Ideoblog

Federalism and the California marriage decision

As much of the literate world knows by now, the California Supreme Court has ruled that the California constitution forbids the California legislature from denying the right to enter into a relationship denominated marriage on the basis of sexual orientation. The court reasoned that the state lacked the requisite compelling state interest to discriminate in this way. I have not examined the opinion closely, and I’m not going to take on the task of critiquing its constitutional basis. My interest is basically where this decision sits in the state competition of marriage law, a subject on which I’ve written in Calling a Truce in the Marriage Wars (with Buckley), 2001 University of Illinois Law Review 561 (with Buckley) and more recently here Standard Form Approach to Same Sex Marriage. It is also the subject of a chapter in my forthcoming book with Erin O’Hara, The Law Market.

My position in summary is this: as a matter of policy, I personally favor the right to same sex marriage, and would vote for it. But that leaves the question whether this contentious matter of social policy should be settled by a court – in this case, and in others, essentially by a single judge in a closely divided court. In other words, I’m sympathetic with these dissenting words in the California decision:

The process of reform and familiarization should go forward in the legislative sphere and in society at large. We are in the midst of a major social change. Societies seldom make such changes smoothly. For some the process is frustratingly slow. For others it is jarringly fast. In a democracy, the people should be given a fair chance to set the pace of change without judicial interference. That is the way democracies work. Ideas are proposed, debated, tested. Often new ideas are initially resisted, only to be ultimately embraced. But when ideas are imposed, opposition hardens and progress may be hampered.

But I think that each state ought to be able to decide the same sex marriage issue, in this way letting the issue percolate through society. As things stood earlier this week, same sex couples could marry only in Massachusetts. Their relationship was threatened when they left the state. Costly, to be sure, but on the other hand the beginning of an important social experiment. Now same sex couples can establish themselves in California as well. This puts economic pressure on other states (e.g., NY), which among other things risk losing productive taxpayers to competitive states. As they live with and observe same sex couples, and watch them leave for friendlier states, people will increasingly have to decide how much they really care about the difference, say, between “marriage” and “domestic partnership.”

Because I believe in this process of state experimentation, I would oppose a federal constitutional amendment that forbids or mandates the right to same sex marriage. But I would distinguish state constitutional decisions, as well as judicial decisions under state constitutions like the one in the California case. Here’s what I wrote on these issues in Standard Form:

Just as the choice-of-law model argues against declaring same sex marriage bans unconstitutional, there are strong arguments against a constitutional amendment that would lock in current state restrictions against same sex marriage. To be sure, the process of amending the constitution, requiring votes in state legislatures, would give the states an opportunity ultimately to decide the issue. However, once decided, a particular solution would be frozen indefinitely into place. By contrast, leaving this to state law would permit a variety of solutions to flourish, and allow for change over time.

The analysis differs, however, for state constitutional amendments forbidding same sex marriage. State constitutional provisions preserve state competition over marriage laws, and therefore raise issues similar to those raised by state statutes for purposes of the federal constitution.

Finally, Congress is considering a federal constitutional provision that ensures that state legislatures, rather than federal or state judges acting under state or federal constitutional provisions, decide the issue. The problem with this approach is that it is ultimately impossible to isolate the appropriate judicial role. Among other things, there are subtle differences between interpretation and invalidation. Moreover, the same rationales for committing the issue to state law experimentation emphasized in this article apply to state constitutional decisions as well as to state statutes. Indeed, if state court decisions increase the variety of legal choices that are available to same sex couples; this further decreases the need for a federal constitutional approach.

In other words, I think the “process of reform and familiarization” the California dissent mentioned is best carried on through our federal system. While that leaves the court with the knotty question of interpreting the constitution, I am suggesting that a state court should be able to carry out this task without worrying about foreclosing the national debate.

Spitzer and AIG: three years later

In August 2005, I summarized the state of play on Spitzer vs. AIG, which led to a massive accounting restatement by AIG's board and the departure of Hank Greenberg, AIG’s longtime and highly successful CEO, to ward off a possible crushing indictment of the company:

Greenberg was the last of the imperial CEOs, and the whole Starr International setup did not seem designed for transparency or governance discipline. But history will probably demonstrate that AIG was better off with him in charge, or trusting to corporate governance processes to replace him, than with Spitzer's political maneuvering. In other words, the price tag on the costliest governor election campaign in history is mounting.

Of course we know what happened to Spitzer. Greenberg, who is still an AIG shareholder, is suing AIG over the restatement. As a result of Greenberg's departure, or the accounting restatement, or both (I suspect mainly the former), AIG is not doing so well. As today’s WSJ comments:

A careful and lengthy look at the evidence available so far . . . suggests that the AIG case, like so many others that Mr. Spitzer brought, was an example of prosecutorial excess. Instead of uncovering some great fraud by a titan of industry, its main result has been to damage the company, and harm innocent managers and shareholders. * * *Trading above $72 in February 2005 before it was Spitzerized, AIG shares closed yesterday at $39.57. The company's directors defend themselves by saying Mr. Spitzer gave them little choice but to dismiss Mr. Greenberg. Whether that was true at the time, they – and Mr. Spitzer – owe an apology to AIG shareholders.

Bainbridge on shareholder activism: do we really need shareholders?

Steve Bainbridge has a new paper, Investor Activism: Reshaping the Playing Field? In this paper he announces that directors should have less power and that we should have more shareholder activism.  Just kidding.  Really, here's the abstract:

Shareholders of U.S. corporations historically tended towards rational apathy. Holding small blocks that were unable to affect the outcome of the vote and faced with the considerable costs associated with gathering sufficient information to make an informed decision, they adopted the so-called Wall Street Rule (it was easier to switch than fight). In the last 15 years or so, a growing number of commentators and investor activists have claimed that the rising importance of institutional investors has the potential to reshape the field by empowering shareholders to become active players in corporate governance. This paper situates investor activism in the so-called director primacy theory of corporate governance. In so doing, it demonstrates that the separation of ownership and control typical of U.S. public corporations has significant efficiency benefits. It then argues that shareholder activism threatens to undermine the advantages of director primacy without offering significant countervailing gains. Accordingly, the paper concludes that pending regulatory proposals to expand shareholder governance rights should be viewed with suspicion.

As Steve points out, "institutional investor activism does not solve the principal-agent problem but rather merely relocates its locus." He makes theoretical sense. Moreover, his theory his supported by the fact that we actually observe little effective shareholder activism. The exception is union and pension funds, which proves the rule.  As Steve points out, "these are precisely the institutions most likely to use their position to self-deal—i.e., to take a non-pro rata share of the firms assets and earnings—or to otherwise reap private benefits not shared with other investors."

But if we can’t rely on the owners to keep managers honest, how can we make them accountable? Well, I have another idea – the “uncorporation,” including private equity and publicly held partnerships. See my Rise of the Uncorporation. These firms go Steve one better by effectively eliminating outside shareholders.

Of course there’s still a market for control, the conventional way to empower shareholders. But aside from strategic combinations engineered by incumbents, the disciplinary role of the control market is largely due to uncorporations -- private equity restructuring and activist hedge fund intervention.

I'll have more to say about all this, and a new version of my paper, at a conference at the University of Chicago next month.

Business, film and Chuck Lorre's vanity cards

Today’s WSJ has an amusing article about Chuck Lorre, a writer and producer of tv’s “Two and a Half Men” and “The Big Bang Theory.” Seems Lorre posts little vanity cards at the end of his shows that appear very briefly but can be read via dvr. The article has an example of a recent card from Monday. Here’s an excerpt:

When I began writing these vanity cards, I never in my wildest dreams imagined that one day they would be the subject of an extensive article in The Wall Street Journal (or as I like to call it, The Depressingly Inevitable Next Step Toward the End of a Free Press in America, Thanks a Lot Rupert, Journal). But I digress into a bitter diatribe on the profit-fueled degradation of journalism that spells the end of any hope for rational debate in this country from my initial point — which is, gratitude for all the attention my cards are receiving. I mean, let’s face it, a vanity card, by definition, is merely an exercise in personal vanity. The truly legitimate production card at the end of each episode belongs to the Warner Brothers Corporation. They’re the monolithic, multi-tiered, entirely un-integrated, boy-did-we-make-a-colossal-boo-boo-with-AOL entity which owns the facility we shoot in, deficit-finances production, distributes the shows around the world, and most importantly, maintains the shaky book-keeping necessary to hide the profits while blowing a fortune on Speed Racer. . . .

This interests me because it perfectly supports my theory of capitalism in film. In my paper, Wall Street and Vine, I argue that artists in general, and film artists in particular, are not so much anti-business as anti-capitalist. They have that attitude because they believe the capitalists constrain creative expression – particularly in film, in which expression takes wads of money. In other words, anti-capitalism in film is a product of artists' resentment.

Why do the capitalists permit their vassals to smuggle this resentment into their films? Well, agency theory teaches us that constraints on agents are costly, and these costs are only worthwhile up to a point. It makes no sense to spend $10 to reduce theft by $9. By the same token, it would not pay for studios to put such tight constraints on their writers and directors that they could not attract the best people.

Thus, the best people get more slack. Or as Leslie Moonves says in the WSJ article: "If someone wants to give me two hit television shows, they won't hear from me -- except for when I'm going to get in trouble with the FCC."

Another way of looking at this is that giving artists more creative freedom is a way of paying them. The pay is pretty cheap, too, if the resentment is unleashed in a minor plot twist, for example, that doesn’t really bother most people, and pleases at least some of the audience. Why make the villain a possibly politically incorrect stereotype when you can use an evil drug company?

My theory focuses on film, and suggests that commercial television might be different because the need to sell advertising introduces a monitor in the form of the advertising market. So you wouldn’t expect Mr. Lorre’s screeds to go into the show. But a quick little shot only legible via dvr is a different matter.

Until this WSJ article, I had only a lot of circumstantial evidence of my artists' resentment theory of anti-capitalism in film. But now I’ve got a great anecdote, which after all is the singular of data.

A Clear Channel lesson: where can you sue?

Steve Davidoff has a good analysis of the Clear Channel settlement, and list of lessons learned from the deal, including this one:

6. Choice-of-forum and choice-of-law clauses matter. Once again, as in Finish Line/Genesco, differing choice-of-forum clauses made a difference. The ambiguity in the choice-of-forum clause in the debt commitment letter permitted the private equity firms to sue for tortious interference in Texas. Again, expect parties to focus on the wording of these clauses and avoid uncertain judicial jurisdictions and law, i.e., places other than New York or Delaware. The fact that Clear Channel was able to obtain a temporary restraining order on a $20 billion deal from the Texas judge by going to his home in the early evening proves this point.

Yep. Note that choice of law and forum are interrelated, in part because courts tend to enforce choice-of-law clauses that choose local law.  And this raises the question of where the corporate “internal affairs doctrine” leaves off and conventional choice of law rules begin. The problem is, there isn’t a sharp dividing line, because the internal affairs doctrine is basically a rule about enforcing choice of law clauses. For more on this, see my and Erin O’Hara’s Corporations and the Market for Law.

Looks like the big money might finally be getting very interested in these formerly arcane issues.

Ben Stein and Clear Channel

Back in September 2006 a certain journalist-cum-clown wrote that management buyouts should be banned as rip-offs. I responded with a question: "Have you wondered why the shareholders approve these transactions?"

A couple of months later Clear Channel agreed to a buyout at 37.

Then in January 2007 I wrote about reports that some Clear Channel shareholders, led by its largest shareholder, Fidelity Management & Research [perhaps prodded by a certain high-profile NYT columnist?], were opposing the buyout that was then headed for a shareholder vote. The WSJ reported that "[t]he revolt signals what could be a wave of opposition to the public-to-private binge sweeping the markets." But I noted that the WSJ had also pointed out that companies rejecting buyouts also saw the premium vanish. In Clear Channel’s case, the premium (from the low 20s) represented a very high debt load. I theorized that the alternative to a buyout deal – self-help restructuring – may not be such a great alternative, since you need the special talents of the buyout firm to make this significant debt load work.

After several months of back-and-forthing, the newly empowered Clear Channel shareholders did manage to squeeze a couple more dollars a share out of the buyout firms, and the deal was finally approved in September 2007 for 39.20.

Then the economy turned south. It didn't have to go very far south to make the heavy debt load that supported the $39 price a dubious proposition.  The lenders balked, litigation ensued, a judge hesitated to force the lenders to go ahead, a trial loomed.

Today we hear that everybody’s settled. The new price: $36/share.

But we're not there yet. Today's WSJ observes that this means the company will have to redo its proxy materials, a process that could take "much as three months. Then, the company may need a month to solicit shareholder approval.”

Some shareholders might opt for the "stub equity" option, which instead of cash gives shareholders a portion of the private company. Still, many shareholders will simply be happy to cash out, especially given that the stock has traded below $30 for much of this year. That's good news for Clear Channel, which under Texas law needs a two-thirds shareholder majority to complete its privatization.

Guess we're learning the answer to my question from September 2006 of why the shareholders were approving these transactions.

Hedge funds and jurisdictional competition

From Dealbook:

California has backed away from a controversial proposal to regulate hedge funds under strong opposition from its hedge fund industry. . . . California withdrew its proposal this month after many hedge fund industry officials suggested the lightly regulated investment funds could move to another state if California started regulating them.

Yes, and they would take with them all those huge houses, big cars and taxes paid by hedge fund managers. I previously discussed Connecticut's similar conundrum.

California is used to having its regulatory way because many firms can’t avoid its market. But hedge funds can operate just fine without California. So California is learning the same lesson that the U.S. did after SOX (and would learn again if it clamped down on hedge funds).

The general theory is in my Erin O’Hara’s Corporations and the Market for Law, and in our forthcoming book, The Law Market.

Hedge funds as whistleblowers

Corporate managers notoriously are tempted to fudge the truth about their firms. The law’s usual strategy is to threaten an army of gatekeepers – outside directors, corporate officers, accountants, lawyers – with criminal and civil penalties for not reporting fraud. The second line of defense is to encourage whistleblowers to come forward by protecting their jobs. SOX, of course, was big on both of these approaches. The only problem is that neither approach works very well. It seems that gatekeepers and employees are stubbornly nervous about blowing up their careers by squealing.

There is another way. Whistle-blowing is all about information. Thanks to the stock market, information is, as Gordon Gekko said, “the most valuable commodity I know of.” Most trading on information (including a lot of the “insider” trading portrayed in Wall Street) is legal, and it’s done today by hedge funds. And as Bruce Kobayashi and I argue in our Insider Trading as an Incentive Device, “outsider trading can provide incentives for socially beneficial conduct. In particular, outsider trading provides an important way to capitalize on investments in information that are not otherwise protected by the intellectual property laws.”

However, outsider trading in general, and short-selling in particular, doesn’t sit well with corporate managers. They like their investors to be patient. Short-sellers don’t wait for the managers’ brilliant strategy to pay off. Short-sellers make money by exposing managers’ lies. Firms would like to see short-sellers go to jail (as Gekko ultimately did), or at least go out of business.

The public shares this view. Whistleblowers are romantic heroes. They get to be played in movies by sympathetic actors like Russell Crowe. Short-sellers and other stock traders, on the other hand, are greedy capitalists. They get played by vest-wearing actors with greasy hair. (Apparently, according to Christine, there's even a little of this in Speed Racer, reason number 5001 for not seeing it). The unsurprising result of this political dynamic is an intermittent war against shorts, as I’ve written, e.g., here and here.

Which finally brings me to Jesse Eisinger’s flattering Portfolio column on David Einhorn, a hedge fund manager who's been engaged in a long-running battle with a company he shorted, and now has written a book about the whole affair. Eisinger portrays Einhorn as a heroic whistleblower.

Maybe Eisinger's column is a sign that the tide is turning. I’m looking for Einhorn to get a movie contract. We may even get our first hedge fund movie hero – the first step toward a sensible public policy on incentives to produce information.

Money

You know the best things in life are free.  But you can give them to the birds and bees.

Arthur Brooks has some worthwhile thoughts about capitalism .  Here it is in a nutshell: (1) Success makes us happy; (2) in a capitalist economy, we tend to measure success by money; so (3) money makes us happy, and more money makes us happier.

Take the case of billionaire Larry Ellison, founder of Oracle. The world’s 14th-richest man, he would need to spend more than $30 million per week, or $183,000 per hour, just to avoid increasing his wealth. Further, he would have to spend it on items with no investment qualities, meaning that, unless he sets his money on fire, or (better yet) gives it away, he simple cannot not be filthy rich. Yet he continues to slave away, earning billion after billion. Being rich, and having more than the average Joe, simply cannot be driving Larry Ellison. It is the will to succeed and create value at greater and greater heights.

Who enjoys the benefits created from the slaving of Bill Gates (worth $58 billion and counting), Warren Buffett ($62 billion), and all of America’s other success-addicted, ultra-rich entrepreneurs? We all do: As long as fortunes are earned—as opposed to stolen, squeezed from governments, or otherwise extorted from citizens—this is good for all of us. Oracle has not made Larry Ellison a rich man without any benefit to society. The firm currently has tens of thousands of employees, people with well-paying jobs to support their families. The company has introduced technology that has benefited all parts of the economy, and it has paid billions to its shareholders. And we can’t forget that Oracle has rendered generously unto Caesar, year after year: In 2007 alone, it paid $1.2 billion in corporate taxes, totally apart from the personal taxes paid by Ellison and his employees. * * *

Brooks might have added that Ellison, Gates and people like him also give lots of money away.

I have some more thoughts in the same vein.  One reason why money works so well as a success generator is because in a market economy it can get you anything you want. In other words, it’s really markets that make us happy.

Another great thing about money: in order to get it in a market economy, you have to sell things to other people. In order to do that, you need to provide them with something that increases their happiness. Compare war, for example. Now, to be sure, that gives capitalists incentives to create wants. But that’s not necessarily a bad thing. After all, if you don’t want anything, what’s going to make you happy?

Brooks concludes:

[C]apitalism is the best system to allow people to succeed on their merits in the economy—and we know that it is success that truly does bring happiness. Capitalism, moored in proper values of honesty and fairness, is a key to our gross national happiness, and we should defend it vigorously.

Are you ready for the frivolous five?

It's a bit off topic but there was simply no resisting this.  I dare the NYT to top this.

CEOs aren't overpaid

Marc Hodak has some thoughts worth sharing in Forbes:

Consider that the average S&P 500 company has a market value on the order of $10 billion. If one had to choose among CEO candidates, and the board believed that one candidate's leadership was likely to yield a return on capital just one percentage point better than the next best candidate's, that difference would be worth $100 million per year to investors. A conscientious board with the shareholder's interests at heart could hardly risk letting the best candidate go elsewhere over even a few tens of millions of dollars. * * *

Nearly every reform attempting to rein in CEO pay has been based on some version of the managerial power thesis. These attempts have proved ineffective or backfired in exactly the way one would expect if executive compensation were driven by a reasonably well-functioning market for talent. * * *

[T]o continue to recommend and implement reforms based on a theory that directors are lazy, incompetent or corrupt--or that competition for talent is an afterthought in setting pay--only invites policies that impose costs on companies for which there may be no offsetting benefits, and which may create distortions that actually undermine shareholder value.

The battle for the heart of Delaware uncorporations continues

In my Uncorporation and Corporate Indeterminacy, I contrast the indeterminacy of corporate law with the Delaware uncorporate cases, in which “Delaware lawmakers provide substantial coherence by focusing on the parties' contracts.” I backed this up with a detailed analysis of recent Delaware limited partnership and LLC cases.

This is consistent with Delaware Chief Justice Steele’s admonition, in Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1,4 (2007) that “[c]ourts should recognize the parties' freedom of choice exercised by contract and should not superimpose an overlay of common law fiduciary duties, or the judicial scrutiny associated with them, where the parties have not contracted for those governance mechanisms in the documents forming their business entity.”

This emphasis on the contract is an important part of what I view as the heart of the uncorporation. 

Nevertheless, I worried in my article that "the judicial tendency to apply corporate rules is always lurking and that courts have not yet completely severed the uncorporate cases from corporate indeterminacy."

Recently Chancellor Chandler had an opportunity to come down on the side of applying the contract, in a case I described here. However, in a more recent limited partnership case, discussed here, Vice Chancellor Parsons went out of his way to read a proper purpose requirement for inspecting books and records into a limited partnership agreement that plainly did not have one.

Another shoe dropped Wednesday when Chancellor Chandler, in Fisk Ventures, LLC v. Segal, 2008 WL 1961156 (no link yet) refused to limit LLC members' clear veto power under an LLC agreement. Here’s some of what the Chancellor had to say about the plaintiff’s various attempts to read contractual, good faith and fiduciary duties into a contract that didn’t have any (some footnotes omitted):

The sine qua non of pleading an actionable breach is demonstrating that there was something to be breached in the first place. In other words, before the Court can start worrying about whether or not there was a breach, the Court needs to determine that there was a duty.In the context of limited liability companies, which are creatures not of the state but of contract, those duties or obligations must be found in the LLC Agreement or some other contract.FN34

FN34.See, e.g., Myron T. Steele, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 DEL. J. CORP. L. 1, 4 (2007) (“I conclude that parties to contractual entities such as limited liability partnerships and limited liability companies should be free-given a full, clear disclosure paradigm-to adopt or reject any fiduciary duty obligation by contract. Courts should recognize the parties' freedom of choice exercised by contract and should not superimpose an overlay of common law fiduciary duties....”).

* * * [T]he LLC Agreement endows both the Class A and Class B members with certain rights and protections. In no way does it obligate one class to acquiesce to the wishes of the other simply because the other believes its approach is superior or in the best interests of the Company. To find otherwise-that is, to find that the Court must decide whose business judgment was more in keeping with the LLC's best interests-would cripple the policy underlying the LLC Act promoting freedom of contract.FN35

FN35.See Larry E. Ribstein, The Rise of the Uncorporation 3 (Illinois Law and Economics Research Papers Series, Research Paper No. LE07-026, 2007) (“[U]ncorporate firms have flexible control rules and permit contractual modification or even elimination of fiduciary duties.”), available at http://ssrn.com/abstract=1003790; Sandra K. Miller, The Role of the Court in Balancing Contractual Freedom with the Need for Mandatory Constraints on Opportunistic and Abusive Conduct in the LLC, 152 U. PA. L.REV. 1609, 1616-17 (2004) (“The Delaware LLC statute stands out, however, for its lack of mandatory rules and its express policy to ‘give maximum effect to the principle of freedom of contract.’”); Larry E. Ribstein, Fiduciary Duty Contracts in Unincorporated Firms, 54 WASH. & LEE L.REV. 537, 594 (1997) (recognizing that the Delaware LLC act allows parties “to alter default duties in their agreements as long as they are held to good faith compliance with their contracts”). *

Although occasionally described in broad terms,the implied covenant is not a panacea for the disgruntled litigant. In fact, it is clear that “a court cannot and should not use the implied covenant of good faith and fair dealing to fill a gap in a contract with an implied term unless it is clear from the contract that the parties would have agreed to that term had they thought to negotiate the matter.”Only rarely invoked successfully, the implied covenant of good faith and fair dealing protects the spirit of what was actually bargained and negotiated for in the contract.

* * * [T]he Genitrix LLC Agreement eliminates fiduciary duties to the maximum extent permitted by law by flatly stating that members have no duties other than those expressly articulated in the Agreement. Because the Agreement does not expressly articulate fiduciary obligations, they are eliminated. * * *

Bottom line: Chief Justice Steele and Chancellor Chandler have made it clear that the contract controls uncorporations in Delaware. Hopefully the rest of the Delaware judiciary will get on board.

There is, however, one possible caveat to this analysis.  Chief Justice Steele suggests that the courts should not add duties to the contract.  Chancellor Chandler, saying that fiduciary duties not stated are eliminated, was also at pains to note that the agreement had eliminated them.  So what result here without an express elimination of duties? 

As discussed in my article linked above and in other writings, the Delaware cases have made it clear that the parties must contract carefully to waive fiduciary duties, as the parties did in Fisk. In other words, courts will add fiduciary duties to the express contract if the parties don't negate them. This can be reconciled with CJ Steele's admonition in this way: in the absence of contrary agreement, the fiduciary duties are part of the Delaware standard form contract, consisting of statutory and common law default rules. This seems sensibly consistent with the parties' usual expectations.

Update:  Here's Francis Pileggi's thorough analysis.

Hot off the press: An Analysis of the Revised Uniform Limited Liability Company Act

The published version of my study of RULLCA, appearing in the Virginia Law and Business Review, is must reading for lawyers thinking about adopting the Act in their states. My advice in a nutshell: don’t.

And by the way, as with its sparsely adopted predecessor, the moniker “uniform” is an aspiration rather than a description, and not a very realistic one at that. Promulgated in 2006, RULLCA is so far uniformly the law all over Idaho.

If you want some guidance, states like Delaware and Virginia have been polishing their LLC acts for years. Also, an American Bar Association subcommittee is working on a Revised Prototype LLC Act which promises to be a far superior model than this product of the National Conference of Commissioners on Uniform State Laws.

You got to know when to hold em

I've been watching the bidding pretty closely for the last few weeks, thereby taking America's pulse (as well as you can do that in Greenwich Village). Tonight was the first sudden shift in sentiment I've seen -- a 55% drop from this afternoon (from 28 to 12).  This reflects the reality that the NC wipeout plus the squeaker in Indiana will finally convince the super-d's that they have no remaining basis for denying Obama.  From now on it's about ego and face, not about possibility.

And know when to fold em.

Update:  On Wednesday morning, Clinton is trading at about 10.  The underlying math is provided by CNN's handy delegate counter. By my calculation, if Clinton takes 55% of WV, KY and PR, and Obama takes 55% of Mt, OR and SD, all estimates that seem to me favorable to Clinton, Obama needs only 30% of the still uncommitted super-d's to clinch the nomination.  Only a major Obama skeleton or gaffe can produce that result.  Do Clinton and the uncommitted super-d's know something we don't?  Otherwise I'm not sure I follow their calculation.

Paredes to SEC

As I wrote back in February, it's a good thing.

Microhoo still lives

Me yesterday morning:

The gurus are saying Yahoo stock will drop to the low 20s, but that assumes no MS. Watch Yahoo stay around, say, 26 or so over the next couple of days.

Yahoo right now: 25.64, after getting up to 26.25 today.

More Wright on the future of law and economics

Josh Wright has another installment in his useful series on the future of law and economics, this time focusing on law and economics scholarship and whether it will happen in law schools.

He comes out at about the same place I have: the future lies in collaboration between legal and economics scholars. Let me reiterate: the economists bring a lot to the table, but the lawyers provide the institutional background that is essential for good law and economics.

The concern, of course, is that both types of scholars have at least short-term incentives to try to capture all of the rents, and in the process sacrifice quality. I’m hoping, and expecting, that the market for academic work is efficient enough to ultimately get the incentives right.

So I think good law and economics will continue to come simultaneously out of law schools and economics departments, as long as both types of experts understand and play their proper roles.

Delaware uncorporation jurisprudence takes a step back

Francis Pileggi has an interesting post on a books-and-records claim in connection with a limited partnership takeover. His thorough description of the case leaves little work for me in that regard, but I do want to make a few points about two interesting aspects of the case.

First, As Mr. Pileggi suggests, there is the fact that the Delaware court was willing to imply a proper purpose requirement into an agreement that plainly didn’t have one. Indeed, the court went out of its way to do so, since it had already determined with some basis that the agreement didn’t cover the request, and that there was no improper purpose problem with materials that would have been within the agreement.  The court expressed concern at several points in the long opinion that the plaintiff was interested in the books and records mainly as a potential bidder for control rather than an owner.

My article The Uncorporation and Corporate Indeterminacy discusses my hopes and concerns about whether courts would, as they should, apply contracts rather than general governance rules in uncorporation cases. An opinion last month by Chancellor Chandler gave me cause for hope. This case pushes me back slightly in the direction of concern.

Second, the case is interesting for the light it casts on takeovers in uncorporations. I’ve written in my Rise of the Uncorporation that even publicly held uncorporations are generally fairly takeover-proof because the owners often have minimal management rights, and the rights may not be tradable. I have reasoned that this doesn't leave the owners too vulnerable because the tradeoff is that they get some assurance of receiving a stream of cash flows.

But here we have a takeover.  Moreover, the court characterizes the plaintiff as specializing in tender offers for partnerships, a business that is given some legs by the deep discounts in the targets’ real estate investments. So the partnerships' governance structure does allow room for takeovers to come into play when the firm is facing particularly hard times.

Unless, that is (as in this case), the courts decide to add takeover protection that the firm’s agreement does not expressly provide.

The politicians, the economists and the gas tax

From today's WSJ:

Host George Stephanopoulos -- a former staffer in President Bill Clinton's White House -- quoted Princeton economist and New York Times columnist Paul Krugman, who has written in support of Sen. Clinton's policies in the past but called the [gas tax holiday] idea "pointless and disappointing." Mr. Stephanopoulos then asked Sen. Clinton to name "a credible economist who supports the suspension." Sen. Clinton responded in the populist tone heard in many of her recent stump speeches. "We've got to get out of this mind-set where somehow elite opinion is always on the side of doing things that really disadvantage the vast majority of Americans," she said.

Economics is a tool that informs policy. You can bring your ideological priors to policymaking, but don’t you want to know what the effect of those policies will be?

For the record, here’s Paul Krugman:

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers. Is the supply of gasoline really fixed? For this coming summer, it is. . . . . The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.

Basically, when Clinton dismisses the economists, she is saying she doesn’t care what the effect of her proposal is. Let’s get at least that clear.

One other point:  from a public choice perspective, the gas tax is actually a good tax because it is salient to the taxpayers rather than hidden, thereby making the political choice more viable.  Clinton and McCain, like typical politicians, would rather keep the tax under the rug.

Microhoo lives?

I pointed out yesterday that it’s unclear Microhoo is finished. The simple reason is that the deal is close to an economic imperative for Microsoft. The economies of scale in Web ad sales demand that Microsoft be as big as Google, and Yahoo would seem to be the only way it gets there. NYT’s Dealbook supports that in an interview with a big Yahoo shareholder, Legg Mason’s Bill Miller:

“They didn’t have a prayer of competing with Google without Yahoo,” he said. The difference between Microsoft’s offer of $33 a share and Yahoo’s demand for $37 a share was a few billion dollars, an amount of cash that Microsoft generates in just a few months, he said. For Microsoft, the downside of not buying Yahoo is far greater than the risk of overpaying for Yahoo by a small margin, he said.

Today’s WSJ repeatedly hits the theme that the deal isn’t dead, e.g., here and here.

Under this reasoning, Ballmer’s exit was a ploy to pound Yahoo stock down to a more reasonable level, as I also noted yesterday. But will that work if the market expects another bid? The gurus are saying Yahoo stock will drop to the low 20s, but that assumes no MS. Watch Yahoo stay around, say, 26 or so over the next couple of days.