Tesla shareholders won an important victory for shareholder rights today, at a time when Silicon Valley CEO’s continue to try to wrest power away from their investors through various mechanisms like non-voting stock (SNAP) and dual and triple class capital structures (Google, Facebook, Theranos).

The Delaware Chancery Court denied a motion to dismiss by Tesla in a lawsuit over Tesla’s controversial acquisition of SolarCity.

The close ties between Tesla CEO Elon Musk and his board members at the time of the SolarCity acquisition were clearly a concern for the Delaware Chancery Court. That Tesla has now added two new independent board members is an important acknowledgement that Tesla had a problem prior to this point in time because Tesla’s board was not sufficiently autonomous from Musk.

Technically what happened here is that the Court agreed with the plaintiff shareholders that it would be reasonable to conclude that Musk “controlled” the Tesla board and thus judicial review of the merger vote is subject to the most exacting standard of review, known as “entire fairness,” as opposed to the more deferential “business judgment” standard. Cases like these rarely get dismissed. Now, Tesla will face full discovery of its internal records and a possible trial on the merits or look to settle the case.

One interesting comment by the Court: the judge compared this situation with the Dell MBO and concluded that there Michael Dell took important steps to separate himself from the Board when it considered the acquisition offer from Silverlake et al. But here Musk took “practically no steps to separate [himself] from the Board’s consideration of the Acquisition.”

A recent meeting of the State Bar’s Committee of Bar Examiners (CBE) suggests to me that the California Bar may have a problem with race. That is, its leaders do not understand or are not willing to accept that they are putting up a barrier to minorities who wish to practice law. The evidence of this potential problem is found in the tape of the hearing which you can view here as well as a report prepared by the Bar Association’s staff on the bar exam.

The CBE chair, Karen Goodman, who readily admits (Min. 48:00) that she is from “Elk Grove” (a small town south of Sacramento that is, ironically, quite racially diverse) and so may not understand the data presented to her, questions whether lowering the “cut score” (the minimum number of points needed to pass) on the bar exam would help improve access to justice.

Yet, the data presented to the CBE she chairs indicates clearly that lowering the cut score even a modest amount (and still at a level well above that of New York state) would significantly increase the number of minority lawyers in the state. And this would be true in a state bar that remains overwhelmingly white and male and older, despite significant demographic shifts in the state over the last few decades.

The Bar staff report concluded: “…applicants of color pass the [current] bar exam at rates that are disproportionate to those of their white counterparts.This impact, when combined with disproportionately lower numbers of people of color in the pipeline to higher education and law school, has resulted in a pool of licensed attorneys in California that does not reflect the population of the state.”

And CBE Chair Goodman seems to go out of her way to minimize the impact of not lowering the cut score by suggesting, without any basis, that newly admitted minority lawyers won’t be of any assistance to the communities from which they came because they may not return to work in those settings. She apparently believes, despite decades of experience with affirmative action and other programs suggesting the contrary, that the only way they help those communities is by going back to them!

In any case, she and others on the CBE seemed unfamiliar with the debt repayment plans and financial support for those who go into public interest legal positions that are available to many law school graduates, thus opening a pipeline to enable lawyers to return to those communities. Of course, if we arbitrarily limit the number of minority lawyers that goal is not going to be easy to meet.

The Bar staff report also concluded that lowering the cut score would likely not have any impact on the number of attorneys subject to discipline by the bar, thus the Committee’s mandate to protect the public would still be met: “…attorney discipline – as measured by private and public discipline per thousand attorneys – appears to have no relationship to the cut score….based on the data available, it appears unlikely that changing the cut score would have any impact on the incidence of attorney misconduct.” (p. 36 of the Report to the Board of Trustees of the California State Bar Final Report on the Standard Setting Study and Public Comments Regarding Pass Line Options September 5, 2017.)

Thus, while we do not know why the cut score is so much higher than needed to meet the primary mandate of the CBE (protection of the public), we do know that by setting it at 144 the Bar has put up a wall over which minority law school graduates have difficulty climbing with the inevitable outcome: a disparate impact on those hopeful new law school graduates.

(This is likely why the Bar staff recommended three options: leaving the score the same, lowering it slightly to 141 or lowering it further to 139, a point which would still be 6 points higher than New York. Despite the troglodyte nature of the CBE deliberations, the Board of Trustees voted 6-5 to send all three staff options to the Supreme Court, which remains free to accept or reject those, as it has ultimate authority now over the cut score.)

Goodman and others on the Committee also seem to be ignorant of the actual improving employment data for lawyers in California over the past several years. Instead of using the reliable longitudinal data of, for example, the Bureau of Labor Statistics (which show steady increases in the number of employed lawyers in California over the last decade as well as steady increases in average earnings), Goodman casually read aloud random and somewhat misleading ABA employment reports of various law schools. These only track the first ten months of a law school graduate’s career.

Amazingly, Goodman seems unaware what that means – given the very high cut score in California, many students require several expensive and demoralizing attempts to pass the bar and thus are unable to get jobs as lawyers in those first ten months.

Yet, many of those students will, in fact, eventually pass. They are only forced to delay their careers at great personal expense because of California’s irrational and baseless high passing score required by Goodman’s committee.

In other words, if Goodman and her Committee were truly motivated to improve access to the bar for minorities who wish to become licensed lawyers they could easily take steps to do so. But they have steadfastly refused to do that to date, instead punting the issue to the California Supreme Court. Hopefully, the Court will do the right thing and begin the process of restructuring the State Bar, including its committee structure and current leadership.

At a minimum, they should ignore the self-serving surveys conducted by the current Bar and 1) temporarily lower the cut score to the same level as New York (133 as opposed to its current 144); and 2) appoint a blue ribbon independent commission chaired by Dean Ferruolo of the University of San Diego School of Law to conduct a thorough study of the purpose, impact and structure of the bar exam with a mandate to propose any and all changes needed to improve access to, and effectiveness of, the legal profession in California.

The State Bar of California has released a study today it conducted of the so-called “cut score” which determines who does and does not pass the California bar exam. Using the results of a focus group of 20 individuals the study concluded that the cut score could go as high as 150 (it currently stands at 144 – second highest in the country) or as low as 139. An accompanying memo from the Bar seems to suggest moving to 141 as the appropriate step. (The Committee of Bar Examiners will discuss today whether to propose lowering the cut score for the recent July 2017 exam only but will then conduct additional hearings before submitting a final recommendation to the Supreme Court.)

Yet the bar also admits there is little correlation between the bar cut score and lawyer competence and therefore consumer protection: “There is no empirical evidence available that would support a statement that as a result of its high pass line California lawyers are more competent than those in other states, nor is there any data that suggests that there are fewer attorney discipline cases per attorney capita in this state.”

But what stands out about the results is the fact that the 20 person focus group relied upon in the study had only 2 hispanic members but 10 white members. Hispanics out number whites in California and access to legal services by minority communities is a significant issue of concern. This raises the issue of inherent bias in the 20 person study group whose subjective views was the key source of input for the result which led to the study’s conclusions.

The Bar is conducting a meeting today to discuss the results. Video can be found here.

UPDATE: The Bar’s Committee of Bar Examiners voted today to send out for public comment two options: keeping the cut score the same and lowering the cut score for July 2017 only to 141.

Policy by committee is not a pretty process….

The Bureau of Labor Statistics (BLS) is out with its annual employment report and the news is, once again, very positive for lawyers. Lawyers’ incomes and employment numbers have increased steadily over the last two decades (except for a decline in incomes in 2008 at the onset of the financial crisis).

The BLS reports that the total number of lawyers employed as of May 2016 was 619,530 compared with 609,930 the year before. Lawyers’ mean income was $118,160 compared to last year’s wage of $115,820.

The outlook here in California continues to be strong with 76,840 lawyers earning a mean annual wage of $162,010. This compares to 72,790 lawyers the year before who earned a slightly higher mean wage of $163,020.

The numbers in my region of Silicon Valley (Santa Clara County which includes Palo Alto but not Menlo Park) remain strong with 5,170 lawyers earning the nation’s highest mean wage of $197,320. This represents a correction against last year when there were 5,430 lawyers earning an annual wage of $204,010. This may reflect a shift in the epicenter of Silicon Valley to the social media companies now based in San Francisco. Lawyers employed there rose in the past year from 10,320 to 11,750 while incomes rose from $178,110 to $183,890.

I tracked earlier data here, here and here.

There are some caveats to the data. Solo practitioners and partners in firms are not included in this data. I examined the prospects for solo practitioners here. The former may fall below the means reported here, while partner incomes could easily outpace those of “employed” lawyers so that the overall effect of the exclusions is minimized.

Here is the court order blocking the Executive Order on immigration.

David Frum took a shot today on KRCW at predicting what Trump’s economic policy is likely to be. Frum says it will be a heavy dose of debt financed spending on arms and infrastructure which will help boost industrial employment for (largely) white male workers. That will, Frum insightfully suggests, buy him some popularity, perhaps enough to guarantee a second term.

To those who think recalling history is important this should remind people of the policies implemented by the Nazis under Minister of the Economy Hjalmar Schacht. Massive infrastructure spending (the autobahn, for example) was linked to autarkic trade policy as a way to deal with the collapse of the German economy. The financial hunger of the Nazi regime soon turned to the assets of its Jewish population with Schacht (who expressed some opposition to the more extreme anti-semitism of the Nazi party) suggesting that Jewish property be held in trust by the government rather than outright expropriation.

Schacht funded the industrial and military expansion of the Hitler regime in part by the issue of a new basically fraudulent form of government debt known as MeFo Bills. These were used to hide a massive government debt. Today on CNBC Trump advisor Larry Kudlow basically admitted Trump would be forced to inflate debt in order to cover his planned spending because planned tax cuts won’t generate sufficient growth in GDP.

Countries that try to inflate their way out of economic problems end up in deeper trouble. The signs point to a similar path in the new Trump era.

It will be a race at Yahoo – can the current board engineer a sale of assets sufficient to satisfy shareholders while under challenge by a competing slate of directors proposed by an activist investment fund?

I was interviewed about the emerging battle at Yahoo! by Bloomberg here.

Steve Bainbridge writes here of the passing of Henry Manne, one of the most important legal thinkers of the late 20th century. I did not know Henry at all personally until one evening a few years ago I was very pleased, out of the blue, to receive an email from him commenting on a paper of mine that had been posted on SSRN. That led to a brief but fruitful exchange of ideas about law and capitalism that proved very helpful in my own thinking and apparently, while he was perhaps just being polite in saying so, in his own thinking as well. Henry was someone who I think, alongside the late Benoit Mandelbrot whom I also was privileged to get to know in a similarly random way, should have received a Nobel Prize. Henry’s work and ideas will be of significance for a very long period of time and deserve careful study.

The widely respected Journal of Legal Studies has now published “The Economic Value of a Law Degree,” the most important and widely discussed study of the value of earning a JD authored by legal scholar Michael Simkovic and economist Frank McIntyre.

The study concludes based on exhaustive empirical analysis that includes the impact of the recent recession that “a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

A working paper version of the article released last year triggered an intense debate because it provided strong empirical evidence that, despite the difficulties of recent law school graduates, over a career a JD had significant value relative to entering the workforce with only a BA. The concrete data assembled by the authors flew in the face of the anecdotal approach taken by most critics of the JD who dominated discussion of the future of law school in the wake of the economic crisis. Examples of the debate can be found here, here and here.

Here is the full abstract from the article:

“We investigate the economic value of a law degree and find that for most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. The median and 25th-percentile earnings premiums justify enrollment. We track lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We incorporate unemployment and disability risk and measure earnings premiums separately for men and for women. After controlling for observable ability sorting, we find that a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

Some critics claimed, inaccurately, that the paper was not subject to peer review. It was, however, peer reviewed prior to its circulation in working paper form (as I explained here) and now has been published in a leading refereed journal published by the University of Chicago Press.

As the economic recovery from the collapse of the 2008-10 period continues its momentum there is some evidence that applications to top tier JD programs remain strong with applicants with very LSATs now having increased. Nonetheless, second and third tier schools remain challenged to survive the prolonged economic cycle. This study, however, is likely to reinforce the argument that the JD and law schools remain a viable and important economic institution.

Coming out in (relatively) affordable paperback soon. Order now in time for the Xmas holiday gift giving season!

Source: The Facebook effect: secondary markets and insider trading in today’s startup environment : Research Handbook on Insider Trading