Thursday, April 24, 2014
Last week the DC Circuit Court of Appeals generally upheld the Dodd-Frank conflict minerals rule but found that the law violated the First Amendment to the extent that it requires companies to report to the SEC and state on their websites that their products are not “DRC Conflict Free.” The case was remanded back to the district court on this issue.
As regular readers of the blog know I signed on to an amicus brief opposing the law as written because of the potential for a boycott on the ground and the impact on the people of Congo, and not necessarily because it’s expensive for business (although I appreciate that argument as a former supply chain professional). I also don’t think it is having a measurable impact on the violence. In fact, because I work with an NGO that works with rape survivors and trains midwives and medical personnel in the eastern Democratic Republic of Congo, I get travel advisories from the State Department. Coinicidentally, I received one today as I was typing this post warning that “armed groups, bandits, and elements of the Congolese military [emphasis mine] remain security concerns in the eastern DRC….[they] are known to pillage, steal vehicles, kidnap, rape, kill and carry out military or paramilitary operations in which civilians are indiscriminately targeted… Travelers are frequently detained and questioned by poorly disciplined security forces [I was detained by the UN] at numerous official and unofficial roadblocks and border crossings…Requests for bribes [which I experienced] is extremely common and security forces have occasionally injured or killed people who refused to pay.”
None of this surprises me. I commend the efforts of companies to clean up their supply chains and to cut off income sources to rebel groups who control some of the mines or brutally insert themselves into the mineral trade. But what the State Department advisory makes clear (and what many people already know) is that the problem that the Dodd-Frank law is trying to solve is not something that can be cured through a “name and shame” corporate governance disclosure, especially one that may no longer have the “shame” factor of having companies brand themselves “not DRC Conflict Free.”
Earlier this week, Senator Ed Markey and eleven other members of Congress sent a letter urging SEC Chair Mary Jo White to avoid any delay in implementing the rule. The letter states in part “…the law we passed was simple. Congress said that any company registered in the United States which uses any of a small list of key minerals from the DRC or its neighbors has to disclose in its SEC filing the use of those minerals and what is being done, if anything, to mitigate sourcing from those perpetuating DRC's violence. Such transparency allows consumers and investors to know which companies source materials more responsibly in DRC and serves as a catalyst for industry to finally create clean supply chains out of Congo.”
The "law" may have been “simple,” but the implementation is not for a large number of companies. That’s probably why the EU has proposed a voluntary self-certification scheme focused on importers rather than manufacturers and sellers like Dodd-Frank. That’s probably why a large number of companies are not ready to comply, according to a recent PwC survey of 700 companies.
Chair White, who has made no secret of what she thinks of the SEC’s role in solving human rights crises, still has to reissue Dodd-Frank 1504, the resource extraction rule that was struck down after a court challenge. According to a Davis Polk report, as of April 1, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 45.7% have been missed and 54.3% have been met with finalized rules. The SEC has a lot of financial rule making to complete and should consider how to prioritize and retool the conflicts minerals rule using the agency's discretion and going beyond the fixes that may be required by future rulings on the First Amendment issue.
I will continue to monitor the future of this law. I am now on my way to a conference for businesspeople, lawyers, academics and students at UConn entitled New Challenges in Risk Management and Compliance. I will discuss regulatory issues related to global human rights and enterprise risk management on a panel with the human rights initiative leader for General Electric and the General Counsel for the Shift Project, who worked with John Ruggie on the UN Guiding Principles on Business and Human Rights. I am excited to meet and learn from them both. The Guiding Principles and earlier iterations of Ruggie’s work greatly influenced both the US and EU conflict mwinerals laws.
Next week I will report back on some of the outcomes from the conference.
April 24, 2014 in Business Associations, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)
Wednesday, April 23, 2014
In March, the Fourth Circuit held in Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, that racial identity can be imputed to a corporation for purposes of standing under Title VI, citing to case precedent from the several circuits allowing 1981 claims to be raised by corporations.
“[W]e observe that several other federal appellate courts have considered this question, and have declined to bar on prudential grounds race discrimination claims brought by minority-owned corporations that meet constitutional standing requirements.”
The Fourth Circuit had to deal with the following language in Arlington Heights, 429 U.S. 252, 263 (1977): “As a corporation, MHDC has no racial identity and cannot be the direct target of the petitioners' alleged discrimination. In the ordinary case, a party is denied standing to assert the rights of third persons.” In Arlington Heights, the Supreme Court however did not need to “decide whether the circumstances of this case would justify departure from that prudential limitation and permit MHDC to assert the constitutional rights of its prospective minority tenants. For we have at least one individual plaintiff who has demonstrated standing to assert these rights as his own.” (citations omitted). The dicta in Arlington Heights was not a barrier to imputing a racial identity to the corporation in the Fourth Circuit case.
In a clear statement, the Fourth Circuit concluded that:
“We agree with the Ninth Circuit that a minority-owned corporation may establish an “imputed racial identity” for purposes of demonstrating standing to bring a claim of race discrimination under federal law. We hold that a corporation that is minority-owned and has been properly certified as such under applicable law can be the direct object of discriminatory action and establish standing to bring an action based on such discrimination.”
Chief Justice Roberts was concerned about the connection of racial identities for corporations and corporate free exercise of religion as raised in the Hobby Lobby and related cases. Note that fellow BLPB blogger Josh Fershee wrote about the racial identity of a corporation on BLPB here arguing why religious discrimination claims by corporations should be allowed and how the analysis would work. Professor Bainbridge weighed in on the issue as well.
Here is my best response as to why holding that corporations can have a racial identity is not necessarily fatal to the claim that corporations cannot have a religious identity for purposes of free exercise under the 1st Amendment, and why religious discrimination cases for corporations may also be more difficult than racial discrimination cases.
Line drawing. In the Carnell case as well as in others, the corporations at issue had been certified as a minority/women owned business at the state level, which is treated as a form of pre-requisite for such standing to assert a racial discrimination claim. There is no similar bright line test or religious entity process for a for-profit corporations. Indeed the very process of such a certification may implicate other 1st Amendment protections for freedom of speech and association.
Third Parties & Equity. Second, imputing the racial identity to the corporation for purposes of a Title VI claim of racial discrimination upholds the minimum anti-discrimination standard against third parties. So in the race cases, the identity of the owners is imputed to the corporation to prevent third parties from evading a legal standard. In the corporate free exercise of religion context, the owners are requesting that their individual religious beliefs be imputed to the corporation to allow it to evade compliance with a law. Anti-discrimination laws are applied generally and don’t allow a person to discriminate whether it is with an individual or through a corporation rather than exempting a corporation from a neutrally-applied, generally applicable law.
This last points get to the debate, in part, about the relevance of reverse veil piercing (RVP) on which Professor Stephen Bainbridge has advocated as a framework to resolve the mandate issue in Hobby Lobby. The corporate veil is rejected in both CVP and RVP when equity requires and that is usually dependent upon a third party interest that is best protected by rejecting the legal fiction of a separate corporate form. In the anti-discrimination/racial identity there is an equitable argument that the third party cannot discriminate against the corporation simply because it is owned by minorities. What is the equitable argument in Hobby Lobby? The fairness rationale is weakened here, especially in light of the interests of the 13.5K employees receiving health care coverage as a form of compensation for their work for the company. Instead RVP, it must rest, if at all, on the public policy justification advanced by Professor Bainbridge. But again, the public policy argument cuts both for and against RVP. There is a public policy argument in protecting/promoting religious freedom as there is in facilitating access to health care, including forms of health care that Congress has determined to be necessary for women (and families) under the ACA.
Steve Bainbridge has an excellent post on the insider trading liability of secondary tippees: where, for example, an insider provides nonpublic information to Tippee #1, and Tippee #1 gives that information to Tippee #2.
He argues that Tippee # 2 should be liable under the Dirks case only if Tippee #2 knew or should have known that the insider provided the information for a personal gain. He's clearly right under Dirks. Dirks says that a tippee is liable only if he knew or should have known that the insider tipped the information in breach of a fiduciary duty, and Dirks says, that for this purpose, a breach of fiduciary duty requires some sort of personal gain. But, as Professor Bainbridge points out, the lower courts have not consistently got this right.
Tuesday, April 22, 2014
Over at realclearpolitics.com, a number of leading thinkers, including some leading business law folks such as Richard Epstein and Jonathan Adler, among others, have signed a public statement: Freedom to Marry, Freedom to Dissent: Why We Must Have Both. Following is a portion of the statement:
The last few years have brought an astonishing moral and political transformation in the American debate over same-sex marriage and gay equality. This has been a triumph not only for LGBT Americans but for the American idea. But the breakthrough has brought with it rapidly rising expectations among some supporters of gay marriage that the debate should now be over. As one advocate recently put it, “It would be enough for me if those people who are so ignorant or intransigent as to still be anti-gay in 2014 would simply shut up.”
The signatories of this statement are grateful to our friends and allies for their enthusiasm. But we are concerned that recent events, including the resignation of the CEO of Mozilla under pressure because of an anti-same-sex- marriage donation he made in 2008, signal an eagerness by some supporters of same-sex marriage to punish rather than to criticize or to persuade those who disagree. We reject that deeply illiberal impulse, which is both wrong in principle and poor as politics.
For those who don’t know, former Mozilla CEO Brendan Eich resigned following the public outcry when it was revealed that he had donated $1,000 to support Proposition 8, a 2008 California ballot initiative and constitutional amendment designed to ban same-sex marriage in the state.
To be clear on my stance: I strongly support same-sex marriage, and I fundamentally disagree with Prop 8. Still, punishing people, as opposed to criticizing people, for contrary and even wrong-headed political views is neither productive nor proper. (Nonetheless, there are multiple examples of people who felt Eich needed to resign. See, e.g., here, here, and here.)
Admittedly, if it’s clear that the head of any organization, whether it is a profit or nonprofit entity, doesn’t further the goals of the organization, then there is a bad fit. Furthermore, this isn’t about Mr. Eich’s free speech rights in that there is no government actor here. This was a private response to a private person’s actions. Mozilla has the power to act to replace Mr. Eich, and members of the public have a right to call for his ouster. It just doesn’t make it inherently right or wise.
Certainly, one can imagine a scenario where a CEO’s prior political or organizational giving would create problems for the organization. For example, an environmental organization may not be comfortable with a CEO who had given money to a group fighting climate legislation. But, in that circumstance, the hiring body, and likely the CEO, would, or at least should, have known that support for climate change initiatives would be expected as part of the job. Top employees often become the face of the organization, and that comes with job, but if a particular political view is deemed necessary for the job, it would help if the CEO knew it during the interview process.
Even if Mozilla was responsible for the mistake (in hiring someone with political views that were not accepted to many employees and customers), as an entity, the company was not improper to respond in what it deemed to be in the best interest as the organization. Just as important, though, is the community response to Mozilla as an entity. The free market allows us all to choose with whom we wish to do business. But when we make such decisions, we need to be careful about who we are punishing and why.
People have a right to be upset and to protest Mr. Eich’s views. I think Prop 8 was dead wrong, and I don’t like that anyone supported it. Still, I don't think calling for Mr. Eich or anyone else to lose their job is proper simply because I disagree with their views. I would feel differently if there were evidence that Mr. Eich discriminated against gay employees. There just doesn't seem to be any support for that proposition.
We need to be careful to avoid a world where every portion of what we do becomes politicized and polarized. Although there are core values each of us holds, we should also recognize that not everyone shares all of our core values, all of the time. Nor can they. My wife and I agree on a lot of things, and it is a big reason why we’re together. Still, some of my best learning has been when we don’t agree. Sometimes I change my mind, and other times I don’t, but even then I have learned more about my views and why I hold them.
I don’t want to live in a world where politicians and news outlets and companies operate in lockstep to a specific set of ideals. There are too many examples of that already to make me comfortable. I don’t want to choose only from a Republican burger joint or a Democratic sub shop. We need more. We need a populist pizza place, and a libertarian ice cream shop, and everything in between. In my view, the litmus test should be whether people do a good job at doing their job, and whether they treat others well (employees and customers), regardless of their ideological differences.
Open public discourse is a right under our Constitution, but it is not socially required. When respectful and thoughtful, open discourse helps all of us be better citizens and better people. If we commit ourselves as individuals to respecting others and listening, even when (and especially when) we disagree, good things will follow. It is one thing to dismiss views with which we disagree; it is another to dismiss, out of hand, the people who hold such views. For all the complaints about the evils of business, I have a suspicion that if we expected more of ourselves, businesses would follow our lead.
Monday, April 21, 2014
The SEC has proposed, but not yet adopted, an exemption that would allow securities to be sold to the general public through crowdfunding. But a number of states have beat the SEC to the punch, adopting exemptions allowing securities to be sold in crowdfunding offerings within those states. See here for a list of the state exemptions.
Those state exemptions do not (and cannot) provide an exemption from federal law. Even if a state exemption is available, the issuer of the securities must still register with the SEC unless a federal exemption is available. The obvious exemption is the intrastate offering exemption in section 3(a)(11) of the Securities Act, and its safe harbor, Rule 147.
The intrastate offering exemption imposes a number of restrictions on the issuer and the issuer's use of the offering proceeds. But there's a potential problem with crowdfunded intrastate offerings even if the issuer complies with all of those other restrictions.
Both section 3(a)(11) and Rule 147 require that the securities be offered and sold only to residents of that one state. It’s not enough to limit sales to residents. An offer to nonresidents would violate the intrastate offering exemption, even if those nonresidents were successfully filtered out before any sales were made.
So how can securities sold on an Internet web site open to the general public not be offered to non-residents? Given the global nature of the Internet, aren’t offers to non-residents inevitable?Luckily, the SEC staff has stepped in and provided advice that will allow intrastate offerings on public Internet sites.
Here is a recent staff interpretation:
Question: An issuer plans to use a third-party Internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable securities crowdfunding within that state. Assuming the issuer met the other conditions of Rule 147, could it rely on Rule 147 for an exemption from Securities Act registration for the offering, or would use of an Internet portal necessarily entail making offers to persons outside the relevant state or territory?
Answer: Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147.
Thus, as long as the web site makes it clear that offers are being made only to residents of the relevant state and potential purchasers are screened for residence before they see the details of the particular offering, the intrastate offering exemption would still be available.
However, the staff went on to warn about the use of social media or the issuer’s own web site:
Question: Can an issuer use its own website or social media presence to offer securities in a manner consistent with Rule 147?
Answer: Issuers generally use their websites and social media presence to advertise their market presence in a broad, indiscriminate manner. Although whether a particular communication is an "offer" of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.
Social media and an issuer’s general web site would reach non-residents and violate the intrastate offering exemption. However, there’s nothing in section 3(a)(11) or Rule 147 that requires an intermediary to be used for the offering, so I don’t think issuers would be excluded from direct, unmediated offerings—as long as they complied with the requirements of Question 141.04—using a separate web page with appropriate disclaimers and only allowing residents to see the actual offering. However, staff interpretations and no-action letters often attempt to impose restrictions that have little relationship to the statutory or regulatory requirements, so perhaps the staff did mean to exclude unmediated offerings.
Sunday, April 20, 2014
"Law & Economics Prof Blog" http://t.co/cB1A56VseC— Stefan Padfield (@ProfPadfield) April 19, 2014
An oldie but a goodie: J.W. Verret on the "Top Ten Books in Corporate Governance" http://t.co/DKtYxhvFTQ— Stefan Padfield (@ProfPadfield) April 17, 2014
"despite the ... importance of shareholder voting, none of the existing corporate law theories coherently justify it" http://t.co/no4frvaw12— Stefan Padfield (@ProfPadfield) April 16, 2014
"business interests have substantial ... impacts on U.S. government policy, while average citizens ... have little" http://t.co/5jgUTC7ZJK— Stefan Padfield (@ProfPadfield) April 16, 2014
Don't read too much into the conflict rules decision in NAM v. SEC http://t.co/EgRmKveXWE— Stephen Bainbridge (@ProfBainbridge) April 14, 2014
Saturday, April 19, 2014
Today I'm plugging my colleague Elisabeth de Fontenay's new article, despite the existential threat it poses to my specialty.
InDo the Securities Laws Matter?, de Fontenay compares the market for syndicated loans, which are not treated as securities, to the market for bonds, which are. She finds that the market for syndicated loans is as deep and as liquid as the market for bonds, suggesting that the mandatory disclosure regime that governs bonds, but not loans, is unnecessary.
As she puts it in her abstract:
One of the enduring principles of federal securities regulation is the
mantra that bonds are securities, while commercial loans are not. Yet the
corporate bond and loan markets in the U.S. are rapidly converging,
putting significant pressure on the disparity in their regulatory treatment.
As securities, corporate bonds are subject to onerous public disclosure
obligations and liability regimes, which corporate loans avoid entirely. This
longstanding regulatory distinction between loans and bonds is based on
the traditional conception of a commercial loan as a long-term relationship
between the borrowing company and a single bank, in contrast to bonds,
which may be issued to widely dispersed retail investors and are traded in a
liquid market. Today, however, not only are loans funded by dispersed, nonbank
creditors, but the pricing, terms, participants, and liquidity in the two
markets are rapidly converging. Logically, securities regulators should
respond to this functional convergence by treating loans and bonds as one
and the same. While the regulatory disparity persists, however, it provides a
rare natural experiment testing the effectiveness of the securities laws. That
the loan market has achieved comparable depth and liquidity to the bond
market, even in the absence of mandatory disclosure and robust antifraud
provisions, suggests that the securities laws are not doing the work for
which they were intended.
It's a really fascinating paper.
Friday, April 18, 2014
Earlier this semester, Belmont undergraduate students competed for a total of $8,000 in a business plan competition. The first place team, What’s Hubbin’, won $5,000. Law firm Baker Donelson was one of the sponsors.
Each competition team was required to provide: (1) an executive summary, (2) a description of the business (including mission and vision), (3) plans for marketing, operating, finances, and growth, and (4) financial statements (historical, if applicable, and projected). The finalists presented in front of a team of judges, which included local attorneys, investors, and entrepreneurs. The event also attracted a strong audience of faculty members (myself included), staff, and students.
Given the evolving legal industry, and the increasing focus on Law & Technology and Law & Entrepreneurship, I could see business plan competitions like this one being a success at law schools (perhaps in coordination with their sister business schools).
One of the three What’s Hubbin’ team members is Makenzie Stokel. She is also one of my undergraduate business law students. I asked her if she would mind answering a few, short questions about the competition and about her team's business, which is one of the competition’s businesses that is already up and running. My questions and her answers are below.
HM: Will you please briefly describe your business, What’s Hubbin’, for our readers?
MS: What's Hubbin’ is a website that promotes music here in Nashville. We highlight local artists and promote events going on around town. Our site allows users to "hub" (RSVP) events and artists and have an organized profile of their music preferences. We also allow users to filter events based on their preferences to ensure that everyone finds something that they will want to do. We host events around Nashville and will be hosting a day-long festival at the end of this month. Our goal is to have everything music related all in one place so users don't have trouble finding events or discovering new music. You can find us online at www.whatshubbin.com and on Twitter at @WhatsHubbin
HM: How has participating in the competition helped your business?
MS: Participating in the business plan competition has helped promote our business a great deal. We have had multiple blogs write about us, and were even named Belmont's hottest start-up by Southern Alpha. It has really helped us get our name out there with the Belmont community and provided some validation of our business.
HM: How has participating in the competition enriched your college experience, especially your experiences in your classes?
MS: I am so glad that the What's Hubbin' team was able to participate in this competition. The competition definitely helped us with our public speaking skills, which is necessary to have in classes and after college. It also forced us to think quickly when answering the judges’ questions. When preparing for the questions that we thought they might ask, we had to determine who was best at the different aspects of our business. The competition, and the start-up process part in general, has been more relevant to some classes than others. Business Law and Foundations of Entrepreneurship are two examples of relevant classes. Also, as a result of being involved in What’s Hubbin’, I have seen ways to apply what I am learning in classes outside of school.
HM: Congratulations and best of luck.
MS: Thank you!
Thursday, April 17, 2014
Elizabeth Pollman at the Loyola Law School Los Angeles, recently posted her paper, A Corporate Right to Privacy, on SSRN (forthcoming in the Minnesota Law Review 2014). This paper timely weighs in on the corporate personhood debate by addressing one aspect of that question: privacy.
Abstract: The debate over the scope of constitutional protections for corporations has exploded with commentary on recent or pending Supreme Court cases, but scholars have left unexplored some of the hardest questions for the future, and the ones that offer the greatest potential for better understanding the nature of corporate rights. This Article analyzes one of those questions — whether corporations have, or should have, a constitutional right to privacy. First, the Article examines the contours of the question in Supreme Court jurisprudence and provides the first scholarly treatment of the growing body of conflicting law in the lower courts on this unresolved issue. Second, the Article examines approaches to determining the scope of corporate constitutional rights and argues that corporate privacy rights should be evaluated not by reference to the corporate form itself or a notion of corporate personhood, but rather by reference to the privacy interests of the various people involved in the corporation and their relationship to the corporation. Further, because corporations exist along an associational spectrum — from large, publicly traded corporations constituted purely for business purposes to smaller organizations with social, political, or religious purposes — the existence of a corporate privacy right will and should vary.
Back in August, Bloomberg reported that the legal costs for the six largest U.S. banks since 2008 totaled over $100 billion. (Yes, billion with a "B.") Bloomberg included settlement amounts in that huge number, as well as fees to lawyers.
The financial and emotional costs of litigation, not to mention the tremendous amount of time required, amazes me. Litigation has its place, but the vast majority of disputes eventually settle and many times all parties would have been better off settling earlier using some form of alternative dispute resolution (ADR).
A former colleague recently pointed me to the University of Missouri School of Law's listserv for ADR educators.
I know many of our readers only teach business law courses, but adding negotiations to my teaching package has made me see the various intersections between negotiations and business law. This semester, I set aside some time in my business law classes to discuss a bit of the negotiations literature, and the students seemed to appreciate it. I just signed up for the listserv, so I cannot speak to its quality yet, but I do think more business law professors should consider exploring the world of ADR.
Tuesday, April 15, 2014
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting--Agency, Patnerships, LLCs & Unincorporated Assoc. Section
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014. The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair ([email protected])
They really don't.
To be clear, this is not a post bashing corporations (or government). It's not really extolling the virtues of corporations, either. Instead, it's just to make the point that, notwithstanding Citizens United or Hobby Lobby and other cases of their ilk, the idea that corporations are people is still a legal fiction. A useful and important one, but a fiction nonetheless.
On April 11, Corey Booker posted the following on Facebook:
In awful years past, corporations polluted the Passaic river to the point that it ended the days where people could eat from it, swim in it, and use it as a thriving recreation source. Today we announced a massive initiative to clean the Passaic river and bring it back to life again. The tremendous clean up effort will create hundreds of jobs and slowly over time restore one of New Jersey's great rivers to its past strength and glory.
The river needs the clean-up, and I applaud the effort. Still, the reality is corporations did not pollute the Passaic River, at least not literally. People working for the corporation did. It is agency law that allows a corporation to act in the first place, because the fictional corporate person needs a natural person to act. (For a simple explanation, see here.) The corporation is liable for the harm caused by its agents. (And, in certain cases, the individuals would also be liable directly if their actions were, for example, illegal.)
Government doesn't really do anything, either. The clean-up proposal that Booker was referencing is a $1.7 billion Superfund river remediation project that was proposed by the EPA. Of course, government works through agents, too, and there are real people behind the proposal. Real people, through concerted action between corporations and government will actually do the clean up, too.
This is a point I have made before, but I think it's an important one. We need to remember that people are at the root of all corporate and government actions. This is important in two directions. First, for those criticizing a corporate or government action, it is critical for them to remember that there are people carrying out the action. A corporation or a government may act in an inappropriate manner, but it is also likely that the person carrying out the action is doing so with the intent to do well in the capacity in which they were fired.
Second, for people working for corporations or governments it is equally critical that they recognize that the their employer doesn't carry out actions without their help. That is, people who work for corporations or governments must recognize that they are carrying out the will of the entity they represent (and they should hold themselves responsible for doing do). Perhaps it is their boss who gave them the order (also a natural person), or even the board of directors (a group of natural people), but the charge is in fact, if not legally, being given by natural people.
Why does this matter? When we vilify or exalt the action of entities (like corporations or governments) we disconnect ourselves from the realities of the world, or at least our responsibilities within it. We become more susceptible to Groupthink in either direction. We are able to shirk our responsibilities -- as employees, as agents, as lawyers, as voters, as shareholders, as people -- to make decisions the are conscious of the world around us. In our daily lives and in our representative capacities, we all must make difficult decisions from time to time.
Sometimes, tough decisions require a cost-benefit analysis that means someone else will be worse off because of our decision. It's hard, but it's what people do. Often, it's what we must do. In doing so, though, it is essential that we hold ourselves and other people accountable as people for what we've done. Regardless of the rhetoric we often hear, the amalgamations of people who make up both governments and corporations have done some amazing and impressive things. Both have also done some horrendous and outrageous things. The people in charge, and the people who follow, are accountable in both circumstances.
In this instance, I am making a conceptual argument, not a legal one. There are legal regimes, sometimes effective, sometimes not, for holding both entities and their agents accountable for their actions (and rewarding them, where appropriate). How we think about corporations and governments and each other, though, has a broader impact. Without us -- all of us -- there are no corporations and there is no government. If we remember that, our responses to challenges are more likely to be more targeted, more effective, and more reasonable. Just because we don't always agree, doesn't mean we aren't all in this together. Whether we like it or not, we are, and it's time we acted like it.
Monday, April 14, 2014
In an opinion released earlier today, the D.C. Circuit Court struck down the SEC's Dodd-Frank Conflict Mineral Rule under the compelled speech doctrine for failing the least restrictive alternative prong.
We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
Not striking down the need for information about conflict minerals, but rather the required approach, the Court suggested that:
[A] centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers. The Commission has failed to explain why (much less provide evidence that) the Association’s intuitive alternatives to regulating speech would be any less effective.
In August, 2012, the SEC released final Dodd-Frank rules for conflict minerals "requir[ing] companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country."
Delaware, like most states, has a provision in its corporate statutes allowing corporations to limit directors’ liability for breaches of fiduciary duty. Delaware section 102(b)(7) allows corporations to include in their charter “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages" for certain breaches of fiduciary duty.
A recent Delaware case plows a huge hole through the protection provided by a section 102(b)(7) charter provision. In the Rural Metro case [In Re Rural Metro Corp. Stockholders Litigation, 2014 WL 971718 (Del. Ch. Mar. 7, 2014)], the Delaware Court of Chancery held that a 102(b)(7) provision does not protect against claims that non-directors aided and abetted a duty-of-care violation by directors, even when the directors themselves are protected.
The Chancery Court’s reasoning is sound. Section 102(b)(7), and the associated charter provision, don’t say there’s no breach of fiduciary duty, just that directors aren’t personally liable for damages. The underlying conduct by the directors is still a breach of fiduciary duty, and injunctive relief is still available, just no money damages.Since there’s still a breach of duty, and the statute says nothing about the liability of aiders and abettors, the court concluded that aiders and abettors can still be liable if: (1) the directors breached their fiduciary duties; (2) the third party knew the directors were breaching their fiduciary duties; and (3) the third party participated in the breach.
The court ultimately held that RBC Capital Markets, LLC was liable for aiding and abetting. I can't do justice to the facts in the space available here; I highly recommend a reading of this important opinion.
The real question is whether the Delaware legislature will let this holding stand. The Chancery Court’s statutory reasoning is sound, but that doesn’t mean the result is necessarily good policy. Investment bankers, brokers, accounting firms, and other third party providers, perhaps even lawyers in some cases, are exposed to the risk of liability under this holding. Even if they ultimately win on the merits, as I suspect many will, the litigation itself will be costly. That cost will, of course, be passed on to the corporations using the services of those third parties.
There’s a possible gain associated with that cost, of course: the possible increased deterrence of breaches of fiduciary duty by corporate directors. But the Delaware legislature, in adopting section 102(b)(7), has already decided that other considerations outweigh the deterrent effect of imposing liability on the directors themselves.
Two Legislative Options
Plugging the Rural Metro hole is easy. A simple amendment to 102(b)(7) would do the trick. But how the Delaware legislature chooses to amend the statute (if it does) is important.
One way would be to authorize corporations to include provisions in their charters protecting not only directors, but also people who aid and abet violations by the directors. If that's all the Delaware legislature did, the protection from liability would not be automatic. Companies with 102(b)(7) exculpation provisions would have to amend their charters to protect aiders and abettors.
A simpler, neater solution would make the protection of aiders and abettors automatic. The legislature could just add a sentence at the end of 102(b)(7) providing that aiders and abettors are not liable when the directors themselves are protected from liability. Something like the following would work: “Unless otherwise specified in the certificate of incorporation, no person shall be liable for money damages for aiding and abetting an action protected by such a provision.” If the legislature did this, no further corporate action would be needed to make this protection effective. Only companies that did not want aiders and abettors protected would have to amend their charters.
Stay tuned to see what, if anything, the Delaware legislature does.
Sunday, April 13, 2014
My Akron colleague Bernadette Bollas Genetin recently posted “The Supreme Court's New Approach to Personal Jurisdiction” on SSRN, and I believe it may be of interest to readers of this blog. Here is the abstract:
This article provides an analysis of the Court’s two recent personal jurisdiction opinions, Daimler AG v. Bauman, 134 S. Ct. 746 (2014), and Walden v. Fiore, 134 S. Ct. 1115 (2014), and concludes that these cases suggest a new doctrinal approach to personal jurisdiction.
In Daimler AG v. Bauman, the Supreme Court narrowed the scope of general jurisdiction, making it available primarily in a corporation’s states of incorporation and principal place of business and rejecting, in most instances, the prior approach of permitting general jurisdiction based on a defendant’s “continuous and systematic” forum contacts. In Walden v. Fiore, the Court used an interest balancing approach to resolve the specific jurisdiction question at issue, turning away from its longstanding purposeful availment approach.
Together, these cases can be interpreted to reinvigorate the reasonableness analysis of International Shoe, in which the Court focused on the “relation among the defendant, the forum, and the litigation.” The Supreme Court has, famously, reversed course several times on its analysis of personal jurisdiction. The article concludes that the Court should, in the full range of specific jurisdiction cases, return to an analysis that considers all relevant interests, including the interests of the defendant, the plaintiff, and the state.
Saturday, April 12, 2014
Well, it's almost exam time at most law schools, and by the end of this week, I have to turn in my first exam to the registrar. I'm teaching Securities Litigation, and it's mostly a lecture course - the first time I've ever taught. I knew writing an exam would be difficult, but I didn't anticipate all of the types of issues I would experience.
Mostly, I'm trying to develop one or two solid issue-spotter-type questions for them to examine.
The first and most obvious concern is making sure that it has varying levels of difficulty, so that it distinguishes between students who are better and less-well prepared.
Additionally, since I haven't done this before, I need to make sure that it takes the right amount of time to complete - it's an 8 hour take home; I'm guessing that erring on the shorter side is preferable to longer, since I'm likely to underestimate the difficulty of the material.
I also find, as I develop the fact pattern, that it really forces me to confront which areas we did not cover extensively, and which areas we did (thus perhaps offering a guide for edits to the syllabus in the future) - for example, I keep discarding potential scenarios because I realize they would implicate too many issues we only touched on tangentially.
Part of the difficulty, I think, is that because the course is Securities Litigation, it includes both substantive securities doctrine, and a some civil procedure issues as they arise in the securities context. It's difficult to develop a realistic fact pattern that directs them toward precisely the topics we've covered without implicating the topics - particularly civil procedure topics - we have not covered.
Ultimately, I think I will have to sacrifice some degree of realism in order to make sure that the students' attention is directed in the right place, and I don't inadvertently end up testing them on how well they remember Civil Procedure topics they covered in other classes, but we did not discuss in my class.
Also, I have to just accept that there will be some parts of the course that simply won't be on the exam. So be it.
Friday, April 11, 2014
On March 24, the petition for certiorari was denied in the Strine v. Delaware Coalition For Open Government, Inc. case, ending the Delaware Court of Chancery's experiment with arbitration by their sitting judges. (H/T Brian Quinn).
As far as I know, however, sitting judges on the Delaware Court of Chancery still conduct mediation. A Chancellor or Vice Chancellor does not mediate his own cases, but rather mediates the cases assigned to one of the other four judges on the court (if the parties agree to submit to mediation).
More information about the Delaware Court of Chancery's mediation process is here. The benefits of the mediation include:
- Expertise. You would be hard pressed to find someone more knowledgable about Delaware corporate law and the merits of a Delaware Court of Chancery case than a sitting Delaware Chancellor or Vice Chancellor.
- Relatively Inexpensive. The fee is only $5,000 a day, for cases that are already on the Chancery docket, which is a decent amount of money, but is dwafted by the legal fees spent in almost all of these cases. For mediation only cases (cases not already on the docket), there is a $10,000 initial fee and a $5,000 for each additional day.
- Confidential. All mediation proceedings are strictly confidential.
These are many of the same main benefits as the Delaware Court of Chancery arbitration, but, of course, in mediation, the judge is not making a decision, but rather assisting the parties in reaching a voluntary settlement.
According to Steven Davidoff, in the Strine case, "the federal court found that the arbitration proceedings were effectively a civil trial, with no difference in judges, place or proceeding except the secrecy and the arbitral nature."
Mediation, however, is quite a bit different than a civil trial. While the comments of a sitting Chancellor may carry a lot weight with the parties, a mediator does not come to a determination for the party and the parties are able to walk away from the mediation at any time.
In short, judicial mediation carries many of the benefits of judicial arbitration, but the practice of judicial mediation seems to be more difficult to challenge.
Washburn University has posted an opening for an Assistant Professor of Legal Studies.
I know not everyone can move to Kansas, but when I was first on the market, I even applied to jobs like this one in Kuwait. If you really want to be a professor, you can't let location get in your way. Granted, I know I would have had to use my best negotiating skills to convince my wife to move to Kuwait (or Kansas).
The details of the Washburn University position can be found after the break.
Thursday, April 10, 2014
[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. -Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).
When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.”
Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission. Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission. Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997. The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.
Why is this important? The petition includes the following enlightening statistics:
1) The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.
2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.
3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).
4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.
5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.
6) The website shareholderactivist.com calls shareholder activism a "participatory sport" where investor activists submit similar proposals to multiple companies so that they can "advance a larger agenda.”
The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.
As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final? Must be the end of the semester.
April 10, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (0)