An article in today's WSJ thinks so. As Steve Bainbridge notes, this is, and always has been, a matter of comparing the cost of market transactions to those of firms (see Coase).

If vertical integration is back, I may have to tweak some of my theories.

For example, I note in my Rise of the Uncorporation (see p. 235) that the uncorporation is rising in part because the benefits of corporate-type capital lock-in are declining with outsourcing. If that's not true, maybe corporations will be with us awhile longer.

And in my Death of Big Law I argue that legal outsourcing is part of what's making big law firms less necessary. But here the implications of vertical integration for my theory are less clear, because corporations can vertically integrate legal services, too (but see Beardslee, Nanda, Wilkins & Coates on that point).

During the presidential campaign we heard a lot about change and special interests. Well, the campaign has delivered on its promises. We got a change in the special interests that are collecting the rents, and with the vast increase in government they have an opportunity to get a lot richer. This is a price we pay for dismantling capitalism and substituting government for markets.

For some examples, see John Carney's list of the "the top 8 winners of Obamanomics" and Tim Carney's book.

As John Carney says:

Whether he likes it or not, President Barack Obama's policies on finance, the economy, technology, the environment, and even health care are turning out to be boons to the most entrenched special interests. Meanwhile, smaller businesses, taxpayers, and some disfavored industries are bearing the burden. Our President believes in a "mixed economy" in which private enterprise and the profit motive are still alive and well, but government gets to pick the winners and losers.

Geoffrey Miller (NYU) writes about the Origin of Obligation: Genesis 2:4b-3:24:

This paper analyzes the Eden narrative (Genesis 2:4b-3:24) as a philosophical account of the origins and extent of political obligation and the consequences of its breach. The strong (but not unlimited) form of obligation identified in the text would have been congenial to the interests of the leaders under whose auspices the narrative appears to have been compiled and preserved.

Here's more:

[T]he message of the text is straightforward. A citizen's job is to work hard and appreciate the manifold benefits he receives from the king: peace, security, and the opportunity for a fulfilling life. Citizens should not concern themselves with questions of policy, which are properly reserved for the king and his ministers. Moreover, they are not supposed to break the rules imposed on them by their governments. Even if the ruler is absent the citizen's duty is to obey. But merely breaking a rule is far less dangerous than the more fundamental transgression of subversion, an offense deserving of the most severe punishment. Such a doctrine of breach would have been appealing to rulers in Ancient Israel because it encouraged unquestioning disobedience to the laws, and more particularly because it strictly and unequivocally condemned the type of breach that would be most dangerous to a ruler – subversion or rebellion from within.

I have often written (most recently) about why artists in general, and particularly filmmakers, dislike capitalists. But it turns out that artists are major beneficiaries of capitalism, with all of its associated wealth disparity. That's the lesson of Goetzmann, Renneboog & Spaenjers, Art and Money. Here's the abstract:

This paper investigates the impact of equity markets and top incomes on art prices. Using a long-term art market index that incorporates information on repeated sales since the eighteenth century, we demonstrate that both same-year and lagged equity market returns have a significant impact on the price level in the art market. Over a shorter time frame, we also find empirical evidence that an increase in income inequality may lead to higher prices for art, in line with the results of a numerical simulation analysis. Finally, the results of Johansen cointegration tests strongly suggest the existence of a long-term relation between top incomes and art prices

I have some thoughts on CELS on my return from LA (as well as a picture).

There's so much stuff at this conference that one might wonder if it's a granfalloon. David Zaring thinks so:

[I]t strikes me that ELS has a number of different constituencies, and the common cause among them is not always obvious. 

I sympathize with David's observation. There's not a lot linking, say, survey data on how people feel about being cheated with a study crunching CRSP data on a corporate governance issue.

On the other hand, I think CELS has an important role to play in inserting some discipline into what I've referred to in private conversations as the empirical legal scholarship "bubble."

Legal scholars once decried too much untested theorizing. That time is long gone. Legal academics' discovery of empirical research has given rise to the greatest explosion of intellectual entrepreneurship since Al Gore created the Internet. Now instead of untested hypotheses we get unhypothesized tests. We also get some tests that could be characterized as the intellectual equivalent of pets.com (although thankfully little of this bad stuff at CELS itself).

Ted Eisenberg's keynote address attacking the Chamber of Commerce's court ranking highlighted the need for discipline. But data distortion by interest groups is not exactly a new thing. And something like the truth is likely to emerge even without CELS from interest group competition and robust media.

I think the greater need is self-discipline in a community of scholars that is becoming rapidly more diverse as folks trained in all kinds of disciplines mingle with legal scholars like me. That, I think, is CELS's "common cause." It is furthered by bringing scholars together once a year to focus on methodology and to weed out the bad methods from the good ones. One of CELS's key contributions to discipline is assigning a discussant to each talk. The discussants I saw were well-prepared, and many (including me) brought slides. I hope CELS continues to thrive, and that its emphasis on rigor helps to tame the empirical bubble.

I would like to see two other developments. First, the data is starting to outstrip the theory. The empirical bubble has encouraged scholars to go right to the data, sometimes without developing the theory adequately for a good empirical test.

One problem here is that the good theory people are not always good empiricists. This leads to my second wish: more humility by both empiricists and theoreticians, and more co-authorship. The empirical bubble has made empirical articles more publishable, which tempts theory people into empirical territory they're not ready to navigate. And of course empirical scholars may be tempted to collect all of the rents. CELS can help bring the two types of specialists together, and to persuade them that they need each other.

As Key said in Hustle and Flow:

There are two types of people: those that talk the talk and those that walk the walk. People who walk the walk sometimes talk the talk but most times they don't talk at all, 'cause they walkin'. Now, people who talk the talk, when it comes time for them to walk the walk, you know what they do? They talk people like me into walkin' for them.

Which I think is a good thing.

Update:  Josh Wright responds, suggesting more collaborations of a slightly different type. 

From my hotel room, with my iPhone.

This Saturday morning at 9:00 A.M. PST Bruce Kobayashi and I will be presenting our paper Jurisdictional Competition for LLCs at the Conference for Empirical Legal Studies. If you're at the conference, then be there! If not, then watch the webcast.  Here's the abstract:

Most of the work on jurisdictional competition for business associations has focused on publicly held corporations and the factors that have led to Delaware's dominant position in attracting out of state firms. Is there an analogous jurisdictional competition to attract formations by closely held firms? Limited liability companies (LLCs) offer a good opportunity to examine this question. Most LLC statutes have been adopted and changed rapidly during the past 20 years. Unlike general and limited partnerships, which have been shaped by uniform laws, LLC statutes vary significantly, and states have devoted a lot of effort to drafting their individual statues. This variation provides an opportunity to test the statutory provisions and other factors that influence LLC's choice of where to organize. We find little evidence that firms choose to form outside their home state in order to take advantage of variations in statutory provisions. Instead, we find evidence that large LLCs, like large corporations, tend to form in Delaware, and that they do so for the many of the same reasons – that is, for the quality of Delaware's legal system.

Obviously this relates to both of my recent books, The Law Market and The Rise of the Uncorporation.

Tune in and find out how LLCs fit into the market for "corporate" governance.

There's water on the moon. Per the WSJ, "[w]ater's availability would . . . make further human exploration of the moon possible, since the water could be used to generate oxygen, as well as to make rocket fuel."

But who owns it?

This matters, because as lawyer Timothy Nelson told the WSJ blog:

Of course, getting resources from the moon will take an enormous capital investment, and the trick in setting up a treaty will be to make it feasible to get private capital involved. If you don't do that; if it's something that's overly regulated by a centralized U.N. framework, it won't work. You have to make it such that private investors could sensibly commit the funds to go ahead and do the exploitation.

Now, would you make an investment that's subject to a treaty providing

The exploration and use of the moon shall be the province of all mankind and shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic or scientific development. Due regard shall be paid to the interests of present and future generations as well as to the need to promote higher standards of living and conditions of economic and social progress and development in accordance with the Charter of the United Nations [?]

Probably not. What would Coase do? We'll need to define property rights up there to encourage investment. But based on what?

Maybe we could get some guidance from the Man Who Sold the Moon, who bought up the parts of earth whose air rights include the moon. Of course he needed to raise a lot of money, so he had to hope his property rights theory actually worked. Bit of a jurisdictional tangle here.

Then he had to use a corporation to raise the money. Unfortunately he got squeezed out before he could make it to the moon. Maybe he should have used an uncorporation (Rise of the Uncorporation indeed).

Anyway, it's comforting to know that when we do go into outer space my books will still be relevant.

Here's the discussion so far. More in this vein from Erik Gerding:

[T]he changing and increasingly ruthless economics of legal education will place faculty governance under incredible stress. Law schools that cannot react nimbly to changing economic circumstances have everything to lose. Consensus-based decision-making by faculties is already being challenged. At the same time, more hierarchical, corporate-type models for university governance do not sit well with professors. * * *

Where does that leave law schools? With some potentially nasty Darwinian outcomes if faculty governance can't negotiate these various tensions while adapting to the more ruthless economics of education. * * *

But will law schools finally get the guts and foresight to change their century-old model to cope with the vastly different economics of the law business?

Consider this (citing significantly increased LSAT-test-taking):

This doesn't seem surprising. When employment markets constrict, people seek other options, including additional schooling. Moreover, it's not clear to me that the death of Big Law or the death of the Big Law School would have much of an effect on the demand for legal education * * *

And this:

Do we need as many law schools as we have?  Absolutely not.  Will we see, as a result of this downturn, any massive changes in curriculum?  We just don't think so.  The ships of big firms and big-name schools take too long to turn in any groundbreaking way.  And by the time they do, we'll be on to the next disaster.

As those applications flood in, expect to see champagne corks popping on the decks of the Law School Titanic.

Upate:  Erik Gerding says law schools are in for a correction if the job market doesn't improve.  I agree -- which is why I think they should put away the champagne bottles.

Taken with my iPhone.

Andrew Heinze, writing in today's WSJ, has one. He's paying $2,000 a year for a hospitalization-only policy as a self-employed writer in NYC. Health insurance in NY is very expensive because NY prohibits insurers from denying coverage because of a pre-existing medical condition or from pricing or denying coverage based on age. His insurer's next cheapest insurance would cost him $13,000/yr. Heinze buys the only cheaper plan and banks $11,000/yr to pay for office visits.

Heinze explains that the health-care reform bill that the House passed would require him either to buy the $13,000/yr plan or to pay a $2,000/yr fine – what's he's paying now for insurance – for not having "qualified" insurance. And, he points out,

there is nothing in any of the pending health-care legislation that will make the cost of a qualified plan significantly lower than it is in New York now. On the contrary, once the health-insurance mandates that already exist in New York become the law of the land, insurance premiums everywhere else will rise as they did here.

I haven't checked Mr. Heinze's facts, so I invite corrections. My point here is that it seems to me that we need more simple stories like this to cut through the morass of op-eds, talk radio and policy studies to demonstrate what's really at stake here.

aSpeaking of the Death of Big Law, the National Law Journal reports (HT ABA Journal) from its NLJ 250 survey (based on an attorney census covering 10/1/2008-9/30/2009) that Big Law significantly shrank and decreased partner-associate ratios in 2009. Here are the grim details:

• Lawyers working at the top 250 law firms down 5,259 lawyers or 4%. According to the article, "it's as if all of the lawyers working at two firms the size of Jones Day vanished in 2009." It was the worst of only three declines since the start of the survey 1978 (the others were .9% in 1993 and 1% in 1992).
• 15 of the top 75 law firms dropped more than 100 lawyers.
• Associates shrank by 8.7%. 113 firms deferred 2,784 associates, or 42% of the law graduate pool.
• Partners increased 0.9%, with increases at 30 of the top 50 firms. According to NLJ:
  • "The results confirm that law firms' strategy in managing the downturn was to save the partners -- and partnerships. "The cuts made were done primarily to preserve workloads for partners," said Ward Bower, a consultant with Altman Weil. And perhaps troubling to clients, "it suggests that work done by partners is work that associates could do," he added.
• Nonpartner, nonassociate lawyers shrank 8.9%.

The declines basically reversed growth since 2005. So does this mean just that Big Law overgrew over the last few years, or is this the first phase of a long-term decline? My article linked above provides theoretical and factual support for the latter hypothesis. We will get a better picture as the broader economy picks up.

Update: Bill Henderson has a more detailed analysis:

So what is the bottomline analysis?  I think the slowdown in the economy has made the largest firms the most vulnerable to price pressure from large corporate clients.  The largest firms have the highest cost structure (rents and associate pay), and there is some doubt whether there is a corresponding value-add for their higher fees.  At the high end, the market is pretty crowded.  An international footprint is not necessarily a competitive advantage when 20+ of firms have the same high fixed costs and similar lawyer credentials.  Not surprisingly, a lot of desirable legal work that does not require a multi-office international platform is migrating to firms further down the AmLaw/NLJ 250 food chain.  Indeed, anecdotal evidence from my informal network suggests that boutiques are booming.

Folks, we are in uncharted waters.  The structure of the corporate bar is changing rapidly.  The giants are vulnerable.

This analysis is consistent with my theory: it's not just a general downturn, but a shifting of work from firms that are more dependent on the standard highly-leveraged/one-stop-shop big firm model to firms that are less dependent.

Eric Gerding wrote a couple of days ago about the "Death of 'Big Law School.'" He has some dismal predictions of what the Death of Big Law (taking off from my paper) means for legal education:

• Lower-paying jobs mean lower tuition income and less alumni support.
• More emphasis on training of practice-ready lawyers.
• But a lower-cost model of doing so – i.e., bigger classes, more reliance on adjuncts, grad students, VAPs.
• Research will have to find grants.

The WSJ Law Blog opines, "[i]f we're reading Gerding correctly, law school may become less fun, but perhaps more useful."

My article linked above has a somewhat different view. My basic theory is that law firms are dying because they have no asset core binding them together. Future lawyers must be trained to build those assets. This means high-end law practice will not simply shrink or get less lucrative, but be transformed into general-purpose firms that call for closer connections between law and other disciplines.

Here's what I say about the implications of these developments for legal education:

First, creating the new legal products industry . . . . requires law-trained entrepreneurs and venture capitalists. Law students will need training that enables them to develop products rather than just how to litigate and give individualized advice. This could lead to a convergence of legal education with technology and business training.

Second, law firms investing in research and development . . . could increase the demand for the sort of "law and" work law schools have been moving toward for the last generation. Law firms might use disciplines such as history, psychology and economics to get potentially profitable insights into contracts and litigation.

Third, the multi-disciplinary firms discussed [above] involve not only a combination of distinct disciplines, but also a kind of synergy that firms cannot easily replicate simply by hiring in those disciplines. Lawyers will have to learn to speak the languages of the other disciplines in their firms, and these other disciplines will have to learn some law.

Fourth, the growing role of in-house counsel . . . would make these business people integral parts of their firms. This could trigger a broader demand for business-trained lawyers than is now supplied by JD or JD-MBA programs. Business training could be moved within law schools by greater attention to business background in both advanced seminars and basic courses like business associations, securities regulation, antitrust and bankruptcy.

Finally, all the above developments plus the Wal-Mart lawyer phenomenon discussed [above] point to an even clearer separation between the high and low ends of legal practice than currently exists. While some types of practice will demand even more sophistication and multi-disciplinary skills than many current lawyers have, the Wal-Mart lawyer would need less training than the standard three years of law school. As the market for legal services fractures, so might legal education.

In other words, many of the high-end lawyers of the future will have to be trained to be more than just lawyers. "Law-and" may become part of the basic model, though "and" may be more business, finance and economics, perhaps with some psychology and sociology, but less philosophy.

My discussion of the "Wal-Mart" lawyer suggests there will still be a need for "law-only" lawyers to do more routine legal work. Expect these lawyers to come from the kind of law schools Gerding envisions. The strategic decisions made by today's law schools will decide which category they end up in.

Update:  Erik provides a very interesting response.

As everyone surely knows, this was the title of the last episode of season 3 of Mad Men. I've previously covered the anti-capitalist aspects of this show, but have come to realize that it's too subtle and nuanced to dismiss on that basis.

Spoilers!

Sterling Cooper's British parent is being sold along with SC to McCann-Erickson. Needless to say (for those who've been watching), Sterling, Cooper, Draper and gang don't want to go to that "sausage factory." But what can they do? They've got their books of business, but they've all signed long-term contracts.

Watch the show to see how they deal with the contract problem. My point here is that the show deals with the problems of binding professionals into a firm. Without the SC principals, what property can the parent firm sell to McCann? It can use contracts to try to bind the principals, but we see that contracts can only go so far. The human "glue" here only binds the SC principals to each other, not SC to the parent. The forces of global competition are starting to play havoc with the stability of firms.

Does this sound like a law firm? With the exception, of course, that law firms can't use the same contracts with noncompetes that other firms can. See my Death of Big Law.

It gets even more fun in Mad Men when the show brings in the Drapers' marriage as an obvious comparison. They basically can't divorce under NY law. This helps keep them together, which the show portrays as good for the assets of the Draper-Draper firm (i.e., the kids). But there's always Reno. In other words, The Law Market (see Chapter 8 on marriage) comes into play. In general, Mad Men has been quite nuanced on the changes in family cohesiveness happening during the show's time span of the early 60s.

By the end of the show, individual freedom has prevailed over firms. The evil CEO of the British parent has been vanquished. But will everybody be happy in their new world of instability? I guess we'll see in Season 4.

I said yesterday that I would be posting more on the acquittal of the Bear Stearns hedge fund managers, but John Carney says it for me:

[W]hen taken in context, the evidence provided actually indicated that the men were engaged in an active and ongoing analysis of the shape of the market. They were evaluating different pieces of evidence from the market, some of which seemed to show that the market for mortgages was falling apart and some of which indicated that the markets were temporarily dislocated due to an investor panic over the popping of the real estate bubble.

We want fund managers to feel free to express doubt about their strategies, to openly debate new evidence. This case threatened to have a chilling effect on internal debates over fund strategies.  Hopefully this acquittal will restore the confidence in fund managers that juries will not jump to the conclusion that the private expression of doubt equals fraud if it is not disclosed to investors.

Unfortunately, our view on this may be too optimistic. The very threat of prosecution may be a deterrent enough for many, even if they think they would be acquitted in the end. The chilling effect of this misguided prosecution may not have been totally extinguished by today's acquittal.

This point extends beyond what managers are saying to what they're doing. Criminal law does not mix with ordinary business operations. We have to decide whether we like the comforting spectacle of "fat cats" being hauled before the bar when times turn bad more than encouraging risk-taking to promote the creation of wealth.

The jury completely rejected the government's misbegotten prosecution of the Bear Stearns hedge fund managers. 

I expect to have more to say later about this case. 

A couple of months ago I speculated that, despite everything, a legal education might be a worthwhile investment:

Look at it this way: Assume for illustration purposes that a legal education buys you an annuity of $25,000 (over and above wages without legal training) which can be expected to grow over a lifetime at .5% a year, with a 3% discount rate. Under these assumptions, a legal education has a present value of $1,000,000. At $50,000/year tuition plus career opportunity costs, this looks like a decent investment regardless of assumptions about the future of law. * * *

This post got a fair amount of reaction, which led to a clarification:

I meant to say that it is not "obviously" a bad investment despite the recent job problems of law school grads.  I would certainly like to see data that sheds more light on that issue. So far the media and blogosphere have been dominated by anecdotes that do not get to the basic issue I raised:  what is the lifetime economic value of a legal education?  And of course a legal education potentially has a value that is not reflected in my annuity analysis.

Well, Herwig Schlunk of Vanderbilt decided to take this on, in the provocatively titled Mamas Don't Let your Babies Grow up to be . . . Lawyers. Here's the abstract:

This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited "typical students," the investment is shown to be a bad one.

Professor Schlunk says in a footnote that the paper was inspired by my post:

As I disagree both with the numbers he [Ribstein] pulled out of the air, and with what he does with them, I pulled out my own set (which are at least slightly better supported) and subjected them to my own analysis.

Well, yes, my numbers were pulled out of the air. But they accomplished their purpose of provoking more analysis, and hopefully a continuing discussion of this important subject.

Yesterday at the Illinois Corporate Colloquium Jonathan Klick presented his important paper (co-authored by Jonah Gelbach and Eric Helland) Valid Inference in Single-Firm, Single-Event Studies.

The paper discusses single-firm event studies, which determine the existence of abnormal returns (compared to a model of expected returns such as the capital assets pricing model) around a disclosure or other event. Such studies are virtually mandatory in securities cases to demonstrate a causal link between an allegedly fraudulent statement and investor losses.  They are also important in antitrust cases. Event studies generally are a staple of the finance literature. But how accurate are these studies? 

Well, the paper shows that the current standard methodology for performing single-firm event studies is, in the authors' words, "fundamentally flawed," and that "existing securities litigation practices appear to be inappropriate as a matter of basic statistical practice." 

Essentially what's happening is that single-firm event studies are determining the existence of abnormal returns against an assumption that the firm's returns are "normally" distributed under a bell-shaped curve. "Abnormal" refers to returns located around the "bell's" right and left sides. The problem is that returns are often not normally distributed, and you can't determine if the observed returns are abnormal if you don't know the shape of the curve. The paper proposes "a very simple but statistically sound alternative," the "SQ" test, which does not present the problem of assuming a normal distribution.

The paper concludes that "event studies as currently performed may be inadmissible on reliability grounds" under Daubert and Kumho Tire. Moreover, there is evidence that the flawed test is producing systematically anti-plaintiff results because it under-rejects the "null hypothesis" that the returns are normal. Specifically, it's mainly the more volatile stocks that are producing abnormal returns.

This already sounds pretty important. But the problem may touch not only single-firm event studies like those done in securities litigation, but multiple firm event studies such as those examining the effect of the passage of Sarbanes-Oxley. What's happening to the firms' returns may be correlated, again interfering with a normal distribution. Similar problems could infect even multiple-firm/multiple-event studies. In other words, it looks like a significant chunk of securities and antitrust cases and papers published in finance journals and law reviews are based on a fundamentally flawed test. This could be the finance equivalent of DNA evidence in criminal trials.

The discussion in the workshop and class touched on a wide range of issues:

• As a matter of policy, should we worry about the anti-plaintiff bias in securities cases? Behavioral finance suggests that investors may be over-reacting to disclosures of all sorts, true and false, which contributes to stock price volatility. Klick, et al, just provide more evidence of the unreliability of securities class actions by indicating that statistical fraud is a byproduct of volatility. My article Fraud on a Noisy Market suggests that we can minimize this problem by relying on a bright-line test of loss causation, as arguably supported by the Dura case. More broadly, maybe the anti-plaintiff bias just offsets more basic problems with fraud cases such as the circularity or "pocket-shifting" nature of fraud damages.
• The Klick et al paper raises basic questions about expert testimony. Judges and lawyers untrained in statistics have to rely on experts who are invested in their standard theories, or tied to one or the other side in particular types of litigation. Klick suggested that judges could appoint their own experts. But who?
• Can we do a better job of training lawyers and judges to deal with these problems? Require statistics in law school? Sounds like a good way to scare away applicants. Maybe require statistics in grammar school or high school. As Jon suggested, do the students really have to learn all the state capitals?

Anyway, this is important stuff. Start by reading the paper.

This is the question asked by Subramanian, Herscovici and Barbetta. Here's part of the abstract:

Delaware's antitakeover statute, codified at Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was first enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on empirical evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future empirical evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. * * * Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 that were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid.

The authors also suggest that the absence of case law since the trio of 1988 cases is attributable to the strength during that period of the pill. Now that the pill is weakening under pressure of increased shareholder activism, Section 203 becomes more important. As the authors say,

Twenty years of unexamined experience, then, might be explained by a historical context in which the pill, not Section 203, was the binding constraint on a bidder's strategy. But today Section 203 is becoming important once again. As it does, it seems worthwhile, if not essential, to examine this past experience.

I'm skeptical of the authors' unconstitutionality claim. Notably, Section 203 is part of the Delaware's corporate statute, and therefore an integral part of its regulation of internal corporate governance, like its jurisprudence on the poison pill. This is important because, as Erin O'Hara and I explain in The Law Market (p. 126, footnote omitted):

Although the U.S. Constitution probably does not forbid a state from regulating the internal governance of a firm that is incorporated elsewhere, it may confer some extra regulatory power on the incorporating state. In CTS Corp. v. Dynamics Corp. of America, the Court reasoned that "no principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders."     This "authority" in CTS allowed the incorporating state to regulate the governance of firms based in other states, consistent with the Commerce Clause, and to preserve a state corporate law provision notwithstanding a potentially preemptive federal law, under the Supremacy Clause.

Moreover, even if the Court were inclined to hold a provision of a state corporate statute unconstitutional, I doubt the Court would hold constitutionality hostage to the vagaries of the takeover market.

Finally, as an aside, one section of the paper particularly piques my interest. The authors explain the shift from unconstitutionality of the Illinois takeover statute in Edgar to constitutionality of the Indiana statute in CTS on the basis that the CTS Court

was clearly more receptive to state regulation of takeovers than the Court's reasoning just five years earlier. One likely explanation for this shift, at least in part, was the change in popular sentiment towards hostile takeovers. Stories of "corporate raiders" dismantling healthy companies for enormous personal gain dominated the business press during the mid-1980s. American competitiveness was faltering compared to Japanese and German manufacturers, and many blamed "two-tier, front-end-loaded, boot-strap, bust-up, junk-bond-financed" hostile tender offers. It is no coincidence that 1987, the year that CTS was decided, was also the year that Oliver Stone's Wall Street hit movie theaters. The villain was Gordon Gekko, a takeover artist played by Michael Douglas, whose infamous mantra "Greed is Good" became Exhibit A for those who wanted greater regulation of hostile takeovers. Three years later, Richard Gere played a soulless corporate raider in the even bigger Hollywood blockbuster Pretty Woman. Rather than going to federal prison for insider trading like Mr. Gekko, Gere found personal salvation in Julia Roberts, and business salvation when he promised her that he would build companies rather than break them apart.

I'm not sure exactly where the authors are going with all this. I think the distinction between CTS and Edgar is based on the internal affairs doctrine, as discussed above. But for what it's worth I have my own views on the role of film in shaping public policy on finance, including takeovers. I discuss both films in my Wall Street & Vine, and focus on Wall Street and its regulatory aftermath in Imagining Wall Street. I update all this to the current financial crisis in my recent How Movies Created the Financial Crisis. The bottom line is that I agree that films can have an effect on popular views, and accordingly on regulation. On the other hand, my research shows the anti-capitalist bias in films is fairly consistent. Accordingly, it's no more reliable as a test of the constitutionality of state takeover law than is the authors' data.

Update: Professor Subramanian responds:

Thanks to Professor Ribstein for his thoughtful post on our article.  As I've tried to explain in other forums (see, e.g.,), our article makes three fairly straightforward points:

1. Three federal district courts held in 1988 that Delaware's antitakeover statute must give bidders a "meaningful opportunity for success" in order to be valid under the Supremacy Clause of the U.S. Constitution.

2. These three courts upheld Section 203 because the empirical evidence available at the time showed that bidders were able to achieve an 85% tender in hostile offers reasonably often, but all three courts left open the possibility that future empirical evidence could change this constitutional conclusion.

3. No bidder in the past nineteen years has been able to achieve 85% in a hostile tender offer against a Delaware target 

Implicit in the posting above, and confirmed through private communications, Professor Ribstein does not dispute any of these three points. Instead, Professor Ribstein speculates about how a future federal court might assess Section 203 in view of CTS and the internal affairs doctrine. It is not obvious why this future assessment should be different than the three prior assessments, which all occurred post-CTS. In any case, my co-authors and I do not speculate in our article about what a future federal court might do; instead we simply observe: "[T]he empirical claim that the federal courts have relied upon to uphold Section 203's constitutionality is no longer valid. It seems possible that the federal courts would uphold the constitutionality of Section 203 on different grounds. But at the very least the constitutionality of Section 203 would seem to be up for grabs."