Thursday, February 22, 2018
The Supreme Court just released its opinion in Digital Realty Trust, Inc. v. Somers. The case resolves a controversy over whether employees making internal reports of securities law violations qualify for Dodd-Frank's whistleblower protections. The Court ruled that internal reporters do not qualify because they are not "whistleblowers" under the statutory definition. Writing for the Court, Justice Ginsberg focused on the the statutory provision specifically defining whistleblowers as persons that provide "information relating to a violation of the securities laws to the Commission." Under this strict reading, a person that called a company's ethics hotline to blow the whistle on misconduct in their office would not qualify as a whistleblower unless she also went to the SEC with the information.
The Court read the definition and the Dodd-Frank provision in light of existing whistleblower protections. Sarbanes-Oxley already protects internal reporters from retaliation. Yet pursuing a Sarbanes-Oxley claim requires a whistleblower to jump through some quick procedural hoops. The first step is filing a complaint with the Department of Labor within 180 days of the retaliation. If Labor does not issue a decision within 180 days of the whistleblower's filing, the whistleblower can go to court for reinstatement, backpay with interest, and litigation costs. In contrast, Dodd-Frank provides a better remedy. A qualifying whistleblower can go directly to federal court anytime within six years and seek double back pay plus interest.
There is another piece to this puzzle. Dodd-Frank also contains a bounty program. Whistleblowers that report information to the SEC may qualify for awards if the SEC recovers significant funds because of the information provided by a whistleblower's tip. News reports indicate that the SEC may soon announce an eye-popping $48 million award for a whistleblower under that program.
A statutory definition limiting "whistleblowers" as persons that provide information to the SEC makes sense for the bounty program. It makes less sense for the anti-retaliation provision. To protect internal reporters from retaliation, the SEC had used its rule-making authority to craft a different definition for purposes of the anti-retaliation provision, covering persons that make internal reports. The Supreme Court rejected that contextual definition and limited Dodd-Frank's more generous protections to persons that "tell the SEC" about their concerns.
What does this mean in practical terms? It means that employees with concerns about actual or potential securities law violations should make reports to the SEC before (or in lieu of) reporting their concerns internally. If they do not report to the SEC, they'll lose the more significant Dodd-Frank protections.
If reporting behavior shifts in the wake of this decision, the SEC's bounty program may receive more noise than signal. If persons report to the SEC simply to secure protection from retaliation, the SEC may not receive as much targeted and useful information as it would otherwise. Increased volume may diminish the SEC's ability to focus on the most useful tips.
There is room to be skeptical about whether tip volume will materially increase after this decision. A potentially culpable potential whistleblower faces a dilemma. She has to consider whether blowing the whistle to the SEC would somehow serve as an admission of wrongdoing. It'll be interesting to see if the SEC receives an increased volume of tips in the wake of this decision.
Wednesday, February 21, 2018
"Citizens United gave virtually no weight to Congress's findings .... Instead, the Court summarily concluded 'that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.'" 2017 B.Y.U. L. Rev. 525 #corpgov— Stefan Padfield (@ProfPadfield) February 19, 2018
"Public Choice and the Origins of the Radical Right: A Review of Nancy Maclean's Democracy in Chains – The Deep History of the Radical Right's Stealth Plan for America ... a heck of a read, but ... fundamentally flawed" https://t.co/Sekvl6oj1m #corpgov— Stefan Padfield (@ProfPadfield) February 19, 2018
"While prosecutors have been experimenting with reform-as-punishment, the dominant academic and political discourses on corporate crime still focus on deterrence and retribution." 103 Iowa L. Rev. 507 #corpgov— Stefan Padfield (@ProfPadfield) February 20, 2018
"justices ruled 9-0 ... that the Dodd-Frank Act, a 2010 Wall Street reform law, protects whistleblowers from retaliation only if they have brought their claims of securities law violations directly to the SEC" https://t.co/6foOwnRtl7 #corpgov— Stefan Padfield (@ProfPadfield) February 21, 2018
This may be the first time a company’s cost of capital is explicitly tied to its third-party-verified ESG performance. https://t.co/FEIgzjNMeg— Helen Bird (@Birdsperch) February 20, 2018
Tuesday, February 20, 2018
The Columbia Law School/Columbia Business School Program in the Law and Economics of Capital Markets is seeking a full time Capital Markets Research Fellow. The incumbent would be appointed as a Postdoctoral Research Scholar. The appointment will run from July 1, 2018 to June 30, 2020.
This position is intended for a person who expects to begin a law school teaching career at the start of the 2020-21 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise. More information is available here.
Law Teaching for Adjunct Faculty and New Professors Conference
Law Teaching for Adjunct Faculty and New Professors is a one-day conference for new and experienced adjunct faculty, new full-time professors, and others who are interested in developing and supporting those colleagues. The conference will take place on Saturday, April 28, 2018, at Texas A&M University School of Law, Fort Worth, Texas, and is co-sponsored by the Institute for Law Teaching and Learning and Texas A&M University School of Law.
Sessions will include:
Course Design and Learning Outcomes – Michael Hunter Schwartz
Assessment – Sandra Simpson
Active Learning – Sophie Sparrow
Team-based Learning – Lindsey Gustafson
Technology and Teaching – Anastasia Boles
Details are here.
CALL FOR PRESENTATION PROPOSALS
Institute for Law Teaching and Learning—Summer 2018 Conference Exploring the Use of Technology in the Law School Classroom June 18-20
Gonzaga University School of Law
The Institute for Law Teaching and Learning invites proposals for conference workshops addressing the many ways that law teachers are utilizing technology in their classrooms across the curriculum. With the rising demands for teachers who are educated on active learning techniques and with technology changing so rapidly, this topic has taken on increased urgency in recent years. The Institute is interested in proposals that deal with all types of technology, and the technology demonstrated should be focused on helping students learn actively in areas such as legal theory and knowledge, practice skills, and guided reflection, etc. Accordingly, we welcome proposals for workshops on incorporating technology in the classrooms of doctrinal, clinical, externship, writing, seminar, hybrid, and interdisciplinary courses.
The Institute invites proposals for 60-minute workshops consistent with a broad interpretation of the conference theme. The workshops can address the use of technology in first-year courses, upper-level courses, required courses, electives, or academic support roles. Each workshop should include materials that participants can use during the workshop and when they return to their campuses. Presenters should model effective teaching methods by actively engaging the workshop participants. The Institute Co-Directors are glad to work with anyone who would like advice on designing their presentations to be interactive.
Second, our summer conference will be at Gonzaga Law, June 18-20 and will focus on the use of technology in the classroom. We're currently accepting proposals for that conference (and the deadline has been extended to March 2). More info here.
Monday, February 19, 2018
Mark your calendars!
March 1, 2018 is the deadline for nominations for the inaugural award of the Grunin Prize.
The Grunin Prize has been created to recognize the variety and impact of lawyers’ participation in the ways in which business, whether for-profit or not-for-profit, is increasingly advancing the goals of sustainability and human development.
Lawyers, legal educators, policymakers, in-house counsel, or legal teams that recently have developed innovative, scalable, and social entrepreneurial solutions using existing law, legal education, or the development of new legal structures or metrics are eligible for nomination. And self-nominations are encouraged!
The Grunin Prize will be presented on June 5, 2018 at the IILWG/Grunin Center conference. To learn more about the Grunin Prize and the nomination process, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship/grunin-prize.
June 5-6, 2018 are the dates of the Impact Investing Legal Working Group (IILWG)/Grunin Center for Law and Social Entrepreneurship’s 2018 Conference on “Legal Issues in Social Entrepreneurship and Impact Investing – in the US and Beyond.” This year’s IILWG/Grunin Center’s annual conference will take place at NYU School of Law in New York City.
The themes of this year’s conference include:
· Embedding Impact into Deal Structures and Terms
· Policy and Regulation of Impact Investing and Social Entrepreneurship
· Blending and Scaling Capital for Impact
· Building Investment-Ready Social Enterprises
· Mainstreaming Impact
Last year over 250 lawyers and other stakeholders attended this groundbreaking conference for lawyers working in the fields of social entrepreneurship and impact investing. In a post-conference survey of these conference attendees, we learned that:
· Over 99% of survey respondents rated the conference as “excellent” (over 76%) or “very good” (23%);
· Over 84% of survey respondents were very likely to recommend attending this conference to others; and
· Over 64% of survey respondents made 6 or more new connections at this conference.
Come join this growing community of legal practice!
Conference registration will open in April. For more information about the conference, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship.
June 7, 2018 is the date of the first Grunin Center Legal Scholars convening. This convening, which is scheduled to take place immediately after the IILWG/Grunin Center Annual Conference, is intended to advance legal scholarship in the fields of social entrepreneurship and impact investing by bringing together legal scholars who are writing and researching in these fields and introducing them to the legal/policy challenges and opportunities that legal practitioners are facing in these fields.
Law school faculty (fulltime and adjunct), other academic personnel working fulltime in law schools who are engaged in legal scholarship, practitioners who are engaging in legal scholarship, and professors who are teaching law in other schools yet are engaging in legal scholarship are invited to join this convening.
If you are interested in joining this community of legal scholars, please contact the Grunin Center (email@example.com) and we will send you more information about the June 7, 2018 Legal Scholars convening.
Helen Scott and Deborah Burand
Co-Directors, Grunin Center for Law and Social Entrepreneurship
New York University School of Law
245 Sullivan Street, 5th Floor
New York, NY 10012
Sunday, February 18, 2018
"striking to encounter ... successful companies ... under the ... control of a self-appointing board of directors whose compensation is divorced from the profitability of the company & who cannot be removed or replaced by anyone except themselves" https://t.co/ZsdRNJRcRf #corpgov— Stefan Padfield (@ProfPadfield) February 13, 2018
"evidence that the current state of sustainability disclosure is inadequate for investment analysis and that these deficiencies are largely problems of comparability and quality that cannot readily be addressed by private ordering" https://t.co/R0xVCtTtxx #corpgov— Stefan Padfield (@ProfPadfield) February 14, 2018
Saturday, February 17, 2018
The possibility lurking in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 2017 WL 6375829 (Del. Dec. 14, 2017), has now materialized.
For those of you just joining us, in Dell and DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Delaware Supreme Court threw some cold water on the practice of appraisal arbitrage. The two decisions suggest that in an appraisal action, courts should not try to conduct their own valuation of a company except in unusual circumstances; instead, where the deal was negotiated appropriately, the deal price itself represents the best evidence of fair value.
That alone would be enough to discourage would-be appraisers, absent evidence of significant dysfunction in the process by which the deal price was reached, but the decisions went further: both contained extensive endorsements of the efficient markets hypothesis and the accuracy of market pricing. In the context of the opinions themselves, the market price discussions were puzzling, because they played little role in the Court's actual analysis. In both cases, the Court ultimately suggested that the deal prices - which were above market price - were appropriate. At the same time, however, in neither case did the defendants argue that the deal price included value arising from the merger itself (which is unavailable in an appraisal action) - a point that the DFC court in particular highlighted.
That left open the possibility that in future cases, defendants would be able to successfully argue that the market price of a publicly traded company is the best evidence of its value, and that any premium above that amount represents value arising out of the merger. Such an argument would leave appraisal petitioners with, at best, market price - which is usually a figure less than the deal price, rendering the appraisal remedy itself not worth pursuing for most publicly-traded companies. Worse, it would do so even in situations where there were significant problems in the deal negotiations. After all, no matter how hair-raising the process by which the deal price was reached, if that price was above market price - and if market price is evidence of the standalone fair value of the target as a going concern - then appraisal provides no remedy.
Well, that's what just happened. In Verition Partners Master Fund, Ltd., et al. v. Aruba Networks, Inc., C.A. No. 11448-VCL, memo. op. (Del. Ch. Feb. 15, 2018), VC Laster concluded that after Dell, he had no choice but to accept the market price as the best evidence of the target's fair value - even in the face of evidence that the acquirer made an employment offer to the target's CEO while negotiations were continuing (in violation of a prior agreement with the target, and without the Board's knowledge), and in the face of evidence that the target's financial advisors were trying to curry favor with the acquirer. As a result, he awarded the dissenters the pre-deal market price of $17.13 per share, a figure significantly below the merger price of $24.67 per share.
It appears that unless the Delaware Supreme Court steps in to say this isn't what it meant in Dell and DFC, going forward, appraisal arbitrageurs will have to show both that there were dysfunctions in deal negotiations, and that there were significant reasons to distrust the pre-deal market price, before they can hope to come out ahead. That'll be quite an uphill climb.
Friday, February 16, 2018
Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era
This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:
With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration.
Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.
February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)
Thursday, February 15, 2018
Massachusetts Alleges Scottrade Used Emotional Manipulation and Sales Contests for Retirement Accounts
Earlier today, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Scottrade. The complaint alleges that Scottrade "knowingly violated its own internal policies designed to ensure compliance with the United States Department of Labor ("DOL") Fiduciary Rule by running a series of sales contests involving retirement accounts." It may be the first state enforcement action seeking to force brokerages to comply with the DOL Fiduciary Rule.
More specifically, Massachusetts took issue with Scottrade's sales contests because the DOL's Fiduciary Rule requires that "advice to retirement account customers must be based on the best interest of customers, not the best interests of the firm." On paper, Scottrade had enacted impartial conduct standards for its customers' retirement accounts. The brokerage's compliance manual includes a subsection on incentives, saying:
The firm does not use or rely upon quotas, appraisals, performance, or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended to reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement Account clients or prospective Retirement Account clients.
Despite this provision and the DOL Fiduciary Rule, Scottrade allegedly ran national sales contests and offered rewards for selling customers and causing them to move their assets to Scottrade. How much of an impact the sales contests had on employee behavior may be difficult to know. An internal email from a Scottrade Divisional Vice President seems to indicate that the contest had an impact on employee behavior:
The first week of the Q3 "RUN-THE-BASSES" contest is done, and we have a few regions off to a SCREAMING start  You certainly knocked the cover off the ball! Some would say you knocked it out of the park! Very soon, we will get an official count on how we did, and more exciting, a chance to see where we stack-up against our peers on our official scoreboard! [. . .] Happy Selling!
In contrast to the intense internal focus on these sales contests, Scottrade's retirement customers were not always aware of the incentives that might be shaping the financial advice they received. One representative told the Massachusetts enforcement section that the prizes and sales contests were not disclosed to clients during the conversations.
The Massachusetts complaint also contains troubling allegations that Scottrade trained its staff to identify customers' emotional needs and then use them to gather new assets, including a focus on emotional needs that "are not rational or logical." The complaint alleges that "Scottrade's own internal-use materials instructed agents to target a client's 'pain point' and emotional vulnerability," with training sessions lauding "the use of emotion over logic in getting a client to bring additional assets to the firm." It's difficult to square using customers emotional needs to manipulate them into using Scottrade with giving advice in the best interest of customers. The Massachusetts complaint does not reveal whether the Scottrade compliance manual contains any provision about the appropriate level of emotional manipulation for retirement customers.
Now that Massachusetts has filed this administrative complaint, it opens up questions about what happens next. Other states may follow after Massachusetts and file their own enforcement actions. It's also possible that FINRA will bring its own enforcement proceeding. FINRA Rule 3110 requires firms to "establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations." FINRA might also consider whether Scottrade violated FINRA Rule 2010, requiring its member firms to "observe high standards of commercial honor and just and equitable principles of trade."
Wednesday, February 14, 2018
Recent (overdue) additions to my SSRN page:
A New Social Contract: Corporate Personality Theory and the Death of the Firm, 101 Minnesota Law Review Headnotes 363 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123349
Socio-Economics: Challenging Mainstream Economic Models and Policies, 49 Akron Law Review 539 (2016). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123817
The Role of Corporate Personality Theory in Opting Out of Shareholder Wealth Maximization, 19 Transactions: The Tennessee Journal of Business Law 415 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123795
The Inclusive Capitalism Shareholder Proposal, 17 UC Davis Business Law Journal 147 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123823
Tuesday, February 13, 2018
I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.
To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals. I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale. Anyway, I hope you'll forgive the self-promotion and give the paper a look. Here's the abstract:
Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)
Monday, February 12, 2018
Just a quick post today about a teaching technique I have been using that offers significant opportunities for exploration, especially in small class environments.
I am again teaching Advanced Business Associations this semester. The course allows students to review and expand their knowledge of business firm management and control issues in various contexts (public corporations, closely held corporations, benefit corporations, and unincorporated business entities), mergers and acquisitions, and corporate and securities litigation. I have reported on this course in the past, including in this post and this one.
At the conclusion of each unit, I have students locate (go off on a treasure hunt, of sorts) and post on the course management website (I use TWEN) a practice document related to the matters covered in that unit. Today we concluded our unit on benefit corporations. Each student (I only have five this semester) was required to, among other things, post the actual corporate charter (not a template or form) of a benefit corporation. Although the Advanced Business Associations course features training presentations by representatives of Lexis/Nexis, Westlaw, and Bloomberg that include locating precedent documents of various kinds, the students have not yet had this training.
In our discussions about this part of today's assignment, we learned a number of things. Here are a few:
- New articles, blog posts, and other secondary materials can be a good starting place in locating firms with particular attributes.
- The word "charter" can mean different things to different people.
- Journalists do not understand the difference between a benefit corporation and a B corporation.
- In research geared toward locating precedents for planning and drafting, googling descriptive terms is likely to yield yield fewer targeted results than googling the terms used an actual exemplar document.
- Corporate charters for privately held firms can be difficult to find--especially in certain specific jurisdictions, even when you know the firm's name and other identifying attributes.
- "If at first you don't succeed, try, try, again." Three of the five students posted more than one document before they found an appropriate example.
- The corporate charters the students posted include exculpation and indemnification.
- Patagonia's charter is pretty cool. It has a detailed, specific benefit purpose, a prohibition on redemptions, and a right of first offer. It also requires a unanimous vote on certain fundamental/basic corporate changes, redemptions, and bylaw amendments.
- There is a law firm in California that is a professional corporation organized as a benefit corporation "to pursue the specific public benefit of promoting the principles and practices of conscious capitalism through the practice of law." Also pretty cool.
The discussion was rich. The students accomplished the required task and reflected responsibly and valuably on their individual search experiences during our class meeting. They learned from each other as well as from me; benefit corporations seemed to come alive for them as we spoke. We accomplished a lot in 75 minutes!
Do any of you use a similar teaching technique? Have you adapted it for use in a large-class (over 50 students) environment? If so, let me know. I would like to evolve my "treasure hunt" for business law drafting precedents for use in a larger class setting.
Sunday, February 11, 2018
'We are also looking examine (...) whether its major institutional investors complied with the Stewardship Code' This is big news from the UK as it would imply that insti investors can be considered partially resonsible for coprorate misconduct https://t.co/wZJWmoahT4 #corpgov— Patrick Jahnke (@pdjahnke) February 8, 2018
"successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing internat'l scale, filling portfolio gaps, or building a 3d leg of the portfolio—tend to be vague" https://t.co/LLf85WX1Mo #corpgov— Stefan Padfield (@ProfPadfield) February 10, 2018
"Justice Stevens sounds the alarm on foreign corporations in his dissent to highlight the untenable position of the majority that 'the First Amendment does not allow political speech restrictions based on a speaker's corporate identity.'" 47 Stetson L. Rev. 225 #corpgov— Stefan Padfield (@ProfPadfield) February 11, 2018
Saturday, February 10, 2018
Socially responsible investing is all in the news these days, as several large asset managers and advisors have publicly declared commitments, of one kind or another, to pressuring portfolio companies to act in socially responsible ways.
Commenters debate whether these managers genuinely believe social responsibility will improve value at portfolio companies, or whether they are trying to appeal to the preferences of clients who themselves favor socially responsible investing, either as a mechanism for improving value, or, more probably, as a matter of, essentially, “taste.” If you’re going to invest an index fund, for example, you may as well invest in the one where you believe your dollars will also be used to push for your preferred agenda – even if little is actually being done in that direction.
The reason it’s so difficult to suss out anyone’s exact motive, of course, is that it’s tough to admit – as an asset manager or any kind of institutional investor – that you’re interested in anything other than financial returns. Not simply because of the publicity you’ll generate, but because it’s not clear how far fiduciary obligations allow fund managers to go in pursuing social goals.
(This is, of course, one of the ways in which reductionistic fiduciary duties strips out the real concerns of the ultimate humans the duties are designed to benefit).
Which is why I found the letter by Jana Partners announcing its new social activism fund – and targeting Apple – so intriguing. In a partnership with the California State Teachers Retirement System (who is not, at least yet, an investor in the fund), Jana is urging Apple to institute stronger parental controls on the iPhone. Now, there’s been a lot of commentary about Jana’s motivations - is Jana truly trying to profit via social activism? Or is this a loss leader so that it can cultivate relationships with kinds of institutions it needs to support its more traditional activist campaigns?– but what intrigues me are the interests of CalSTRS.
Because the letter spends most of its time talking about how better controls will ultimately prove profitable for Apple and thus Apple’s shareholders, but concludes by pointing out that the issue is “of particular concern for CalSTRS’ beneficiaries, the teachers of California, who care deeply about the health and welfare of the children in their classrooms.”
In other words, the subtext is that CalSTRS’ interest is for teachers as teachers – not necessarily for teachers as shareholders.
This is hardly the first time a pension fund has shown its hand in this way, but it does highlight how funds are even more constrained than businesses in terms of openly pursuing socially responsible goals, and the delicate tapdance they sometimes do around that fact.
Friday, February 9, 2018
As I watch the opening ceremonies of the 2018 Winter Olympic Games, I am struck by all of the design work that goes into the ceremony and the games. Who designs the vast opening and closing ceremony productions? Does the host country hire some or all the people who appear in the productions or are some or all volunteers? Who holds the intellectual property rights to the program elements and the recording of the program? The International Olympic Committee, I guess . . . . It strikes me that the Olympic Games have become big business, and intellectual property rights have become important to the value of that business. The World Intellectual Property Oganization notes that "[t]he Games are as much a celebration of innovation and creativity as they are of humanity, fair play and sporting excellence."
Perhaps most amusing to me in the run-up to the 2018 Winter Olympic Games has been the coverage of the U.S. opening ceremony outfits, designed by Ralph Lauren. Even for those of you who purport to know nothing about fashion design, you may recall that Ralph Lauren designs those shirts and shorts and sweaters with the little embroidered polo horse on the chest . . . . But trust me, he's an iconic American designer. Anyway, here is a critique of the American ensembles, ranking each item. The jacket is heated (!). But the large fringe suede gloves appear to be a particularly controversial fashion choice. As one critic noted:
These outfits have come in for a lot of criticism, particularly because they require the athlete to wear ludicrously large gloves that look as though they were designed for grilling by some sadist who then wants the grillers to go up in flames because the fringe of their large gloves has caught on fire.
She goes on to say the following:
The gloves have also come in for criticism because they have a Southwestern, Native American–meets–Route 66 truck stop, tchotchke vibe to them. The Olympic rings and the American flag are beaded. Between the fringe and the beading, there have been some claims and concerns about appropriation. I hear those. However, I do think that, in the long view, we want the American Olympic team outfits to be referencing a broader set of cultural influences on American life.
Wow. Who knew the business of deigning for the Olympic Games was so complex and fraught with peril?
In truth, the relationship between the U.S. Olympic Committee and Ralph Lauren is just one example of a designer collaboration seen frequently in fashion design in recent years. Target, H&M, and many others have entered into successful collaborations with major designers. See, e.g., here, here and here. These collaborations involve contracts addressing the fusion of the applicable intellectual property rights, among other legal and business issues. See, e.g., here and here. This is undoubtedly an interesting aspect of fashion law.
But back to the Olympic outfits . . . . Bustle is running a series of articles on the team uniforms and their designers. Here is the first installment. And if you want to know how much it will cost you to buy parts of the Team U.S.A. opening ceremony outfits, you can read about that here. They're pricey; be prepared . . . .
Thursday, February 8, 2018
About a week ago, FINRA released a Special Notice detailing a new portal for stakeholders to signal their willingness to serve on FINRA's board and other important committees. The new portal creates a way for FINRA to increase engagement from key stakeholders, specifically including retail investors, consumer groups, and institutional investors. Persons with an interest in serving on FINRA's committees, advisory boards, or Board of Governors can use this new portal to get their information to FINRA.
FINRA has drawn criticism in the past for bypassing investor and consumer advocates in favor of appointing persons with deep industry ties to serve as "Public Governors" on its governing Board. In a recent op-ed, Andrew Stoltmann and I pointed out that credibly signalling commitment to FINRA's stated investor protection mission means that it should have investor advocates on its board. In a report issued by the Public Investors Arbitration Bar Association (PIABA), we discussed our governance concerns in more detail and suggested that the FINRA Board consider a number of investor advocates with knowledge of the securities industry for future Public Governor seats. FINRA has now created a process for bringing a broad array of candidates into its nominating process.
Some of these changes may be attributable to the FINRA 360 process led by Robert Cook, FINRA's new CEO. This organizational review process has already resulted in substantial increases in transparency. We praised some of these changes in the PIABA governance report:
FINRA recently announced its FINRA360 organizational improvement initiative. The initiative offers an opportunity for FINRA to build upon existing strengths and become a more effective force for investor protection. FINRA’s successes generate widespread public benefits by giving investors the confidence to invest for their futures. Investor protection also plays a vital role in business capital formation—keeping bad actors out of the market increases investor confidence and willingness to invest. Because FINRA’s policies and enforcement affect far more than its member firms, the public has a strong interest in its regulatory performance.
Transparency of FINRA’s governance structure has received some attention as part of its 360 process. In response to comments received through this process, FINRA disclosed additional information about its Board of Governors on its website for the first time. We encourage FINRA to maintain these disclosures and increase the availability of information about FINRA’s governance. This increased transparency decreases the odds that material conflicts will go undetected and potentially taint FINRA’s vital governance processes.
For this new portal to successfully engage stakeholder communities, FINRA should do some outreach to consumer and investor groups to ensure that awareness spreads quickly. Unlike a new Beyoncé album, it might take some time for everyone to realize that something new and wonderful has arrived. Consumer and investor groups should respond to this opening and outreach.
Wednesday, February 7, 2018
Draft of my new article, Beyond the Numbers: Substantive Gender Diversity in Boardrooms, is now up https://t.co/tevZqFE3As. I find significant differences between the genders in the roles they take on in the boardroom. Looking forward to your feedback!— Yaron Nili (@ynili) February 5, 2018
"when courts treat [misleading corporate] speech as part of a larger scientific debate, they threaten to undermine the deterrent function of antifraud laws and shift the costs of misleading speech onto the public" 106 Geo. L.J. 447 (2018) #corpgov— Stefan Padfield (@ProfPadfield) February 6, 2018
I love how Uber's massive datasets are fueling economic research. Male Uber drivers earn 7% more per hour.— John Backus (@backus) February 6, 2018
"The Gender Earnings Gap in the Gig Economy: Evidence from over a Million Rideshare Drivers" https://t.co/2Qja81wMdB pic.twitter.com/DT3CIv5Fkf
If you follow me because you are interested in #incomeinequality & the small piece of that puzzle I work on (bringing CEO pay down from the stratosphere), please sign up for this free webinar: https://t.co/XhEmmMgsNj (Also, feel free to share broadly.)— Rosanna Landis Weaver (@LandisWeaver) January 25, 2018
Tuesday, February 6, 2018
A brand new Arizona case continues the trend of incorrectly discussing limited liability companies (LLCs) as limited liability corporations, but it does allow for an interesting look at how entities are sometimes treated (or not) in laws and regulations. Here’s the opening paragraph of the case:
Noah Sensibar appeals from the superior court's ruling affirming the Tucson City Court's finding that he had violated the Tucson City Code (TCC). He argues that the municipal ordinance in question is facially invalid because it conflicts with a state statute shielding members or agents of a limited liability corporation from personal liability.
City of Tucson v. Noah Sensibar, No. 2 CA-CV 2017-0087, 2018 WL 703319 (Ariz. Ct. App. Feb. 5, 2018).
About three years ago, the City of Tucson alleged that Sensibar, as “the managing member and statutory agent of Blue Jay Real Estate LLC, an Arizona corporation, was responsible for building code violations.” Id. (emphasis added). Notwithstanding the incorrect characterization of the entity type, it looks like the court at least reasonable (though not clearly correct) to hold Sensibar individually liable. Here’s why:
The Tuscon City Code states that “Any owner or responsible party who commits, causes, permits, facilitates or aids or abets any violation of any provision of this chapter . . . is responsible for a civil infraction and is subject to a civil sanction of not less than one hundred dollars ($100.00) nor more than two thousand five hundred dollars ($2,500.00).” Tucson Code Sec. 16-48(2) (Violations and penalties).
The Code Definitions in Sec. 16-3 provide the following:
Owner means, as applied to a building, structure, or land, any part owner, joint owner, tenant in common, joint tenant or tenant by the entirety of the whole or a part of such building, structure or land.
. . . .
Person means any natural person, firm, partnership, association, corporation, company or organization of any kind, but not the federal government, state, county, city or political subdivision of the state.
. . . .
Responsible party means an occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land; and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.
As such, the Code seems to contemplate holding both entities and individuals liable. Still, Sensibar had an argument. The use of the term “manager” here causes some potential confusion because one can be a manager of an LLC, while the LLC might serve as the manager of the property. Thus, it could be that only the LLC should be liable. Another plausible reading, though, is that “manager” meant the natural person doing the managing as is common in property situations. Manager, like occupant, lessee, and lessor, is not defined in the Code, so it would seem the intended source of the definitions should be from a property perspective, not an entity perspective.
Similarly, the Code could mean a natural “person having control over a structure” can be liable. If that’s the case, and the court seems to have gone down this road, the argument would be that Sensibar was being held liable directly for his role as manager or person in control of the property and not vicariously for violations of the LLC. Given that occupants, lessors, and lessees, among others, can be held liable, it does appear that the Code could have intended to impose liability directly on multiple parties, including both individuals and entities. This would be sensible, in many contexts, though it would also be sensible to say explicitly, especially given that the term “person” clearly includes entities.
A simple improvement might be to update the definition of “responsible party,” as follows:
Responsible party means an, whether as an individual or entity, any occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.
That would, at least, be consistent with the decision. Because if the court is holding Sensibar liable for merely being the manager of the LLC, and not as the manager of the property, the case is wrongly decided. Too bad the notice of appeal was not timely filed – maybe we could have found out.
UPDATE: Based on a good comment from Tom N., I did a little more research. As of an LLC filing in 2009, Noah Sensibar owned at least a 20% interest. (It may be 50% because there were two listed members, but it was at least 20%.) As such, this suggests that the LLC does not have funding to cover the fines or that express indemnification is lacking and the other member(s) won't agree to cover the costs from LLC funds.
I will also note that a 2016 decision denying Sensibar's appeal stated, "The court also heard evidence that Sensibar, the managing partner of the LLC, was 'the person in charge' of the property." City of Tucson v. Sensibar, No. 2 CA-CV 2016-0051, 2016 WL 5899737, at *1 (Ariz. Ct. App. Oct. 11, 2016). Seriously? He's an LLC manager. That's all. LLCs are not corporations OR partnerships. THEY ARE LLCS!
Monday, February 5, 2018
WOMEN’S LEADERSHIP IN ACADEMIA CONFERENCE
Advancing women professors, librarians, and clinicians in leadership positions in the academy.
Thursday & Friday July 19-20, 2018
University of Georgia School of Law
Call for Proposals!
DEADLINE: Thursday, March 15, 2018