Ideoblog

Rise of the Uncorporation: Tomorrow at Searle

Tomorrow I’m going to a Searle Center Research Roundtable on Jon Macey’s book, Corporate Governance: Promises Kept, Promises Broken and my forthcoming Rise of the Uncorporation. I’ve enjoyed past roundtables, but this is my first stint as target. It's a good group and should be interesting.

The book is nearing completion – watch for more on the book in coming weeks. At last, in one place, everything you wanted to know about the uncorporation, big and small, past, present and future.

The future of the auto industry (and the death of American capitalism)

Well, it looks worse than I hoped. Per the WSJ, the government may get a majority of GM, with most of the rest belonging to the workers (who are also in line to control Chrysler). So the once proud US auto industry will become a WPA project. 

I wonder if the car of the future will look like this. Which government agency will handle our complaints about the windshield wipers?  Or can we go right to the president?  Does this mean that the government will use regulation to hammer its competition?  Here's more on that sort of thing.

Well, at least the government won't have to worry about auto industry cooperation with its environmental or whatever agendas.  We can replace corporate social responsibility with the more straightforward corporate social duty.  And they will finally get me, by force of law, to invest in a car company. 

But I do know this: they can harass me, they can torture me, they can force me to walk on a bed of nails, but I will never, ever, buy a government-built car.

Big fins and a ragtop

So it seems that GM is planning on dumping Pontiac along with Saturn, Hummer and Saab. That would leave Chevy with about 80% of GM's market, plus GMC, Buick and Cadillac. I’m not sure where the synergy is with GMC, so let’s dump that, too. Buick's market is literally dying.

So here’s my plan for post-bankruptcy General Motors: Chevrolet and Cadillac.

Why Cadillac? Now, I’m a BMW guy myself. But here's the car I’ve always really wanted. And here's the song.

Some thoughts about business, film and law

The Illinois Business Law and Policy Roundtable on the portrayal of business in film, previously noted here, wrapped up yesterday. After a day of thought-collecting I have some details and observations.

First, the details. The participants were a sort of intellectual Noah’s ark of folks who brought a variety of perspectives, including an entrepreneur (Virginia Boyd), a journalist (John Carney of Clusterstock), law professors with general interests in film and law (John Denvir, USF, David Papke, Marquette, Barak Orbach, Arizona, David Ritchie, Mercer), journalism professors (Matthew Ehrlich and Amy Gajda of Illinois (who also teaches law)), a non-law academic with an interest in popular culture (Judith Grant, Ohio University), and corporate law scholars with interests in culture and film (Peter Huang, Temple, Mae Kuykendall, Michigan State, and Usha Rodrigues of Georgia). My colleague Christine Hurt was the main organizer, and Christine, Nicola Sharpe and I kept the discussion going.

I had a couple of other roles in the conference – target, and curator. As target, I provided the theory that the participants could shoot at, via my papers Wall Street & Vine and Imagining Wall Street. My theory is that what might seem to be negative view of business in film is, more accurately, a negative view of capitalists. I think the most important (though not the only) explanation of this view lies in film artists’ resentment of the constraint that capitalists put on their self-expression.

This theory matters because it affects the story (or what some would call “narrative”) of business that is presented in countless films: the heroic artist (sometimes represented by journalists, gunfighters, athletes, entrepreneurs) struggling against the capitalists and often exposing the evils they would prefer to hide. Since the general public lacks a clear countervailing view, this narrative directly or indirectly affects decisions made in the jury room, voting booth, boardroom, and the halls and offices of Congress and administrative agencies.

As curator, I picked the movies. Here they are, detailed for the academics and others out there who may want to follow up on this subject or present it in class. Film clips are identified by approximate timings or scene numbers on the DVDs. For general descriptions of the films, see www.imdb.com.

Introductory movie: The Insider. Here we see both sides of the narrative – the evil corporations (Brown & Williamson and CBS) and crusading journalist.

Session #1; The Evil Corporation: Analyzing and preliminarily discussing Hollywood’s negative view of business. Michael Clayton 1:47:47-1:52:31; Erin Brokovich, 1:55:44-1:57:55; Tucker, 1:39:10-1:42; The Aviator, 1:57:37-2:03:15. Note that these clips presented two alternative views of the corporation -- as evil manipulator, and as the victim of government. My point was that there is more than one possible way of characterizing corporations.  Why do we see mainly the first, and rarely the second?

Session #2; How films deal with specific participants in firms (capital, labor, management): Executive Suite, 37:10-40:00; It's a Wonderful Life, 1:07:36-1:12:45; Wall Street, 1:34:20-1:38; Hudsucker Proxy, Scene 5; Glengarry Glen Ross, Scene 3; The Big Knife, Scene 13; Hudsucker Proxy, Scene 4.

Session #3; Explaining Hollywood’s View of Business: Executive Suite, 1:31:20-1:41:52; The Insider, 1:43:53-1:48:22; Big Night, 22:50-29:15; Quiz Show, 2:05:31-2:09.

Session #4; To what extent does the Hollywood view reflect the reality of business? Pursuit of Happyness, 1:48:25-1:51:30; Other People’s Money, 1:24:31-1:30:27.

Session #5; The Political and Public Policy Impact of Film: Silkwood (2:04:30-2:08:20); China Syndrome, 13:00-21:30 (plus the commentary from around 5:00 explaining the making of this scene). In this session we also discussed a Dubner-Levitt NYT article, The Jane Fonda Effect, about the public impact of this film and the Three Mile Island incident, which happened only a few days after the film’s release, on the nuclear power industry.

Session 6 was intended to be an open-ended discussion about the film industry and how the evolution of that business might affect films' portrayal of business. But our scheduling of the conference in conjunction with a major local film festival, Ebertfest, paid an important dividend. We were able to induce an actual filmmaker, Nina Paley (whose film Sita Sings the Blues is playing today at Ebertfest), to join us.

Of course I couldn’t resist the temptation to ask Nina what she thinks of business and how this is reflected in her films. Given Nina’s complete independence, enabled by her low budget, the standard story of the artist’s capital constraint would not seem to apply. And this may be an important model going forward, as films can be independently financed and produced at low cost on personal computers. This is basically what Nina said.

So will the evil corporation retreat to the sidelines in films – where it already is in plays and books? Maybe not. our filmmaker also pointed out the sharp constraints placed on her work by the extended copyrights controlled by large corporations. And her next work is going to deal with these issues.

Throughout the conference the participants pushed from all sides at my story. They pointed out that there were a lot of other things going on in films that contribute to what we see – audience demands, other things artists have on their minds, etc. For example, audiences are looking for convincing villains, and alien, impersonal corporations are handy targets.

But I’m sticking to my story. Filmmakers could make corporations more personable and user-friendly if they wanted to. Hence the clip I showed from Pursuit of Happyness. See also, e.g., Tom Hanks in Cast Away. Audiences may resent corporations, but they don't necessarily care as much about capitalists as the artists do.  Maybe that's why we don't see more films like Office Space.

And if you’re looking for a villain, why not government? There’s no better example than the critical confrontation between Howard Hughes (Leonardo DiCaprio) and Senator Brewster (Alan Alda) in The Aviator. Brewster (who’s portrayed as being in the pocket of PanAm’s Juan Trippe) threatens to put TWA out of business by giving a monopoly on overseas flights to PanAm. Brewster tells Hughes that he should go along, explaining: “It's not me Howard. It's the United States government. We just beat Germany and Japan. Who the hell are you?"

The bottom line is that it is pretty clear that a narrative of business is being constructed both in film and the popular press (though Mae Kuykendall has her doubts). Law and economics types like me generally eschew narrative theory as soft stuff, lacking rigor. But that leaves the construction of the critical stories to others. Moreover, this is an area that is susceptible to both rigorous public choice analysis and data about the construction and effect of the story. That’s the discussion I’m trying to promote.

Finally, this conference further convinced me of the value of this type of gathering. Unlike the typical law school conference, this was not a law-review-driven collection of mini-workshops on papers in process. Though that sort of conference can be valuable, too often it amounts to the retailing of ideas that are best done in other ways. This was instead an extended discussion that, I hope, contributed to the process of forming ideas. In our digital age, this could end up being the primary function of physical meetings among academics.

Morgenson still silent on the NYT

As I have pointed out before (e.g.), the NYT’s Gretchen Morgenson, while loudly complaining about undemocratic corporate governance throughout corporate America (see my archive), hasn’t said anything “about the Stalinist corporate structure in her own backyard.”

And of course she’s railed even more loudly about executive pay. Nevertheless, as reported recently (HTBainbridge), her silence about her own employer continues even as the NYT pays its executives significant bonuses in the face of dismal financial results while asking employees to take pay cuts.

Surely Morgenson could provide special insight on this story. Could it be that the Times doesn’t want this story told about itself, even as it sold the story on others? Just asking.

Me on tv on Madoff

I have condemned the SEC as an “unwitting accessory” to the Madoff fraud. This view is also expressed today by one of Madoff’s investors. 

Now you can see a somewhat more extended presentation of my views of the SEC’s Madoff performance (“one of the most spectacular regulatory failures of all time”) on a U of I-produced TV show also featuring my colleague Christine Hurt. We're on the first two segments.

VC Strine on LLC fiduciary duties

A recent decision by Delaware VC Strine in Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, decides a number of issues involving the implied covenant of good faith and fair dealing, fiduciary duties of LLC managers, fraud and aiding and abetting breach. Francis Pileggi does his usual excellent job of analyzing the case, so I will simply refer to that for the longer analysis and highlight a couple of specific points.

First, the court interprets an agreement that did not clearly opt out of fiduciary duties as providing for the full range of corporate-type fiduciary duties of the LLC’s manager. VC Strine reasoned (footnote omitted):

the interpretive scales also tip in favor of preserving fiduciary duties under the rule that the drafters of chartering documents must make their intent to eliminate fiduciary duties plain and unambiguous.

I’ve discussed this Strine approach in my Uncorporations and Corporate Indeterminacy (2009 Illinois L. Review 131, 165), noting that

Vice Chancellor Strine’s admonition to lawyers not to address fiduciary duties “coyly” could require such careful and costly drafting that it makes fiduciary duties in effect mandatory. Even a moderate insistence on careful drafting could put fiduciary duty waivers out of the reach of smaller firms. In other words, by making very skilled drafting the price of avoiding indeterminacy, Delaware’s uncorporate law may be trading lower litigation costs for higher fees to transactional lawyers. This may reserve the benefits of the uncorporate approach only for the largest and most sophisticated uncorporations.

While I still think this drafting burden issue is a potential concern, I’m not worried about it in the seemingly significant number of cases, like this one, in which the agreement seemingly is at war with itself.  Here the agreement provided:

Section 6.1 Relationship of Members. Each Member agrees that, to the fullest extent permitted by the Delaware Act and except as otherwise expressly provided in this Agreement or any other agreement to which the Member is a party: . . . (b) The Members shall have the same duties and obligations to each other that members of a limited liability company formed under the Delaware Act have to each other.

Section 6.2 Liability of Members. . . . Except for any duties imposed by this Agreement . . . each Member shall owe no duty of any kind towards the Company or the other Members in performing its duties and exercising its rights hereunder or otherwise.

Maybe the lawyers carelessly used boilerplate, or maybe the parties just hadn’t made up their minds how much they wanted to opt out of fiduciary duties. In either case it is sensible for the courts not to give the parties an agreement they were unable or unwilling to give themselves.

A second issue is whether affiliates of a managing member can be liable for breach of fiduciary duties. This liability has often been recognized in partnership cases. See Bromberg & Ribstein Section 6.07(a)(8). I note in Ribstein & Keatinge (§9.9, n. 6) that it may also be recognized in LLC cases, citing Federalpha Steel LLC Creditors' Trust v. Federal Pipe & Steel Corp., 368 B.R. 679 (N.D. Ill. 2006) (where the LLC to which duties were owed owned the manager). VC Strine says it’s a case of first impression in Delaware LLCs, and that may be true.

Finally, and perhaps most importantly, the court held that liability for fraud may lie against the individual owner and manager (Nevis) of the managing LLC. The court reasoned that under settled Delaware law [footnotes omitted],

[a] corporate officer can be held personally liable for the torts he commits and cannot shield himself behind a corporation when he is a participant.” This includes situations where a corporate agent participates in corporate fraud. Nevis does not argue that he cannot be held individually liable for his participation in fraud committed by PKI, or that he did not participate in the activities that Bay Center alleges were fraudulent. Instead, Nevis argues that PKI’s actions were not fraudulent because PKI had no duty to speak, so there was no fraud for Nevis to participate in. But, as discussed above, I find that Bay Center has stated a claim that PKI’s conduct constituted fraud. Bay Center may therefore also move forward on its claim against Nevis individually for his participation in the alleged fraud.

This reasoning, taken too far in this context, could eviscerate the liability shield. I’ve noted in Ribstein & Keatinge, Section 12:4, n. 1, that

some cases amount to findings that the act of managing an LLC may result in personal culpability. This may be justified where there is a strong need for such culpability * * * In other cases, the liability may be an unjustified abrogation of the limited liability shield.

I cited as a particular example Estate of Countryman v. Farmers Co-op. Ass'n, 679 N.W.2d 598 (Iowa 2004), which reversed summary judgment in favor of manager and 95% that provided managerial services, including ‘‘safety management,’’ in a suit arising out of explosion of propane gas provided by LLC.

The problem here is that a business entity has to be managed by someone. If when the LLC commits the tort the manager is the tortfeasor, what’s left of limited liability for torts?

I can understand that you wouldn’t want to let an LLC manager lie with impunity. But in Bay Center the fraud claim was based on a breach of the managing member's duty to disclose. That member was the LLC, not Nevis.  Without some basis for veil-piercing, this theory gets pretty close to, if not crosses, the line I’m drawing.

Offshore vs. onshore

There's an interesting review of my and Erin O'Hara's new book, The Law Market, in the Cayman Financial Review. Here's the gist:

Surely, it couldn’t simply be a popular distraction designed to take away from the onshore greed and incompetence which gave rise to the world’s current economic crisis? Erin O’Hara and Larry Ribstein’s new book, The Law Market may suggest to some that it is. I hope that President Obama will find time from bailing out US banks and insurance companies from the consequences of their fiscal irresponsibility and inept behaviour to read it; he may (or may not) be surprised to learn from this book how many states have sought, and still seek, to emulate the offshore centres which he so publicly denounces. * * *

The authors give interesting insights into other areas where the domestic states compete with each other for business in much the same way as do offshore jurisdictions. * * *

I * * * found it fascinating to learn that Delaware and South Dakota repealed their usury laws in order to attract credit card companies which, as a result, are legally unconstrained in the interest rates and late fees which they can charge customers. One can only wonder if an offshore financial centre would be allowed to get away with that.

Interesting question.  I'm working on it.  

Coming soon: The Illinois business movie roundtable

The Illinois Business Law and Policy Program Roundtable Beyond Wall Street: The Interplay Among Film, Business and the Law is coming on Thursday. Here’s my prior post.

I’ll be posting about insights and so forth from the conference. And watch this space for news about the film I’ve selected to kick off the Roundtable.

The First Amendment and the credit raters

Looks like there’s a First Amendment issue heating up with credit rating agencies. Here’s the WSJ law blog and the WSJ story.

It will be interesting to watch what happens here, because I’ve been raising 1st amendment problems with the securities laws for the last 15 years. For detailed discussions, see my and Henry Butler’s Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994), a chapter in our Corporation and the Constitution.

A few years ago I applied this analysis to SEC Reg FD.  See my WLF Legal Opinion Letter, text here.

Different types of securities regulation present different problems under the First Amendment, and clearly any application of the First Amendment would leave room for regulation.  But it would be interesting to see some more judicial recognition of the basic point that, yes, speech doesn’t lose 1st Amendment protection just because it’s about securities rather than about, say, sex. 

To be sure, the credit raters haven't exactly covered themselves with glory lately.  But the basic principle still holds that it would be better to have a free market for securities speech (to be sure, with proscriptions on fraud) than one that's wholly dictated by politicians.