Dammann and Schundeln have a new paper up on SSRN entitled “Where are Limited Liability Companies Formed? An Empirical Analysis” (see here) that examines the state of formation choice of 64,000+ LLCs. Here’s the abstract:

We empirically study the incorporation choices or, more accurately: formation choice, of limited liability companies. Most of the firms in our large sample of more than 64,000 limited liability companies are formed in the state where their principal place of business is located (the PPB state). As their size increases, however, firms become more likely to be formed outside that state, with Delaware emerging as the primary destination for those that are not formed in the PPB state. In particular, of those firms that have 1,000 or more employees, roughly half are formed outside their home state, and of the latter, more than 80% are formed in Delaware.

We show that substantive law matters to the formation choices of closely held limited liability companies. More specifically, limited liability companies appear to be migrating away from those states that offer lower levels of protection for minority investors: We find statistically significant evidence that firms are less likely to be formed in their PPB state if the latter offers relatively lenient rules on managerial liability or if it allows companies to be dissolved via a less than unanimous resolution of the members.

Today, Treasury Secretary Henry Paulson is set to present some comments about the Treasury’s Blueprint for Financial Regulatory Reform, released on Saturday.  (A summary of the proposal is here.) 

The summary of the proposal report provides:  “In this report, Treasury presents a series of “short-term” and “intermediate-term” recommendations that could immediately improve and reform the U.S. regulatory structure. The short-term recommendations focus on taking action now to improve regulatory coordination and oversight in the wake of recent events in the credit and mortgage markets. The intermediate recommendations focus on eliminating some of the duplication of the U.S. regulatory system, but more importantly try to modernize the regulatory structure applicable to certain sectors in the financial services industry (banking, insurance, securities, and futures) within the current framework.” 

I have a few comments on the proposals:

1.  The report contemplates consolidation of market regulators for the securities markets and the commodities markets.  This is a difficult issue.  Intuitively, I like the notion of consolidating regulation, as the regulatory authority dealing with commodities (the CFTC) and regulators of the general securities markets (SEC) both regulate the markets for securities.  That said, commodities regulation is (a) incrementally more sophisticated than the regulation of the generic securities markets due to the increased complexity in products, their evolution, and their likely economic/market impact and (b) different in sort than the regulation of plain vanilla securities.  Moreover, my impression – based on my experience working at the SEC and my experience as a corporate/securities/business scholar – is that the CFTC does a bit of a better job than the SEC in avoiding political pressure.  (Think about it – while we can easily recall a series of SEC Chairmen resigning under pressure, can we easily recall a series of CFTC Chairmen resigning under pressure?)  Is it sensible to combine agencies and lose that market niche insulation?

2.  The motivation for Treasury’s proposals strikes me as questionable.  The report summary says:  “Market conditions today provide a pertinent backdrop for this report’s release, reinforcing the direct relationship between strong consumer protection and market stability on the one hand and capital markets competitiveness on the other and highlighting the need for examining the U.S. regulatory structure.”  Indeed, the argument was made in connection with last spring’s Paulson report that the US capital markets are becoming less competitive, in part due to mis-regulation (and overregulation).

 But the argument that the US capital markets are becoming less competitive continues to be the subject of robust academic debate.  (For example, Howell Jackson, Jack Coffe, Kate Litvak, and Don Langevoort, all very credible scholars, expressed differing views on the issue at the AALS annual meeting this past year.)  I, for one, do not believe that the US capital markets are becoming less competitive.  Instead, I believe that the overseas markets are becoming *more* competitive.  That is not a bad thing, nor is it reason to overhaul US market regulation.  In reality, maybe the increasing competitiveness of overseas capital markets counsels in favor of our holding the status quo, to see how things shake out with the fundamentals that make the overseas markets increasingly competitive in the short term.

To that end, the report summary says “[g]lobalization of the capital markets is a significant development. Foreign economies are maturing into market-based economies, contributing to global economic growth and stability and providing a deep and liquid source of capital outside the United States. Unlike the United States, these markets often benefit from recently created or newly developing regulatory structures, more adaptive to the complexity and increasing pace of innovation.”  Until we know how these more newly developed regulatory structures fare in the long term, is seems unwise to jump to action to keep up with them.    Moreover, the summary of Saturday’s report indicates that its authors looked closely at the UK, Australia, and Netherlands financial markets regulatory regimes in designing the proposals in the report.  Basing reform of the US capital markets on regulation in the UK, Australia, and the Netherlands, however, does not strike me as sound.  If we are entertaining notions of wholesale reform, why not instead pin down what the conceptual optimal model would look like, as opposed to mining for inspiration from other regulators?  That said, the report purports to so do, to a degree, as discussed below in point three. 

3.  The report touts a new “objectives based regulatory approach.”  This approach, however, while radically different from the current US capital markets regulatory structure in terms of how it is implemented, is nothing new in terms of goals.  (Indeed, the summary says the new structure is motivated in part by “the convergence of financial services providers and financial products has increased over the past decade.  Financial intermediaries and trading platforms are converging.   Financial products may have insurance, banking, securities, and futures components.”  But wasn’t this dealt with in the Gramm- Leach-Bliley Act?  Why now do we need to revisit what appears to have been sensible reform less than a decade ago?)

The report summary says “[l]argely incompatible with these market developments is the current system of functional regulation, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities, and futures,” and the report instead argues for an objectives based regulatory scheme, based on the objectives of “[m]arket stability regulation…, [p] rudential financial regulation…, and [b]usiness conduct regulation.”  But our current functional regulatory scheme operates with a focus on these exact objectives.  A consolidation of power into one regulatory authority for each objective seems to do nothing other than allow for (a) tunnel vision by a given objective’s regulator and (b) decreased input in terms of how to regulate to the goal of meeting these objectives.  With respect to point “b,” I believe that it is useful to have the leaders at the SEC, the CFTC, and the Federal Reserve all making calls to each other, giving input to the President and Congress, and agitating for ways to secure better regulation.  Yes, there is tension and a bit of repetitive regulation, but it seems to me that that is healthy when dealing with a matter as important as the United States capital markets.

4.  I have not worked through exactly how Saturday’s report proposes, if at all, to restructure the actual Board of Governors of the Federal Reserve System.  I will note, however, that I am generally leery of restructuring the Federal Reserve, both in terms of authority and operation.  Part of what makes the Federal Rserve work is the fact that the Governors serve for 14 year terms, allowing for insulation from political pressure (to a degree) and a link between immediate decision-making and longer-term implications.  (Contrariwise, the SEC Commissioners are usually long gone before the fall-out from their decisions becomes manifest.)  The Federal Reserve System has worked well for almost 100 years.  Does it really make sense to tamper with it?   

5.  To paraphrase, “regulate in haste and repent in leisure.”  I am never thrilled to see a massive proposal for overhaul and reform on the heels some major business or economic event.  Did the aftermath of the Sarbanes-Oxley Act (which is an act that I support, by the way) teach us nothing?

David Zaring and Gordon Smith have some interesting comments over on the ‘Glom, as does Larry Ribstein on his blog.

is here, over at eCCP, and differs somewhat from Thom’s.

The takeway excerpt is:

Credit Suisse has important implications for antitrust practice. The decision’s effect is to narrow the scope of antitrust law and to invite efforts by regulated industries to narrow it still further. The court’s “clearly incompatible” standard is new and (though it purports not to) seems to water down considerably the old “plain repugnancy” test of Gordon v. New York Stock Exchange, Inc. 422 U.S. 659, 682 (1975). Under the new incompatibility standard, there no longer has to be an actual conflict between antitrust and other federal law for antitrust implicitly not to apply. Even a mere regulatory overlap may now be sufficient to trigger antitrust immunity. (Recall that in Credit Suisse the Court assumed that both antitrust and the SEC disapproved of the tying and other practices in question, and yet the Court still considered the two bodies of law incompatible on account of the regulatory overlap.) ….

Going forward, the Court will need to tighten the rule in Credit Suisse if it wants antitrust to continue to operate as Congress intended it to in conjunction with the compartmentalized maze of federal regulatory law. No one thinks that securities firms should be exempt from the legal obligations that generally flow from non-securities law (antitrust aside). If we expect to hold securities and other regulated firms accountable for torts and breaches of contract, or for crimes and discrimination, then why not also hold them accountable for antitrust violations? If Congress says otherwise, that is one thing. But if Congress is silent on the question, a federal agency should not have have any more power than a state to confer antitrust immunity upon those that it regulates. Of states we require a clearly articulated policy that presents an actual conflict, not merely the possibility of future potential incompatibility. From federal agencies we should not expect any less.

Just yesterday, in its historic decision in Leegin, the Court strongly reaffirmed its confidence in the Rule of Reason’s workability by overturning Dr. Miles and extending the rule’s reach to vertical RPM. That workability should make us equally confident that antitrust can peacefully coexist with the reguatory state.

The governor of North Dakota recently signed into law the North Dakota Publicly Traded Corporation Act (ht: Broc Romanek). The Act resembles a shareholder activist wish list including majority voting for the election of directors, elimination of staggered boards, advisory shareholder votes on executive compensation, shareholder proxy access, proxy contest reimbursement, poison pill restrictions, etc.

While the Act is certainly groundbreaking, my view is that it was enacted as a publicity stunt. The practical effect of it is likely to be zilch. The Act only applies to public companies incorporated in North Dakota that affirmatively opt-in through provisions in their articles of incorporation. Hence, shareholders cannot unilaterally opt-in a company since an articles amendment requires board and shareholder approval. Additionally, a grand total of two public companies are incorporated in North Dakota (Dakota Growers Pasta and Integrity Mutual Funds of Minot), and there is no reason to suspect that they will opt-in.

Even if a corporation wanted to grant shareholders the rights provided for in the Act, it seems highly unlikely it would do so by reincorporating in North Dakota and opting-in. Instead, it could simply tailor its governing documents to strike what it believes to be the appropriate balance between board and shareholder power for its particular business and continue to enjoy the benefits of Delaware incorporation (business savvy judiciary, responsive legislature, etc.).

Of course, the genius of American corporate law may ultimately prove me wrong, but I doubt it.

Larry Ribstein has an interesting post responding to Professor Warren’s discussion of her own classroom experiences teaching Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991). Professor Warren describes a discussion with her students involving the notion raised by Justice Blackmun that “passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys.” Specifically, the discussion was aimed at eliciting student reactions as to whether Blackmun’s line of reasoning was fact or mere theory.

Long story short: Given this choice Warren’s students answered “fact” and Warren worries about what this response says about what we are teaching our law students. She asks “is it all all about deduction, with nothing left over for reality?” Larry’s post makes the case that the students were correct:

Justice Blackmum was responding to the Court of Appeals conclusion that such clauses should never be enforced because they’re not negotiated. In other words, the availability of a market means that direct negotiation should not be an absolute prerequisite to enforcement. This paragraph contains Justice Blackmun’s reasoning against the Court of Appeals’ conclusion. Recall that, according to Professor Warren’s report, she asked the students whether this was “fact” or “law.” Given only that choice, the students responded that it was “fact,” which seems logical since it was reasoning in support of a legal conclusion, and not the legal conclusion itself.

But then Professor Warren appears, again from her post, to have changed the question: was it “fact” or “theory.” That’s a different and somewhat more difficult question. She was concerned that the students “resisted.” But even as an aged law professor, I’m not familiar with this distinction, so it’s not surprising the students were confused. Perhaps the professor means to distinguish between something that does, and something that does not, require additional proof. Is she referring to the distinctions discussed in Imre Lakatos’ Proofs and Refutations? Or what?

Professor Warren clearly wants to contrast some correct method of reasoning with the erroneous “deductions” of the economic model. But it’s not clear who exactly is engaging in this erroneous reasoning. Not Justice Blackmun, who as just noted was only suggesting reasons why bargaining should not be an absolute prerequisite to enforcement. Not the students, at least from Professor Warren’s description, because they were apparently making the fact-law distinction, and seemed quite willing to recognize the qualifications necessary to make the leap to economic proof of some sort.

Read both posts. While I agree with the spirit of Warren’s post that economic logic should be subjected to empirical testing and we ought to be teaching our students how to think critically (about economic arguments and otherwise), I want to take this discussion in a different direction. What are we teaching law students about economics in various law schools? My thoughts on this subject appear below the fold.

(more…)

Here’s a taste:

If the Internet Gambling Prohibition Act is approved, it will become a precedent for congressional control over other aspects of the Internet and an important loss in our liberty. Let’s follow the money and ask who benefits should the law be passed. What about legal gambling establishments in Las Vegas, Atlantic City and elsewhere? From their revenue point of view, they’d be happy to see less online gambling competition.

What about federal, state and local governments? Online gambling, most of which is offshore, doesn’t create any tax revenue for them. The bill focuses on online games such as poker, blackjack and sports betting but exempts taxable state-regulated gambling such as lotteries and horse racing.

If people want to gamble online, they are going to gamble online. The only thing the act will accomplish is, like Prohibition, make criminals out of otherwise law-abiding people. It will turn banks and other financial institutions into government snoops. Rep. Barney Frank, D-Mass., said, “If an adult in this country, with his own money, wants to engage in an activity that harms no one, how dare we bar it.” I second that and add, since protection of “the children” often serves as an excuse to restrict our liberties, that if children get involved, let their parents, not Congress, deal with it.

Check it out. Christine Hurt also offers some thoughts here and here.

GMU Law, the Mercatus Center, and the Journal of Law, Economics, and Policy are sponsoring a symposium on this topic Wednesday at Hazel Hall (the law school building) at GMU.  The symposium has a nice mix of economic research and legal analysis.  It looks very interesting and includes a keynote address by Kenneth Starr.  The agenda is available here.  See you there.

I’m no expert on the topic (I anxiously await Randy Barnett’s comments), but does anyone else think the opinion in Gonzales v. Oregon issued today (limiting the application of the Controlled Substances Act and upholding Oregon’s assisted suicide law) could have been a masterful dissent in Gonzales v. Raich (reading the Controlled Substances Act to preclude the legal use of medical marijuana). I’m getting my information from SCOTUSblog (as good as the Court itself, and edited, too!), so keep that in mind, but just read these sentences from SCOTUSblog describing the case:

The Court conceded that the attorney general does have the authority to write rules for enforcing federal laws on illegal drugs. But, it said, federal law “does not authorize the Attorney General to bar dispensing controlled substances for assisted suicide [how about “medicinal use”?] in the face of a state medical regime permitting such conduct.

“The background principles of our federal system…belie the notion that Congress would use such an obscure grant of authority to regulate areas traditionally supervised by the states’ police power.” Thus, the Court said, it was unnecessary to determine whether Congress had made a clear statement of intent to interfere with state authority over medical practice, or whether Congress had intended to preempt that state authority.

The federal Controlled Substances Act “and our case law,” the Court said, “amply support the conclusion that Congress regulates medical practice insofar as it bars doctors from using their prescription-writing powers as a means to engage in illicit drug dealing and trafficking as conventionally understood. Beyond this, however, the statute manifests no intent to regulate the practice of medicine generally….The structure and operation of the CSA presume and rely upon a functioning medical profession regulated under the State’s police powers.”

How you square all of that with Raich is beyond me, but, hey — if this means news of federalism’s death was exaggerated, I’m happy with the result.