The Other Janus and the Future of Labor’s Capital

Two forms of labor’s capital—union funds and public pension funds— have profoundly reshaped the corporate world. They have successfully advocated for shareholder empowerment initiatives like proxy access, declassified boards, majority voting, say on pay, private fund registration, and the CEO-to-worker pay ratio. They have also served as lead plaintiffs in forty percent of federal securities fraud and Delaware deal class actions. Today, much-discussed reforms like revised shareholder proposal rules and mandatory arbitration threaten two of the main channels by which these shareholders have exercised power. But labor’s capital faces its greatest, even existential, threats from outside corporate law. This Essay addresses one of those threats: the direct and indirect challenges posed to labor’s capital by the Supreme Court’s holding in Janus v. American Federation of State, County, and Municipal Employees, Council 31. These threats may have spillover effects in the corporate arena. This Essay discusses these developments in light of Randall Thomas’s early and prescient work on labor as a shareholder

Is \u27Pay-to-Play\u27 Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study

The recent emergence of public pension funds as frequent lead plaintiffs in securities class actions has prompted speculation that the funds’ litigation activism is driven by “pay-to-play”. “Pay-to-play” posits that public pension funds are driven by politician board members to obtain lead plaintiff appointments in securities class actions because of campaign contributions made by plaintiffs’ lawyers to those board members. This paper provides a comprehensive analysis of the securities litigation activity of 111 such funds from the years 2003 through 2006. Three of the paper’s findings cast doubt on the “pay-to-play” theory, including that: (1) politicians and political control negatively correlate with lead plaintiff appointments; (2) beneficiary board members - and outright beneficiary control of the board - positively correlate with such appointments; and (3) the degree of a pension fund’s underfunding positively correlates with lead plaintiff appointments, particularly when the fund is controlled by beneficiaries. The substantial role played by beneficiary board members in driving the funds’ litigation activism is analyzed by the author in the context of prior literature comparing such board members to corporate managers with an equity stake in a corporation. The paper also finds no support for the theory that unions drive beneficiary board members to obtain lead plaintiff appointments, and offers evidence that resistance by politicians to lead plaintiff appointments correlates with the degree of business influence in the politicians’ home states

The Humanities Strike Back: (E)ESG and Justice Strine Challenge Gamer Shareholder Primacy

Leo E. Strine, Jr. is closing in on Blair and Stout for the undisputed title of all-time top-scoring stakeholderist.3 I don\u27t intend to squander this opportunity to roast and toast him by weighing the pros and cons of basketscoring primacy. Instead, my aim is to surface an overlooked argument in the debate over shareholder primacy and stakeholderism, the case for which has been recently reinvigorated by Strine\u27s work. My argument is this: one underappreciated aspect of shareholder primacy\u27s appeal is that it creates a competition with a single endpoint, basically a game, and that the exhilarating tournament that results, separate and apart from any ethical or instrumental justification, is an underestimated aspect of shareholder primacy\u27s appeal. I want to be clear that this is not intended as any glib insult hurled at the doctrine. Quite the contrary, its advocates root their claims in wholly legitimate philosophical foundations, in libertarian ideas about freedom and private property, in notions of the common good best advanced by each person pursuing his or her own lawful self-interest, in empirical claims about what best stimulates economic growth, in pragmatic claims that stakeholder interests are best addressed by governments, not corporations. 4 I disagree with some of these claims, but accept the good faith nature of the arguments made in their favor

Private Policing of Mergers & Acquisitions: An Empirical Assessment of Institutional Lead Plaintiffs in Transactional Class and Derivative Actions

Transactional class and derivative actions have long been controversial in both the popular and the academic literatures. Yet, the debate over such litigation has thus far neglected to consider a change in legal technology, adopted in Delaware a dozen years ago, favoring selection of institutional investors as lead plaintiffs in these cases. This Article fills that gap, offering new insights into the utility of mergers and acquisitions litigation. Based on a hand-collected dataset of all Delaware class and derivative actions filed from November 1, 2003 to December 31, 2009, I find that institutional investors play as large of a role in these cases as they do in federal securities fraud class actions, leading 41% of them. Controlling for the size of the deal and other factors, institutions have been more likely to assume a lead role in cases with lower premiums over the trading price, at least until the collapse of Lehman Brothers in September 2008, at which point most institutional types increased their litigation activity and sued in higher premium deals too. Other case and deal characteristics significantly predict institutional lead plaintiffs, such as the number of complaints filed in the case (an illustration of lead plaintiff competitiveness), the length of the complaint (a measure of attorney effort), whether the transaction is cash-for-stock, the market capitalization of the target, and the presence of Go-Shop provisions (which negatively correlate with institutional lead plaintiffs). I also find that public-pension funds, in particular, target controlling shareholder transactions. I present evidence that public-pension funds, alone among institutional types, statistically significantly correlate with the outcomes of greatest interest to shareholders — both an increase in the offer price and lower attorneys\u27 fees. The improvement in offer price associated with public-pension funds may be because they are better shareholder representatives. It may also be because they cherry-pick the best cases, although I offer some evidence against this hypothesis. These results are consistent with the view that public-pension funds outperform traditional lead plaintiffs as monitors of class counsel and that they reduce agency costs for shareholders in mergers-and-acquisitions litigation

The Humanities Strike Back: (E)ESG and Justice Strine Challenge Gamer Shareholder Primacy

Leo E. Strine, Jr. is closing in on Blair and Stout for the undisputed title of all-time top-scoring stakeholderist.3 I don\u27t intend to squander this opportunity to roast and toast him by weighing the pros and cons of basketscoring primacy. Instead, my aim is to surface an overlooked argument in the debate over shareholder primacy and stakeholderism, the case for which has been recently reinvigorated by Strine\u27s work. My argument is this: one underappreciated aspect of shareholder primacy\u27s appeal is that it creates a competition with a single endpoint, basically a game, and that the exhilarating tournament that results, separate and apart from any ethical or instrumental justification, is an underestimated aspect of shareholder primacy\u27s appeal. I want to be clear that this is not intended as any glib insult hurled at the doctrine. Quite the contrary, its advocates root their claims in wholly legitimate philosophical foundations, in libertarian ideas about freedom and private property, in notions of the common good best advanced by each person pursuing his or her own lawful self-interest, in empirical claims about what best stimulates economic growth, in pragmatic claims that stakeholder interests are best addressed by governments, not corporations. 4 I disagree with some of these claims, but accept the good faith nature of the arguments made in their favor

Should Labor Abandon Its Capital? A Reply to Critics

Several recent works have sharply criticized public pension funds and labor union funds (“labor’s capital”). These critiques come from both the left and right. Leftists criticize labor’s capital for undermining worker interests by funding financialization and the growth of Wall Street. Laissez-faire conservatives argue that pension underfunding threatens taxpayers. The left calls for pensions to be replaced by a larger social security system. The libertarian right calls for them to be smashed and scattered into individually-managed 401(k)s. I review this recent work, some of which is aimed at my book, The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, and some of which is aimed at labor’s capital more broadly. I argue that while critics of labor’s capital make some reasonable points, none justify a retreat by labor from implementing capital strategies. None justify either wholesale abandonment of the current pension regime, or the smashing and scattering of pensions into individually managed-401(k)s. Leftist structuralist critiques underestimate new opportunities to advance labor’s capital created by the ideological retreat of shareholder primacy and a newly-emboldened stakeholderism. They also overlook serious but curable errors by unions in permitting their capital to be used against them. They tend to critique labor’s capital in a vacuum, making heroic assumptions about offstage policy preferences like a comprehensive new social security system or macrofinancial reform, though labor obtained neither when it was more powerful than it is today. Moreover, social security systems, important as they are, do not give workers voice in markets the way pensions do. At the other end of the spectrum, laissez-faire rightist critiques overstate the underfunding threat, which has subsided as markets have recovered from the Great Recession of 2008 and as forty-nine states have revised their funding formulas. They also exaggerate the risks to taxpayers of underfunding and fail to articulate any plausible reason why taxpayers shouldn’t be on the hook to pay-in-full for services rendered by public servants.Properly organizing its capital to advance worker interests remains a critically important and attainable goal for labor in the 21st century

The Other Janus and the Future of Labor’s Capital

Two forms of labor’s capital—union funds and public pension funds—have profoundly reshaped the corporate world. They have successfully advocated for shareholder empowerment initiatives like proxy access, declassified boards, majority voting, say on pay, private fund registration, and the CEO-to-worker pay ratio. They have also served as lead plaintiffs in forty percent of federal securities fraud and Delaware deal class actions. Today, much-discussed reforms like revised shareholder proposal rules and mandatory arbitration threaten two of the main channels by which these shareholders have exercised power. But labor’s capital faces its greatest, even existential, threats from outside corporate law. This Essay addresses one of those threats: the direct and indirect challenges posed to labor’s capital by the Supreme Court’s holding in Janus v. American Federation of State, County, and Municipal Employees, Council 31. These threats may have spillover effects in the corporate arena. This Essay discusses these developments in light of Randall Thomas’s early and prescient work on labor as a shareholder

Rethinking Political Considerations in Investment

Five years ago, Professor David H. Webber was invited to deliver an address both to our Delaware Law School community and to the Delaware Bench and Bar as Visiting Scholar in Residence of Corporate and Business Law. Webber\u27s Speech, Rethinking \u27Political\u27 Considerations in Investment, made several predictions about the rise of politicized investment which were quite prescient. As relevant today as when it was delivered, this piece explores the consideration of investment factors outside the traditional realm of shareholder profit maximization, both in its current state and in the future. Webber\u27s analysis of how investors balance the role of capital accumulation with the special concerns of their members is addressed with objectivity and attentiveness. As political factors are on the rise in what seems every facet of our national landscape, it is increasingly important to address how such forces can impact markets and economies. On the occasion of its fifth anniversary, the Delaware Journal of Corporate Law has decided to publish the speech so it can be read by a broader segment of the corporate law community. - Dante S. Pavan, Editor-in-Chie

Comment on Proposed Regulation: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights

In my view, while it is a significant improvement over its predecessor, the proposed rule’s persistent relegation of job creation/preservation to the status of mere “collateral benefit” is a mistake and undermines ERISA’s duty of loyalty. In reality, job creation and preservation are inextricably linked to fund financial health. Relegating that fact to a mere collateral benefit means trustees fail to consider the effect on a pension of investing in projects that eliminate the jobs of the fund’s own participants, or ignore the benefit of creating new jobs and thereby new pension contributors. This runs counter to President Biden’s executive order 14030 noting the importance of “creating well-paying job opportunities for workers.” It also runs counter to the spirit and purpose of the duty of loyalty. I therefore urge the Department to designate job creation and preservation as an ESG factor material to the risk-return analysis under §2550.404a-1(b)(4), or as one “relevant” to said analysis, should the Department adopt a relevance standard in lieu of materiality