That Pascal quote encapsulates why I strongly disagree with Noah Feldman’s Bloomberg column on the new word limits for federal appellate briefs. 

The new rules reduce the number of words in opening briefs by 1,000, and in reply briefs by 500.  Feldman argues that the reduction will cut down billable hours.  He’s wrong; it will do the opposite.

When I was in practice, I spent nearly as much time cutting words from briefs as I did doing the initial draft.  Every first draft clocked in at more than the then-limit of 14,000 words; in some cases, I was closer to 21,000 words my first time through.  Only after substantial editing – going over each sentence again and again, and (naturally) taking serious liberties with Bluebook format – was I able to bring briefs within the limit.  (I never went this far, though.)

(Note to Lexis:  You are at a disadvantage relative to Westlaw because your citation format for unpublished cases has more words. I did initial research on Lexis but then translated all citations to Westlaw to bring my word count down.  Rookie mistake, guys.)

For what it’s worth, I think the new limits are a travesty.  Judges often berate attorneys for prolix writing – particularly when they’re drafting complaints, while trying to meet increasingly byzantine pleading standards – and it’s unfair.  Yes, there are extreme cases of bad writing and bad lawyering, but at the end of the day, if lawyers had the talent of Hemingway, they wouldn’t be lawyers, and there’s a certain limit to what can be reasonably demanded.  Judges assume that if word limits are reduced, lawyers will cut the excess verbiage – usually unnecessarily florid language, hyperbole, etc – but there is just no assurance of that; lawyers often ex ante misjudge what is hyperbolic and what is substantive.   The wasted pages are a small price (for clerks) to pay in order to make sure that attorneys can get their arguments heard.  (Especially in light of evidence that word reductions harm appellants more than appellees, which I assume is due to the fact that the appellee has the district court opinion to function as a supplementary brief on its behalf).

Frankly, if there’s a pressing need to reduce judges’ reading load, I recommend jettisoning the reply brief.   Though certainly many plaintiffs make good use of replies, in my experience both as a clerk and in practice, the vast majority of replies did nothing more than repeat arguments in the opening brief, without truly responding to the arguments made in the response brief.  So if something has to be cut, that’s what has my vote.

As a professor who moved from a law school to a business school, I remain amazed how little the two legal scholarly worlds overlap. I do, however, think the overlap is increasing somewhat, as more professors move between the two types of schools and the conferences and journals becoming a bit less segregated. That said, I imagine that many of our law professor readers may have missed legal studies professor Larry DiMatteo’s (University of Florida, Warrington College of Business) 2010 American Business Law Journal article on strategic contracting. I had not read it until I moved to a business school and met Larry at a legal studies conference. Larry’s article is proving useful in my current work, so I thought I would share it here with our readers. Abstract reproduced below:

——-

This paper uses sources taken from the legal literature, as well as literature from strategy and human resource management. It explores Professor Gilson’s noted remark in the Yale Law Journal that “business lawyers serve as transaction cost engineers and this function has the potential for creating value.” This exploration focuses on the strategic use of contract law in gaining a competitive advantage and to create value. It begins by differentiating two frames of the contract paradigm. One is the internal frame in which contract law’s inherent flexibility allows for its use as a source of competitive advantage. The second frame is external since it focuses on the use of the contract paradigm in non-contractual contexts.

The paper examines the use of contract to create value and uses for examples, the commodification of information, licensing and IT outsourcing, and franchising. From there, the paper explores the use of contracts to sustain a competitive advantage (strategic contracting) and to create shared competitive advantages (strategic collaboration). It uses the creation and use of patent pools to illustrate both strategic uses of contract law. The next part focuses on the use of contracts to mitigate uncertainty in business transactions. It explores the strategic use of existing contract doctrines, the use contracts to insure performance and to deter opportunistic behavior, and the use of contracts to develop a preventive legal strategy. This is followed by the examination of contracting for innovation and contracts’ role in creating private governance structures, such as strategic joint venturing.

The final parts explore the use of contract as metaphor in nexus of contact theory in corporate law, psychological contract theory in employment law, and the potential abuse of the freedom of contract paradigm in limited liability company law. The paper then examines strategic responses to regulation by asking whether strategic avoidance or non-compliance to regulations has a place in a company’s legal strategy? The paper concludes by asking how does strategic contracting impact contract law? It answers the question by arguing that contract law change is inevitable due to a feedback loop.

Today I used Wells Fargo as a teaching tool in Business Associations. Using this video from the end of September, I discussed the role of the independent directors, the New York Stock Exchange Listing Standards, the importance of the controversy over separate chair and CEO, 8Ks, and other governance principles. This video discussing ex-CEO Stumpf’s “retirement” allowed me to discuss the importance of succession planning, reputational issues, clawbacks and accountability, and potential SEC and DOJ investigations. This video lends itself nicely to a discussion of executive compensation. Finally, this video provides a preview for our discussion next week on whistleblowers, compliance, and the board’s Caremark duties.

Regular readers of this blog know that in my prior life I served as a deputy general counsel and compliance officer for a Fortune 500 Company. Next week when I am out from under all of the midterms I am grading, I will post a more substantive post on the Wells Fargo debacle. I have a lot to say and I imagine that there will be more fodder to come in the next few weeks. In the meantime, check out this related post by co-blogger Anne Tucker.

Job posting from an e-mail I recently received:

——————–

The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for

lateral candidates for a tenured faculty position to hold the Clayton K. Yeutter Chair at

the College of Law. This chaired faculty position will be one of four faculty members to

form the core of the newly-formed, interdisciplinary Clayton K. Yeutter Institute for

International Trade and Finance. The Institute also will include the Duane Acklie Chair at

the College of Business Associations, the Michael Yanney Chair at the College of

Agricultural Sciences, and the Haggart/Works Professorship for International Trade at the

College of Law. The Yeutter Chair, along with the other three professors, will be

expected to support the work and objectives and ensure the success of the Yeutter

Institute. The Yeutter Chair will teach courses at the College of Law, including

International Finance. Other courses may include Corporate Finance and/or other related

classes pertaining to issues arising in international business and finance. More on the

Yeutter Institute can be found at http://news.unl.edu/newsrooms/today/article/giftsestablish-

endowed-chairs-for-yeutter-institute/ .

 

Minimum Required Qualifications: J.D Degree or Equivalent; Superior Academic

Record; Outstanding Record of Scholarship in International Finance and/or other areas

related to international business; and Receipt of Tenure at an Accredited Law School.

General information about the Law College is available at http://law.unl.edu/. Please fill

out the University application, which can be found at

https://employment.unl.edu/postings/51633, and upload a CV, a cover letter, and a list of

references. The University of Nebraska-Lincoln is committed to a pluralistic campus

community through affirmative action, equal opportunity, work-life balance, and dual

careers. See http://www.unl.edu/equity/notice-nondiscrimination. Review of applications

will begin on November 5, 2016 and continue until the position is filled. If you have

questions, please contact Associate Dean Eric Berger, Chair, Faculty Appointments

Committee, University of Nebraska College of Law, Lincoln, NE 68583-0902, or send an

email to lawappointments@unl.edu.

 

I am preparing to teach the doctrine on controlling shareholders in my corporations class tomorrow, and found the recent Delaware opinions on non-controlling shareholder cleansing votes and the BJR to be helpful illustrations of the law in this area.

In summer 2016, the Delaware Court of Chancery dismissed two post-closing actions alleging a breach of fiduciary duty where there was no controlling shareholder in the public companies, where the stockholder cleaning vote was fully informed, and applied the 2015 Corwin business judgment rule standard.  The cases are City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB,  (Del. Ch. Aug. 24, 2016) (Bouchard, C.) and Larkin v. Shah, C.A. No. 10918-VCS, (Del. Ch. Aug. 25, 2016) (Slights, V.C.), both of which relied upon  Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015).  (Fellow BLPB blogger Ann Lipton has written about Corwin here).

The Larkin case clarified that Corwin applies to duty of loyalty claims and will be subject to the deferential business judgment rule in post-closing actions challenging non-controller transactions where informed stockholders have approved the transaction.   The Larkin opinion states that:

(1) when disinterested, fully informed, uncoerced stockholders approve a transaction absent a looming conflicted controller, the irrebuttable business judgment rule applies; (2) there was no looming conflicted controller in this case; and (3) the challenged merger was properly approved by disinterested, uncoerced Auspex stockholders. Under the circumstances, the business judgment rule, irrebuttable in this context, applies. ….The standard of review that guides the court’s determination of whether those duties have been violated defaults to a deferential standard, the business judgment rule, which directs the court to presume the board of directors “acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.” In circumstances where the business judgment rule applies, Delaware courts will not overturn a board’s decision unless that decision ‘cannot be attributed to any rational business purpose.’ This broadly permissive standard reflects Delaware’s traditional reluctance to second-guess the business judgment of disinterested fiduciaries absent some independent cause for doubt.  Larkin at 21-22 (internal citations omitted).

Two-sided controller transactions (a freeze out merger where a controlling shareholder stands on both sides of the transaction) is covered by the 2014 Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014) case, which I summarized in an earlier BLPB post here.

To refresh our readers, the controlling shareholder test is a stockholder who owns a majority of stock. Additionally, a stockholder may qualify as a controller if:

Under Delaware law, a stockholder owning less than half of a company’s outstanding shares may nonetheless be deemed a controller where ‘the stockholder can exercise actual control over the corporation’s board.’This “actual control” test requires the court to undertake an analysis of whether, despite owning a minority of shares, the alleged controller wields “such formidable voting and managerial power that, as a practical matter, [it is] no differently situated than if [it] had majority voting control.’A controlling stockholder can exist as a sole actor or a control block of “shareholders, each of whom individually cannot exert control over the corporation . . . [but who] are connected in some legally significant way—e.g., by contract, common ownership agreement, or other arrangement—to work together toward a shared goal.’ Larkin at 33-34 (internal citations omitted).

Excellent commentary on theLarkin and Comstock cases and their practical implications can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation, available here.

-Anne Tucker

 

The Trump-Pence campaign has adopted a common West Virginia criticism of U.S. energy policy under the Obama administration that is known as the “war on coal.” This phrase is used to describe the current administration’s support for U.S. Environmental Protection Agency (EPA) policies to reduce greenhouse gas emissions (via the proposed Clean Power Plan) and other environmental protections that relate to consumption of fossil fuels, especially coal.  In the vice presidential debate Republican Mike Pence repeated the phrase several times, asserting that the EPA was killing coal jobs, especially in places like West Virginia and Kentucky.  The problem is that regardless of the EPA’s goals, it is not environmental regulation that is coal’s main challenge.  It is price. 

As Charlie Patton, president of West Virginia-based Appalachian Power explained, “Forget the clean power plan. You cannot build a coal plant that meets existing regulation today that can compete with $5 gas. It just cannot happen.”  Cheap natural gas, made available by horizontal drilling and hydraulic fracturing in shale formations, has led to a significant increase in natural gas-fired electric power generation, most of which replaced coal as the fuel of choice. The shale gas boom, which started approximately in 2008, can account for most of this change.  Here’s the U.S. electricity generation data by fuel (my chart using Energy Information Administration data) for 2006 to 2015):  

U.S. Electricity Generation, by fuel

Annual Total Coal  Natural Gas Renewables
2006 48.97% 20.09% 2.36%
2007 48.51% 21.57% 2.52%
2008 48.21% 21.43% 3.04%
2009 44.45% 23.31% 3.63%
2010 44.78% 23.94% 4.02%
2011 42.28% 24.72% 4.69%
2012 37.40% 30.29% 5.29%
2013 38.89% 27.66% 6.01%
2014 38.64% 27.52% 6.39%
2015 33.18% 32.66% 6.65%

 

Note the drop in coal begins modestly in 2008 and drops from 48.21% to 33.18% in 2015. In that time frame, coal lost 15.03% of the market, while natural gas increased 11.23%.  Renewable sources (not including solar and hydropower) increased 3.61% to 6.65% overall. That means that natural gas and renewables picked up 14.84% of the market — or 98.7% of the market lost by coal. 

Coal production in my home state of West Virginia has declined from the peak of 158 million short tons in 2008 down to 95 million in 2015, with further decline expected for 2016.  And the state is feeling the devastating effect of lost jobs — West Virginia was the only state in 2015-16 to lose a statistically significant number of jobs.  Tax revenues are down dramatically, and that decline, too, is expected to continue.  The harm to the state of these lost jobs is real, but there is no reasonable governmental policy that could change this decline, even if we wanted it to.  The reality is that natural gas is a cheaper option, it has long-term potential to work alongside renewables, and no energy proposal from any major candidate has suggested a proposal that would help coal take back marketshare from natural gas (despite promises to simply bring back coal jobs).  

Living in West Virginia, a place I love to live, it is easy to want hope.  We need hope, and we need a plan, but that plan has to include educating our workforce and expanding economic opportunities in other industries, not harkening back to another time that will never return. The reality is that the war on coal is not one that can be won. In the end, as a pricing problem, trying to win the war on coal is really trying to win a war on math.  It just can’t happen. The numbers don’t add up.  

 

National Business Law Scholars Conference (NBLSC)
Thursday & Friday, June 8-9, 2017

Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 8-9, 2017, at the University of Utah S.J. Quinney College of Law. 

This is the eighth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world.  We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by February 17, 2017.  Please title the email “NBLSC Submission – {Your Name}.”  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.”  Please specify in your email whether you are willing to serve as a moderator.  We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May. 


Keynote Speaker:

Lynn A. Stout, Distinguished Professor of Corporate & Business Law, Cornell Law School


Plenary Author-Meets-Reader Panel:

Selling Hope, Selling Risk: Corporations, Wall Street, and the Dilemmas of Investor Protection by Donald C. Langevoort, Thomas Aquinas Reynolds Professor of Law, Georgetown Law School

Commentators:

Jill E. Fisch, Perry Golkin Professor of Law, University of Pennsylvania Law School

Steven Davidoff Solomon, Professor of Law, University of California, Berkeley School of Law

Hillary A. Sale, Walter D. Coles Professor of Law, Washington University School of Law


Conference Organizers:

Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia School of Law)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)

Please save the date for NBLSC 2018, which will be held Thursday and Friday, June 21-22, at the University of Georgia School of Law

I am intrigued by this new genre of financial writing that warns (in increasingly apocalyptic terms) that passive investing will lead to increasingly distorted and inefficient markets.

Nevsky Capital, a large hedge fund, noisily shut its doors last year with an investor letter that blamed, among other things, index investing that distorted correlations among stocks.

Sanford C. Bernstein & Co., LLC. recently published a note declaring that passive investing is “worse than Marxism” because at least Marxism allocates capital according to some kind of principle, whereas passive investing allocates capital by the happenstance of inclusion in an index.

And a research analyst recently posted “The Last Active Investor,” a short story that posits a dystopian future in which all market prices are set by a single person performing the world’s only fundamental research.

It’s true that index investing distorts stock prices to some degree, though there has been plenty of pushback to the claim that there’s any real danger of passive investing overtaking the market, especially since the definition of passive investing itself might be somewhat malleable in an age of increasingly sophisticated computerized trading.

But what I’m mostly curious about is what sorts of policy fixes defenders of active investment would recommend.  The Bernstein note is vague on this but apparently objects to government-sponsored initiatives that would favor passive investment of pension funds.  Meanwhile, Steve Johnson writing at the Financial Times proposes that passive investing actually be taxed to subsidize active investing.   And the author of the Last Active Investor does not say so explicitly, but he appears to favor some kind of loosening of insider trading restrictions – at least, that’s what I gather from the part of the story (spoiler alert!) where the Active Investor’s fundamental research is treated as market manipulation.

Of course, it’s somewhat ludicrous to suggest that workers should invest their retirement funds in a less profitable manner so that white collar business analysts can be subsidized in their important price setting work, and it seems to me that if passive investing is to be taxed to subsidize active investing, we probably want to make sure that active investors are keeping their costs down – which probably means some kind of vetting as well as salary and price controls, and … oh no, I think I maybe just endorsed the Marxism theory.

This post is mainly for our practicing lawyer readers. If I were to venture back to a law firm, I wouldn’t ask graduating students for recommendations only from their law professors. Instead, if the student was on law review (as most BigLaw applicants are) I would ask for at least one recommendation from a law professor whose article the student edited. 

First, a law professor has less reason to exaggerate or falsely praise a student at another school. Second, a law professor who has worked on an article with a student gets excellent insight into that student’s attention to detail (or lack there of) and attention to deadlines (or lack there of). Third, the law professor/author gets to see the student do work where the rewards are not immediate nor as large as they can be in the studying/grades context. Fourth, the cite checking and editing work done on law review articles is more similar to the work of a junior associate than is (at least a good percentage of) course work. 

Yes, a law professor at another school will have limited interaction with that student and usually only virtual interaction. But a lot of legal work is done virtually these days; in practice, there were a number of people I worked with but never met in person. Another challenge is that law review editing is usually done by committee or by a number of students. But, especially if the student is the contact person or the responsible editor, this might show the potential employer whether the applicant can inspired and work well with his/her peers. 

I’ve worked with a number of law student editors. There are some who I am sure will make excellent employees, and there are others who promise to be problems.

Thinking about this more, and thinking back to my time on law review, I also think hiring committees of law schools might get some special insights by reaching out to student editors of law reviews where the law professor applicant published.