Monday, July 16, 2018
Had I not been taking pictures on the beach during a morning walk with dear college friends on the New England shoreline, I would not have seen the incoming call on my silenced cell phone--a call from a business law colleague from UT Law that I figured I ought to answer. But the call was not, as I expected, a request for help with a research or teaching question. Instead, this colleague was calling to inform me of an email message from our Dean letting us know that our junior business law colleague, Jonathan Rohr, had died the day before. (I am linking here to a YouTube video featuring Jonathan, which will tell you much more about the man that he was than any CV or website.)
Jonathan came into my life almost two years ago when he interviewed with UT Law for a permanent, tenure track position after VAP-ing at his law alma mater, Cardozo. From the start, Jonathan impressed me and others on the Appointments Committee with his intellect, his enthusiasm for the faculty task, and his intensity. He survived the appointments tournament and came to work with us last summer. Before his untimely death, he already had been invited to comment on a paper at last year's AALS annual meeting and had symposium and virtual symposium invitations--as a first-year tenure-track colleague. His scholarship was thoughtful and lucidly written. He worked hard to make every piece better and better and better through editing. He was a popular and revered teacher. He was contributing to our College of Law community in significant ways. I could not have been prouder to have him as a colleague and tried to introduce him to everyone imaginable to get his permanent teaching career off to the right start.
I think it's fair to say that no one was more excited for Jonathan's arrival at UT Law than I. He was what my dear husband calls a "Mini-Me"--someone at the early stages of a career trajectory with a similar professional background who aspires to similar career goals and seeks to be mentored by me along the way. Most of the Mini-Mes that I have worked with were and are law practice colleagues and students. Jonathan was my first faculty Mini-Me. I had plans for our ongoing work together. I think he had plans of that kind, too. We had started working in a number of areas informally. We drank beer and discussed strategies for research, teaching, tenure, promotion, etc. The one academic year that we had together was idyllic in so many ways--too good to be true, for me, as I often observed. Our last conversation about his current work and my current work was last week. He was writing a guest post for this blog. He promised to send me his most recent essay in draft form for review. On July 11, he sent the essay to me and a few others. Two days later, he was no longer with us. Unbelievable.
And so, on Saturday, after my colleague delivered the news during that beach walk, I stopped and cried. I asked "why?" so many times and shook my head in disbelief as I moaned and the tears fell. What else could I do? The once colorful, happy beach scene turned gray. Over 20 years ago, I remember my husband relating that the colors were taken from him when his Dad, a vibrant graphic artist, died too young (but at a much older age than Jonathan). I understood in that moment on the beach exactly what my husband meant. Yet, I knew I had to move on. My friends were way down the beach by that time. They needed to know what had transpired. I needed their support and love; and I knew I needed them to to try help me make sense out of the world around me. Everything was and remains a bit off-kilter. I know many of you can identify with that feeling.
As I walked down the beach, head bowed low, the first thing that stood out for me on the bland, gray sand was this rock.
It appeared blue in the sunshine--a striking blue in the dull sandy grayness--although in other lights it takes on more charcoal color, as it does in this photo. Like Jonathan, it stood out as special, a near-perfect specimen among many others. In finishing the walk, I picked up several other objects that stood out from others on the beach. Somehow, that effort comforted me. I cannot really say why . . . .
Over the past few years, those of us who research and teach business law have mourned the loss of a number of amazing colleagues. These passings have hit all of us hard, professionally and personally. But the loss of Jonathan Rohr from our midst feels qualitatively different to me, as a close colleague and mentor. It will take time for me and many others who knew him to even begin to process this tragic loss. Perhaps this post will begin a process of healing for me. But I do not know that I ever will make sense out of this. We have lost a man that many had loved and respected. In his way-too-short life, he touched colleagues and students, as well as family and friends. His enthusiasm and love for life was so palpable and contagious; I still feel that energy now. I hope that sense of connection lingers. It also is a comfort.
I dedicate this post to Jonathan, with offers of sympathy and love to his wonderful wife, Jing, and the rest of their family. I am so glad that he became part of my life and so mournfully sad that he has left us.
Sunday, July 15, 2018
Does “compelled speech law … contribute to a post-truth information economy, in which the public’s ability to engage in truth-seeking, self-fulfillment, & self-government is constrained by its inability to obtain useful ... information at all”? https://t.co/y0FZSypnxY #corpgov— Stefan Padfield (@ProfPadfield) July 11, 2018
"Despite near record-low unemployment, a booming stock market, & nearly the longest period of sustained economic growth in U.S. history ... The share of Americans living in poverty climbed from 13.8 percent to 15.1 percent between 2010 and 2016." https://t.co/N6EEokd4Yo #corpgov— Stefan Padfield (@ProfPadfield) July 13, 2018
"Seven national fast-food chains have agreed to end policies that block workers from changing branches — limiting their wages and job opportunities — under the threat of legal action from the state of Washington." https://t.co/U8SFVXqRMh #corpgov— Stefan Padfield (@ProfPadfield) July 13, 2018
"new classical models assumed away all the ‘imperfections’ that ... make the macroeconomy such an ornery beast... And voila! Unemployment disappears! The great depression was really millions of workers taking a spontaneous holiday." https://t.co/UpYoP58au5 #corpgov— Stefan Padfield (@ProfPadfield) July 15, 2018
"Analysts seeking to curry favor w/ management ... lowball ... earnings estimates, helping the companies to beat them .... executives, in return, let the analysts & their ... investor clients ... pick up hints about the future of the business." https://t.co/Sb4ncGj8dK #corpgov— Stefan Padfield (@ProfPadfield) July 15, 2018
Saturday, July 14, 2018
Several months ago, I posted about the Chancery decision finding Elon Musk to be a controlling shareholder of Tesla for the purposes of Corwin v. KKR Financial Holdings, 125 A.3d 304 (2015), despite the fact that he held only a 22% stake. The decision took into account both Musk’s stock holdings and his other mechanisms of influence.
One of the reasons the decision stood out was because, while there is a long history in Delaware of considering both voting power and other factors to determine controlling shareholder status, after a certain point, you have to wonder whether the “stockholder” piece is doing any work, and whether instead the question should just be whether someone has effective control, either of the corporation generally or of a particular business decision.
Well, last week, we took a few steps more toward answering that question in Basho Technologies Holdco B, LLC et al v. Georgetown Basho Investors, LLC et al. There, plaintiffs contended that a minority stockholder was a “controller” for purposes of owing fiduciary duties to the corporation. Vice Chancellor Laster agreed, based on a holistic inquiry that took into account, among other things, the stockholder’s contractual rights via preferred stockholdings, its use of those rights (to block alternative transactions), its control over certain board members, and those members’ conduct.
But that’s not the important part. The important part is that Laster laid out a test for “controller” that appears to depend minimally – if it all – on voting power. As Laster put it:
If a defendant wields control over a corporation, then the defendant takes on fiduciary duties, even if the defendant is a stockholder who otherwise would not owe duties in that capacity. One means of establishing that a defendant wields control sufficient to impose fiduciary duties is for the plaintiff to show that the defendant has the ability to exercise a majority of the corporation’s voting power. A defendant without majority voting power can be found to owe fiduciary duties if the plaintiff proves that the defendant in fact “exercises control over the business and affairs of the corporation.” …
To show that the requisite degree of control exists generally, a plaintiff may establish that a defendant or group of defendants exercised sufficient influence “that they, as a practical matter, are no differently situated than if they had majority voting control.” One means of doing so is to show that the defendant, “as a practical matter, possesses a combination of stock voting power and managerial authority that enables him to control the corporation, if he so wishes.”
It is impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of actual control over a particular decision. Examples include, but are not limited, to: (i) relationships with particular directors that compromise their disinterestedness or independence, (ii) relationships with key managers or advisors who play a critical role in presenting options, providing information, and making recommendations, (iii) the exercise of contractual rights to channel the corporation into a particular outcome by blocking or restricting other paths, and (iv) the existence of commercial relationships that provide the defendant with leverage over the corporation, such as status as a key customer or supplier. Lending relationships can be particularly potent sources of influence, to the point where courts have recognized a claim for lender liability when a lender exercises influence over a company that goes “beyond the domain of the usual money lender” and, while doing so, acts negligently or in bad faith.
Broader indicia of effective control also play a role in evaluating whether a defendant exercised actual control over a decision. Examples of broader indicia include ownership of a significant equity stake (albeit less than a majority), the right to designate directors (albeit less than a majority), decisional rules in governing documents that enhance the power of a minority stockholder or board-level positon, and the ability to exercise outsized influence in the board room, such as through high-status roles like CEO, Chairman, or founder Invariably, the facts and circumstances surrounding the particular transaction will loom large.
All of which begs the question whether stockholder status is necessary at all. Are pure lenders, or pure board members, potential controllers? Or is stockholder status a nominal necessity, so that one share is sufficient to begin the inquiry into controller status? These questions are left unanswered by Laster’s opinion.
Now, to be fair, no one who has ever studied Martin v. Peyton or Gay Jensen Farms v. Cargill in their Business Associations class would be surprised to learn that a lending relationship may ultimately transform into a control relationship, with associated duties. That said, it is still striking that Laster concluded that the particular stockholder in Basho was a “controller” for fiduciary purposes without even mentioning how much voting power the controller had, other to say that it was less than a majority. This nominal controller also did not have more than two appointees to a multi-member board. Nonetheless, its contractual rights were sufficient to trigger, in Laster’s view, fiduciary duties.
And that just raises more questions. For example, does a controlling stockholder – versus a controller by any other means – have any special status in this formulation, on the theory that controlling stockholders are uniquely invulnerable to challenge? Or is control the only relevant inquiry? And if control by any means is all that is necessary, can Laster’s analysis square with Corwin? There, the Delaware Supreme Court refused to find controller status where a nominal stockholder nonetheless had complete contractual control of the corporation’s business.
And how are we going to deal with complex capital structures? Both Tesla and Basho dealt with shareholders who had “blocking” rights – i.e., not enough votes to control the Board and dictate corporate action, but enough to block actions with which they disagreed. In Tesla’s case, this was because of a supermajority charter provision; in Basho, it was because a private company had issued multiple rounds of preferred financing with bespoke characteristics. As more companies stay private longer – and as more issue nonvoting stock, and/or high-vote shares – Delaware is going to have to ask more complex questions regarding controlling status and what it precisely entails. On this point, I note that in Third Point LLC v. Ruprecht, 2014 WL 1922029 (Del. Ch. May 2, 2014), the Chancery court determined that Sotheby’s could properly adopt a low-threshold poison pill in order to prevent a hedge fund from obtaining “negative” control, namely, the power to block corporate action, even if it could not generally control corporate policy. Is that what counts as control now? And does that mean – as recommended by Iman Anabtawi and Lynn Stout – that hedge funds now have fiduciary duties? (h/t Eric Goodwin for suggesting the possibility). As I alluded to in my Tesla post, the questions take on a new urgency in the wake of Corwin and Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014).
My final thought is, so much of corporate law these days has a back to the future quality. Complex capital structures with multiple rounds of financing, different classes of stockholders with different rights – many of which are nonvoting – were once the norm. Corporate control was relatively concentrated. For example, when Berle & Means wrote The Modern Corporation, they raised the alarm that one-third of America’s wealth was concentrated among 1800 corporations and 200 men.
That changed. With the federal regulation of the apparatus for securities issuance and trading, control over the Exchanges, and so forth, one-share-one-vote became the norm, as did dispersed share ownership and control.
Today, it feels like the pendulum has swung back the other way. As Jan Fichtner, Eelke M. Heemskerk & Javier Garcia-Bernardo put it, “we witness a concentration of corporate ownership not seen since the days of J.P. Morgan and J.D. Rockefeller.” Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk, 19 Bᴜs. & Pᴏʟ. 238 (2017). The statistics are well-known – and I talk about a lot of this in my new article, Shareholder Divorce Court (stealth plug! I am so stealthy!) – but, for example, BlackRock, State Street, and Vanguard together constitute the largest shareholder in 88% of the S&P 500, and 40% of all U.S. listed firms. In 2005 ownership of the S&P 500 was so concentrated that in any hypothetical conflict between two member firms, 15% of the equity on either side would be held by institutions that preferred the other side to win.
Meanwhile, we’ve begun to depart from a one-share-one-vote norm as more companies offer private financing with different terms, and even maintain differential voting rights after going public. Even fiduciary duties are up for debate again; they were a matter of some debate back in the early 1900s, they became standard, and now the fastest growing business form is the LLC, which allows fiduciary waivers. It’s as though in many areas – corporate law being, ahem, but one – we’re going to have to learn the lessons of the 20th Century all over again.
Thursday, July 12, 2018
• Dress provocatively on the job
• “…have sex with male HSBC executives and clients at company-sponsored events”
• Specifically, “have sex with an unnamed senior executive at the bank’s Mexico unit”
In addition to:
• “…falsely t[elling] co-workers that Doe was having sex with clients when they traveled to bank functions outside the U.S.”
• “… attempt[ing] to pull down Doe’s blouse and expose her breasts in the presence of male HSBC employees.”
The new story on this HSBC case resonates because it also seems to suggest a link between sexual harassment and other compliance concerns:
Mike couldn’t shake the feeling that he was being retaliated against for elevating sexual harassment complaints—and that the retaliation also conveniently sidelined his questioning of compliance issues. Moving him into what was essentially a junior position limited his exposure to HSBC’s internal operations and contained his objections, at a time when pressure on the bank was intensifying.
HSBC has had other compliance problems in the past and only recently exited a deferred prosecution agreement after its $1.9 billion fine for "helping Mexican drug cartels launder money and breaching international sanctions by doing business with Iran."
How an organization handles sexual harassment and gender equality issues may correlate with how it handles other compliance issues. In both instances, the organization will often need to discipline upper management. In organizations where "producers" break rules with impunity, they may not confine misbehavior to one area. Weak compliance systems that fail to check sexual harassment will also, predictably, fail in other areas. If management does not respect the compliance team on sexual harassment issues, they probably will not respect them on suitability issues.
If sexual harassment suits do serve as an indicator about other compliance problems, it's another reason to exempt these types of claims from arbitration agreements. If everything can be hidden away within arbitration systems, public enforcers lose the ability to see the signals that they should take a closer look at a particular firm's compliance systems.
Wednesday, July 11, 2018
"the case for bifurcating limited liability company ('LLC') law depending on LLC owners' projected sophistication" Peter Molk, More Ways to Protect LLC Owners and Preserve LLC Flexibility, 51 U.C. Davis L. Rev. Online 181, 183 (2018) #corpgov— Stefan Padfield (@ProfPadfield) July 10, 2018
"substantial impediments to meaningful social return remain because the beneficiaries of benefit corporations' social missions have no rights to influence corporate decision making--the 'separation of benefit and control.'" 39 Cardozo L. Rev. 1783 #corpgov #socent— Stefan Padfield (@ProfPadfield) July 10, 2018
"how should we conceptualize & regulate new forms of concentrated private power...when...firms control the terms of access to vital services...?" The New Utilities: Private Power, Social Infrastructure, & the Revival of the Public Utility Concept, 39 Cardozo L. Rev. 1621 #corpgov— Stefan Padfield (@ProfPadfield) July 10, 2018
"corporate charter competition ... is capable of generating only one result: deregulation. What remains of corporate law is not regulation, but mere obfuscation.... The only solution ...: abandon the internal affairs doctrine" LoPucki, 102 Minn. L. Rev. 2101 #corpgov— Stefan Padfield (@ProfPadfield) July 10, 2018
"We’ve heard over and over that the SEC hates cases implicating a large number of firms in wrong-doing. Such cases ... challenge a core ideological assumption of the SEC, which is that wrong-doing is a problem of 'a few bad apples'" https://t.co/Bi7GjpMIm0 #corpgov ht @AnnMLipton— Stefan Padfield (@ProfPadfield) July 10, 2018
Tuesday, July 10, 2018
I am both a business law professor and an energy law professor, which is sometimes surprising to people. That is, some folks are surprised that have a research focus in two areas that are seemingly very distinct. In one sense, that's true, at least in the academic realm. Most energy law scholars tend to have a focus on more close related disciplines, such as environmental law, administrative law, and property law. And business law scholars tend to trend toward things like commercial law, bankruptcy, tax, and contracts.
There is substantial overlap, though, in the energy and business law spaces, as I have noted on this blog before. I am even working on some research that looks specifically at the role laws and regulations have on business and economic development. My work with the WVU Center for Innovation in Gas Research and Utilization builds on this energy and business nexus.
I am pleased to share a newly published article I wrote with Amy Stein from the University of Florida's Levin College of Law. The piece is called Decarbonizing Light-Duty Vehicles, and it appears in the July issue of Environmental Law Reporter. It is available here. This article is based on our forthcoming book chapter that will appear in Legal Pathways to Deep Decarbonization in the United States (Michael B. Gerrard & John C. Dernbach eds.) and published by the Environmental Law Institute. The book expands on the U.S. work of the Deep Decarbonization Pathways Project, and was prepared in collaboration with that organization. Following is an excerpt that gives a sense of how energy and business law and policy sometimes intersect.
A last challenge surrounds the existing business models that revolve around the [internal combustion vehicle (ICV)]. First, a number of states have a strong incentive to maintain a core of ICVs due to their heavy reliance on the gasoline tax to fund highway infrastructure in their respective states. The gasoline tax has been in place since 1956 to help pay for construction of the interstate highway system. Since that time, Congress has directed the majority of the revenues from this tax to the Highway Trust Fund (HTF). At the federal level, Congress has not increased the tax in more than 20 years, leaving it at 18.4 cents a gallon. As of July 2015, state taxes on gasoline averaged 26.49 cents a gallon, bringing the total tax on gasoline to about 45 cents per gallon. All efforts to reduce reliance on gas-dependent vehicles therefore stand in sharp contrast to efforts to maintain a healthy highway fund. The interplay between fuel economy and the dependence on gasoline tax revenues should not be overlooked, as well as the conflicting demands placed on legislators.
Second, dealers, mechanics, and gas stations have a strong incentive to maintain the dominance of ICVs. Dealers may not be as familiar with [alternative fuel vehicles (AFVs)] and so are less likely to be able to demonstrate specifics about available incentives, nor be able to exude confidence about charging, range, and battery life-span. More importantly, dealers may also be hesitant to sell AFVs for some of the same reasons that customers may be inclined to purchase them—specifically, the expectation of reduced maintenance costs. These misaligned incentives exist because an essential part of a dealer’s business model relies on post-sale revenues related to the sale of used cars, oil changes, and engine maintenance repairs, avoided costs for AFV owners. More car dealers may need to explore options that evolve with the technology, including maintaining and repairing fleets of autonomous vehicles.
In short, although the United States has begun the transition to AFVs, there are a number of obstacles, financial, psychological, and cultural, that stand in the way of a greater shift to AFVs.
Amy L. Stein & Joshua Fershée, Decarbonizing Light-Duty Vehicles, 48 Environmental Law Reporter 10596 (2018) (footnotes omitted).
Monday, July 9, 2018
As a legal advisor to both for-profit and not-for-profit ventures for more than 30 years, I have had to learn about the business operations of new clients many, many times. The facts are so important in these knowledge acquisition processes (which generally take time to complete). The more experienced one is as a business lawyer, the more adept one is at getting the right facts--and analyzing the legal risks, rights, and responsibilities they represent or signal.
As a law professor, I have had many opportunities to experience joy from the work of my students. They do such amazing things! As the careers of my former students lengthen and deepen, my pride in them often exponentially increases.
With all that in mind, I bring you today a podcast featuring one of my beloved former students. She doesn't work for a law firm or a major multinational corporation. She is not a general counsel. Instead, she works for a relatively small nonprofit organization in a broad-based planning and development role.
The podcast consists of an exposition/interview by that former student, Betty Thurber Rhoades. In the podcast, Betty explains--from soup to nuts (i.e., application to move-in)--the process of getting disabled veterans into modified or new homes through Jared Allen's Homes for Wounded Warriors (JAH4WW), the nonprofit organization for which she works. Betty started her career post-law school thirteen years ago as a Presidential Management Fellow working for the Department of Veterans Affairs (VA) on regulatory policy matters. She stayed with the VA until March 2017, ending her VA career as Executive Management Officer (Chief of Staff) to the Deputy Under Secretary for Economic Opportunity, before beginning her work for JAH4WW. Totally impressive; totally heartwarming.
What I love about this podcast (other than how proud it makes me of the work Betty does) is the utility this kind of description would have/could have for a lawyer who wants to volunteer or otherwise sign on to help with one of JAH4WW's housing projects. She mentions in the podcast the contributions of lawyers; she talks about acquiring and titling property, identifying and selecting contractors, etc. She is, of course, herself a lawyer, so she is sensitive to the facts that matter. I could easily create a checklist for an engagement letter from this podcast--and get a good overall sense of the "givens" and uncertainties of the representation, too.
We probably ought to talk more in this space about the work that some of our students do once they graduate. I know I have done very little of this. But Betty's work and podcast inspire action--at least for me.
Sunday, July 8, 2018
Do Google and Facebook "undermine competition for values and ideas"? "In a 2001 article ... attorneys in the Department of Justice’s antitrust division, noted antitrust law has long sought to preserve competition in ideas, not just products." https://t.co/4x8CdqzcxO #corpgov— Stefan Padfield (@ProfPadfield) July 5, 2018
"California's push for gender quotas on company boards" ... @AkronLaw @ProfTracyThomas "argues that there is a constitutional path to mandating gender quotas as a remedy to discrimination" https://t.co/FIVTGsKpiO #corpgov— Stefan Padfield (@ProfPadfield) July 5, 2018
"Lynn Stout, the late, great legal scholar who led the charge against shareholder primacy, argued that in order to weaken the hold shareholder primacy has over our economy, it’s crucial that, first, we better understand shareholders." https://t.co/Xwvch6CVGF #corpgov— Stefan Padfield (@ProfPadfield) July 6, 2018
"states grant benefit corporations a concession of a brand. Indeed, this concession may well warrant a limited and partial revival of a modernized concession theory of the corporation.... focus[ed] ... on accountability." 14 Hastings Bus. L.J. 37 #corpgov #socent— Stefan Padfield (@ProfPadfield) July 7, 2018
"data show that courts have pervasively embraced the concept that corporate managers should maximize shareholder wealth" Robert J. Rhee, A Legal Theory of Shareholder Primacy, 102 Minn. L. Rev. 1951, 1954 (2018) #corpgov— Stefan Padfield (@ProfPadfield) July 8, 2018
Saturday, July 7, 2018
One of the topics I’ve repeatedly discussed in this space is how layers of doctrine have been so piled on top of inquiries like materiality and loss causation in the Section 10(b) context that the legal analysis has become completely unmoored from the ultimate factual inquiry, namely, did the fraud actually result in losses to investors. As I put it in one post:
[A]ll of our measures of impact and harm and loss are, at this point, so far removed from reality as to border on complete legal fiction. Materiality is a construct from case law, with numerous additional doctrines piled on to it by courts without any heed for actual evidence of how markets behave. …. [W]hat we call “harm” and “damage” for the purpose of private securities fraud lawsuits have become so artificial that it no longer seems as though we’re even trying to measure the actual real-world effects of fraud. I believe private lawsuits are an essential supplement to SEC action but a system of fines or statutory damages would make so much more sense.
This week, I call attention to another recent example of the phenomenon. In Mandalevy v. BofI Holding, 2018 WL 3250154 (S.D. Cal. June 19, 2018), the plaintiffs alleged that the defendant BofI Federal Bank lied about various money laundering offenses and falsely denied that federal authorities were looking into the matter, in violation of Section 10(b). The court dismissed their claims on various grounds, including that the plaintiffs had failed to show that they had experienced any losses caused by the defendant’s false denial of an SEC investigation. The plaintiffs alleged that BofI’s stock price dropped after publication of a New York Post article disclosing the SEC’s interest, but the court observed that the story was based on information that the reporter had obtained by making a FOIA request. Information available via FOIA, the court concluded, is information generally available to the public, and, by extension, the market. As a result, the article itself was deemed to have merely summarized previously-public information, and could not qualify as a corrective disclosure that revealed the truth. As the court explained its reasoning:
The efficient market theory presumes that interested, “information-hungry” market participants are actively and continuously trading a company’s stock. Basic Inc. v. Levinson, 485 U.S. 224, 249 n.29 (1988). One obvious source of information about a particular company is its regulator, particularly when—as we have here—the company has denied the existence of a regulatory investigation in response to reports stating the contrary. The Court must assume that, in the nearly seven months between BofI’s denial [of the investigation] and the October 25 article, a market participant would have made the sensible step of asking the SEC whether BofI’s denial was accurate. The fact that a market participant would have had to jump through a bureaucratic hoop to obtain this information does not mean that the information was not “public.” To the contrary, the Court must assume that “information-hungry” market participants seeking an edge in trading BofI’s stock would expend at least some effort to obtain material information about the company. The Court’s understanding of an efficient market’s collective reach, in other words, cannot be limited to information one can find on Google….
Having been offered no reason to believe that any other market participant could not have made a FOIA request from the SEC about BofI prior to October 25, the Court must assume that he or she did. The CAC therefore fails to allege with particularity a revelation of the falsity of BofI’s March 31 statement.
Let’s take a moment to unpack the factual inferences here that the court is willing to draw at the 12(b)(6) stage: that unspecified investors made a FOIA request, that they got their response faster than the reporter’s own inquiry, and that they used that information to trade in sufficient quantities to completely offset the effects of the initial lie. And that despite the fact that markets, apparently, can be expected to behave in this manner, these investors believed, ex ante, it would be cost-efficient to justify the time and expense of making the FOIA request in the first place so that they could exploit the information that the request – might! – reveal.
And, it should be noted, in drawing these inferences, the court remained untroubled by the fact that the stock did, in fact, drop upon publication of the Post article.
Forgive me if I have a little trouble accepting – without any additional evidence – that markets are imbued with this kind of near-mystical perfection. Indeed, as the Supreme Court made clear, they don’t need to be in order to justify the fraud on the market presumption. Yet, as Stephen Bainbridge and Mitu Gutali put it, “federal judges are claiming--at least implicitly--a level of expertise about the workings of markets and organizations that, in some areas, not even the most sophisticated researchers in financial economics and organizational theory have reached.” Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L.J. 83 (2002).
To be fair, plenty of other courts approach market evidence with more humility. For example, in Pub. Empls. Ret. Sys. of Miss., Puerto Rico Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313 (5th Cir. 2014), the Fifth Circuit concluded that publicly-available raw data – later analyzed and reported in a Wall Street Journal article – could not be presumed to have impacted stock prices because “it is plausible that complex economic data understandable only through expert analysis may not be readily digestible by the marketplace.” Similarly, in In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d 597 (S.D. W. Va. 2012), the court refused to presume that information in a public database was sufficiently available to the market to offset defendants’ lies about their safety record. (Notably – as I previously posted – the Massey court’s intuition that raw data would not be easily digested by investors was subsequently validated by an empirical study of the impact on such information on stock prices.)
That said, despite my snarky subject line, the goal here is less to attack this particular opinion – which follows a line of similar cases that, while perhaps not quite as aggressive, are also willing to draw broad conclusions about market behavior on a thin record – than to question the value of this entire mode of analysis. It seems increasingly likely that an alternative system that avoids judicial measures of market impact (like, for example, a system of a statutory damages) would better serve investors and deter misconduct.
Thursday, July 5, 2018
Earlier today, the Justice Department announced that it had reached a non-prosecution agreement with Credit Suisse. The bank admitted to hiring the relatives of Chinese government officials and exempting them from performance reviews in order to curry favor. The DOJ press release lays out the issue:
“In the banking industry, not every undertaking is fair game,” said Assistant Director-in-Charge Sweeney. “Trading employment opportunities for less-than-qualified individuals in exchange for lucrative business deals is an example of nepotism at its finest. The criminal penalty imposed today provides explicit insight into the level of corruption that took place at the hands of Credit Suisse Group AG’s Hong Kong-based subsidiary.”
According to CSHK’s admissions, between 2007 and 2013, several senior CSHK managers in the Asia Pacific (APAC) region engaged in a practice to hire, promote and retain candidates referred by or related to government officials and executives of clients that were state-owned entities (SOEs). The employment of these “relationship hires” or “referral hires” was part of a quid pro quo with the officials who referred the candidates for employment, whereby CSHK bankers sought to and did win business from the referral sources. Employees of other subsidiaries of CSAG were aware of the referral hires and facilitated the conduct.
In situations like this, DOJ may be unlikely to ever actually indict a major bank because of fears about what the indictment would do to global markets. Andrew Baker has flagged this issue, explaining that:
the DOJ also instructs their attorneys to consider the “collateral consequences” associated with prosecuting corporations when considering whether to seek charges. Following the indictment and subsequent collapse of the accounting firm Arthur Andersen, federal prosecutors became excessively risk-averse, relying on the collateral consequences carve-out to justify an increasing reliance on alternative corporate prosecution agreements. This shift in practice was misplaced but predictable given the public backlash to Arthur Andersen’s prosecution and the DOJ’s lack of subject matter expertise in determining corporate systemic importance. To regain the public’s trust in equality before the law, the DOJ should divest its undue collateral consequences determination to an agency with the requisite expertise, and such a determination should be made formally and should be subject to public inspection.
From what I know about this particular situation, I don't think it would be appropriate to indict the bank as a whole here for an issue isolated to a Hong Kong subsidiary. Still, it would be worthwhile to get more insight into how fears about collateral consequences compel the decision to go for a non-prosecution agreement. It might make sense to break up banks that frequently benefit from this doctrine.
Wednesday, July 4, 2018
"If securities existing entirely within virtual space are securities for purposes of federal securities law, software developers, platform owners, and users become subject to the registration requirements and anti-fraud provisions ...." #corpgov https://t.co/aZF6TvK3st— Stefan Padfield (@ProfPadfield) July 1, 2018
"Google said ... it would stop its computers from scanning ... inboxes .... But the internet giant continues to let ... outside software developers scan the inboxes .... At one point ... employees read about 8,000 unredacted emails ...." https://t.co/4sfJUwvaTV #corpgov— Stefan Padfield (@ProfPadfield) July 2, 2018
"if the country can be thrown into a swivet by the retirement of a single...man, it suggests...the Supreme Court has become...too sensitive to small changes...Increasing the number of justices would reduce the importance of any single retirement" https://t.co/b8TSYafYcx #corpgov— Stefan Padfield (@ProfPadfield) July 2, 2018
"a series on the uses and abuses of the First Amendment as a deregulatory tool – that is, the First Amendment’s potential to undermine regulatory schemes that protect workers, consumers, voters, investors, and more" https://t.co/tQxmn1Lq8d #corpgov ht @AnnMLipton @ShallTakeCare— Stefan Padfield (@ProfPadfield) July 4, 2018
Tuesday, July 3, 2018
Bernard Sharfman has posted Dual Class Share Voting versus the “Empty Voting” of Mutual Fund Advisors’ and it is an interesting read. He argues:
Dual class shares (shares with unequal voting rights) arise when the board of directors of a company decides to raise capital through the sale of newly issued shares, but wants one or more insiders, who may be giving up economic control through the issuance of the shares, to retain voting control in the company. Typically, this occurs in an initial public offering (IPO), but it can also occur before. In an IPO, a company will usually issue a class of common stock to the public that carries one vote per share (ordinary shares), while reserving a separate class, a super-voting class, that provide insiders with at least 10 votes per share. However, both types of shares will have equal rights to the cash flow of the company. The issuance of dual class shares may create a wide gap between voting and cash flow rights over time, especially if the insiders periodically sell a significant amount of their ordinary shares.
But this is the critical point. A dual class share structure cannot exist without the permission of those shareholders who are purchasing the ordinary shares at the price offered. The bargaining process that leads to the issuance of dual class shares is referred to as “private ordering.” . . . .
. . .
By contrast, the empty voting of mutual fund advisors is not a firm specific corporate governance arrangement that results from private ordering. It is the consequence of the industry practice of centralizing the voting of mutual funds into the hands of their advisor’s corporate governance department. As a result of this delegation of voting authority, mutual fund advisors have the voting power, but not the economic interest in the shares that they vote.
I am not evangelical about dual-class shares, but I do appreciate his point on private-ordering, which is similar (as I have noted before) to my take in many circumstances. His distinction between dual-class shares and empty voting for mutual fund advisors is a compelling one, and I recommend checking out the whole post.
Monday, July 2, 2018
Seton Hall University School of Law welcomes applications for tenure-track positions to begin July 1, 2019. Candidates should have a J.D. or equivalent degree and a record of academic excellence. Candidates should be able to demonstrate both extraordinary scholarly promise and the ability or potential to be an outstanding teacher who can motivate students while preparing them for the practice of law in the twenty-first century. The School of Law will consider entry-level and junior lateral candidates in a variety of subject areas with particular focus on 1) Law and Technology, including data analytics/AI as it intersects with law and compliance, social media and electronic discovery, and ethics in the intersection of law and technology; 2) Business Law, preferably with a focus on Securities Regulation; and 3) Health Law, preferably with a focus on Healthcare Fraud or Food and Drug Law.
Seton Hall Law School offers a vibrant, energetic academic environment. Located in downtown Newark, New Jersey, approximately 20 minutes from Manhattan, Seton Hall Law is especially well-regarded in the health and life sciences law, intellectual property, cybersecurity, and privacy arenas, and it is in the process of expanding its role in energy, technology and data analytics. The faculty includes nationally recognized scholars and teachers with expertise in a wide range of areas.
Seton Hall Law School is an equal opportunity and affirmative action employer. We welcome applications from minorities, women, and others whose background and experiences will contribute to institutional diversity.
To apply, please send a resume and cover letter to Professor Marina Lao, Chair, Faculty Appointments Committee, Seton Hall Law School, at firstname.lastname@example.org.
What would the world look like if a public company officer or director, recognizing the value of material nonpublic firm information in his possession and intending to benefit people of limited means, gave this valuable information to those less fortunate without the knowledge or consent of the firm and without any expectation of benefit in return? How, if at all, do we desire to regulate that behavior? The officer or director apparently would be in breach of his or her fiduciary duty absent a valid, binding, and enforceable agreement to the contrary. Does that conduct also, however, violate U.S. federal insider trading rules? Should it? This article, a relatively short piece that I wrote for a "virtual symposium" issue of the Washington University Journal of Law & Policy, offers answers to those questions.
Other symposium authors with insider trading pieces in this volume include:
Great reading on this topic, all around. As we await the next insider trading regulation volley after Salman v. United States, this collection of essays and articles fills a nice gap. Although the issue is not yet posted to the journal's website, it soon should be. In the mean time, here is a photo of the relevant page from the table of contents:
(Sorry for the faint image and the shadows! I took this in my office; no natural light was available, if you know what I mean . . . .)
I received the following today through the AALS teaching listserv. It may be of interest to some of you or to folks you may know in the region.
I am happy to report that the UC Davis School of Law is offering a mandatory skills course for 1Ls starting in Spring 2019. It will include segments on negotiation and client interviewing. If you are in northern California, or plan to be January through March 2019, I hope you will consider applying for one of the six adjunct positions relating to this exciting new course. Information here: https://recruit.ucdavis.edu/apply/JPF02281
Donna Shestowsky, J.D., Ph.D.
Director of Lawyering Skills Education
Professor of Law, UC Davis School of Law
Martin Luther King Jr. Research Scholar
Affiliated Faculty, Department of Psychology, UC Davis
Phone: (530) 754-5693
My latest research, published in the Harvard Negotiation Law Review, can be found here:
Sunday, July 1, 2018
"what makes this ad special is that there isn’t a full-service ad agency behind it..Ocasio-Cortez wrote it..'It just didn’t compute to us that the same people creating working-class propaganda are creating essentially propaganda for corporations'" https://t.co/qKFhnJ5l9P #corpgov— Stefan Padfield (@ProfPadfield) June 28, 2018
"Many voters see left-wing front-runner Andrés Manuel López Obrador as an alternative to years of free-market policies that have made Mexico a global competitor but left many families behind" https://t.co/U2sw1nXNQQ #corpgov— Stefan Padfield (@ProfPadfield) June 28, 2018
Buying a cup of coffee "burns through much of a worker’s entire monthly wage but costs just pennies -- .... the devastating effects of the government’s frantic money-printing policies and how they are sinking the country deeper into poverty." https://t.co/uv8MXioHXU #corpgov— Stefan Padfield (@ProfPadfield) June 28, 2018
"Stare decisis has in the past been a notoriously pliable doctrine on the Court, but insofar as one can discern its shape, it comes in two versions—weak and strong.... A weaker version ... is the kind ... Janus follows ...." https://t.co/g5Yh75DjOn #corpgov— Stefan Padfield (@ProfPadfield) June 29, 2018
ICYMI: "Judge Dismisses Climate Suit Against Oil Companies ... said the world had benefited from fossil fuels and held that the courts were not the proper venue to balance those benefits against global warming concerns." https://t.co/cZDZ22kvL0 #corpgov— Stefan Padfield (@ProfPadfield) July 1, 2018
"When courts issue decisions that define corporate rights without first— Stefan Padfield (@ProfPadfield) July 1, 2018
defining the corporate person, they may unintentionally alter what it means to be a corporation." #corpgov https://t.co/bAFvYdMuWi
Saturday, June 30, 2018
One of the odd things about teaching business and securities in the Trump era is that it’s been one of the few areas of law that’s been left largely unchanged by this singularly, umm, disruptive presidency.
That may be about to change.
As most readers are likely aware, the Supreme Court recently ruled in Lucia v. SEC that SEC ALJs are inferior officers, and therefore must be appointed by the Commission directly (instead of, as has been traditional, by the SEC staff). The SEC, anticipating this holding, altered its procedures to have the Commission ratify the staff’s selection. But – even assuming the ratification is sufficient – the next obvious question is whether, as inferior officers, ALJs must have fewer restrictions on their removal – an issue that, it should be noted, the Solicitor General’s office urged the Court to resolve against the SEC. This is a much bigger deal, because leaving aside questions about how such a deficiency would be remedied as a technical matter, without such protections, the impartiality of the ALJs – and thus the fairness and, I suspect, the constitutionality of the entire administrative adjudicative process – would be open to question. Cf. Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797 (2013) (anticipating these issues).
But that’s only the beginning.
In Janus v. AFSCME and NIFLA v. Becerra, the Supreme Court held that speech that was previously viewed as regulable – namely, required disclosures in the provision of health related services, and dues for union representation – instead would be subject to heightened scrutiny. In both cases, the dissents pointed out that the Court’s reasoning would jeopardize a wealth of ordinary consumer – and securities – regulation. As Justice Breyer put it, “In the name of the First Amendment, the majority today treads into territory where the pre-New Deal, as well as the post-New Deal, Court refused to go.” Justice Kagan was even more blunt in her Janus dissent: “Speech is everywhere—a part of every human activity (employment, health care, securities trading, you name it). For that reason, almost all economic and regulatory policy affects or touches speech. So the majority’s road runs long. And at every stop are black-robed rulers overriding citizens’ choices.”
And then there’s Masterpiece Cakeshop v Colorado Civil Rights Commission. There, the Court largely avoided the free speech claim, but the majority opinion stated, “The free speech aspect of this case is difficult, for few persons who have seen a beautiful wedding cake might have thought of its creation as an exercise of protected speech. This is an instructive example, however, of the proposition that the application of constitutional freedoms in new contexts can deepen our understanding of their meaning.” – suggesting, again, the Court is inviting creative new First Amendment challenges to business regulation. Indeed, a couple of years ago, John Coates empirically demonstrated the increasing use of the First Amendment to challenge business regulation.
As readers are likely aware, the SEC regulates in large part via required (and prohibited) speech. After Citizens United, Larry Ribstein argued that some proposals for corporate governance and securities regulation might violate the First Amendment. And, as it turns out, it was only three years ago that the SEC found itself in First Amendment crosshairs with respect to conflict minerals disclosures (umm, that link is to my post on the subject, and it anticipated that the DC Circuit would reconsider the matter en banc, which it … did not, so that only shows how seriously you should take my prognostications). Rebecca Tushnet has more in-depth discussion of the conflict minerals case. It seems to me that the SEC is long overdue for a First Amendment reckoning, and the climate has never been more ripe.
Meanwhile, the Supreme Court has already granted cert to consider whether to reinvigorate the non-delegation doctrine, Justice Gorsuch has ostentatiously cast doubt on the viability of Chevron,* and Trump is expected to appoint a new conservative justice in the coming months – which will only encourage more aggressive litigation. All of which suggests we’re about to see a rather dramatic dismantling of the regulatory state – including the SEC’s authority.
*although, to be fair, no one ever deferred much to the SEC anyway – which is like the Rodney Dangerfield of agencies – so Chevron’s fate may not end up making much difference to it.
Thursday, June 28, 2018
If you're teaching securities regulation and touch on GAAP v. Non-GAAP metrics, you may catch millennial attention by talking about National Beverage Corp., notable to millennial audiences as the maker of LaCroix. National Beverage's CEO put out a press release saying that:
National Beverage employs methods that no other company does in this area – VPO (velocity per outlet) and VPC (velocity per capita)… Unique to National Beverage is creating velocity per capita through proven velocity predictors. Retailers are amazed by these methods.
If you're looking to evaluate the company's financial situation, more clarity on these metrics might help. The SEC reached out to ask for that information and got an odd response from a company executive, claiming that the "information is as secretive as the formulas of our beverages and should not be disclosed to our competition."
It's odd to tell the market that it should get excited about particular metrics and then refuse to provide information about what the metrics mean. This little tempest may also be a good way to touch on puffery again.
Wednesday, June 27, 2018
The University of California Hastings College of the Law in San Francisco seeks to hire a tenured or tenure-track faculty member. We seek someone who is, or who promises to be, an innovative and productive scholar, an exemplary teacher, and a role model for our students, and who will contribute as a dynamic and engaged institutional citizen. We will accord priority in consideration to candidates who teach and produce scholarship in the areas of state and local government law or contracts/private law. We are particularly interested in recruiting someone who will contribute to our vibrant and diverse community of interdisciplinary scholars. Entry-level and lateral candidates should send a cv, statement of interest, and representative publications in .pdf format to Professor Chimène Keitner, Appointments Committee Chair, email@example.com, with the subject heading “Faculty Position.” We will conduct interviews on campus and at the 2018 AALS Faculty Recruitment Conference.
UC Hastings prohibits discrimination against any person employed; seeking employment; or applying for or engaged in a paid or unpaid internship or training program leading to employment with UC Hastings College of the Law on the basis of race, color, national origin, religion, age, sex, gender, sexual orientation, gender expression, gender identity, gender transition status, sex- or gender-stereotyping, pregnancy, physical or mental disability, medical condition (cancer-related or genetic characteristics), genetic information (including family medical history), ancestry, marital status, citizenship, or service in the uniformed services, including protected veterans. This policy applies to all employment practices, including recruitment, selection, promotion, transfer, merit increase, salary, training and development, demotion, and separation.
"Google ... announced today that it is bringing its IT Support Professional Certificate to over 25 community colleges to help graduates get in on the estimated 150,000 well-paying jobs currently open in IT departments around the country." https://t.co/vr8sQkTtOj #corpgov— Stefan Padfield (@ProfPadfield) June 26, 2018
Breach of duty? CEO admits to passing on "very, very lucrative government contracts" due to belief that "face recognition software will be ... used to harm citizens" https://t.co/zIsFl3Rf2k #corpgov ht @AnnMLipton @Matt_Cagle— Stefan Padfield (@ProfPadfield) June 26, 2018
I guess I've got to have it in my timeline somewhere: Justice Kennedy retires. (Google News can fill in the rest.)— Stefan Padfield (@ProfPadfield) June 27, 2018
"BEAT is the Base Erosion and Anti-Abuse Tax, a complex minimum tax meant to prevent the world’s biggest corporations from shifting profits from the U.S. to other countries. Turned from idea into law last year as part of the tax-code revamp ...." https://t.co/vYKhnOySlr #corpgov— Stefan Padfield (@ProfPadfield) June 28, 2018