Saturday, November 29, 2008

The paucity of forced consolidation mechanisms in the nonprofit sector

As a longtime nonprofits lawyer, I have long been struck by the asymmetry between the not for profit sector and the for profit sector in the matter of takeover mechanisms. Essentially, the not for profit sector lacks any true mechanism for a hostile takeover - because it has no share ownership structure that is legally separate from the board and management of the enterprise, such that an outside acquirer could obtain control from the share owners against the wishes of the organization’s board and management.

I say ‘paucity’ rather than absolute lack of consolidation mechanisms for two reasons. One is that in the case of non profits that are about selling services for fees and income, albeit with a charitable purpose, such as a nonprofit hospital, there are indeed mechanisms at work that can force a board and management to have to merge, consolidate or otherwise be acquired. Moreover - and this is one of those mechanisms - it is possible that an organization can default and go into insolvency, which can also force a takeover of sorts. However, there are important issues in that case as to the disposition of charitable assets - one reason why lenders to nonprofits are typically careful to insist on precisely described secured assets, the seizure of which will not create issues of public policy or diversion of charitable assets. And in any case, if the reason a charitable organization has to seek consolidation or some other exit is on account of default or insolvency, the interests that are at stake are not the disposition of charitable assets as such, but the interests of creditors as such.

What I mean here, rather, is a mechanism by which a nonprofit organization can undertake a takeover, and in particular a hostile or unsought takeover, of another nonprofit. Not as a matter of insolvency acting as creditors, but for the specific social efficiency of having a mechanism (equivalent to the ability of outsiders to purchase stock ownership and hence control, without the permission of management and the board) by which nonprofit assets can flow into the most efficient hands and efficient uses. There is a nonprofit capital market of sorts; there is, however, no market for nonprofit corporate control.

Is this an inefficiency? An inefficiency in the sense that we would say would be the case if there were no market for corporate control in the for profit sector? A good question, in both a conceptual and empirical sense. I’ll leave that for now.

In a sense, true, there is a market for control in the nonprofit world in the sense that the upstream funders of nonprofits - the private foundations, the philanthropists, perhaps even the public - can refuse to fund and so put pressure on a nonprofit to merge or otherwise join with some other organization, or to reorganize to get rid of existing management and even the board. But I do not think this is the same thing as a market in control.

However, one effect of the asymmetry between the nonprofit and for profit world with respect to take over mechanisms is that there is a further asymmetry between mechanisms of consolidation and mechanisms of devolution in the nonprofit world: it is far easier, especially in world that consists almost entirely of human capital, for any player to set up a new organization. You can’t (very easily, anyway) force organizations to consolidate, but it is easy for them to splinter and create a raft of smaller, independent organizations. To the extent that there is a check on it, the check comes from the willingness or unwillingness of the upstream funding organizations to fund or not fund.

It might be that this asymmetry is efficient in the nonprofit world, in which human capital is everything and it is often hard to imagine that a fundamentally forced consolidation could work very well - maybe the good people leave and the bad people stay. But I’m doubtful this is any different from the for profit world.

Wednesday, November 19, 2008

Deleting some now irrelevant entries, and anyway I'm blogging at Opinio Juris mostly now

I think I’m going to delete some entries that are not so relevant today - conference announcements, but also some election related posts that bore me today. It’s like yesterday’s newspaper. So some stuff is going to disappear, and I don’t think anyone will miss it, least of all me.

In any case, I am mostly blogging over at Opinio Juris these days.

Tuesday, November 18, 2008

Pirates off the coast of Somalia

I posted a note up at Opinio Juris - where I do nearly all my blogging these days - about Somali pirates and how the Obama administration might make it a useful situation in which to discover a happy confluence among the use of force, international law, multilateral interests, and the traditional US interest in the lawful freedom of the high seas. There’s something about pirates that excites the imaginations of the blogosphere, and it attracted considerable attention, despite being very tentative. But it has made me think it might be fun to write a little article about Somali pirates and legal and international policy. Hmm. Hmm. Hmm .... But I should add that my Opinio Juris post was intended to raise questions, not answer them - I am not by any stretch of the imagination expert in naval operations or the law of naval operations, military or law enforcement or otherwise. A number of blog reactions have cited me as though I were advocating what my friend had said, and I’m not; or that I have expressed views on what the actual law is, and I’m not. I might one of these days, but not today.

Monday, November 17, 2008

Thanks to Glenn Reynolds for the happy birthday to my Kid

Glenn ran a happy birthday note for my kid’s 16th birthday last night - she had asked, to my surprise, for a junior membership in the ... NRA. I included a photo - carefully chosen so it showed her shooting but not her face - from a few years ago, and Glenn was kind enough to stick that up too. Kid’s reaction was, “This is the greatest birthday!” Thanks Glenn.

And note, Glenn’s average per day is over 300,000 visitors, and this morning by 9 am, already 60,000 people. So if you’re just looking for 15 minutes of fame - as in birthday greetings - this is impressive. My Kid was sure impressed.

Sunday, November 16, 2008

Requiem for my New York Times home subscription

Well, all thanks to Pajamas Media for publishing my little op-ed, A Requiem for the My New York Times Home Delivery. And thanks, too, to Glenn for the Instalanche - and welcome to anyone who is coming over from PJM. You probably see not much activity here. True. For various reasons, I’ve been blogging less and when I do, it is almost exclusively over at the international law blog Opinio Juris.

However, I did want to note something about the New York Times piece. To judge by the comments, PJM readers believe it is about the politics of the Times.  It is - but mostly it isn’t.

I don't mind partisanship in a magazine. I am even willing to read partisanship of the "who you going to believe, the NYT front page or your lyin' eyes" kind because I want to know what is said across the spectrum; subsidizing it as such doesn’t especially disturb me.  

I'm even willing to read a paper that has decided it's business model of the future is Judith Warner, so long as I don’t have to spend more than nanoseconds on her. But I'll only do it for free.  I won't pay 50 dollars a month for it, because I don't think the Times values the content at that price, at least not discounted into the future.  

What am I doing with the 50 bucks a month? I’m contributing it to my teen Kid’s Sharebuilder stock account - she can figure out what to invest it in. I’ve told her I’ll match anything she puts in from babysitting, dealing drugs, running guns, etc. If nothing else, she’ll learn a valuable lesson in the effects of taxes as urged by the New York Times and channeled by the Obama administration on incentives to save and invest.

I should also mention that I have many friends at the Times, and I am not thrilled with what I foresee as their economic future - due far more than it should be to the mismanagement and self-dealing of the family shareholders at the Times. There have been very interesting comments on the latest SEC filings by the Times company. Also the Very Great Megan McArdle’s take. I’m sorry, folks, but while I’d be happy to dance on the Sulzberger grave, I have too many friends at the Times to wish them ill.

But all this is very different from saying what the commentators mostly say, which is, ‘liberal rag, cancel’.

My point was, instead: Going online for free puts me in the position of valuing the New York Times in the same way and at the same price, at least into the long term, that the Times values me. We have reached a free and equal bargain - I don’t pay for home delivery, and it delivers the kind of product you can pay for with the online ad revenue stream, which is to say, Judith Warner and the “nurse ant tending to the slumbering larvae,” as I put it in the op ed.