Spotlight on Scholarship

UCLA School of Law possesses one of the most dynamic and productive business law faculties in the country. A recent sampling of their scholarly work includes:

Iman Anabtawi

Predatory Management Buyouts

“Going Private” transactions are again in the news. UCLA Law Professor Iman Anabtawi, an expert on mergers and acquisitions, was quoted in The Seattle Times about the Nordstrom family group’s offer to take the Seattle retailer private—an offer that was rejected by the company’s independent directors last week. Although the Nordstrom family’s offer represented a 24% premium to the Company’s $40.48 share price on June 7, 2017, the stock price before the family group’s interest in a take-private transaction was announced, the directors still found the deal to be inadequate. Anabtawi, Professor of Law and an Affiliated Faculty of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, explained: “The fact that the offer is higher or even substantially higher than that [June 7] price is not indicative of whether it is the highest value transaction reasonably available.”

Professor Anabtawi’s scholarship includes analyzing management buyouts (MBO), a type of going private transaction. In her article Predatory Management Buyouts, 49 UC Davis Law Review 1285 (2016), Professor Anabtawi explains the special issues that face the board when management, partnering with a financing source such as a private equity firm, seeks to buy out the public shareholders:

MBOs raise an important corporate governance concern not present in other corporate acquisitions: managers act as fiduciaries to target shareholders at the same time that they act as acquirors…. In direct opposition to those fiduciary duties are managers’ incentives to acquire the company on the best terms possible. Corporate law’s prevailing answer to questions of conflicts of interest, including in MBOs, is to rely on procedural safeguards to sanitize otherwise tainted transactions.

Professor Anabtawi demonstrates that the existing procedural safeguards do not necessarily produce “the desired equivalent outcome of arm’s-length bargaining.” As a result, managers and their financial backers may underpay for the target to the financial detriment of the target’s shareholders. In her article, Professor Anabtawi suggests various mechanisms that can serve to protect shareholders from opportunistic managerial behavior in MBOs.

Stephen M. Bainbridge

Corporate Directors in the United Kingdom

In the United States, state corporation law uniformly provides that only natural persons may serve as directors of corporations. Corporations, limited liability companies, and other entities otherwise recognized in the law as legal persons are prohibited from so serving. By contrast, the United Kingdom allowed legal entities to serve as directors of a company. In 2015, however, Parliament enacted legislation adopting a general prohibition of these so-called corporate directors, albeit while contemplating some exemptions. In his article in the William & Mary Law Review, entitled Corporate Directors in the United Kingdom, Professor Stephen M. Bainbridge, the William D. Warren Professor of Law at UCLA School of Law, argues that there are legitimate reasons companies may wish to appoint corporate directors. Professor Bainbridge, an affiliated faculty member of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, argues that the transparency and accountability concerns that motivated the legislation are overstated. Professor Bainbridge urges Parliament to repeal the ban or, at least, authorize liberal exemptions.

Corporate Directors in the United Kingdom is a companion piece to Professor Bainbridge’s most recent book, Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance (Cambridge University Press 2018), with his co-author M. Todd Henderson, the Michael J. Marks Professor of Law at the University of Chicago School of Law. In Outsourcing the Board, the authors propose that U.S. law be modified to permit legal entities to serve as corporate directors. The proposal is intended to permit the rise of service companies—so-called Board Service Providers (BSPs)—that would serve  as a company’s board of directors. Professors Bainbridge and Todd demonstrate significant advantages inherent in the BSP model. The BSP is likely to level the informational playing field with management. A single BSP wielding the full powers of the board may be in a better position to demand forthrightness by the top management team than would a single, lone wolf director acting alone. Finally, a BSP could provide highly specialized services by vertically integrating with some or all of the experts that currently provide board members with information and advice.

Applying the arguments developed fully in Outsourcing the Board  to the legislative proposals in the U.K. Professor Bainbridge observes that the U.K. ban forecloses the opportunity for companies in the U.K. to experiment with the BSP model, thereby depriving UK companies with opportunities for more efficient and effective corporate governance.

Outsourcing the Board: How Board Service Providers can Improve Corporate Governance

Why do corporate boards of directors regularly fail to govern corporations effectively? Tackling one of the thorniest issues of corporate law, Professor Stephen Bainbridge, the William D. Warren Professor of Law at UCLA School of Law, and M. Todd Henderson, the Michael J. Marks Professor of Law at the University of Chicago School of Law, explore the question and provide a revolutionary response in Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance, published this month by Cambridge University Press.

Professor Bainbridge, an affiliated faculty member of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, and Henderson review the history of the corporate board to show that there are few persuasive reasons for today’s practice of requiring a board of individuals, who may not have the expertise or knowledge base, to govern the board. They propose allowing corporations to employ expert organizations known as Board Service Providers, or BSPs, to provide corporate governance services.

Corporations have traditionally hired professional service organizations, such as accounting firms and law firms, to deliver expert professional services. A BSP would offer expert services in governing corporations, with the goal of increasing board accountability to shareholders and providing effective and efficient governance. Unlike many corporate boards, a BSP, much like a full-service law firm, would have the expertise and experience required for its assignment – to govern the corporation effectively and efficiently.

Steven. A Bank

When Did Tax Avoidance Become Respectable?

In the 1930’s and 1940’s government officials and taxpayers alike viewed tax avoidance as morally corrupt and unpatriotic. By the late 1960’s the moral outcry over tax avoidance had shifted, and seeking tax “loopholes” became acceptable, if not encouraged behavior. In his forthcoming article in the Tax Law Review, When Did Tax Avoidance Become Respectable? Professor Steven A. Bank, the Paul Hastings Professor of Business Law at UCLA School of Law, seeks to answer the questions of when and why American’s shifted their perspective on tax avoidance.

Professor Bank, an Affiliated Faculty Member of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, studied newspaper advertisements for tax planning services from 1935-1970 to identify trends in advertising that evidenced shifts in public opinion. Professor Bank’s innovative empirical research uncovered that advertising for tax planning services was fairly rare in the 1930’s and 40’s but rapidly increased throughout the 1950’s and 1960’s. By the end of the 1960’s tax shelter advertising was commonplace.

Professor Bank explores several potential causes for the shift in public perception. He theorizes that during the 1930’s and 1940’s paying taxes was considered patriotic especially due to the exigencies of World War II and the material sacrifices of the American public during the war. After World War II, however, tax rates remained historically high and, at the same time, the tax base expanded and the number of tax advisors engaged in helping those new taxpayers grew as well. With more people paying taxes, and without the overriding patriotic justification, avoiding taxes gained respectability.

The consequence of the shift in public morals is that Americans assume that neither individuals nor corporations will actually pay their imposed tax rate, but rather will use loopholes and other mechanisms to reduce the effective tax rate. The implications for tax policy abound, but what is certain is that policy makers would be well served to factor in the public’s willingness to tolerate tax avoidance when developing tax policy.

Daniel J. Bussel

Doing Equity in Bankrupty

UCLA Law Professor Daniel J. Bussel’s latest article, Doing Equity in Bankruptcy, in the Emory Bankruptcy Development Journal, addresses equitable remedies’ tendency to impair fundamental bankruptcy policies favoring equal treatment of creditors, debtor fresh start and reorganization. Bussel, Professor of Law and an Affiliated Faculty of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, demonstrates that the Bankruptcy Code, properly construed, carries forward the historical tradition of conferring discretion on bankruptcy judges to monetize nonbankruptcy entitlements to equitable relief by reweighing the equities in light of these policies. He critiques appellate court decisions that have restricted the bankruptcy judge’s discretion to do so.

Professor Bussel proposes that injunctions and other forms of equitable relief should be presumptively treated as “claims” under the Bankruptcy Code, even if nonbankruptcy law does not permit the enjoined party to satisfy the injunction by the payment of money. Professor Bussel contends that the presumption should be rebuttable, and he identifies a non-exclusive list of factors and circumstances which courts should take into account in determining whether equitable relief is available notwithstanding the bankruptcy policies at stake.

Doing Equity in Bankruptcy questions the wisdom of a bright-line analytic test that seeks to resolve the issue of equitable enforcement in bankruptcy cases on a theoretical basis. Although recognizing that judges exercising discretion under balancing tests may sometimes make mistakes and that bright-line rules make sense in some situations Professor Bussel concludes that in employing nonmonetary remedies “hundreds of years of experience … shows us that we do not know how to craft such a rule even while it points us in the direction of how to exercise discretion in individual cases soundly.”

Lynn M. LoPucki

A Rule-Based Method for Comparing Corporate Laws

Comparing corporate laws between states and nations is a notoriously difficult problem. Professor Lynn M. LoPucki, the Security Pacific Bank Distinguished Professor of Law at UCLA School of Law, solves this problem in A Rule-Based Method for Comparing Corporate Laws, published in 94 Notre Dame Law Review.

Professor LoPucki, an Affiliated Faculty of the Lowell Milken Institute for Business Law and Policy, explains that corporations are able to incorporate almost anywhere in the world, regardless of the location of their headquarters or operations. The widely applied internal affairs doctrine means that the governing law of the jurisdiction of incorporation will be the controlling law for that corporation; therefore, a corporation’s lawyers and other advisors must be able to compare the laws of many jurisdictions to determine the most favorable jurisdiction for that corporation. As Professor LoPucki explains, comparing the governing law of different jurisdictions is not an easy task for researchers. If they do not use a comparison method, the researchers typically produce narratives that leaves to the reader the task of comparison, and the reader may not have the skills or knowledge to do so correctly. On the other hand, previously offered methods are complex and unwieldy because of the many factors and nuances inherent in comparing laws from different jurisdictions.

Professor LoPucki offers up a rule-based method of comparison that is “simple and intuitive… that comparative law experts can apply without extensive comparative law training.” Professor LoPucki identifies six steps that will result in a useful comparison and can be used by scholars, lawyers, judges and policymakers to understand the choice of law options and decisions available to corporations. The keys to the method are to (1) compare on entity type from each jurisdiction on one point of law at a time, and (2) to extract and expressly compare governing rules from the law of each country.

Algorithmic Entities

Professor Lynn M. LoPucki, the Security Pacific Bank Distinguished Professor of Law at UCLA School of Law, has identified a possible doomsday scenario as a result of corporate law’s failure to stay ahead of technological changes. Corporate entities, not controlled by humans, can serve as malevolent bots, engaging in terrorism and criminal activities. However, instead of placing effective controls on such entities, Professor LoPucki, an Affiliated Faculty Member of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, shows that current corporate law actually aids them.

Professor LoPucki’s recent article, Algorithmic Entities (published in 95 Washington University Law Review) builds on the prior work of Professor Shawn Bayern who demonstrated that personhood can be conferred on an autonomous computer algorithm by putting it in control of a limited liability company.

Professor LoPucki observes that “leading technologists, such as Bill Gates, Elon Musk and Stephen Hawking, have explained that human-level artificial intelligence as an existential threat to humankind.” Professor LoPucki argues “that algorithmic entities—legal entities that have no human controllers—greatly exacerbate the threat of artificial intelligence. Algorithmic entities are likely to prosper first and most in criminal, terrorist, and other anti-social activities because that is where they have their greatest comparative advantage over human-controlled entities. Control of legal entities will contribute to the threat algorithms pose by providing them with identities. Those identities will enable them to conceal their algorithmic natures while they participate in commerce, accumulate wealth, and carry out anti-social activities.”

Under current law, algorithmic entities can control U.S. corporations, limited liability companies, partnerships, and limited partnerships as well as entity forms in many other countries. U.S. states lack the ability to determine who controls the entities; and therefore, those jurisdictions cannot identify which entities do not have human controllers. State and national corporate charter competition, combined with ease with which entities can migrate to other jurisdictions, makes it very difficult for any government to regulate algorithmic entities because as soon as one does the entities (human-controlled or otherwise) will migrate to a jurisdiction which does not impose such disclosure requirements.

Professor LoPucki’s concerns have hit a nerve! Algorithmic Entities was the most downloaded article on SSRN, a leading internet repository for academic research, in late February 2018 and it continues to rank high on SSRN’s download list. Many of the readers who downloaded the article learned of the paper through SSRN’s Combating Terrorism ejournal.

Jason Oh

Wealth Tax Add-Ons: An Alternative to Comprehensive Wealth Taxes

Interest in wealth taxes has spiked recently due to disclosures of tax-haven abuses by the ultra-wealthy (the Panama Papers in April 2016 and the Paradise Papers in November 2017) and new empirical work on rising wealth inequality in countries around the world. These developments have led many to consider comprehensive wealth taxes as a potential solution.

In their recent paper, Wealth Tax Add-Ons: An Alternative to Comprehensive Wealth Taxes, 158 Tax Notes 1613 (2018), UCLA School of Law Professors Eric M. Zolt, the Michael H. Schill Distinguished Professor of Law and Jason Oh offer an alternative set of instruments – wealth tax add-ons – that countries can use to achieve many of the goals of a comprehensive wealth tax. Rather than trying to tax all wealth with a new tax instrument, add-ons would target and tax particular forms of wealth and be attached to existing tax systems.

Professors Zolt and Oh, Affiliated Faculty Members of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, propose three different types of add-ons: (1) a surtax on real property for the property tax system, (2) a minimum tax for closely-held businesses for the corporate tax system, and (3) a Netherlands-style presumptive tax for financial assets for the personal income tax system. Instead of a one-size-fits-all approach of a comprehensive wealth tax, countries can tailor add-ons to target the forms of wealth most prevalent in that country and can address weaknesses in the existing regime for taxing income from capital. All emerging countries (and many developed countries) struggle to tax income from capital effectively. In these countries, wealth tax add-ons can play an important role in buttressing less robust income or property tax regimes.

Professors Zolt and Oh present an analytical framework for how particular countries might pick and tailor these wealth tax add-ons. The starting point is to collect data to understand the distribution of wealth in the country, the composition of wealth (the relative importance of different types of assets), and how the composition of wealth changes across the wealth distribution. This information will influence the design of the add-ons (especially the threshold for taxation and the rate) and the relative attractiveness of these instruments. Countries should make these determinations in the context of existing tax systems, and, in particular, how well a country’s existing systems tax income from capital.

As detailed in their analysis, wealth tax add-ons provide a promising alternative to comprehensive wealth taxes. If implemented well, wealth tax add-ons may yield many of the benefits of a comprehensive wealth tax at lower administrative and political cost. The wealth tax add-on approach provides countries the option of beginning with one type of add-on and then expanding to other types if the experience proves successful. Finally, wealth tax add-ons can be a temporary solution for emerging economies in which the fiscal system is still developing. As the taxation of income from capital improves under income, corporate, or property tax systems, wealth tax add-ons can be phased out. Alternatively, the successful implementation of wealth tax add-ons may be a valuable step toward building the administrative capacity and political support for future implementation of a comprehensive wealth tax.

Eric M. Zolt

Wealth Tax Add-Ons: An Alternative to Comprehensive Wealth Taxes

Interest in wealth taxes has spiked recently due to disclosures of tax-haven abuses by the ultra-wealthy (the Panama Papers in April 2016 and the Paradise Papers in November 2017) and new empirical work on rising wealth inequality in countries around the world. These developments have led many to consider comprehensive wealth taxes as a potential solution.

In their recent paper, Wealth Tax Add-Ons: An Alternative to Comprehensive Wealth Taxes, 158 Tax Notes 1613 (2018), UCLA School of Law Professors Eric M. Zolt, the Michael H. Schill Distinguished Professor of Law and Jason Oh offer an alternative set of instruments – wealth tax add-ons – that countries can use to achieve many of the goals of a comprehensive wealth tax. Rather than trying to tax all wealth with a new tax instrument, add-ons would target and tax particular forms of wealth and be attached to existing tax systems.

Professors Zolt and Oh, Affiliated Faculty Members of the Lowell Milken Institute for Business Law and Policy at UCLA School of Law, propose three different types of add-ons: (1) a surtax on real property for the property tax system, (2) a minimum tax for closely-held businesses for the corporate tax system, and (3) a Netherlands-style presumptive tax for financial assets for the personal income tax system. Instead of a one-size-fits-all approach of a comprehensive wealth tax, countries can tailor add-ons to target the forms of wealth most prevalent in that country and can address weaknesses in the existing regime for taxing income from capital. All emerging countries (and many developed countries) struggle to tax income from capital effectively. In these countries, wealth tax add-ons can play an important role in buttressing less robust income or property tax regimes.

Professors Zolt and Oh present an analytical framework for how particular countries might pick and tailor these wealth tax add-ons. The starting point is to collect data to understand the distribution of wealth in the country, the composition of wealth (the relative importance of different types of assets), and how the composition of wealth changes across the wealth distribution. This information will influence the design of the add-ons (especially the threshold for taxation and the rate) and the relative attractiveness of these instruments. Countries should make these determinations in the context of existing tax systems, and, in particular, how well a country’s existing systems tax income from capital.

As detailed in their analysis, wealth tax add-ons provide a promising alternative to comprehensive wealth taxes. If implemented well, wealth tax add-ons may yield many of the benefits of a comprehensive wealth tax at lower administrative and political cost. The wealth tax add-on approach provides countries the option of beginning with one type of add-on and then expanding to other types if the experience proves successful. Finally, wealth tax add-ons can be a temporary solution for emerging economies in which the fiscal system is still developing. As the taxation of income from capital improves under income, corporate, or property tax systems, wealth tax add-ons can be phased out. Alternatively, the successful implementation of wealth tax add-ons may be a valuable step toward building the administrative capacity and political support for future implementation of a comprehensive wealth tax.

The Lowell Milken Institute for Business Law and Policy at UCLA School of Law supports and collaborates with UCLA Law’s distinguished business law faculty. UCLA School of Law has one of the finest business law programs in the United States including a business law specialization program, a rich and varied co-curricular program for its students, and events and conferences for the business law community. We are training the business law leaders of the future!