Friday, October 24, 2014

Ello and Social Enterprise

My co-blogger Stefan Padfield passed along this article from The New York Times Dealbook on the social network Ello.

Ello is a Delaware public benefit corporation. The social enterprise terminology is proving difficult, even for sophisticated authors at the New York Times Dealbook. The article calls Patagonia and Ben & Jerry’s public benefit corporations. Patagonia, however, is a California benefit corporation. I wrote about the differences between public benefit corporations and benefit corporations here. Ben & Jerry’s is a certified B corporation, but, as far as I know, Ben & Jerry’s has not yet made the legal change to convert to any of the social enterprise forms. I wrote about the differences between benefit corporations and certified B corporations here and here. Just as my co-blogger Joshua Fershee remains vigilant at pointing out the differences between LLCs and corporations, so I will remain vigilant on the social enterprise distinctions. 

Besides my nitpicking on the use of social enterprise terminology, there are a few other things I want to say about this article.     

First, Ello raised $5.5 million dollars, which is not that much money in the financial world, but puts Ello in pretty rare company in the U.S. social enterprise world. The vast majority of U.S. social enterprises are owned by a single individual or family; some social enterprises have raised outside capital, but not many. The increasing presence of outside investors in social enterprise means two main things to me: (1) the social enterprise concept is starting to gain some traction with previously skeptical investors, and (2) we may see a shareholder derivative lawsuit in the near future, which would give us all more to write about. 

Second, Ello included a clause in its charter that “forbids the company from using ads or selling user data to make money.” This provision seems a direct response to the eBay v. Newmark case. The business judgment rule provides significant protection to directors and, at least theoretically, should calm many of the fears of social entrepreneurs. But risk adverse individuals may seek additional layers of protection.

Third, Ello claims that their charter provision “basically means no investor can force us to take a really good financial deal if it forces us to take advertising.” This seems overstated.  Charters can be amended, but at least the charter puts outside investors on notice. This provision in the charter does not, however, protect against a change of heart by the founders and a selling of the company (such as in the case of Ben & Jerry’s sale to Unilever).

Fourth, this October 4, 2014 article claims that Ello is pre-revenue. The NYT Dealbook article notes that “[u]sers will eventually be able to download widgets and modifications, paying a few dollars for each purchase.” (emphasis added). Ello seems to be one of the growing number of technology companies that are being valued by number of users rather than by revenues or profits. Ello “grew from an initial 90 users on Aug. 7 to over a million now, with a waiting list of about 3 million.”

Fifth, even if traditional investors are (somewhat) warming up to social enterprises, social entrepreneurs still seem to be a bit skeptical of traditional investors. When raising money, Ello "drew the attention of the usual giants in the venture capital world. . . . But Mr. Budnitz said he instead turned to investors whom he could trust to back the start-up’s mission, including the Foundry Group, whom he came to know when he lived in the firm’s hometown, Boulder, Colo.” There are increasing sources of capital for social enterprises from investors who also have a stated social goal (See, e.g., JP Morgan’s May 2014 survey of impact investors).

Some in the academic world have wondered if social enterprise is just a fad. While I am confident that the space will and must continue to evolve, if it is a fad, it has already been a long-running one. The names and details of the statutes may change, but I see a growing interest in marrying profit and social purpose, and I think that interest is likely to continue in some form.     

Cross-posted at SocEntLaw.

October 24, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Delaware, Haskell Murray, Social Enterprise | Permalink | Comments (0)

What do Jeremy Bentham and Norway’s Pension Fund Have in Common?

I used to joke that my alma mater Columbia University’s core curriculum, which required students to study the history of art, music, literature, and philosophy (among other things) was designed solely to make sure that graduates could distinguish a Manet from a Monet and not embarrass the university at cocktail parties for wealthy donors. I have since tortured my son by dragging him through museums and ruins all over the world pointing spouting what I remember about chiaroscuro and Doric columns. He’s now a freshman at San Francisco Art Institute, and I’m sure that my now-fond memories of class helped to spark a love of art in him. I must confess though that as a college freshman I was less fond of  Contemporary Civilization class, (“CC”) which took us through Plato, Aristotle, Herodotus, Hume, Hegel, and all of the usual suspects. At the time I thought it was boring and too high level for a student who planned to work in the gritty city counseling abused children and rape survivors.

Fast forward twenty years or so, and my job as a Compliance and Ethics Officer for a Fortune 500 company immersed me in many of the principles we discussed in CC, although we never spoke in the lofty terms that our teaching assistant used when we looked at bribery, money- laundering, conflicts of interest, terrorism threats, data protection, SEC regulations, discrimination, and other issues that keep ethics officers awake at night. We did speak of values versus rules based ethics and how to motivate people to "do the right thing."

Now that I am in academia I have chosen to research on the issues I dealt with in private life. Although I am brand new to the field of normative business ethics, I was pleased to have my paper accepted for a November workshop at Wharton's Zicklin Center for Business Ethics Research. Each session has two presenters who listen to and respond to feedback from attendees, who have read their papers in advance. Dr. Wayne Buck, who teaches business ethics at Eastern Connecticut State University, presented two weeks ago. He entitled his paper “Naming Names,” and using a case study on the BP Oil spill argued that the role of business ethics is not merely to promulgate norms around conduct, but also to judge individual businesspeople on moral grounds. Professor John Hasnas of Georgetown’s McDonough School of Business also presented his working paper “Why Don't Corporations Have the Right to Vote?” He argued that if we accept a theory of corporate moral agency, then that commits us to extending them the right to vote. (For the record, my understanding of his paper is that he doesn’t believe corporations should have the right.) Attendees from Johns Hopkins, the University of Connecticut, Pace and of course Wharton brought me right back to my days at Columbia with references to Rawls and Kant. My comments were probably less theoretical and more related to practical application, but that’s still my bent as a junior scholar.

In a few weeks, I present on my theory of the social contract as it relates to business and human rights. In brief, I argue that multinational corporations enter into social contracts with the states in which they operate (in large part to avoid regulation) and with stakeholders around them (the "social license to operate", as Professor John Ruggie describes it). Typically these contracts consist of the corporate social responsibility reports, voluntary codes of conduct, industry initiatives, and other public statements that dictate how they choose to act in society, such as the UN Global Compact. Many nations have voluntary and mandatory disclosure regimes, which have the side benefit of providing consumers and investors with the kinds of information that will help them determine whether the firm has “breached” the social contract by not living up to its promise. The majority of these proposals and disclosure regimes (such as Dodd-Frank conflict minerals) rest on the premise that armed with certain information, consumers and investors (other than socially responsible investors) will pressure corporations to change their behavior by either rewarding “ethical” behavior or by punishing firms who act unethically via a boycott or divestment.

I contend in my article that: (1) corporations generally respond to incentives and penalties, which can cause them to act “morally;” (2) states refuse to enter into a binding UN treaty on business and human rights and often do not uniformly enforce the laws, much less the social contracts; (3) consumers over-report their desire to buy goods and services from “ethical” companies; and (4) disclosure for the sake of transparency, without more, will not lead to meaningful change in the human rights arena. Instead, I prefer to focus on the kinds of questions that the board members, consumers, and investors who purport to care about these things should ask. I try to move past the fuzzy concept of corporate social responsibility to a stronger corporate accountability framework, at least where firms have the ability to directly or indirectly impact human rights.

As a compliance officer, I did not use terms like “deontological” and “teleological” principles, but some heavy hitters such as Norway's Government Pension Fund, with over five billion Kronos under management, do. The 2003 report that helped establish the Fund’s recommendations on ethical guidelines state in part:

One group of ethical theories asserts that we should primarily be concerned with the consequences of the choices we make. These theories are in other words forward-looking, focusing on the consequences of an action. The choice that is ethically correct influences the world in the best possible way, i.e. has the most favourable consequences. Every choice generates an infinite number of consequences and the decisive question is of course which of the consequences we should focus on. Again, a number of answers are possible. Some would assert that we should focus on individual welfare, and that the action that has the most favourable consequences for individual welfare is the best one. Others would claim that access to resources or the opportunities or rights of the individual are most important. However, common to all these answers is the view that the desire to influence the world in a favourable direction should govern our choices.

Another group of ethical theories focuses on avoiding breaching obligations by avoiding doing evil and fulfilling obligations by doing good. Whether the results are good or evil, and whether the cost of doing good is high, are in principle of no significance. This is often known as deontological ethics.

In relation to the Petroleum Fund, these two approaches will primarily influence choice in that deontological ethics will dictate that certain investments must be avoided under any circumstances, while teleological ethics will lead to the avoidance of investments that have less favourable consequences and the promotion of investments that have more favourable consequences.

Recently, NGOs have pressured firms to speak on out human rights abuses at mega-events and have published their responses. The US government has made a number of efforts, some unsuccessful, to push companies toward more proactive human rights initiatives. These issues are here to stay. As I formulate my recommendations, I am looking at the pension fund, some work by ethicists researching marketing principles, writings by political and business philosophers, and of course, my old friends Locke, Rousseau, Rawls and Kant for inspiration. If you have ideas of articles or authors I should consult, feel free to comment below or to email me at mnarine@stu.edu. And if you will be in Philadelphia on November 14th, register for the session at Wharton and give me your feedback in person.

 

 

 

 

October 24, 2014 in Books, Business School, Call for Papers, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Manesh on Johnson & Ricca on Revlon

Mohsen Manesh (Oregon) has posted a new article entitled Nearing 30, Is Revlon Showing Its Age?  I have read a fair number of Mohsen’s articles and am consistently impressed.

The abstract reads:

Nearly thirty years ago, in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court famously dictated that in certain transactions involving a “sale or change in control,” the fiduciary obligation of a corporation’s board of directors is simply to “get[] the best price for the stockholders.” Applying a novel remedial perspective to this iconic doctrine, in The Dwindling of Revlon, Professor Lyman Johnson and Robert Ricca argue that Revlon is today of diminishing significance. In the three decades since, the coauthors observe, corporate law has evolved around Revlon, dramatically limiting the remedial clout of the doctrine. In this Essay, I show how two recent Delaware Chancery Court decisions — Chen v. Howard-Andersen and In re Rural Metro — underscore the expansive reach of Revlon and, therefore, the limits of Johnson and Ricca’s thesis. Instead, I suggest the dwindling of Revlon, if it is indeed dwindling, may be best observed from what is happening outside the pressed edges of corporate law, where other competing bodies of business law have emerged rejecting Revlon’s fiduciary mandate.

The article is a nice response to a thoughtful article by Lyman Johnson and Rob Ricca entitled The Dwindling of Revlon.

Both articles are highly recommended.

In addition, Stephen Bainbridge, Christopher Bruner, Franklin Gevurtz, and Vice Chancellor Travis Laster have all weighed in with interesting articles on Revlon over the last few years.

October 24, 2014 in Business Associations, Corporate Governance, Corporations, Delaware, Haskell Murray | Permalink | Comments (0)

Wednesday, October 22, 2014

Corporate Law Professors Comment on Proposed HHS Definition of "Eligible Organization" for Hobby Lobby Accommodation

In response to the Department of Health and Human Services' Proposed Regulation and Request for Comments regarding the definition of "eligible organization" (see earlier post here) at least two groups of law professors have weighed in on the issue.

The first comment letter, available here, was submitted by the U.C. Berkeley corporate law professors and encourages the Department to adopt a definition based upon the veil piercing theory.  "We ... propose that for purposes of defining an “[W]e ... suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego."  The comments argue that utilizing the veil-piercing theory avoids the consequences of a setting an arbitrary number of shareholders thus creating a rule that would be "seriously under-and-over-inclusive, capturing corporations that meet the numerical test but for which shareholders are not the alter egos of the corporation, as well as failing to capture corporations with a relatively large number of shareholders that are all united in their interests and are alter egos of one another."

The second comment letter on which I worked and was joined by some editors of this blog as signatories, is available here.  This comment letter, signed by 43 corporate law professors, was produced through the coordinating efforts of the The Public Rights / Private Conscience Project at Columbia Law School headed by  Katherine Franke, and the project's executive director,  Kara Loewentheil.   This letter too encourages the HHS to adopt an approach that requires an "identity of interests."  These comments suggest a blueprint for establishing an identity of interest, namely a focus on "entities (1) with a limited number of equity holders/owners, (2) that demonstrate religious commitment, and (3) submit evidence of unanimous consent of equity holders to seek an accommodation on an annual basis."  The comments provide additional criteria under each of these three elements to operationalize the holding in Hobby Lobby.

-Anne Tucker

October 22, 2014 in Anne Tucker, Constitutional Law, Corporate Governance, Current Affairs | Permalink | Comments (0)

Tuesday, October 21, 2014

Law and Ethics of Big Data│Bloomington, IN│April 17-18, 2015

Below is a call for papers that I received by e-mail earlier today.  

RESEARCH COLLOQUIUM: CALL FOR PAPERS

Law and Ethics of Big Data

April 17 & 18, 2015

Indiana University- Bloomington, IN.

Abstract Submission Deadline: January 17, 2015

A research colloquium, “Law and Ethics of Big Data,” co-hosted by Professor Angie Raymond of Indiana University and Janine Hiller of Virginia Tech, is sponsored by the Center for Business Intelligence and Analytics in the Pamplin College of Business, Virginia Tech; the Kelley School of Business at Indiana University; and the Poynter Center for the Study of Ethics and American Institutions at Indiana University.

Up to six invitations for research presentation slots will be extended based on this call for papers. In order to receive consideration, researchers are invited to submit an abstract by January 17, 2015.

Continue reading

October 21, 2014 in Business Associations, Call for Papers, Conferences, Ethics, Haskell Murray | Permalink | Comments (0)

Remaining Vigilant: Getting Courts to Recognize LLCs Aren't Corporations

In Business Organizations today, I spent some time reviewing the differences between varying entity types.  I made the point that courts often make mistakes on this front, especially with LLCs and corporations, and it reminded me I needed to follow up on my own pet LLC protection project. 

Over the years, I have taken more than a passing interest in how often courts refer to (and ultimately treat) LLCs. I have this thing where I think LLCs are not treated as well doctrinally as they should. In February of this month, I made the argument,  Courts Should Get the Doctrinal Distinction Between LLCs and Corporations, and I have made other similar arguments (herehere, and here).  

As part of this I committed to noting when courts refer to LLCs as "limited liability corporations" and not "limited liability companies," as they should.  Almost one year ago, I noted this continuing theme, repeating the search I did for a 2011 article, where I found in a May 2011 search of Westlaw’s “ALLCASES” database that there were 2,773 documents with the phrase “limited liability corporation," in describing an LLC. (That article is here.)  Things are not getting much better.  Since Oct. 15, 2013, there have been 410 more cases making that same mistake. Just since my February 4, 2014 post, reference above, there have been 300 of those cases.  

As I read through some of these cases, many of which don't seem to turn on whether the entity is a limited liability company or a corporation, I have noticed that some of the case may have an entity structure issue that no one is raising.  That's a failure of at least one of the parties, and potentially the court.  I plan to follow up with a few example of such cases, but for now, I'll part with my familiar refrain: as long as courts keeping describing limited liability companies as corporations, I'll keep pointing it out.

 

October 21, 2014 in Business Associations, Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Monday, October 20, 2014

Convertibles, Exchangeables, and Derivatives . . . . Oh My!

I typically teach Corporate Finance as a planning and drafting course to 3L law students in the fall semester each academic year.  (See my part of this transcription for some details.)  This year is no different in that regard.  I really like my Corporate Finance class this fall.  The students all seem pretty motivated (although not in every class meeting) and are asking relevant "how to" questions in class.

I am in the midst of teaching my unit on convertible, exchangeable, and derivative instruments at the moment.  This semester, I am teaching that unit in three 75-minute parts (after teaching one 75-minute class on hybrid instruments).  The first part is an introduction to the instruments themselves.  What are they and how do they operate?  Where are the provisions authorizing them in state corporate law statutes?  What do they look like and what are the key components of the operative (conversion, exchange, or exercise) provisions?  The second part is a dive into the poison pill as an intriguing example.  The third part is a look at common litigation issues affecting parties' rights under these kinds of instruments (focusing on things like the characterization of transactions not expressly provided for in determining the applicability and effect of antidilution adjustment provisions and interactions between conversion and redemption provisions). 

I really enjoy teaching this part of the course, but I keep feeling like I am missing something.  Do any of you teach planning and drafting in a corporate finance context?  Do you focus on these instruments?  If so, what topics do you teach and hone in on?  I am writing a casebook for use in this kind of course and would love to make it relevant to as many folks as possible.  Please respond in the comments here or in an email message.  I would appreciate your feedback and guidance.

While you are at it (or even if you're not), I also would be grateful if folks would weigh in on whether hybrid instruments should be taught separately from or together with convertibles, exchangeables, and derivatives.  Do you/would you teach convertibles, exchangeables, and derivatives as a type of hybrid instrument? Or would you call an instrument "hybrid" only if it, e.g., combines core elements of debt and equity at the same time?  I look forward to reading what you have to say on any of this.

October 20, 2014 in Corporate Finance, Joan Heminway, Teaching | Permalink | Comments (0)

14th Annual Transactional Clinic Conference - April 24, 2015

The following announcement comes to us from Alicia Plerhoples (Georgetown).  The 14th annual transactional clinic conference will be held at UMKC School of Law in Kansas City, Missouri and the Ewing Marion Kauffman Foundation is serving as a host partner. Proposals are due by December 15, 2014 and more information about the conference is available after the break.

14TH ANNUAL TRANSACTIONAL CLINICAL CONFERENCE

CALL FOR PROPOSALS, PAPERS, & PANELISTS

Teaching and Writing Methods of the Transactional Clinician

This year’s conference theme is Teaching and Writing Methods of the Transactional Clinician. The conference will have two tracks: (1) a “Nuts & Bolts” Teacher Workshop and (2) a “Pen & Paper” Scholarship Workshop. The Planning Committee seeks proposals for (1) presentations, (2) papers, and (3) panelists as outlined below.   

Continue reading

October 20, 2014 in Call for Papers, Conferences, Haskell Murray, Law School | Permalink | Comments (0)

Job Opening: University of Detroit Mercy

The University of Detroit Mercy School of Law is looking for someone to teach commercial or business law courses. A copy of the job listing is here.

October 20, 2014 | Permalink | Comments (1)

Will We Ever Have a Crowdfunding Exemption?

928 days.

That’s how long we’ve been waiting for the SEC's exemption for crowdfunded securities offerings.

The JOBS Act, which authorized the crowdfunding exemption, was signed by President Obama on April 5, 2012. The act required the SEC to enact the necessary rules within 270 days. The SEC has now missed that deadline, December 31, 2012, by 658 days.

To put it in context, when the JOBS Act passed, I had three grandchildren. I now have six. I may have great grandchildren by the time the SEC acts.

The 270-day deadline was unrealistic, given the time required to draft rules from scratch and the delay imposed by the notice-and-comment requirements of the Administrative Procedure Act. But the SEC finally proposed the rules on October 23, 2013, almost a year ago. The deadline for commenting on the proposal expired last February and the SEC still hasn’t done anything. It’s getting a little ridiculous.

I’m on record that the crowdfunding exemption passed by Congress is unlikely to be very useful. (See my article analyzing the JOBS Act’s crowdfunding provisions.) But we won’t know until we actually have a crowdfunding exemption. At the SEC’s current rate of progress, some new technology may have supplanted the Internet before that happens, and we’ll have to start all over again.

October 20, 2014 | Permalink | Comments (0)

Sunday, October 19, 2014

ICYMI: Tweets From the Week (Oct. 19, 2014)

October 19, 2014 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 18, 2014

Must … resist … joke … about …. no wonder they … missed Madoff….

The Columbia Journalism Review blog reports:

Since 2008, one particular federal government agency has aggressively investigated leaks to the media, examining some one million emails sent by nearly 300 members of its staff, interviewing some 100 of its own employees and trolling the phone records of scores more.  It’s not the CIA, the Department of Justice or the National Security Agency.

It’s the Securities and Exchange Commission. …

All that effort was for naught. Despite the time and resources that have been poured into them, none of the SEC’s eight investigations in the past six years have uncovered the leakers.…

The article further points out that the SEC’s pursuit of leakers has ramped up in the wake of the financial crisis, and it has no problem with leaks (if you call them “leaks”) when the leaks make the agency look good.

The SEC’s argument is that it needs to protect against the release of market moving information, and I'm quite sympathetic to that point, but the leaks involved here seem to be at least in part about concealing internal problems or dissension within the agency.  

Considering how at least two Commissioners have recently spoken out about their dissatisfaction with the SEC’s enforcement efforts (not to mention the best SEC speech ever), I tend to be sympathetic to the argument that sunlight - or at least less intimidation - is in order.

(Also, if they can't catch their own leakers.... )

October 18, 2014 in Ann Lipton | Permalink | Comments (2)

Friday, October 17, 2014

Alison Lundergan Grimes and Public Speaking Classes

256px-Alison_Lundergan_Grimes

(Photo courtesy of Wikimedia Commons, by Patrick Delahanty from Louisville, United States)

Alison Lundergan Grimes and I both graduated from Rhodes College, a small liberal arts college in Memphis, TN. I have not spoken to Alison since college, so I was surprised to see her mentioned on CNN a number of weeks ago as the democratic nominee for U.S. Senator from Kentucky. Since then, she has been in the news quite a bit. She will face Minority Leader Mitch McConnell, in what has turned into one of the hotter Senate races this year.    

Even in college I did not know Alison well, but we did take a public speaking class together. Alison was the type of student who was often in a suit and pearls in class, while I wore flip flops year-round and whatever wrinkled, Goodwill-purchased clothes were the most clean. She was a Chi Omega (easily the most refined group on campus), and I was a part of the football team for all four years (if there was a rowdier group on campus than the football team, it was the rugby club, which I joined because my playing time on the football team was minimal).

The public speaking class that Alison and I took together was definitely one of the most practical classes I took. Each student gave short speeches almost every day, and we were video-taped. We then watched and critiqued the videos as a class. Almost all of us had at least a few nervous habits, but we all appeared to break them after our nervous habits were seen on the screen and pointed out in front of the entire class. It was all quite embarrassing, but effective. I think there were only about a dozen of us in the class, which made this sort of personal attention possible. Our final exam was a presentation to an audience of 100 or more people, and our professor had lined up enough options for each of us, which must have taken a lot of time to organize. 

I had some opportunities to do public speaking in law school. I know those who competed in moot court and trial advocacy had even more opportunities, but I think we should try to give our students even more chances to hone their public speaking skills. Regardless of post-graduation job, almost all students will need public speaking skills, even if their audiences are small. I try to include student presentations in as many of my classes as I practically can.   

While we can all work public speaking into at least some of our classes, a required class fully dedicated to public speaking might be worthwhile. Do any law schools do this? I know public speaking is usually a part of a legal writing or litigation class, but I have not heard of a required course devoted specifically to public speaking.

Update: I should note that Alison is also legally trained. She is a graduate of American University's Washington College of Law.

October 17, 2014 in Business School, Haskell Murray, Law School, Teaching | Permalink | Comments (6)

Thursday, October 16, 2014

Comment from the Student Archives- the Real Housewives Make an Appearance in Business Associations

I plan to write a more traditional blog post later if I have time, but I am in the midst of midterm grading hell. I was amused today in class when a student compared the drama of the Francis v. United Jersey Bank case with the bankruptcy, bank, and mortgage fraud convictions of husband and wife Joe and Teresa Guidice from the reality TV hit the Real Housewives of New Jersey.

I had provided some color commentary courtesy of Reinier Kraakman and Jay Kesten’s The Story of Francis v. United Jersey Bank: When a Good Story Makes Bad Law, and apparently Mrs. Pritchard’s defenses reminded the student of Teresa Guidice’s pleas of ignorance. Other than being stories about New Jersey fraudsters, there aren’t a lot of similarities between the cases. Based on my quick skim of the indictment I don’t think that Teresa served on the board of any of the companies at issue--Joe apparently had an LLC and was the sole member, and the vast majority of the counts against the couple relate to their individual criminal conduct. In addition, Teresa is also going to jail, and no one suffered that fate in United Jersey. But luckily, she may see a big payday from a purported book deal and reality TV show spinoff after she’s out, possibly disproving the adage that crime doesn’t pay.

 

October 16, 2014 in Business Associations, Corporations, Current Affairs, Ethics, Law School, LLCs, Marcia Narine, Teaching, Television | Permalink | Comments (0)

Wednesday, October 15, 2014

Insider Trading

Whether you are teaching insider trading as part of a corporations or a securities regulation course, you practice in the area, or you like these cases because they contain some of the most interesting fact patterns..... I have a couple of gems for you.

First, the on line edition of the New Yorker features two great stories on insider trading.  The first story, The Empire of Edge written by Patrick Radden Keefe, focuses on the conviction of a trader at S.A.C. capital for trades made 10 days before the release of results from clinical trials on an alzheimer's medication. The hedge fund reversed its $.785B position in two companies testing the drug and took a short position against the companies earning the fund $275M. In classic long-form journalism at its best, the story is riveting as it unfolds.  The second story, A Dirty Business by George Packer, tells the story of Raj Rajaratnam, head of the Galleon hedge fund at the heart of the 2009 informant ring scandal, the prosecution and the SEC's stance on enforcement.  

For those of you who are interested, the SEC posted a running list of insider trading enforcement actions here.

-Anne Tucker

October 15, 2014 in Business Associations, Corporations, Securities Regulation | Permalink | Comments (1)

Tuesday, October 14, 2014

Economics in Business Law: Regulatory Capture and The Nobel Laureate

To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics.  I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law.   This week's announcement of  Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.  

I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more.  A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory.  Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs.  The idea of mechanism design runs throughout his papers in many different guises.  Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts.  That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.  He has shown a remarkable breadth and depth over the course of the last thirty or so years.

Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.") 

The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:

  • "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
  • "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."

Here's the abstract (paper available on JSTOR):

The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).

It's worth a read, even if the math part is a little beyond some of us. 

H/T: Geoffrey Manne

October 14, 2014 in Business Associations, Current Affairs, Joshua P. Fershee, Law and Economics, Securities Regulation | Permalink | Comments (1)

Monday, October 13, 2014

More from the Student Comment Archives . . . . Swiss Vereins?!

OK.  I cannot compete with the brevity or humor of the student comment Steve Bradford posted earlier today.  [sigh]  But my post today does relate to a student comment/question--one from my Business Associations course earlier this semester.  Specifically, a student posted the following on our class discussion board under the title "Swiss Vereins and piercing the veil":

I was curious about Swiss Vereins and how that works when trying to pierce the veil since a Swiss Verein consists of independent offices that have limited liability amongst them. Would it have been beneficial for Westin [referring to the Gardemal v. Westin Hotel Co. case] to have used such a structure instead of having Westin Mexico be a subsidiary? It seems that most Swiss Vereins are large law firms, such as DLA Piper and Baker & McKenzie or accounting firms, such as Deloitte. 

This is the first time a student has asked me about the Swiss verein structure in my almost fifteen years of teaching.  My familiarity with Swiss vereins comes solely from what I have read and heard over the years.  I never advised a firm in setting one up (or deciding not to).  Here is the core substance of my response:

Thanks for asking about this.  Swiss vereins . . . are non-entity structures, blessed under the laws of Switzerland, for conducting business through a formal association of multiple firms.  The firms collectively agree to a set of bylaws that govern their joint management/operations through a management board.  In this way, a Swiss verein functions like a corporate group without a separate entity (parent/holding company) owning all of the businesses at the top. So, you can see how it might be an advantage when it comes to veil piercing--although there have been cases in which judges have blessed what I think of as sideways veil piercing in the United States, in which a sister firm is held liable for the obligations of her brother, so to speak.  Bottom line?  The Swiss verein provides a flexible framework for doing business jointly among many firms.
 
Why not use this structure in lieu of creating a corporate family?  I have spent some time thinking about it.  I am no expert on this way of doing business.
 
I suppose the main reasons are the flip side of the coin form the advantages of the Swiss verein.  Corporate structures provide off-the-shelf rules for management and control and cost-sharing and all that.  In a Swiss verein, all of that needs to be scripted out in significant detail in the verein's bylaws, since there is no statutory default rule to fall back on.  So, they are expensive to set up and maintain.  Also, this often means that participants in the verein are more loosely tied together in terms of the norms of their joint operations.  Each firm in the verein is more siloed--autonomously managed and its own profit center.  This can have advantages and disadvantages, but may be less desirable in businesses that desire uniform operations and good employee morale as among all of the constituent firms (which may be harder to achieve in a verein).  Also, the perceptions of outsiders may be an issue, based on what I have read.  People are just not as familiar with the verein structure, and they don't understand it, which may make them more hesitant to do business with it.  And finally, there is no guarantee that the veil of limited liability available under Swiss law in the verein structure, which generally is deemed to be strong, will not be pierced in a judicial proceeding.
 
I am sure some of you are more familiar with the actual operation of Swiss vereins in context and may have some valuable insights.  If so, have at it and share them here.  I just thought it was a provocative question and would love to get my student and her colleagues the best answer . . . .

October 13, 2014 in Business Associations, Corporations, Joan Heminway | Permalink | Comments (0)

Best Student Comment Ever

Several years ago, I was at the front of the classroom preparing for my Business Associations class when a student approached and asked if her friend could sit in on the class. “My friend’s interested in law school,” she said, “and I’m trying to talk her out of it."

No comment needed. Res ipsa loquitur.

October 13, 2014 | Permalink | Comments (3)

Sunday, October 12, 2014

ICYMI: Tweets From the Week (Oct. 12, 2014)

October 12, 2014 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 11, 2014

Loss causation by hindsight

One of the most complex issues in Section 10(b) litigation concerns loss causation, i.e., the question whether the fraud ultimately resulted in a loss to the plaintiffs.

The reason loss causation is so complex is because companies rarely simply admit to wrongdoing, out of the blue.  Most of the time, the "truth" behind the fraud - whatever that truth may be - is revealed gradually or indirectly.   The first revelations concerning an accounting fraud, for example, might simply be a drop in earnings, as the company tries to "make up" for past premature revenue recognition without admitting to wrongdoing.  A company might announce a slowdown in product sales without ever admitting that it had previously lied about the product's features.  A key officer might resign without explanation.  And very often, the first rumblings of a problem come from the announcement of a government investigation - without any further details - that may or may not ultimately culminate in an enforcement action.

In response to any of these announcements, the company might experience a stock price drop, even though the market either is unaware of the possibility of fraud or uncertain as to whether a fraud exists and/or its scope.  In such situations, can the fraud be said to have "caused" a loss?

In a pair of decisions by the Fifth and Ninth Circuits, it appears that whether such early warning signals constitute "loss causation" depends very much on what happened later.

[More under the cut]

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October 11, 2014 in Ann Lipton | Permalink | Comments (5)