Stefan J. Padfield

The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases

Stefan Padfield — Mon, 19 Mar 2012 09:38:50 PDT

In Citizens United v. Federal Election Commission, a 5-4 majority of the Supreme Court held that corporate political speech could not be regulated on the basis of corporate status alone. In support of that conclusion, the majority characterized corporations as mere “associations of citizens.” The dissent, meanwhile, viewed corporations as state-created entities that “differ from natural persons in fundamental ways” and “have been effectively delegated responsibility for ensuring society’s economic welfare." I have argued previously that these two competing conceptions of the corporation implicate corporate theory, with the majority adopting an aggregate / contractarian view, and the dissent an artificial entity / concession view. Even if one understands Citizens United to be primarily about listeners’ rights, this stark contrast of competing theories of the corporation is difficult to ignore. At the very least, what the majority and dissent thought about corporate speakers was relevant to the question of whether the campaign finance restrictions challenged in Citizens United should fall within that narrow class of speech restrictions justified on the basis of the speaker’s identity due to “an interest in allowing governmental entities to perform their functions.” Somewhat surprisingly, however, the majority was silent, and the dissent expressly disavowed, any role for corporate theory. I have previously offered some explanations for this apparent inconsistency, and concluded that an active “silent corporate theory debate” was indeed integral to the outcome of Citizens United - despite protestations to the contrary. In this project, I examine the key Supreme Court cases leading up to Citizens United to see whether a similar silent corporate theory debate is evident in those cases. I find that there is indeed such an on-going debate, and proceed to argue that in future cases involving the rights of corporations the justices should make their views regarding the proper theory of the corporation express. This will allow for a more meaningful discussion of the merits of those decisions, and impose an additional layer of intellectual accountability on the jurists.

The Dodd-Frank Corporation: More than a Nexus of Contracts

Stefan Padfield — Fri, 04 Mar 2011 09:30:11 PST

Corporate theory matters. By way of example, I explain in this Essay how Citizens United can be read as a decision wherein the competing theories of the corporation played a dispositive role. Furthermore, some of the most important issues confronting courts and legislatures in the foreseeable future will involve questions about the nature of the corporation. In light of this, this Essay argues that the Dodd-Frank Wall Street Reform and Consumer Protection Act serves, in addition to all its other roles, as an important and novel data point in the on-going corporate theory debate. Specifically, I argue Dodd-Frank implicates corporate theory in two ways. First, it reaffirms yet again that corporations remain subject to significant government regulation as a matter of positive law—a fact that constitutes at least somewhat of a nuisance for contractarians. Second, and more importantly, Dodd-Frank’s formal recognition that at least some corporations have literally gotten too big to fail vindicates some of the most important normative assertions of concession theory broadly defined.

Immaterial Lies: Condoning Deceit in the Name of Securities Regulation

Stefan Padfield — Tue, 30 Mar 2010 11:13:17 PDT

The financial crisis of 2008-2009 is once again raising the issue of investor trust and confidence in the market. Investors are questioning how managers could have taken such significant risks in the subprime lending and credit default swap markets without apparently providing adequate disclosure to the market. The pending flood of lawsuits following in the wake of this financial crisis provides an opportunity, however, for courts to restore some of this lost trust. This Article argues that one of the ways courts can do this is by curtailing their over-dependence on materiality determinations as the basis for dismissing what they deem to be frivolous lawsuits under Rule 10b-5. There are at least four good reasons for doing so. First, condoning managerial misstatements on the basis of immateriality arguably has a negative impact on investor confidence because whenever courts find a misstatement to be immaterial as a matter of law they are effectively concluding that there will be no relief for shareholders even if the statement was made with full knowledge of its falsity and with the requisite intent to defraud. Second, the materiality “safety valve” doctrines that have evolved to assist courts in dismissing frivolous suits are often in direct conflict with Supreme Court guidance as to both the proper definition and analysis of materiality in the context of Rule 10b-5. Third, the routine categorization of managerial misstatements as immaterial in order to dismiss frivolous suits creates a tension with the disclosure rules, which are premised on ideals of full and fair disclosure and often turn on materiality determinations. Finally, the dependence on materiality is unnecessary because other elements of Rule 10b-5, such as scienter, have been strengthened to the point where they allow courts to deal with the problem of frivolous suits without having to rule on the issue of materiality.

Finding State Action When Corporations Govern

Stefan Padfield — Wed, 25 Mar 2009 09:53:01 PDT

The financial crisis of 2008 is blurring the lines between the State and the private sector. While painful, this process may facilitate a re-examination of the state action doctrine. This Article argues that corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action. This is happening via “new governance,” and while the recent financial crisis may suggest that the problems associated with new governance are waning, the reality is that the corporate consolidations likely to follow in the wake of the downturn—together with the government’s oft-stated desire to divest its bailout stakes in private companies as soon as possible—will result in even more powerful corporate actors with an even greater ability to govern. In this Article, I argue that there are at least four reasons why state action is present when private actors leverage state-granted limited liability to carry out this type of governance: First, the corporation does not exist without the State and the State derives significant benefits in exchange for granting corporate status. Second, the abuse of the corporate form for illegitimate governing is foreseeable and has been predicted since the 1800s, but state law nevertheless encourages this type of abuse by making shareholder wealth maximization the priority of corporate management and protecting those managers from personal liability via doctrines such as the business judgment rule. Third, the democratic process has arguably failed to keep the accumulation of corporate power in check and therefore it falls to the judiciary to rein in the abuse of that power. Fourth, to the extent that the arguments made herein constitute an expansion of current state action doctrine, such expansion is consistent with the history of the doctrine. Understanding state action under the Fourteenth Amendment to include new governance has wide-ranging implications, not least of which is the potential for increasing the degree to which international corporations may be held accountable for human rights violations.

Who Should do the Math? Materiality Issues in Disclosures that Require Investors to Calculate the Bottom Line

Stefan Padfield — Wed, 16 Apr 2008 09:26:26 PDT

Is Puffery Material to Investors? Maybe We Should Ask Them.

Stefan Padfield — Wed, 24 Oct 2007 10:29:41 PDT

In securities litigation, the puffery doctrine stands for the proposition that vague statements of corporate optimism are not actionable because no reasonable investor would rely on them in deciding whether to purchase or sell securities. In other words, puffery is immaterial as a matter of law. Courts routinely rely on the puffery doctrine to dismiss securities claims pre-trial. However, the doctrine has been the subject of much academic criticism. In order to test who is correct about how investors react to alleged puffery, a group of actual investors was surveyed. The survey results showed that when actual investors were confronted with statements deemed immaterial puffery by courts, anywhere from 33% to 84% of them found the statements to be material. This may well be the first direct empirical support for the assertion that the puffery doctrine is being too liberally applied by judges. The paper goes on to argue that surveys should play a role in materiality determinations in securities litigation similar to the role they already play in Lanham Act cases.

Who Should Do the Math? Materiality Issues in Disclosures that Require Investors to Calculate the Bottom Line

Stefan Padfield — Wed, 24 Oct 2007 10:27:01 PDT

Corporations sometimes tread a fine line by disclosing the data necessary to calculate the bottom line impact of a particular set of facts, while failing to disclose the bottom line itself. For example, in 2002, Merck & Co., Inc., disclosed that one of its subsidiaries had recognized as revenue co-payments it never actually received, but failed to disclose that the total amount so recognized was $5.54 billion for the year 2001. When plaintiffs challenge such incomplete disclosure, courts routinely dismiss their claims based upon what I call the "Simple Math" rule. The Simple Math rule states that, assuming a material bottom line, disclosing the data necessary to calculate the bottom line suffices to make failure to "do the math" for investors an immaterial omission as a matter of law. This is, in fact, what the Third Circuit concluded in the Merck case. I argue, however, that courts should apply what I call the "Reasonably Available Data" rule, which builds upon existing materiality doctrines to analyze each particular omission on its own facts. Specifically, I argue that when courts are presented with the question of whether failure to explicitly disclose the bottom line constitutes a material omission, they should ask: (1) whether all the relevant pieces of data necessary to calculate the bottom line were disclosed proximately to one another and the place where a reasonable investor would expect to find them; (2) whether the data was cross-referenced to; and (3) whether the import of the data was sufficiently highlighted to alert the reasonable investor. In addition, where the bottom line was omitted in a corrective disclosure, that fact should weigh in favor of finding materiality. Finally, a presumption of materiality should be applied where the bottom line is subsequently made public and the market reacts negatively to that disclosure. This proposed approach is consistent with the Supreme Court's admonition against the use of bright-line rules in the context of materiality determinations. Furthermore, it makes sense from a policy standpoint because it continues to serve the safety-valve function of the Simple Math rule by allowing courts to dismiss frivolous claims, while avoiding the erosion of a materiality standard that is so integral to our modern disclosure regime.

In Search of a Higher Standard: Rethinking Fiduciary Duties of Directors of Wholly-Owned Subsidiaries

Stefan Padfield — Wed, 24 Oct 2007 10:22:47 PDT

An important, yet undeveloped, area of corporate law concerns the fiduciary duties of wholly-owned subsidiary directors. The district court in First American Corp. v. Al-Nahyan, 17 F. Supp. 2d 10, (D.D.C. 1998), expressed the hope that this “perplexing issue” would become the subject of “a more robust discourse.” Id. at 26, n.17. The Delaware Supreme Court has said that “in a parent and wholly owned subsidiary context, the directors of the subsidiary are obligated only to manage the affairs of the subsidiary in the best interests of the parent and its shareholders.” Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988). Meanwhile, the district court in Al-Nahyan concluded that “the directors of a wholly-owned subsidiary owe the corporation fiduciary duties, just as they would any other corporation.” 17 F. Supp. 2d at 26. As for legal commentators, one has argued that a fundamental rights analysis should be applied to differentiate legitimate from illegitimate shareholder demands in the wholly-owned subsidiary context. Another has suggested that due to the uniquely insulated nature of the relationship between a parent company and its wholly-owned subsidiary, directors of wholly-owned subsidiaries should be held to a lesser standard than other directors—perhaps all we should expect of them is to act as mere agents of the parent. In this article, I argue that precisely because the relationship between a parent company and its wholly-owned subsidiary is so insulated, directors of wholly-owned subsidiaries should be held to higher fiduciary standards than other directors. In the alternative, I argue that a derivative right to enforce the wholly-owned subsidiary director's duty to the corporation should be granted to certain stakeholders.

Self-Incrimination and Acceptance of Responsibility in Prison Sex Offender Treatment Programs

Stefan Padfield — Wed, 24 Oct 2007 09:43:56 PDT

In this Comment, I argue that the withholding of good time credits for refusal to participate in rehabilitation does not constitute compulsion under the Fifth Amendment. Consequently, a state may administer a rehabilitation program utilizing good time credits as an incentive without granting immunity.