Tuesday, September 18, 2018
Last week, I made the argument that Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever. I still think so.
To build on that post (in part based on good comments I received on that post), I think it is worth exploring that ability and appropriateness of boards delegating certain duties, as this impacts any assessment of the business judgment rule.
As co-blogger Stefan Padfield correctly noted, directors "become informed of all material information reasonably available." However, does that apply to a particular ad campaign? Hiring of all spokespeople? Only certain ones? How about a particular ad? Or is it the hiring of a marketing and ad team (internally or externally)?
Nike has a long list of sponsorship (here) for teams and individuals. I sincerely doubt that all of those were run by the board of directors, though it is possible. The board may also weigh in from time to time, based on the behavior of the people they sponsor. Nike famously terminated contracts with Oscar Pistorius and Ray Rice in September 2014. Are these all board decisions? Maybe. Or maybe they have a protocol for dealing with such issues. Regardless, how they deal with this seems plainly within the BJR.
Now, I also would agree that there comes a time when the board would need to do more with regard to their advertising and sponsorships, if they were on notice of a problem with their sponsored athletes, not unlike a Caremark duty or its predecessor. In discussing the applicability of the business judgment rule, an older, but classic, Delaware case stated, “it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, [only] then liability of the directors might well follow . . . “ Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 85, 188 A.2d 125, 130 (1963).
When I started to write this, I did not know if Nike's board of directors saw this ad before it went out (more on that below). I expect they did (or at least knew about it), but I'm not sure. Even it if the ad were raised with the board for informational purposes, trusting the judgment and recommendation of your marketing executives seems imminently reasonable to me. It seems to me that how the board chooses to work with their marketing people fall plainly under the business judgment rule (BJR) unless shareholders can rebut the presumption that the BJR applies. It's not like marketing mistakes are not common. Most years there are recap articles about the works gaffes in marketing for the year. This one from 2017 is a particularly good example, and I don't think any of them would be likely to lead to director liability.
The scope and power of board delegation of such duties would be a good topic for further research. I certainly concede that there are times when such decisions look more like board decisions that require an appropriate process and perhaps some demonstration of due care. Maybe that goes to a need to review ads with certain risk factors, but you'd still have to delegate the decision about what needs to come to the board to someone. And do you need such a process absent notice that your ad folks are taking enormous risks? Is this a Caremark/Allis-Chalmers issue? Or could negligent hiring be the failure, if the ad folks are insane?
Support for my assumptions, and for the idea that Nike, at least, views this as a delegation question, arrived in this breaking news from CNBC, which appeared as I was writing this blog post:
But Comstock, also a former vice chair of General Electric, said Parker didn't need the board's permission before running a "Just Do It" campaign featuring the former San Francisco 49ers quarterback.
"Parker runs the company really well," Comstock said on CNBC's "Squawk on the Street," while also commenting about the new China tariffs. Parker "certainly doesn't need board approval to figure out where to run an ad," she added.
In the end, we know marketing decisions can harm stock prices, but we also know risky marketing decisions can improve stock prices. That very fact, I maintain, puts this decision squarely in the BJR zone.
Monday, September 17, 2018
I am still basking in the warm glow of having hosted a number of my fellow Business Law Prof Blog editors in Knoxville last week for our second annual "Connecting the Threads" event. What a great day we had on Friday. I could listen to these folks talk about business law until the cows come home (so to speak--no actual cows here!).
As BLPB readers may recall, the title of my paper for the 2018 "Connecting the Threads II" symposium is Lawyering for Social Enterprise. I am sure that I will blog more on that topic in this space later--when my paper from the symposium has been published--but I want to offer here the three paragraphs of conclusion to the handout I prepared for the continuing legal education materials for the program, which focus on the need of judgment, discretion, and even wisdom.
Advising entrepreneurs, founders, promoters, and directors of social enterprises can be both satisfying and frustrating. The satisfaction most often comes from helping these businesses achieve financial success while also serving the public good. The frustration comes from the difficulty of the task in providing the necessary counsel—both in selecting the optimal legal form for the firm and in advising management as the business operates over time. These legal advisory contexts involving social enterprises are richly textured and immerse legal counsel in multi-level decision-making that impacts both internal and external business constituencies. The overall advisory environment implicates, among other things, hortatory text in the Preamble to the Model Rules of Professional Conduct providing that “[a] lawyer should strive to attain the highest level of skill, to improve the law and the legal profession and to exemplify the legal profession's ideals of public service.” In lawyering for social enterprise, the legal advisor’s skill and public service responsibilities interact meaningfully.
Said another way, the complex decision-making involved in lawyering for social enterprise presents obvious challenges for business venturers and their legal counsel that involve not only baseline professional responsibility matters of competence (comprising doctrinal knowledge and solid, rational legal analysis), diligence (by offering patient and perceptive insights in helping the client to choose from among available alternatives), and communication (with the goal of ensuring informed client decision-making), but also the exercise of appropriate discretion and professionalism that require the savvy built from doctrinal, theoretical, and practical experience and leadership capabilities. As Professor Jeff Lipshaw has written in his intriguing and engaging book Beyond Legal Reasoning: A Critique of Pure Lawyering, “I am firmly convinced that great lawyers . . . bring something more than keen analytical skills to the table. They bring some kind of wisdom—a metaphorical creativity—that transcends disciplinary boundaries, both within the law and without.” That brand of wisdom is especially important in the kinds of questions that arise in lawyering for social enterprise.
Accordingly, as lawyers representing social enterprises, we need to develop knowledge of a complex set of laws and well-practiced, contextual legal reasoning skills. But that, while necessary, is insufficient to the task. We also must impose judgment borne of a deep understanding of the nature of social enterprise and of our clients and their representatives working in that space. Only then can we fulfill our professional promise as legal advisors: to provide clients with both “an informed understanding of . . . legal rights and obligations” and an explanation of “their practical implications.”
(footnotes omitted; hypertext links added).
Agree? Disagree? Can we help students (and inexperienced members of the bar) develop complex decision-making rubrics that incorporate judgment and wisdom? Can we teach judgment, wisdom, and the like to law students? Forever the optimist, I have an intuition that we can.
And with that thought in mind, I close with a picture of a UT Law student who gives me that hope. He commented on my draft paper at the symposium on Friday. He has been in my classroom for two semesters now (taking Advanced Business Associations, Corporate Finance, and Mergers & Acquisitions). He spoke about why limited liability companies may be a better legal option for organizing social enterprise firms than corporations. Proud moment for him and for me. He aced it.
Sunday, September 16, 2018
I knew it would be impossible. There was no way to relay my excitement about the potential of blockchain technology in a concise way to lawyers and law students last Friday at the Connecting the Threads symposium at the University of Tennessee School of Law. I didn't discuss cryptocurrency or Bitcoin other than to say that I wasn't planning to discuss it. Still, there wasn't nearly enough time for me to discuss all of the potential use cases. I did try to make it clear that it's not a fad if IBM has 1500 people working on it, BITA has hundreds of logistics and freight companies signed up to explore possibilities, and the World Bank, OECD, and United Nations have studies and pilot programs devoted to it. As a former supply chain person, compliance officer, and chief privacy officer, I'm giddy with excitement about everything related to distributed ledger technology other than cryptocurrency. You can see why when you read my law review article in a few months in Transactions.
I've watched over 100 YouTube videos (many of them crappy) and read dozens of articles. I go to Meetups and actually understand what the coders and developers are saying (most of the time). A few students and practitioners asked me how I learned about DLT/blockchain. First, see here, here, here, and here for my prior posts listing resources and making the case for learning the basics of the technology. What I list below adds to what I've posted in the past.
Here are some of the podcasts I listen to (there are others, of course):
1) The Decrypting Crypto Podcast
2) Block that Chain
3) Block and Roll
4) Blockchain Innovation
Here are some of the videos that I watched (that I haven't already linked to in past posts):
There are dozens more, but this should be enough to get you started. Remember, none of these videos or podcasts will get you rich from cryptocurrency. But they will help you become competent to know whether you can advise clients on these issues.
September 16, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Firms, Law Reviews, Law School, Lawyering, Marcia Narine Weldon | Permalink | Comments (1)
"New York state’s top banking regulator on Friday sued the federal government to void its decision to award national bank charters to online lenders and payment companies, saying it was unconstitutional and put vulnerable consumers at risk." https://t.co/9talm0RgWy #corpgov— Stefan Padfield (@ProfPadfield) September 15, 2018
"we find that greater competition from S corporation banks increases the likelihood that rival C corporation banks convert to Subchapter S status.... competition from tax-advantaged firms influences the organizational form choice" https://t.co/g7cQHOUE2f #corpgov— Stefan Padfield (@ProfPadfield) September 16, 2018
"the company made the decision in efforts to avoid controversy. 'There is a wide range of viewpoints on the Nike controversy' .... 'Texas Farm Bureau & Affiliated Companies employees are asked to not wear Nike branded apparel while representing the companies'" #corpgov https://t.co/d35lCnppMb— Stefan Padfield (@ProfPadfield) September 16, 2018
Saturday, September 15, 2018
A coalition of consumer groups put together a study to evaluate the effectiveness of new disclosures proposed by the SEC. In essence, the disclosures are supposed to help consumers recognize the differences between different types of financial advisers. The study found that the proposed disclosures were not particularly effective:
To begin, participants in our testing probably read the CRS in more depth than they would on their own. Despite that more in-depth reading, participants struggled throughout with sorting out the similarities and differences between the Broker-Dealer Services and Investment Adviser Services. Both the formatting and the language contributed to the confusion.
On the upside, the testing provides a useful starting point for thinking about how the initial draft disclosures can be improved. Instead of giving up on disclosure entirely, the authors argued for more work to get it right:
we believe that this report is an important first step in an iterative process designed to improve the SEC’s first published draft. This report helps to identify how typical investors read and misread, understand and misunderstand, and interpret and misinterpret efforts to communicate complex and technical concepts and information. We firmly believe that the results of our testing show that a usable document that communicates clearly and well with potential investors is a viable outcome.
The SEC should continue to work to make the disclosures more effective. It should also work to increase standards to protect investors.
Corporate managers have long complained about proxy advisory services, such as ISS, Egan-Jones, and Glass Lewis. They argue that proxy advisors provide governance advice to companies – for a fee – and then make influential voting recommendations to client shareholders, functionally creating a kind of shakedown service (“Pay us and we’ll be able to recommend that shareholders vote in your favor; don’t, and who knows what we’ll do?”). Corporations argue that shareholders don’t conduct their own analysis of issues anymore, and blindly vote with however proxy services recommend – giving them far too much power.
There is plenty of reason to be skeptical of their complaints. At least one study shows that most institutional investors take recommendations into account but ultimately make their own decisions. And as John Coates recently testified before Congress on the issue, there is no evidence of a market failure necessitating congressional regulation, and regulation might make the industry more concentrated and less competitive, which is the exact opposite of what we should strive for.
I won’t deny that to the extent proxy advisory services potentially have conflicts, these should be known and their policies for cleansing should be clear. But one cannot help but suspect that companies’ reasons for objecting to proxy advisors is the same as their objection to unions – it’s not conflicts or corruption, it’s that they overcome transactions costs of a disaggregated constituency and facilitate coordination so as to create a countervailing power center. Managers, in other words, just don’t want to be challenged – by anyone.
That said, corporate complaints have found a sympathetic ear among Republicans in Congress and now, apparently, in Jay Clayton at the SEC. The SEC just announced that it was withdrawing two no-action letters from 2004 that have become the bete noire of corporate managers, in preparation for an upcoming Roundtable on the Proxy Process. Clayton even went out of his way to issue a separate statement clarifying that staff guidance is non-binding, if we hadn’t gotten the message that anything done under previous administration is now suspect.
You can’t read the letters online, because apparently withdrawing them means making them inaccessible unless you have access to a legal database – and that, by the way, is just terrible practice from a transparency point of view; I’d rather they just be clearly marked as withdrawn.
That said, I will summarize (and embed the letters in this post, if I can get the tech to cooperate). But first, some background – and this is going to get long, so I’m putting the rest behind a cut.
[More under the jump]
Thursday, September 13, 2018
On Sept. 4, it was reported
Nike just lost about $3.75 billion in market cap after announcing free agent NFL quarterback Colin Kaepernick as the new face of its “Just Do It” ad campaign. It’s the 30th anniversary of the iconic TV and print spots.
At the time of this writing, the sneaker company’s intra-day market capitalization was $127.82 billion. On Friday, that number had been $131.57 billion.
Market capitalization is the market value of a publicly traded company’s outstanding shares.
Shares of NKE stock dropped about 4 percent on Tuesday morning, as #NikeBoycott has been trending on Twitter. The company’s valuation has since recovered a bit.
In light of the market cap loss, friend and co-blogger Stefan Padfield asked, via Twitter, "How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here?" My answer: very, very little and very, very limited.
How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here? "Nike Loses $3.75 Billion in Market Cap After Colin Kaepernick Named Face of 'Just Do It'" https://t.co/UIuZanOUon #corpgov— Stefan Padfield (@ProfPadfield) September 6, 2018
Now, it is worth noting that here it is Sept. 13, and as I write this, Nike is at or near its 52-week high. As such, the question is less pressing than it may have seemed a week ago. But even then, I maintain, this is not really even in the realm of a duty of care concern. Or, at least, it shouldn't be. (Also of potential interest, friend and co-blogger Ann Lipton provides a good overview of the varying takes on the ad here.
A while back I wrote, This I Believe: On Corporate Purpose and the Business Judgment Rule, which provided my thoughts on how director )ecision making should be viewed (short answer: "I believe in the theory of Director Primacy"). The business judgment rule provides that absent fraud, self-dealing or illegality, directors decisions cannot be reviewed. "Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule." Brehm v Eisner, 746 A.2d 244 (Del. 2000)(emphasis added)(footnote omitted).
Under this lens, regardless of the market cap impact, Nike's advertising falls within the scope of the business judgment rule. Did the board even know this ad was coming out? I don't know. Probably. But I also think it is clearly proper for the board to delegate duties to CEO to handle day-to-day operations. And it is customary and proper for that CEO to delegate to a marketing VP and/or marketing agency the role of designing and placing advertising. Could the CEO and/or marketing VP get fired for their choices? Sure. Or they could get bonuses. Either way, that would be the call of the directors.
I can come up with lots of reasons why Nike should not have done that ad, and I can come up with a lot of good reasons why it makes sense. The biggest reason it makes sense? Nike knows marketing. They won't get everything right, but they have been taking calculated risks for a long time. In 1992, the Harvard Business Review noted that
in the mid-1980s, Nike lost its footing, and the company was forced to make a subtle but important shift. Instead of putting the product on center stage, it put the consumer in the spotlight and the brand under a microscope—in short, it learned to be marketing oriented. Since then, Nike has resumed its domination of the athletic shoe industry. It commands 29% of the market, and sales for fiscal 1991 topped $3 billion.
Phil Knight, Nike founder, futher explained how Nike looked at using famous athletes:
The trick is to get athletes who not only can win but can stir up emotion. We want someone the public is going to love or hate, not just the leading scorer. Jack Nicklaus was a better golfer than Arnold Palmer, but Palmer was the better endorsement because of his personality.
To create a lasting emotional tie with consumers, we use the athletes repeatedly throughout their careers and present them as whole people. So consumers feel that they know them. It’s not just Charles Barkley saying buy Nike shoes, it’s seeing who Charles Barkley is—and knowing that he’s going to punch you in the nose. We take the time to understand our athletes, and we have to build long-term relationships with them. Those relationships go beyond any financial transactions. John McEnroe and Joan Benoit wear our shoes everyday, but it’s not the contract. We like them and they like us. We win their hearts as well as their feet.
Read in this light, it all makes sense. This is part of Nike's plan, and it always has been. Presumably, they expect that any business they lose because consumers are upset by the ads will be made up and then some by creating a "lasting emotional tie with consumers." That is, creating what we might call brand loyalty.
Not that is should matter to a court. While these explanations may be correct, they aren't necessary. The business judgment rule exists to allow companies, via their directors, to take these kinds of risks. It's how you create companies like Nike (and Apple, for that matter). And that's why there should be no question that this ad is beyond the scope of review, not matter how the public responds. If consumers don't like it, they can buy other products. If shareholders don't like it, they can vote the board out. And that's it. That's the recourse. It just doesn't get much more "business judgmenty" than who you pick for your ads. And that's exactly how it should be.
Wednesday, September 12, 2018
In New Hampshire, "no state campaign finance statutes discuss, define, or even mention LLCs.... The LLC loophole is hardly a feature unique to New Hampshire's campaign finance laws." 41 Seattle U. L. Rev. 1227 #corpgov— Stefan Padfield (@ProfPadfield) September 9, 2018
"CBS CEO & executive chairman Les Moonves made $650.2 million leading the company since ... 2006.... He resigned on Sunday after multiple reports of sexual misconduct. He was negotiating a $100 million severance but might leave with" no severance https://t.co/qc5Fif1xhJ #corpgov— Stefan Padfield (@ProfPadfield) September 10, 2018
JPMorgan "to boost philanthropic giving by 40% to $1.75 billion over five years. Mr. Dimon said that although investing in cities often has no immediate impact on the bank’s bottom line, over time it could boost consumer & small-business banking." https://t.co/Iwmrf1Lv6i #corpgov— Stefan Padfield (@ProfPadfield) September 12, 2018
Uber "may be saving more than $500 million a year by misclassifying its California drivers as independent contractors, according to a lawsuit that claims the ride-hailing company is flouting a ruling by the state’s highest court." https://t.co/xQaheb5ett #corpgov— Stefan Padfield (@ProfPadfield) September 12, 2018
Corporate law geek in need of a fix? Watch today's arguments before the Del Supreme re MFW's ab initio requirement here. (If none of that makes any sense, you may continue with your day.)https://t.co/ZsoxXYlwvr— Brian JM Quinn (@bjmquinn) September 12, 2018
"McDonald’s is fighting a National Labor Relations Board complaint alleging it wields enough control over franchisees and their workers to share legal responsibility in an unfair labor practice case." #corpgov https://t.co/t2Rf8jxtFA— Stefan Padfield (@ProfPadfield) September 12, 2018
“Few trends could so...undermine the...foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for...SHs as possible. This is a fundamentally subversive doctrine.” Friedman, Capitalism & Freedom #corpgov— Stefan Padfield (@ProfPadfield) September 12, 2018
Monday, September 10, 2018
I am writing this fall about (among other things) business deregulation in the Trump era. Given that the President's campaign for office featured business deregulation as a prominent tenet, it seems like a good time to visit what's been done to fulfill those campaign promises. Business being a broad area for focus, I am trying to narrow the subject down a bit by picking some salient examples.
I reference the early executive orders on agency rule rulemaking and assessments of their success. See, e.g., here and here. But the deregulatory moves impacting business that have gotten the most media attention are the Trump administration's tax cuts and a few smaller initiatives--like the tamp-backs to parts of bank regulation in the Dodd–Frank Wall Street Reform and Consumer Protection Act. Apart from these headline items, what catches your attention, if anything, about the current administration's forays into deregulation? I would be interested in knowing.
Of course, there also are areas where it seems that there is new business regulation or business re-regulation rather than business deregulation. Perhaps the most prominent area in which the current administration has taken a non-deregulatory approach to business operation is in international trade. The reported outcome of recent trade talks with Mexico, for example, as well as the imposition of significant tariffs on Chinese imports earlier this year, have both been classified as contrary or counterproductive to a deregulatory agenda. See, e.g., here and here, respectively. Query whether and, if so, how these contrary or counterproductive measures should be weighed in any evaluation of business deregulatory success . . . .
And that's just it. Successful deregulation is somewhat in the eye of the beholder. No single reference point represents an established determinant or embodiment of deregulatory triumph. There are no standardized rules of the road governing the evaluation of efficacious deregulatory actions (taken individually or collectively). Thus, political and other biases often underlie reports of effective or ineffective deregulatory initiatives, just as they underlie reports of effective or ineffective regulatory initiatives, even though deregulatory impact may intuitively seem to be more capable of simple measurement and objective assessment.
I will be presenting a draft paper on business deregulation during the Trump administration at an upcoming symposium sponsored by the Mercer Law Review. The symposium, "Corporate Law in the Trump Era," will be held on October 5 at the Mercer University School of Law. I will have more to say on that essay in later posts, I am sure. But for now, I invite you to let me know what current areas of business deregulation interest you most. I would like to make my choices meaningful to the target audience for this essay, which likely includes many BLPB readers.
Sunday, September 9, 2018
How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here? "Nike Loses $3.75 Billion in Market Cap After Colin Kaepernick Named Face of 'Just Do It'" https://t.co/UIuZanOUon #corpgov— Stefan Padfield (@ProfPadfield) September 6, 2018
DOJ "listened 'closely' to the morning’s testimony.... a meeting on Sept. 25 with state attorneys general 'to discuss a growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas'" https://t.co/wLCOWaIbYh #corpgov— Stefan Padfield (@ProfPadfield) September 6, 2018
"In the late 1980s and 1990s .... Driven by a clamor for 'shareholder democracy' ... the U.S. government implemented regulatory changes that set the stage for hedge-fund activism" #corpgov https://t.co/zBMyelhIIn— Stefan Padfield (@ProfPadfield) September 6, 2018
Jonathan Macey & Leo Strine: "We base our argument that corporations are separate and distinct legal entities and that they are not 'associations of citizens' as Citizens United asserts on three facts about the corporate form" https://t.co/ZLDByaVhWV #corpgov— Stefan Padfield (@ProfPadfield) September 7, 2018
"Under Hobby Lobby, the answer to who is causing the harm is neither a corporation nor an individual, but rather an individual granted the powers and privileges afforded corporations under state law." https://t.co/c3JIZpigsS #corpgov— Stefan Padfield (@ProfPadfield) September 7, 2018
It was a busy second half of the week. More after the break:
Saturday, September 8, 2018
I’ve been absolutely riveted by Nike’s decision to make Colin Kaepernick the face of its new ad campaign. (I assume most readers are aware of the basics but here’s an article to catch you up if you need it.) It’s a daring move, not just because of the controversy over Kaepernick himself, but also because of Nike’s relationship with the NFL: Nike is the official supplier of uniforms and sideline gear (a deal that was just extended through 2028), and presumably, in that capacity, Nike wants to keep the NFL popular and football fans happy.
So, there’s so much to chew over here.
We start with the ongoing tension between the fact that it is good marketing for companies to look like they care about various social causes – whatever those causes may be – and their fiduciary duty not to actually care about those things. (Assuming you buy into a shareholder primacy model, etc etc).
My favorite example for my students is, well, this FT Alphaville blog post in reaction to Jamie Dimon’s ostentatious announcement that he was giving his employees a raise. And then there’s Tax Exempt Lobbying, a new paper by Marianne Bertrand, Matilde Bombardini, Raymond J. Fisman, and Francesco Trebbi, finding that companies strategically direct charitable giving so as to please politicians that have control over their fates.
So on the one hand, it may be good business to promote Kaepernick, but Nike has to absolutely pretend that’s not really its motivation.
(More under the jump)
Thursday, September 6, 2018
FINRA recently appointed Jack Ehnes as a public governor. As the CEO of CalSTRS, he helps manage approximately $224 billion in assets.
Although Mr. Ehnes does not seem to have many of the same kinds of conflicts as other Public Governors currently serving on FINRA's governing board, he would not be my pick to represent the interests of public investors. CalSTRs has significant business relationships with entities associated with other board members. To illustrate, take a quick glance at this CalSTRS investment committee report. It shows CalSTRS investing with Bridgewater and Blackstone. Notably, persons affiliated with Bridgewater and Blackstone already serve on FINRA's governing board. CalSTRS likely has significant additional relationships with other large players.
If FINRA is serious about serving as (and not just portraying itself as) an investor protection organization, it should add investor advocates without these entangling business relationships to its board as public governors.
Wednesday, September 5, 2018
"argument for categorically denying a corporation's religious freedom claims usually rests on a conception of what the corporation is .... [but] business corporations' incapacity to assert religious freedom claims in Canada might be rethought" 51 R.J.T. 337, 340 #corpgov— Stefan Padfield (@ProfPadfield) September 4, 2018
"The strong growth of Islamic capital markets internationally has seen the corresponding development of regulatory frameworks incorporating sharia law.... This article examines ... the evolution of hybrid Islamic capital market regulation." https://t.co/ypRUCtuB98 #corpgov— Stefan Padfield (@ProfPadfield) September 4, 2018
"Fundamentally, economists don’t know why booms happen.... But it is possible to identify some factors that might ... be contributing to the strength of this economic expansion." https://t.co/azsTNeY23p #corpgov— Stefan Padfield (@ProfPadfield) September 4, 2018
2/2 "'Young people are just smarter,' Zuckerberg told the audience ..., adding that successful startups should only employ young people .... said VC Vinod Khosla .... 'People over 45 basically die in terms of new ideas' ... 'The cutoff ... is 32'" https://t.co/wlrSadh6p0 #corpgov— Stefan Padfield (@ProfPadfield) September 5, 2018
Tuesday, September 4, 2018
I am teaching Sports Law this semester, which is always fun. I like to highlight other areas of the law for my students so that they can see that Sports Law is really an amalgamation of other areas: contract law, labor law, antitrust law, and yes, business organizations. I sometimes cruise the internet for examples to make my point that they really need to have a firm grounding the basics of many areas of law to be a good sports lawyer. Today, I found a solid example, and not in a good way.
I found a site providing advice about "How to Start a Sports Agency" at the site https://www.managerskills.org. This is site is new to me. Anyway, it starts off okay:
Ask any successful sports agent: education is the foundation upon which you will build your business. The first step is to earn your bachelor’s degree from an appropriately accredited institution.
. . . .
Once you have obtained your bachelor’s degree, the next step will be to pursue your master’s degree. Alternately, you may choose to pursue a law degree.
While a law degree is not required, the skills you acquire during your studies will be particularly beneficial when it comes to negotiating contracts for your clients. Most major leagues, including the NFL and the NBA, requires their sports agents to possess a master’s degree.
All true. A law degree should also help when it comes to figuring out your entity choice. The site's advice continues:
The next step is to choose a professional name for your business and to create a limited liability corporation (LLC). If you have one or more business partners, then you will need to create a limited liability partnership (LLP).
Yikes. I mean, yikes. First, an LLC is a limited liability company!
Second, I believe that after Massachusetts allowed single-member LLCs in 2003, all states allowed the creation of single-member LLCs, so an LLC is an option. An LLP might be an option, and some professional entities for certain lawyers might be an option (or requirement), such as the PLLC or PC. But the idea that one needs to choose an LLP if there is more than one person participating in the business is flawed. It is correct that to be an LLP, there would need to be more than one person, but this is not transitive.
Anyway, while not great advice, this gives me some good material for class tomorrow. I will probably start with, "Don't believe everything you read on the Internet."
Monday, September 3, 2018
Like many in the law academy, I find three-day holiday weekends a great time to catch my breath and catch up on work items that need to be addressed. This Labor Day weekend--including today, Labor Day itself--is no exception to the rule. I am working today, honoring workers through my own work. My husband and daughter are doing the same.
This blog post and the announcement it carries are among my more joyful tasks for the day. I have been remiss in not earlier announcing and promoting our second annual Business Law Prof Blog symposium, which will be held at The University of Tennessee College of Law on September 14. The symposium again focuses on the work of many of your favorite Business Law Prof Blog editors, with commentary from my UT Law faculty colleagues and students. This year, topics range from the human rights and other compliance implications of blockchain technology to designing impactful corporate law, with a sprinkling of other entity and securities law related topics. I am focusing my time in the spotlight (!) on professional challenges in the representation of social enterprise firms. More information about the symposium is available here. For those of you who have law licenses in Tennessee, CLE credits are available.
I am looking forward to again hosting some of my favorite law scholars at this symposium. I am sure some will blog about their presentations here (Marcia already has previewed her talk and summarized all of our presentations, and I plan to later blog about mine), Transactions (our business law journal) will publish the symposium proceedings, and videos will be processed and posted on UT Law's CLE website later in the year. But if you are in the neighborhood, stop by and hear us all in person! We would love to see you.
Sunday, September 2, 2018
Microsoft "will soon require its suppliers & contractors to provide at least 12 weeks of paid time off to new parents .... policy applies to Microsoft vendors w/ more than 50 employees & covers workers given substantial assignments for Microsoft." https://t.co/1PZdSMqdew #corpgov— Stefan Padfield (@ProfPadfield) August 31, 2018
As the costs of transacting in the market decline, activity will shift out of firms and toward the market. Coase (1937). https://t.co/yY4hwQ3j49— Robert Anderson (@ProfRobAnderson) August 31, 2018
"the global antitakeover device ... is based on the ability of public firms to “mix and match” between different forms of regulations through cross-listing in multiple stock exchanges or incorporation in foreign jurisdictions" https://t.co/Y3O1So6nhE #corpgov— Stefan Padfield (@ProfPadfield) September 1, 2018
A problem with the California statute is that it legislatively overrules the internal affairs doctrine and imposes its own, "often different, internal governance requirements upon foreign corporations having a specified level of contact with the forum state." #corpgov https://t.co/3Ud2s9CLGl— Stefan Padfield (@ProfPadfield) September 2, 2018
Saturday, September 1, 2018
Did I lose you with the title to this post? Do you have no idea what a DAO is? In its simplest terms, a DAO is a decentralized autonomous organization, whose decisions are made electronically by a written computer code or through the vote of its members. In theory, it eliminates the need for traditional documentation and people for governance. This post won't explain any more about DAOs or the infamous hack of the Slock.it DAO in 2016. I chose this provocative title to inspire you to read an article entitled Legal Education in the Blockchain Revolution.
The authors Mark Fenwick, Wulf A. Kaal, and Erik P. M. Vermeulen discuss how technological innovations, including artificial intelligence and blockchain will change how we teach and practice law related to real property, IP, privacy, contracts, and employment law. If you're a practicing lawyer, you have a duty of competence. You need to know what you don't know so that you avoid advising on areas outside of your level of expertise. It may be exciting to advise a company on tax, IP, securities law or other legal issues related to cryptocurrency or blockchain, but you could subject yourself to discipline for doing so without the requisite background. If you teach law, you will have students clamoring for information on innovative technology and how the law applies. Cornell University now offers 28 courses on blockchain, and a professor at NYU's Stern School of Business has 235 people in his class. Other schools are scrambling to find professors qualified to teach on the subject.
To understand the hype, read the article on the future of legal education. The abstract is below:
The legal profession is one of the most disrupted sectors of the consulting industry today. The rise of Legal Tech, artificial intelligence, big data, machine learning, and, most importantly, blockchain technology is changing the practice of law. The sharing economy and platform companies challenge many of the traditional assumptions, doctrines, and concepts of law and governance, requiring litigators, judges, and regulators to adapt. Lawyers need to be equipped with the necessary skillsets to operate effectively in the new world of disruptive innovation in law. A more creative and innovative approach to educating lawyers for the 21st century is needed.
For more on how blockchain is changing business and corporate governance, come by my talk at the University of Tennessee on September 14th where you will also hear from my co-bloggers. In case you have no interest in my topic, it's worth the drive/flight to hear from the others. The descriptions of the sessions are below:
Session 1: Breach of Fiduciary Duty and the Defense of Reliance on Experts
Many corporate statutes expressly provide that directors in discharging their duties may rely in good faith upon information, opinions, reports, or statements from officers, board committees, employees, or other experts (such as accountants or lawyers). Such statutes often come into play when directors have been charged with breaching their procedural duty of care by making an inadequately informed decision, but they can be applicable in other contexts as well. In effect, the statutes provide a defense to directors charged with breach of fiduciary duty when their allegedly uninformed or wrongful decisions were based on credible information provided by others with appropriate expertise. Professor Douglas Moll will examine these “reliance on experts” statutes and explore a number of questions associated with them.
Session 2: Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation
Private fraud actions brought under Section 10(b) of the Securities Exchange Act require courts to make a variety of determinations regarding market functioning and the economic effects of the alleged misconduct. Over the years, courts have developed a variety of doctrines to guide how these inquiries are to be conducted. For example, courts look to a series of specific, pre-defined factors to determine whether a market is “efficient” and thus responsive to new information. Courts also rely on a variety of doctrines to determine whether and for how long publicly-available information has exerted an influence on security prices. Courts’ judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect. Professor Ann M. Lipton will discuss how these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.
Session 3: Lawyering for Social Enterprise
Professor Joan Heminway will focus on salient components of professional responsibility operative in delivering advisory legal services to social enterprises. Social enterprises—businesses that exist to generate financial and social or environmental benefits—have received significant positive public attention in recent years. However, social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Professor Heminway will discuss how these legal uncertainties have the capacity to generate transaction costs around entity formation and management decision making and the pertinent professional responsibilities implicated in an attorney’s representation of such social enterprises.
Session 4: Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, Professor Marcia Narine Weldon will discuss how the technology also has the potential to transform the way companies look at governance and enterprise risk management. Companies and stock exchanges are using blockchain for shareholder communications, managing supply chains, internal audit, and cybersecurity. Professor Weldon will focus on eliminating barriers to transparency in the human rights arena. Professor Weldon’s discussion will provide an overview of blockchain technology and how state and nonstate actors use the technology outside of the realm of cryptocurrency.
Session 5: Crafting State Corporate Law for Research and Review
Professor Benjamin Edwards will discuss how states can implement changes in state corporate law with an eye toward putting in place provisions and measures to make it easier for policymakers to retrospectively review changes to state law to discern whether legislation accomplished its stated goals. State legislatures often enact and amend their business corporation laws without considering how to review and evaluate their effectiveness and impact. This inattention means that state legislatures quickly lose sight of whether the changes actually generate the benefits desired at the time off passage. It also means that state legislatures may not observe stock price reactions or other market reactions to legislation. Our federal system allows states to serve as the laboratories of democracy. The controversy over fee-shifting bylaws and corporate charter provisions offers an opportunity for state legislatures to intelligently design changes in corporate law to achieve multiple state and regulatory objectives. Professor Edwards will discuss how well-crafted legislation would: (i) allow states to compete effectively in the market for corporate charters; and (ii) generate useful information for evaluating whether particular bylaws or charter provisions enhance shareholder wealth.
Session 6: An Overt Disclosure Requirement for Eliminating the Duty of Loyalty
When Delaware law allowed parties to eliminate the duty of loyalty for LLCs, more than a few people were appalled. Concerns about eliminating the duty of loyalty are not surprising given traditional business law fiduciary duty doctrine. However, as business agreements evolved, and became more sophisticated, freedom of contract has become more common, and attractive. How to reconcile this tradition with the emerging trend? Professor Joshua Fershée will discuss why we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). As such, the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default. The duty of loyalty norm is sufficiently ingrained that more active notice (and more explicit consent) is necessary, and eliminating the duty of loyalty is sufficiently unique that it warrants unique treatment if it is to be eliminated.
Session 7: Does Corporate Personhood Matter? A Review of We the Corporations
Professor Stefan Padfield will discuss a book written by UCLA Law Professor Adam Winkler, “We the Corporations: How American Businesses Won Their Civil Rights.” The highly-praised book “reveals the secret history of one of America’s most successful yet least-known ‘civil rights movements’ – the centuries-long struggle for equal rights for corporations.” However, the book is not without its controversial assertions, particularly when it comes to its characterizations of some of the key components of corporate personhood and corporate personality theory. This discussion will unpack some of these assertions, hopefully ensuring that advocates who rely on the book will be informed as to alternative approaches to key issues.
September 1, 2018 in Ann Lipton, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Human Rights, Intellectual Property, International Business, Joan Heminway, Joshua P. Fershee, Law School, Lawyering, LLCs, Marcia Narine Weldon, Real Property, Shareholders, Social Enterprise, Stefan J. Padfield, Teaching, Technology, Web/Tech | Permalink | Comments (0)
Friday, August 31, 2018
It's not that there isn't other news, it's just that this is swimming in warm water. A few days ago, SurveyMonkey filed an S-1 for its forthcoming IPO, and there are a few things that jumped out at me.
First, there's a survey!
(Okay, I'm feeling a little attacked right now.)
Second, there's a warning! I previously warned about warnings; poorly drafted ones can warn the registrant right out of a truth on the market/materiality defense if there's a subsequent securities fraud claim. SurveyMonkey seems to get it right, though:
So, unlike warnings that have gotten issuers into trouble in the past, this one doesn't explicitly tell anyone not to rely on external information. It's just warning you that external information isn't attributable to SurveyMonkey.
(Which, incidentally, highlights the artificiality of the entire exercise; does anyone seriously believe that from an investor/market perspective, there's any real difference between "you should only rely on us" language and "we have not authorized anyone else" language?)
And finally, as I promised in my subject line, there's the litigation limit:
Okay, so much to talk about here. First, if you've been following along, you know that I've repeatedly posted about - and written one article and one book chapter discussing - the question whether corporate governance documents can limit federal securities claims. My view is, they can't. But, as I previously mentioned, that issue is currently being tested in Delaware, with oral argument currently scheduled for September 27, so we may have a clear answer soon (umm, well, after the appeal that I assume will follow whatever the Chancery court decides).
And this matters a heckuva lot, because funneling Securities Act claims into federal courts may not seem like much of a deal, but that's just a stalking horse for the more explosive question, namely, whether corporations can use their governance documents to require that federal securities claims be arbitrated, and likely, arbitrated individually rather than on a class basis. That issue has seen a resurgence of interest, with SEC Commissioners current and former seeming to encourage the idea, and the Consumer Federation of America recently issuing a white paper arguing against it. If Delaware decides - as I think it should - that litigation limits in corporate governance documents can only be applied to state claims, then it's difficult to see what mechanism companies could use to dictate the arbitration of federal claims, no matter what the SEC says. (Though I suppose they'll come up with something, but there will then be the question whether that "something" is a contract subject to the Federal Arbitration Act, etc, etc.)
Finally, I note that SurveyMonkey put its forum selection clause in its bylaws. That's a change from other companies that recently went public, like Snap, Roku, Blue Apron, and Stitch Fix, all of which included the provisions in their charters where they would be much more difficult for shareholders to change (umm, also, some of those shareholders can't vote). In any event, SurveyMonkey is implicitly giving its shareholders the option of repealing the bylaw if they want to (assuming SurveyMonkey's directors don't, you know, change it right back).
So, that's the state of play, and as far as I'm concerned the ball's now in Delaware's - not the SEC's - court.
Thursday, August 30, 2018
The New York Times recently published a compelling article about a dispute a woman had with J.P. Morgan Securities after she discovered odd activity in her mother's account. The account, which was to help provide for her mother through retirement, had losses at times when the market otherwise rallied:
Around the time of her mother’s move, Ms. Dewart noticed what looked like unusual activity in the account, which she and her older sister had overseen for about four years. A closer look revealed that it was down $100,000 in a month.
“My own accounts were rallying, so I thought this was strange,” she said.
She notified the firm that something seemed awry. As someone who does research and policy analysis for a living, she also put her own skills to work.
She pored over piles of statements and trade confirmations, built spreadsheets and traded phone calls and emails with the broker who handled the account, Trevor Rahn, his manager and the manager’s manager. She hired a lawyer and worked with a forensic consultant.
After about six months, she learned that the account, worth roughly $1.3 million at the start of 2017, had been charged $128,000 in commissions that year — nearly 10 percent of its value, and about 10 times what many financial planners would charge to manage accounts that size.
Much financial misconduct may go undetected when sophisticated Wall Street firms manage money for ordinary people. Here, Ms. Dewart appears unusually sophisticated and determined. It still took her about six months to figure out exactly how much money had gone out the account in commissions in a single year. For the average, financially-illiterate American, odds of truly understanding account activity may be even lower.
Law must play a role here. Legal standards should provide adequate assurances to make sure that financial advisers remain faithful to their clients and do not opportunistically mismanage their accounts. This has been a hot issue for some time. The Department of Labor's fiduciary rule attempted to do this for retirement money. The SEC is now considering how to craft an appropriate "Best Interests" regulation to better govern broker behavior. As it works to craft the right regulation, it should keep in mind how much misconduct may go undetected because people don't know much about the area and often struggle to connect the dots.
Speaking of connecting the dots, there are a few dots relevant to the New York Times Story that didn't make it into the article. Publicly available sources provide additional context if you know where to look. Let's start with the settlement amount. The article reports that J.P. Morgan eventually credited some of the commissions back and later settled as sum Ms. Dewart is "prohibited from discussing" because of the confidentiality agreement. The existence of the confidentiality agreement does not mean that amount is not actually public information. According to the BrokerCheck report for Mr. Rahn, J.P. Morgan paid a settlment of $64,590 in connection with a complaint that came in on November 13, 2017. In the Times article, J.P. Morgan cagily stated that Ms. Dewart "agreed to an appropriate resolution of this matter in June." The BrokerCheck form reveals that matter's status was "settled" with a status date of June 13, 2018. This probably means that after all that, Ms. Dewart recovered $64,590.
But there is no reason to wonder whether that settlement involved Ms. Dewart. The information, although not on BrokerCheck, is already public record. Florida has excellent sunshine laws and will produce reports from the CRD Database on request--and quickly too. It took me less than 24 hours to pull the report. It confirms that the settlement involved Ms. Dewart.
Is this settlement amount fair and reasonable given the allegations and what happened? This is probably unknowable. All the documents are not publicly available. But there is good reason to believe that Ms. Dewart didn't manage to recover the opportunity costs for the period of time the account was allegedly mismanaged. In many instances, these cases settle on a net-out-of-pocket basis. That means that the investor may be able to get back some of what they "lost" relative to their initial investment. For example, if you invest $100 and end up with $70 after a year, then the out-of-pocket loss may be $30. But if the market went up 20% during the same time period, the actual losses (taking into account the lost opportunity to get market gains) are probably closer to $50. In practice, this means that a bull market allows a stunning amount of exploitation. Many customers will never alert to opportunity cost losses if their accounts are going up.
There is another dot worth connecting here. Mr. Rahn has another disclosure on his BrokerCheck report. It reveals that another firm has an outstanding judgment/lien against Mr. Rhan for $763,424.76. If the lien hasn't been paid, Mr. Rahn owes Deutsche Bank Securities about three quarters of a million dollars. The Lein appears to be based on an arbitration award against Mr. Rhan from a claim that was filed in 2011. That award can be found by searching for Mr. Rahn in the FINRA Awards Database. Apparently, Deutsche Bank sued Mr. Rahn for not paying a promissory note. The award is notably because Mr. Rahn was also assessed $205,654.59 to cover Deutsche Bank's attorney's fees. The CRD report reveals that he received a withholding notice on August 9, 2014. This means that Mr. Rahn probably loses a portion of his pay each pay period to pay off the outstanding lien. Although there is always an incentive for commission-compensated brokers like Mr. Rahn to do more transactions than necessary to make more money, investors may want to be careful about working with brokers that have financial problems or substantial outstanding debts.
Wednesday, August 29, 2018
"Transamerica ... to Pay $97 Million ... Relating to ... Quantitative Investment Models ... SEC’s order finds that the models, which were developed solely by an inexperienced ... analyst, contained numerous errors, and did not work as promised." https://t.co/RkO7FpCJxS #corpgov— Stefan Padfield (@ProfPadfield) August 27, 2018
"@AnnMLipton, a corporate law professor at Tulane University, has described this [independence] standard as 'blood or money' where only a family relationship, or where a board member is literally on the payroll of the CEO or another transaction beneficiary, can taint." #corpgov https://t.co/KWj1267kc1— Stefan Padfield (@ProfPadfield) August 27, 2018
"Judge Kavanaugh believes that ... corporations ... not directly regulated by or affected by regulations almost always have standing. By contrast, he believes it should be difficult for citizen groups to establish standing ...." https://t.co/wzbDthcjO4 #corpgov— Stefan Padfield (@ProfPadfield) August 29, 2018