other things, the island is not specified. The oft-quoted standard from Lefkowitz does not exhaust the analysis. As the court noted in Leonard, the objective theory of contract formation would also cause us to ask if this were a serious offer.]
Early on in the advertisement, the narrator defines the main terms of the offer: "Introducing an exciting offer for the 100 wealthiest people on planet earth: the first $10.5 million cell phone." If you accept the offer, you get a Blackberry 8830 World Edition Smartphone, introduced earlier this year, and Sprint will throw in your own private island. ("For a limited time, buy a Blackberry 8830 World Edition Smartphone for $10.5 million, and we'll throw in your very own private island.")
The distinctive feature of the Sprint advertisement is that the terms of the offer would be easy for Sprint to fulfill if a smart-aleck plaintiff like Leonard surfaced. Private islands can be had for much less than $10.5 million. (If you are curious, here are some islands you can rent for less than $500 per week!) Of course, that smart-aleck plaintiff would have to be one of the "100 wealthiest people on planet earth," so Sprint won't have to deal with a run on the store in any event.
Jonathan H. Adler, who is the Director of the Center for Business Law and Regulation at Case Western Reserve University School of Law, has put together a conference this Friday on Stoneridge Investment Partners v. Scientific-Atlanta, which is being argued next week before the Supreme Court.
If it weren't for a self-imposed travel moratorium this fall, I would be participating in the conference, which looks to have a great lineup. Fortunately, Case Western will be webcasting the conference.
Jonathan provides more background at VC.
Permalink | Securities Regulation | Comments (0) | TrackBack (0)
Dani Rodrik is the development economist who likes to zig where everyone else zags. He appears to think that Korean, Singaporean, etc, style dirigiste economics often works better than shock therapy transitions to absolutely free markets, if you're interested in economic growth.
Okay, great, got him ... he's one of the few people willing to defend industrial policy as a tool of development. Savvy place to be, given that so many countries in practice think industrial policy can promote growth, but so many economists in theory think it doesn't. He can arbitrage that.
But wait: even though shock therapy isn't good, Rodrik thinks that Naomi Klein's uber-paranoid book on how shock therapists like Jeff Sachs and Milton Friedman control the world needs to be trashed. (So does Geoff Manne, in language at least as zippy as Klein's.)
And double-wait: Rodrik thinks that "fair trade" programs, under which consumers choose to purchase products with sustainability guarantees, may not create suitably high prices. Plus the decision about what exactly goes into fair trade certification is not transparent (sounds like Rodrik thinks there needs to be a Global Administrative Law).
Huh. Maybe Rodrik is all about public, as opposed to private, development initiatives. But whatever the case, he doesn't appear to be a big coalition builder.
Permalink | Globalization & Trade | Comments (2) | TrackBack (0)
October 01, 2007
If you didn't see it, you can get it here and here. Scooped on the Thomas interview, NBC opted for Anita Hill. (When asked about Thomas as a Supreme Court Justice, Hill began her response, "I can't pretend to be objective about Clarence Thomas ..." But "from my reading of the cases, I don't think he has been a particularly convincing Justice.")
The 60 Minutes interview portrays Thomas as a sympathetic and nuanced figure with a complex intellectual history, not as the caricature who usually comes across in discussions of the Court. Thomas was very impressive, and the poll at Volokh suggests that Thomas changed some perceptions with that interview.
September 29, 2007
Siobhán O'Mahony, speaking at the Comparative Organizations Conference about Katherine Chen's work on Burning Man, noted that the organizers of the project had formed a limited liability company called Black Rock City, LLC.
Does this strike you as incongruous? Perhaps. After all, the essence of Burning Man is spontaneity ("There are no rules about how one must behave or express oneself at this event (save the rules that serve to protect the health, safety, and experience of the community at large); rather, it is up to each participant to decide how they will contribute and what they will give to this community."). And yet, the need for organization for such a vast undertaking is obvious. I suppose the question is: why this form of organization? Why not a non-profit corporation?
Permalink | Business Organizations | Comments (0) | TrackBack (1)
Over the past two days, I have been nestled in at the Sundance Resort in Provo, Canyon, attending the BYU Comparative Organizations Conference. The conference was organized by Dave Whetten of BYU's business school, along with junior colleagues Brayden King and Teppo Felin of orgtheory.net. Kieran Healy, Omar Lizardo, and Fabio Rojas of orgtheory.net are also present, as is Peter Klein of Organizations and Markets. I am the only law professor in the group, which comprises mostly sociologists and management scholars.
The conference is premised on the notion that organizational scholars "are incapable of delineating a theoretically-sound justification for 'organizations are different.'" If you find this premise surprising, my guess is that you are a lawyer or an economist. Peter Klein and I were wondering why comparative studies in law and economics didn't seem to count. Joe Galaskiewicz provides a possible answer: lawyers and economists are interested in "incentives, choices, and outcomes," while sociologists and psychologists tend to be interested in "behavioral patterns and environmental selection." Only within the latter group would the statement "organizations are different" be controversial.
Permalink | Organizational Theory | Comments (5) | TrackBack (0)
It's official. The DC Circuit took the month of September off.
September 28, 2007
Senator Levin introduced new legislation today on the tax treatment of stock options. Under current law, companies take a financial accounting expense for stock options up front, when the options are granted (or ratably over the vesting period). But they take a tax deduction later, when the options are exercised. Levin's bill would harmonize the tax and financial accounting treatment. So far so good.
But there is a bad side effect of Levin's proposal. He may be replacing one gamesmanship opportunity with another. Specifically, Levin's proposal severs the traditional link (in section 83(h)) between the employer's tax deduction and the employee's tax inclusion. This too is an important matching principle that restrains gamesmanship. By accelerating the tax deduction for the corporation to match its financial accounting expense but leaving the deferral for the employee's tax inclusion in place, Levin's proposal creates a new arbitrage opportunity which might be worse than the status quo.
David Walker and I are writing a paper on this (tentatively) titled "The Paradox of Executive Compensation Book/Tax Conformity." We don't yet have an SSRN-worthy draft, but here's the basic idea:
We should resist the allure of book/tax conformity, at least in the context of executive compensation. Conformity between the tax and financial accounting treatment of executive compensation seems appealing because it would restrain certain types of gamesmanship. Managers could continue to massage reported earnings, or to minimize corporate taxes, but they could not do both at the same time. By focusing on gamesmanship by the employer, however, book-tax conformity proponents overlook other elements critical to the integrity of our existing approach to taxing executive compensation, such as the importance of preserving tax rules that match the executive’s timing of income with the employer’s deduction.
Consider three potential policy goals in the context of executive compensation: (1) book/tax conformity, (2) matching the employer’s tax deduction with the employee’s inclusion, and (3) preserving a realization-based system for individual taxpayers. This Article argues that we cannot achieve all three of these goals at the same time. Rather, we must choose only two. The first goal, book/tax conformity, prevents regulatory arbitrage between the tax and financial accounting systems. The second goal prevents regulatory arbitrage between the tax treatment of employers and employees. The third goal, preserving the realization doctrine, makes the tax system more administrable and furthers other tax policy goals. Shifting toward book-tax conformity might reduce gamesmanship in one area but would increase arbitrage opportunities in another area. In light of this trade-off and other consistency considerations, we conclude that the status quo—which forgoes book/tax conformity in favor of employer-employee matching in a realization-based tax system—remains the best policy option.
Any comments or suggestions would be most appreciated.
