Own to Rent?: A Proposal to Ease the Mortgage Crisis

Dean Baker has posted a piece in the The Economists Voice on a different approach to addressing the sub-prime mortgage crisis.  Baker proposes a “rent to own” program where certain homeowners at risk of foreclosure would shift from owners to renters.  In this program some sub-prime borrowers could stay in their homes, but lenders would assume ownership of the property.  The borrower-turned-renter would pay fair market rent to the mortgage holder.  Baker states the plan could help protect millions of homeowners facing the prospect of losing their home.  These homeowners could stay in their home so long as they could afford to pay the rent. Tamar Frankel, the securitization guru, mentioned a similar proposal to me recently.  I found it intriguing, and Baker’s piece is the first I have seen that outlines how such a proposal might work. 

Why Do Judges Write Law Review Articles?

Here is a question I have been pondering for a while: Why do Delaware judges write so many law review articles? For example, I have sitting on my desk a stack of 14 articles by Norman Veasey former Chief Justice of the Delaware Supreme Court.  On closer examination, most of these are speeches rather than articles.  But still the question remains why do the judges write these pieces and why do the law reviews publish them?

The question arises as part of my research into the mechanisms for crafting corporate law in the U.S.  Because Delaware judges play a central role in the process, it seems important to determine how they play their role, what motivates them, and to whom they are accountable. 

Many scholars have noted the prolific nature of Delaware’s judiciary.  Professors Marcel Kahan and Ed Rock counted 22 recent articles published by Delaware judges. Professor Lawrence Hamermesh has published a helpful chart as an appendix to his Columbia Law Review article, The Policy Foundations of Corporate Law. Yet nobody seems to have persuasively explained this phenomenon.  Presumably judicial opinions provide judges with an adequate forum to explain and justify their decisions.  Why then would judges feel compelled to supplement their legal opinions with further explanations, elaborations or justifications in the academic literature?  More importantly are these extra-judicial exhortations helpful, harmless or insidious?

One purpose of these articles and speeches could be to provide guidance to corporate managers, attorneys and commentators as to the substance and meaning of Delaware corporate law.  Thus judges are supplementing their law-making role, moving beyond ex-post assessment of corporate conduct to ex-ante guidance for practitioners and their clients.  Such motivation can be viewed as positive, but also potentially  problematic.  The message may be lost in translation and, because judges cannot be bound by these extra-judicial comments, advice gleaned from their comments may be of dubious value.

Another view is that the constant commentary has a political purpose: to shore up the legitimacy of the state’s role in setting corporate policy.  On this view, Delaware judges not only seek to explain their approach to corporate controversies, but promote their own superior abilities to act as arbiters in these disputes.  Certainly, many articles by Delaware jurists fit this mold.  If this is the motivation, we might want to take the message conveyed with a grain of salt.  If part of the motivation for the articles and speeches is preserving the state’s (and the judges’) sphere of influence, then readers and scholars should consider such when evaluating the arguments the judges present.   

 Cross-posted at Conglomerate.

Guest Appearance

In addition to blogging here, I will be guest blogging at Conglomerate  for the next two weeks.  Look for posts on Sarbanes-Oxley, judging and other interesting topics in corporate governance.

oPtion$ Book Club in Progress

Tune in to PrawfsBlawg today for a book club discussion of oPtion$, the secret life of steve jobs.  I am joining host Matt Bodie, Michael Dorff, Darian Ibrahim and David Zaring for a discussion of this funny parody of Steve Jobs.  A number of posts are up and the real fake steve jobs (Forbes editor Dan Lyons) will be commenting at the end of the day.

Access Denied

The Associated Press reports that the SEC has approved the new proxy rules denying shareholders access to the management proxy for the nomination of corporate directors.  The so-called no-access rule was adopted by a 3-1 vote, with Annette Nazareth, the sole remaining Democratic Commissioner voting against it. Here is the New York Times story: S.E.C Allows Firms to Deny Investors Access to Ballots.

My guess is that the struggle over proxy access will continue for some time.  Some shareholder groups threatened litigation if the proposed rule was adopted.  In addition, Congressional Democrats are opposed to the rule adopted, and are likely to be perturbed that the SEC acted without a full complement of Commissioners.  Despite their dismay, it seems unlikely that Democrats in Congress will muster the initiative to legislatively overrule the Commission

“oPtion$” — the Book Club

Tune in next week to PrawfsBlawg for a lively discussion of the new satiric novel oPtion$, by Fake Steve Jobs (aka Forbes reporter, Dan Lyons). 

I will be joining Matt Bodie of PrawfsBlawg who is hosting the book club on Tuesday December 4.  Also posting will be law professors David Zaring, Darian Ibrahim, and Michael Dorff.  Dan Lyons, the real Fake Steve Jobs will respond and answer questions to wrap up the discussion.  Here is the announcement: PrawfsBlawg: Book Club on “oPtion$” by Fake Steve Jobs.

For now, I will only say that oPtion$ is a fun read.  It is a satirical account of Steve Jobs’s excellent adventures as Apple comes under federal investigation for its stock option backdating practices.  It also has a nice shiny cover, a tribute to the  iPod.

New Commissioners Proposed for the SEC

BNA is reporting that Senate Majority Leader Harry Reid has sent forward the names of two individuals to be considered as Democratic representatives to the Securities and Exchange Commission.  According to the report, Reid has proposed Atlanta lawyer, Luis Aguilar and FINRA official, Elisse Walter to serve as new members of the Commission.  The Commission has been down one Commissioner since August when Democrat Roel Campos resigned.  Democrat Ann Nazareth has also announced her resignation, but continues to serve as a Commissioner.  By law, no more than three Commissioners can be members of the same political party.  The resignations, when effective, would leave the Commission with three Republican Commissioners and no Democrats.

The current vacancies on the Commission are a sore spot between Chairman Christopher Cox and the SEC’s Congressional overseeers, as Cox maintains that the Commission will move forward on controversial proxy access proposals despite the absence of a full complement of Commissioners.  Congressional leaders on the other hand have urged Cox to postpone action on proxy access until the existing and prospective vacancies are filled.

Here is the BNA story (subscription required): Securities Regulation & Law Rpt - FINRA Official, Atlanta Lawyer Said Dems Picks for Slots on SEC

Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

Steven Ramirez has posted the The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top , 24 Yale Journal on Regulation (2007) on SSRN.  The article calls for the creation of a new federal agency modeled after the Federal Reserve Board to oversee corporate governance rules for corporations.  Ramirez envisions the new federal regime as an “opt in” regime that that shareholders could choose as an alternative to state corporate law.  He argues that his alternative regime would offer benefits when compared to current federal law and state law, because the agency he envisions would be more impartial and politically independent than the agencies and officials who contribute to the current hodgepodge of corporate governance rules. 

Ramirez’s analysis seems sensible, but his prescription leaves me with two queries:  (1) In what way would the Fed-modeled structure he proposes be superior to the SEC which is ostensibly an independent, bipartisan commission; (2) How could shareholders meaningfully be empowered to opt in to the regulatory scheme he proposes?

Here is the abstract:

The pernicious influence of politics continues to pollute corporate governance applicable to public corporations in the United States. In particular, the political process has yielded a corporate governance regime that simultaneously imposes excessive regulatory costs and impairs investor confidence. CEOs continue to enjoy too much autonomy over the public corporation. Increasingly, empirical evidence shows that corporate governance standards in the U.S. are sub-optimal. This Article proposes to change the legal structure by which corporate governance standards are articulated. Using the Federal Reserve Board as a model, this Article urges the creation of a depoliticized federal agency with authority over an optional federal regime selected by shareholders. As such, corporate governance would be based upon market verdicts and the best corporate governance science rather than institutions (legislatures, courts, and the SEC), which are poorly equipped to impose standards based upon science instead of political caprice.

Suja Thomas, Why the Motion to Dismiss is Now Unconstitutional

Suja Thomas of University of Cincinatti College of Law recently posted Why the Motion to Dismiss is Now Unconstitutional, which is forthcoming in Minnesota Law Review.  In her article, Thomas argues that the Supreme Court’s decisions last term in Bell Atlantic Corp. v. Twombly and Tellabs, Inc. v. Makor Issues & Rights impermissibly impose on a plaintiff’s constititional rights to a jury trial.  Here is the abstract:

This Article is the first to address the issue of the constitutionality of the motion to dismiss. Until now, motions to dismiss have not been the subject of much academic commentary, in part because courts have rarely dismissed cases upon motions to dismiss. However, decisions by the Court this past term in Bell Atlantic Corp. v. Twombly and Tellabs, Inc. v. Makor Issues & Rights, Ltd. changed the civil procedure landscape tremendously. In these decisions, the Court “retire[d]” the fifty-year-old rule of Conley v. Gibson under which a complaint could not be dismissed unless there was “no set of facts” upon which relief could be granted. The Court cast this rule away in favor of a standard under which courts critically assess whether the claim is plausible and at times, examine inferences that favor both the plaintiff and the defendant. In setting up this new standard, the Court emphasized the concern that companies should not be subject to discovery and forced settlements in unmeritorious cases and also stressed that Congress and the rule-makers possessed the authority to establish pleading procedures. Under the new standards, courts will dismiss cases much more often using the motion to dismiss. This impending phenomenon of increased dismissals by judges before the fact-finder hears any evidence is noteworthy. It will compound a significant decline in the number of jury trials due to dismissals upon summary judgment, and this will occur in the presence of the Seventh Amendment that, by its text and history, strongly protects the right to a jury trial. Under established Supreme Court case law interpreting the Seventh Amendment, the “common law” governs the power of constitutional actors such as the courts and Congress to interfere with the jury trial. Under this case law, a modern procedure must satisfy the substance of the English common law jury trial in 1791 to be constitutional under the Seventh Amendment. This Article argues that Twombly and Tellabs did not adequately follow the Supreme Court jurisprudence on the Seventh Amendment. In Twombly, albeit not raised, the Court failed to recognize the Seventh Amendment issue that overlay its decision despite the significant effect of the decision on the right to a jury trial. In Tellabs, where it did recognize a Seventh Amendment question, the Court ignored the governing common law. These cases open up a new constitutional discussion that tests the limits of the Seventh Amendment. The Article shows that the new motion to dismiss standards do not adequately comport with the substance of the common law jury trial and thus are unconstitutional. Contrary to the common law, these standards permit courts to improperly assess the plausibility of facts and corresponding inferences pled by plaintiffs and weigh those inferences against inferences that favor defendants. The Article concludes that while Twombly and Tellabs were in the limited areas of antitrust and securities fraud, the standards set forth in those cases will be used to dismiss a variety of fact-intensive cases including those frequently dismissed upon summary judgment such as employment discrimination and other civil rights cases.

Verret on Shareholder Access

I invited Jay Verret to respond to comments from Professor Stephen Bainbridge on his recent posting over at Harvard Corporate Governance Blog.  Verret’s HLS blog posting is here.  Professor Bainbridge’s comments on his blog are here and here.

What follows is Jay Verret’s response:

I appreciate Professor Bainbridge’s response on his blog to my posting on the HLS corporate governance blog. Perhaps my characterization of his “ignoring” the Delaware legal implications of his position should be retracted, but I would note that it still seems that he has understated the implications of Delaware’s decision to justify it’s craftsmanship of the business judgment rule on the shareholder franchise.  That a few subsequent decisions seem to have ignored it is not enough. Delaware corporate law has won the franchise race.  And, I think he would agree with me that the corporate world is enriched by its expertise.  That doesn’t mean we should rest its jurisprudence on mere myth.

Bainbridge also noted two counterarguments to my position on hedge fund activism.  First, he argues that hedge funds seek control rather than change. I would cite the anecdotal experiences of the Peltz challenges, through his firm Trian Investment partners.  The latest OECD report provides economic data that the Trian anecdote is a representative story of the activist hedge fund world, showing that hedge funds typically take 5-10% positions in firms. (available here http://www.oecd.org/dataoecd/47/27/38672168.pdf ). 

In addition, Bainbridge cites the Kahan and Rock article for the proposition that the corporate proxy mechanism is not adequately equipped for serious proxy contests.  Granted.  Ed Rock and Marcel Kahan are right.  I saw them present this paper, and was honored to offer some minor comments.  I think that, perhaps, Professor Bainbridge has missed the objective of their analysis.  Rock and Kahan call for reform of the proxy solicitation process as an antecedent to reform of the corporate ballot.  I concede that reform of the problems they highlight should precede my own reform proposal. That does not mean that neither reform should occur.  Additionally, I would join Professors Black and Hu in arguing for regulation of the issue of empty voting, as some hedge funds engage in that activity.  That is largely irrelevant to this analysis, as they are not properly characterized as activist funds, despite the fact that many lump the two groups together.