“We have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.” -George Orwell, 1939
I’m delighted to share a new article by yours truly on corporate governance and shareholder activism, The Golden Leash and the Fiduciary Duty of Loyalty, that will be published in the UCLA Law Review.
The “golden leash” is a controversial form of third-party compensation under which activist hedge funds supplement the salaries of directors they nominate to the board, in exchange for increasing the value of the company. A director compensated pursuant to such an arrangement stands to earn millions of dollars rather than the $250,000 paid to a typical director of a large public company, though the more richly compensated director usually works much harder and takes a lot of public abuse.
I offer a qualified defense of the golden leash, situating it in the context of other, more mainstream structures that depend on a more relaxed, porous conception of the fiduciary duty of loyalty than is commonly applied in the context of the golden leash. I also offer thoughts on how a properly disclosed golden leash can not only work for shareholders but improve procedural corporate governance more broadly.
The abstract follows. I welcome any comments on the draft.
Over at Letters Blogatory, friend of the blog Ted Folkman has published his take on Alberta Securities Commission v. Ryckman, the recent Delaware decision that (as I wrote last week) provides a good example of judgment arbitrage. Thank you again, Ted, for bringing the case to my attention.
Judgment arbitrage is a term I coined for a particular strategy for enforcing unenforceable judgments. It is a method of forum-shopping that allows creditors to exploit a quirk in American law that allows them to enforce foreign-country judgments in a forum where they would not otherwise be able to. There’s more discussion of the strategy in my Ryckman post, this symposium piece, and the original article where I lay out the theory.
In Ryckman, the creditor sought to collect Delaware assets in satisfaction of a Canadian judgment. The twist here was that the creditor first got its Canadian judgment recognized in Arizona, hopped a plane east, and then sought to use what was at that point technically an Arizona judgment to collect assets in Delaware. It was undisputed that the underlying Canadian judgment—a fine imposed by a Canadian agency—was not enforceable in Delaware, yet the Delaware court ordered enforcement anyway, because it was enforcing the Arizona judgment. It did so in the name of Full Faith and Credit, falling back on an articulation of that principle that I believe to be an incomplete. (There is a growing consensus, which I discuss at pp. 487-91 of the article, that FF&C does not compel states to grant full credit categorically to sister-state judgments.)
Ryckman is a good example of arbitrage. The creditor was able, with minimal friction, to profit from a major difference between Arizona and Delaware law governing the recognition of foreign judgments. Merriam-Webster defines arbitrage as “the practice of buying something (such as foreign money, gold, etc.) in one place and selling it almost immediately in another place where it is worth more.” The Canadian judgment wasn’t simply more valuable in Delaware for having transited Arizona first; it would have been completely worthless under Delaware law otherwise. The cost of unlocking additional assets for the creditor via the Arizona judgment was a little legal complexity and paperwork. It’s the essence of arbitrage.
Ted’s post disputes that the case is really arbitrage because the debtor, not the creditor, was the one to choose Arizona as the recognition forum—after all, he moved his domicile there. I find this point logically appealing, but my read of the law is that many courts wouldn’t place much stock in it…
A Delaware court has just issued a clear endorsement of the controversial enforcement strategy I call “judgment arbitrage.” I commend the slip opinion (here) to anyone interested in the enforcement of judgments across state or national borders. The case is Alberta Securities Commission v. Ryckman, 2015 WL 2265473.
As I argued in a 2013 article in the Harvard International Law Journal, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” judgment arbitrage is a three-step enforcement strategy that allows a party to enforce a foreign judgment in a U.S. jurisdiction where it would otherwise have been barred from doing so.
It’s uncontested that this is exactly what has just happened in Delaware. Here are the facts:
- Ryckman, who lived in Alberta, was fined about $500,000 Canadian by the Alberta Securities Commission (ASC) for violating Alberta securities laws. The ASC obtained a judgment (the “Canadian Judgment”) in this amount against Ryckman, who then moved his residence to Arizona.
- The ASC sought recognition and enforcement of the Canadian Judgment in Arizona.
- The Arizona state trial court ordered recognition and enforcement of the Canadian Judgment (now the “Arizona Judgment”). Ryckman appealed, and the Arizona appellate court affirmed. The Arizona Judgment simply embodies the Canadian Judgment, but is domestic rather than foreign.
- The ASC later sought enforcement of the Arizona Judgment in Delaware, where Ryckman is believed to have assets.
- Delaware recognition law is so different from Arizona’s that the Delaware court would have rejected the Canadian Judgment had it been presented with it. This is undisputed; the ASC concedes that the Canadian Judgment would not be enforceable in Delaware for two independent reasons:
- The Canadian Judgment constitutes a fine or penalty, and
- The applicable Delaware statute of limitations has run.
And here is the holding:
- The Delaware court orders enforcement of the Arizona Judgment. Now that the ASC has domesticated the Canadian Judgment in Arizona, its foreignness is irrelevant. It’s just an Arizona judgment. The court ignores the Canadian Judgment.
- The court holds that this result is compelled by (1) the Full Faith and Credit Clause of the U.S. Constitution and (2) the Delaware out-of-state judgment registration statute (the Uniform Enforcement of Foreign Judgments Act).
This is a major decision in the law of recognition and enforcement, and a clear example of judgment arbitrage. The court here reached a conclusion that, to my mind, deepens the already considerable doctrinal and theoretical confusion around the issue. I suggested legislation was desirable to address the possibility of judgment arbitrage, but many doubted the phenomenon even existed. In fairness, who could blame them? At that time I was unable to “identify a single real-world example of judgment arbitrage“—that is, a creditor receiving a judgment in a foreign country and then enforcing it in a U.S. state where it would otherwise have been barred from enforcing. An online symposium was held on the article, and the title of the critique summed up this good-natured skepticism well: Is There Really Judgment Arbitrage? (Yes, I replied.)
The linchpin of the strategy, I argued, was to insert a third jurisdiction between the foreign court (where the merits judgment is rendered) and the enforcement court (where it’s ultimately collected). The purpose of this middle jurisdiction is to recognize—and thereby domesticate—the foreign judgment, stripping it of its foreign character and transforming it into a U.S. judgment that other American courts will treat as an ordinary sister-state judgment. This step is key, because many scholars and courts believe that American courts are obligated to enforce sister-state judgments—including recognition judgments—under the Full Faith and Credit Clause and state and federal registration statutes. No such requirement exists for foreign-country judgments.
Judgment arbitrage is best represented graphically (these charts appear at p. 477 of “Ending Judgment Arbitrage”). Here is a typical cross-border judgment enforcement lawsuit, in simplified form—it occurs in two jurisdictions:
And here is judgment arbitrage—note the addition of a third jurisdiction:
I refer to this three-stage dance as “judgment arbitrage,” because of the relative frictionlessness of sidestepping a hostile U.S. recognition law in favor of a more lenient recognition forum. (Some cases have suggested there isn’t even a jurisdictional nexus required to choose this middle forum.) And once the foreign judgment has been domesticated—here, once the Canadian Judgment was rechristened the Arizona Judgment—the process of enforcing it is essentially mechanical.
As I discussed in an October 2014 post, a Pennsylvania court decision (citing “Ending Judgment Arbitrage”) endorsed the possibility of judgment arbitrage. The circumstances of that case left the court’s holding open to future narrowing. After all, the “arbitrage” element was not directly teed up: the two states involved (NY & PA) used the same recognition statute.
But that is not the case here. Arbitrage was directly presented in the Delaware case, where Delaware recognition law would have rejected the Canadian Judgment. Yet the court squarely held that Delaware was obligated to enforce, because the Canadian Judgment was recognized in Arizona before the creditor came to Delaware. That the Alberta Securities Commission probably did not diabolically plot its litigation strategy in a smoke-filled room but instead simply followed the asset trail of a nonpaying debtor is irrelevant to the holding. The court noted the ASC’s lack of an “improper purpose” in pursuing this strategy, but the cases it cited on that subject establish a very high standard for such a purpose. The arbitrage may have been unintended here, but it was real and it was effective—outcome-determinative, in fact.
Alberta Securities Commission v. Ryckman is now the leading example of judgment arbitrage on the books. As the court notes, this means there is now a split among states. Delaware and Pennsylvania now hold that Full Faith and Credit and mechanical registration statutes compel the enforcement of sister-state recognition judgments, and the District of Columbia holds that they do not. It will be very interesting to see how other states proceed.
h/t Ted Folkman, who brought this decision to my attention.
Here is guest post I wrote on the Fed’s open-market operations authority for Confessions of a Supply-Side Liberal, a blog on financial economics (and other subjects) run by University of Michigan economist Miles Kimball:
This is the second guest post by Greg Shill, a lawyer and fellow at NYU School of Law, on the legal scope of the Fed’s powers in the area of unconventional monetary policy. His work focuses on financial regulation, corporate law, contracts, and cross-border transactions and disputes, and his most recent article, “Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk,” examines the role of financial contracts in the Eurozone sovereign debt crisis. (His first guest post was “So What Are the Federal Reserve’s Legal Constraints, Anyway?”)
As a longtime follower of Miles’ work, it’s an honor and privilege to write for his blog and to put my ideas in front of his diverse and sophisticated audience. So, thank you, Miles, and your devoted readers.
For the past several years, the Federal Reserve has used many levers to stabilize and stimulate the economy. One of its most controversial has been the use of so-called unconventional monetary policy, chiefly three rounds ofquantitative easing (or QE, beautifully explained in this clip) from 2008 to 2014. Although the wisdom of these policies has been widely debated, the Fed’s legal range of action largely has not. In fact, as I have notedpreviously, policymakers and observers have been remarkably quiet about the scope of the Fed’s legal authority to conduct unconventional policy, and when they do describe it they often offer timid visions of the Fed’s powers.
Economists and other observers have often urged the Fed to do more to juice a recovery that was, until recently, broadly disappointing. These proposals have included not only calls to cut interest rates and launch quantitative easing in the first place (both of which the Fed did), but to target higher inflation, introduce electronic money, conduct direct monetary transfers to the public, extend QE beyond its wind-down in October 2014, and expand the range of assets eligible for purchase under QE. The Fed of course did none of those more ambitious things, and today, with QE finished and policy normalizing, defining the legal limits on the Fed’s monetary policy arsenal may feel less urgent. Yet it is a startlingly important question to leave open, given persistent overall weakness in the global economy today combined with the strong likelihood that the Fed will need to consider aggressive and creative measures in the future.
The general question is: in a future recession or crisis, does the Fed have the tools it needs to go beyond what it’s done in the past? This is one of the most important open legal questions in public policy today…
Many in the Federal Reserve—both the Board of Governors in DC and the reserve banks around the country—have come to view low inflation as the main threat to the economic recovery. Fed Chair Janet Yellen is the most prominent advocate of this view, and Chicago Fed chief Charles Evans is among its more prominent reserve bank proponents (see this interview yesterday with the New York Times). The Bank of Japan and the European Central Bank are now laser-focused on the same problem. Those institutions, along with Japanese Prime Minister Shinzo Abe, have staked their reputation on the power of monetary policy to stimulate economic growth, and there are growing calls in and outside the Fed for the US central bank to do more.
The basic problem everyone is trying to address is that with inflation expectations low—and they have been very low since 2008—firms and individuals have little incentive to invest or take other economic risks, which means the virtuous cycle of spending and hiring leading to more spending and hiring hasn’t really had the opportunity to get going.
The Fed has sought to address this collective action problem through something called unconventional monetary policy. This has come to mean the use of unusual monetary measures to stimulate demand. The scope of this authority is unclear. I will soon be writing more about it here and at Miles Kimball’s blog, Confessions of a Supply-Side Liberal. Miles, an economist at the University of Michigan, has written extensively on how to combat the so-called Zero Lower Bound problem. This is shorthand for when the economy is stuck in a rut for an extended period and the Fed’s conventional policy channels for increasing demand are gummed up: it can’t stimulate lending by reducing interest rates (because it has already cut them to near-zero) and it can’t juice inflation by expanding the money supply (because people aren’t spending the money in the first place, so merely increasing the supply doesn’t devalue it).
The general question I’ll be looking at is, how far can the Fed lawfully go in unconventional policy beyond what it’s already done. The Fed’s most prominent use of unconventional policy post-crisis took the form of the three consecutive rounds of “quantitative easing,” during which the bank bought US government bonds and government-backed asset-backed securities (Fannie and Freddie mortgage-backed securities (“agency MBS”)). Many economists believe quantitative easing served as a major stimulus to the economy and was particularly helpful given the inadequacy of the 2008 and 2009 fiscal stimulus measures. However, many “dovish” economists and Fed officials (seemingly including Yellen and Evans) want the bank do more.
When I began to look at the legal dimension of monetary policy—after all, that policy is conducted pursuant to a legal mandate—I was surprised to find very little in the way of scholarship or (publicly available) policy guidance…
The process of recognizing and enforcing foreign-country judgments has emerged as a critical issue in international business. Human rights groups see foreign and domestic courts as playing an indispensable role in holding multinational corporations accountable when they operate in developing countries, while those businesses worry that vulnerable foreign legal systems are being exploited to shake them down for political purposes. Somewhat more prosaically (but in my view more significantly on a day-to-day basis), the cross-border share of global capital flows has become enormous and with it has grown the need to more clearly define the standards that determine whether a judgment rendered in one country can be enforced against assets located in another. Judgment enforcement tends to be dictated by sources of domestic law and in the US is normally governed by state law.
In a recent decision in a judgment enforcement case, Standard Chartered Bank v. Ahmad Hamad Al-Gosaibi & Bros. Co., the Pennsylvania intermediate state appellate court held that a New York judgment recognizing a foreign money judgment was enforceable in Pennsylvania. This is significant in part because of the scope of the ruling: the court held that a foreign-country money judgment, once recognized by a single US court, is – poof! – rendered enforceable by a court in any other. The force of this holding is all the more potent considering that New York lacked personal jurisdiction over the judgment debtor. So a court can render a judgment compelling a party over which it lacks jurisdiction to pay a bunch of money, and then another court – in this case, one that appears to have jurisdiction – must enforce it.
This is a strong endorsement of the possibility of what I have called “judgment arbitrage.” In “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States” (which the court cited), I explain the implications of the fact that the law governing the process of collecting on a foreign judgment in the United States formally consists of two stages – recognition and enforcement – that do not need to occur in a single forum or under a single forum’s law. I posit judgment arbitrage as a natural, rational exploitation of that system: a judgment creditor can be expected to seek recognition in one US state and enforcement in a second where doing so serves its interests. (While creditors normally bring recognition and enforcement actions in a single proceeding, they are not obligated to.) Where, for example, the bulk of the debtor’s assets are located in a state where the recognition law is less creditor-friendly, the creditor may choose to bring a recognition action in a pro-creditor jurisdiction and then an enforcement action where those assets lie. That does not appear to be what happened here – New York and Pennsylvania use the same recognition statute, the 1962 Uniform Foreign Money-Judgments Recognition Act – but while the court notes this fact it does not condition its holding on the identity of the two states’ recognition laws.
When I developed the theory of judgment arbitrage, some questioned whether it really exists. My intuition, informed by my experience practicing transnational litigation, was that judgment creditors litigating enormous judgments are very sophisticated actors who would probably consider the option where it’s available, and so I set out to try and see if I could find a case where it had been used successfully. (I did not encounter sister-state judgment arbitrage while in practice.) The article cites (at p. 478) a practice manual that endorses its use, but I couldn’t find a reported case where it had actually been approved. I had noted in the article (e.g., at p. 478-80) that by definition judgment arbitrage is the kind of phenomenon for which it is hard to find traditional legal sources, because it will tend to result in confidential settlements rather than reported decisions, and further explained this challenge in a symposium the journal later held on the article. Although I was confident in my analysis of the relevant legal sources, it would have been nice to be able to point to something more concrete to demonstrate the availability of judgment arbitrage.
The Standard Chartered decision is a pretty solid data point in favor of judgment arbitrage. The opinion does a few things I had said courts might do when confronted with an enforcement action implicating three forums: a foreign merits forum (F1, here Bahrain), a US state recognition forum (F2, here New York), and a US state enforcement forum (F3, here Pennsylvania). Specifically, it endorses the enforcement by F3 of an F2 judgment recognizing the original F1 foreign judgment. And in so doing, the decision offers an energetic and thorough defense of the duty states possess to enforce one another’s judgments under the Full Faith & Credit Clause, both as a matter of constitutional law and public policy. It even says that Pennsylvania will enforce a sister-state recognition judgment where doing so would contradict Pennsylvania public policy, in the name of national unity. It emphasizes that this includes cases when the merits are litigated abroad, in F1. This is consistent with my argument in “Ending Judgment Arbitrage” (see, e.g,. pp. 488-91) that while the judicial duty to enforce sister-state judgments is far from absolute as a matter of constitutional law (the Supreme Court said in Pink v. AAA Highway that it is “not an inexorable and unqualified command”), courts often construe it to be very robust. This court not only doesn’t push back on the scope of that obligation, it offers a powerful and clear endorsement of it – and specifically of the duty to enforce sister-state judgments where the underlying judgment originates in a foreign country.
Here are some passages that support judgment arbitrage (all pages cite to the slip opinion):