Sunday, March 18, 2018
Interesting comparison of state statutes' default definition of "person," particularly as to express inclusion or exclusion of "government." If both corporations & government are just "people, my friend," then the real issue is power. https://t.co/1VvQRYoSiA #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"some States adopted -or are in the process of adopting- legislations that establish or reinforce the duty of care or vigilance of parent companies directly towards victims" https://t.co/DWbyp2uYEo #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"In recent years, parties to mergers and other transformational transactions have begun inserting into their deal documents provisions allocating post-transaction control of the attorney-client privilege for pre-transaction communications." https://t.co/JbIDaUBtS2 #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"Judicial consideration of choice of law is rare in veil-piercing cases, but a brief survey leads to the discovery that state courts often apply their own local laws, regardless of where the subject entities are formed." https://t.co/rfgtbt79oR #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
The internal affairs doctrine: "why law should cleave an enterprise in this way is a puzzle. Economic theories of the firm can’t explain it, and the academic literature is short on answers." https://t.co/JOfymWy5JY #corpgov— Stefan Padfield (@ProfPadfield) March 17, 2018
Friday, March 16, 2018
It’s that time of year again! Tulane is hosting its 30th Annual Corporate Law Institute, a 2-day conference devoted to developments in corporate law, particularly mergers & acquisitions.
I was only able to attend some of the panels on the first day, but I very much enjoyed getting a sense of what lawyers – and judges – are thinking about these days. Below is a summary of some of the highlights that I found most intriguing:
[More after the jump]
Matt Kelly of Radical Compliance has posted on the costs and benefits of regulation. His post is timely considering this week's rollback of certain Dodd-Frank banking provisions by the Senate. Among other things, Kelly notes that according to a draft OMB report, "across 133 major rules, the average annualized cost (in 2015 dollars) was $92.8 billion, average annualized benefit $554.8 billion. Benefits were six times larger than costs." He further writes, with some skepticism, that the OMB is seeking comment from "peer reviewers with expertise... in regulatory policy" on its cost-benefit analysis as it finalizes its report.
He also cited GW public policy professors who looked at over two hundred major rules adopted between 2007-2010 and found that "The design of the rulemaking process can both increase the pace with which rules are promulgated and reduce the level of detail in which they are presented, but only when care is taken to ensure the individuals intimately involved have greater breadth – relative to depth – in the competencies they bring to the endeavor." As Kelly, observed, " Teams with more “breadth of competencies” (one subject matter expert, one lawyer, one economic analyst, one regulatory affairs specialist, and so forth) tended to write rules more quickly and keep them simpler. In contrast, teams with depth of competency (a whole bunch of lawyers, or policy analysts, or subject matter experts) tended to take more time and, as the authors wonderfully phrased it, “elongated the resulting rules.”'
Although Kelly looks at these issues through the lens of a compliance expert, his post is worth a read as Congress and the SEC look at regulatory reform. He correctly focuses on the need to look at the quality rather than the quantity of regulation.
Thursday, March 15, 2018
I had the pleasure of taking a group of students to Washington for the most recent meeting of the SEC's Investor Advisory Committee. Among other things, they discussed issues with dual class shares. In a nutshell, dual class shares give one set of shareholders much greater voting control than other sets. In practice, it provides a means for insiders to permanently entrench themselves and retain control over a corporation even as their economic stake declines. A number of leading companies (Facebook, Snapchat, and Google) have pursued similar structures aimed at entrenching existing founders and owners.
The committee issued a recommendation and suggested that the Commission take a close look at the kinds of risks these arrangements may create. It also highlighted how these developments could widen the separation between ownership and control for many corporations:
For instance, while Snap disclosed the major governance provisions it planned to adopt, its IPO registration statement did not clearly disclose that those provisions would enable each of the co-founders to reduce his equity stake to below 1% of total economic ownership without relinquishing control. The fact that the governance structure adopted by Snap could – without further shareholder check – lead over time to such a dramatic divergence between economic and voting interests could be made significantly more salient and clear to investors. A reasonable investor might (wrongly) presume that existing SEC rules, state laws or listing requirements would prevent such a dramatic change over time.
It's an issue worth keeping a close eye on as more and more corporations adopt dual-class structures. In particular, it's worth thinking about whether the justifications for having founders retain more control extends to indefinite control.
Wednesday, March 14, 2018
Judge Koh "said the plaintiffs could try to show that liability limits in Yahoo’s terms of service were 'unconscionable,' given the allegations that Yahoo knew its security was deficient but did little." https://t.co/u62mXKIXuw #corpgov— Stefan Padfield (@ProfPadfield) March 12, 2018
"The case that has been constructed is that ... Broadcom ... will cut investment significantly, particularly in the 5G roadmap, weaken Qualcomm, as well as the U.S. position and allow Huawei, a Chinese company to take the lead," https://t.co/tfj69LSvc0 #corpgov— Stefan Padfield (@ProfPadfield) March 13, 2018
"corporate successors are liable for the crimes of their predecessors. Always. Any corporation that results from any merger, consolidation, spin, etc., is on the hook for all the crimes of all the corporations that went into the process." https://t.co/cgVPm8AmbO #corpgov— Stefan Padfield (@ProfPadfield) March 13, 2018
"10 years ago this week, Bear Stearns collapsed .... Today, those involved w/ the unprecedented Bear bailout agree it only temporarily staved off a broader meltdown.... that months later ... caus[ed] stocks to shed nearly half their value ...." https://t.co/wXkpk6pVkb #corpgov— Stefan Padfield (@ProfPadfield) March 14, 2018
From me today: Almost unnoticed, the home cleaning service platform Handy has put nearly identical bills in front of 8 state legislatures that would permanently classify its workers as independent contractors. https://t.co/v3z0rBYhmF— Lydia DePillis (@lydiadepillis) March 14, 2018
Tuesday, March 13, 2018
A recent Georgia case highlights a whole host of things that frustrate me with litigation related to limited liability companies (LLCs). This one features an LLC making incorrect arguments and a court sanctioning that silliness. For example
Baja Properties argues that it is exempted from the rule set out in OCGA § 43-41-17 (b) by a provision in OCGA § 43-41-17 (h). Subsection (h) states, in part:
Nothing in this chapter shall preclude any person from constructing a building or structure on real property owned by such person which is intended upon completion for use or occupancy solely by that person and his or her family, firm, or corporation and its employees, and not for use by the general public and not offered for sale or lease. In so doing, such person may act as his or her own contractor personally providing direct supervision and management of all work not performed by licensed contractors.
contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an limited liability corporation [sic] may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera's negligence claim.An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
Monday, March 12, 2018
As I read recent news reports (starting a bit over a week ago and exemplified by stories here, here, here, and here--with the original story featured here) about Carl Icahn's well-timed sale of Manitowoc Company, Inc. stock, I could not help but associate the Icahn/Manitowoc intrigue with the Stewart/ImClone affair from back in the early days of the new millennium--more than 15 years ago. As many of you know, I spent a fair bit of time researching and writing on Martha Stewart's legal troubles relating to her December 2001 sale of ImClone Systems, Inc. stock. Eventually, I coauthored and edited a law teaching text focusing on some of the key issues. A bit of my Martha Stewart work is featured in that book; much of the rest can be found on my SSRN author page. For those who may not recall or know about the Stewart/ImClone matter, the SEC's press release relating to its insider trading enforcement action against Stewart is here, and it supplies some relevant background. (Btw, ImClone apparently is now a privately held subsidiary of Eli Lilly and Company organized as an LLC.)
In reading about Icahn's Manitowoc stock sale, my thoughts drifted back to Stewart's ImClone stock sale because of salient parallels in the early public revelations. Just as Icahn had personal and professional connections with U.S. government officials who were aware of material nonpublic information regarding the later-announced imposition of steel tariffs, Martha Stewart had personal and professional connections with at least one member of ImClone management who was aware of impending negative news from the U.S. Food and Drug Administration regarding ImClone's flagship product. We know from the law itself and Stewart/ImClone fiasco not to jump to conclusions about insider trading liability from such scant facts. Stewart's insider trading case ended up being settled. (No, that's not why she went to jail . . . .) And I have argued in a book chapter (Chapter 4 of this book) that the facts associated with Stewart's stock sale may well have revealed that she did not violate U.S. insider trading prohibitions under Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, as amended.
The Supreme Court's decisions in Dirks v. SEC and Salman v. United States advise us that a tippee trading while in possession of material nonpublic information only violates U.S. insider trading prohibitions under Section 10(b) and Rule 10b-5 if:
- disclosure of the material nonpublic information in the tippee's possession breached a duty of trust and confidence because it was shared (directly or indirectly) with the tippee improperly--typically (although perhaps not always--as I note and argue in a forthcoming essay) because the duty-bearing tipper benefitted in some way from disclosure of the information; and
- the tippee knew or should have known that the tipper breached his or her duty of trust and confidence.
See, e.g., Dirks v. SEC, 463 U.S. 646, 660 (1983).
Thus, there is much more to tease out in terms of the facts of the Icahn/Manitowoc scenario before we can even begin to assert potential insider trading liability. Among the unanswered questions:
- what Icahn knew and when he knew it;
- whether any information disclosed to Icahn was material and nonpublic;
- who disclosed the information to Icahn and whether anyone directly or indirectly making disclosures to him had a fiduciary or fiduciary-like duty of trust and confidence;
- whether any disclosures directly or indirectly made to Icahn were inappropriate and, therefore, breached the tipper's fiduciary or fiduciary-like duty of trust and confidence; and
- whether Icahn knew or should have known that the information he received was disclosed in breach of a fiduciary or fiduciary-like duty of trust and confidence.
Icahn denies having any information about the Trump administration's imposition of tariffs on the steel industry. (See, e.g., here.) And the nature of the duties of trust and confidence owed by government officials is somewhat contended (although Donna Nagy's work in this area holds great sway with me). Regardless, it is simply too soon to tell whether Icahn has any U.S. insider trading liability exposure based on current news reports. I assume ongoing inquiries will result in more facts being adduced and made public. This post may serve as a guide for the digestion of those additoonal facts as they are revealed. In the mean time, feel free to leave your observations and questions in the comments.
Sunday, March 11, 2018
"In Germany ... employees & shareholders have an equal number of seats on the supervisory board .... In Japan, managers do not have a fiduciary responsibility to shareholders.... in France ... [1-3] board positions ... elected by employees" https://t.co/twrjAS2IYr #corpgov— Stefan Padfield (@ProfPadfield) March 7, 2018
Making the Case for Gender Quotas https://t.co/dnEBVKyuKv— Gender Law (@ProfTracyThomas) March 7, 2018
"Conkling told the Justices that the 14th Amendment ... was adopted not just for the freed slaves but also to protect businesses.... As historian Howard Jay Graham memorably concluded, Conkling had engaged in 'a deliberate, brazen forgery.'" https://t.co/kKmoJg2Qap #corpgov— Stefan Padfield (@ProfPadfield) March 9, 2018
"a number of currently pressing social and economic problems.... can be traced to the way shares in business corporations are currently owned, traded, and voted" 41 Seattle U. L. Rev. 551 #corpgov— Stefan Padfield (@ProfPadfield) March 11, 2018
"traditional First Amendment underdogs--the lone pamphleteer, the civil rights picketer, the literary subversive--have mostly been replaced by ... the pharmaceutical advertiser, the corporate human resource manager, & the billionaire political donor" 84 Tenn. L. Rev. 833 #corpgov— Stefan Padfield (@ProfPadfield) March 11, 2018
Saturday, March 10, 2018
I’ve been consumed by the latest twist in Broadcom’s attempt at a hostile takeover of Qualcomm: the dramatic entrance of CFIUS.
For those who haven’t been following the saga, Broadcom, a Singaporean technology company, has been attempting to acquire San Diego-based Qualcomm for months. After its attempts at a friendly merger were rebuffed, it launched a proxy contest, proposing its own nominees to replace Qualcomm’s existing directors.
Qualcomm responded with what is apparently becoming de rigueur in contested proxy solicitations: in addition to setting up a website devoted to making its case to shareholders, it also promoted various tweets on the subject.
One intriguing aspect of Qualcomm’s argument has been that – as a leader in research and development – the merger would be bad for innovation and consumers. This point is reiterated on its website, which fascinates me because it assumes that investors as investors would be persuaded by an argument directed toward consumer wellbeing.
That may not have been the right tack; according to news reports, at least some large shareholders were poised to vote for Broadcom, giving Broadcom a fighting chance at a hostile takeover.
But the day before the crucial shareholder meeting, Qualcomm won a reprieve: the Committee on Foreign Investment in the United States (CFIUS) asked that the vote be delayed so that it could review whether the transaction posed a threat to national security.
CFIUS, Chaired by the Secretary of the Treasury and staffed with representatives of most major federal departments, is charged with reviewing proposed mergers and acquisitions in which a foreign entity proposes to gain control of a domestic one, to ensure that the transaction will not pose national security risks. It can intervene on its own accord when a transaction raises red flags or – more commonly – the parties can ask for pre-acquisition review to ensure that problems will not arise later. In this case, Qualcomm asked for the review, in an elegant example of the use of the regulatory system as a takeover defense mechanism that is sure to serve as a classroom example for decades. (Check out the wording of CFIUS’s letter: “Qualcomm is a global leader in the development and commercialization of foundational technologies… Qualcomm led the mobile revolution in digital communications technologies…” – did Treasury write this or Qualcomm’s PR department?)
CFIUS’s eleventh-hour appearance is quite the eyebrow-raiser. For one thing, it tests the outer boundaries of what counts as foreign control. And that’s not just because of the technical definition of what it means to be foreign – as the New York Times points out, Broadcom’s employees and properties are mostly located in the US, and the company has plans to relocate its headquarters to US this year – but because it’s unclear that Broadcom is, at this time, seeking “control.”
As its proxy filings indicate, Broadcom’s nominees for Qualcomm’s board have no prior relationship to Broadcom and mostly appear to be American. Broadcom is not a controlling shareholder, and its nominees will only gain board positions with the support of Qualcomm’s remaining (American) shareholders. Though of course Broadcom expects that eventually these directors will agree to allow Broadcom to acquire Qualcomm’s stock, that is by no means certain (remember Airgas??) and Broadcom has no legal power to compel them to do so. It is therefore a stretch to categorize the proxy fight itself as a “merger, acquisition, or takeover that is proposed or pending … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States,” which is the only matter over which CFIUS has jurisdiction. Indeed, this precise point apparently troubled Sec. Mnuchin.
The other stunner is the national security risk that CFIUS identifies, namely, the fact that Broadcom’s investment strategy involves cutting R&D spending, which might hobble Qualcomm’s efforts to develop 5G technology. As CFIUS itself concedes, this is the investment strategy of many – American – private equity firms, and is unrelated to Broadcom’s (nominally) foreign status; it is simply the fact that Broadcom happens to be foreign that gives CFIUS jurisdiction to insert itself into the dispute. Steven Davidoff Solomon calls this an example of “realpolitik,” namely, an acknowledgement that China – our main competitor in the 5G space – has a government policy of assisting private development of technology.
Broadcom has responded to all of this with pledges to continue spending on R&D and even to sponsor a new initiative dedicated to training American engineers, but my bottom line reaction is that if the US is so concerned about keeping American tech companies competitive, it might reconsider all those new immigration policies that are scaring talent away to other countries.
Edit: Jinx, buy me a Coke - after I typed this post up, a Qualcomm shareholder filed a lawsuit in Delaware arguing that by inviting CFIUS to review the deal using spurious arguments of foreign control, Qualcomm directors violated their fiduciary duties. I can't say I have high hopes for the suit's chances, at least to the extent it rests on CFIUS's actions, but I did find one detail interesting: the original CFIUS order apparently required that the shareholder meeting be postponed and proxies cease being accepted or counted; CFIUS then modified the order to call for an adjournment of the meeting and to permit proxies to be solicited. The plaintiff contends this was done at Qualcomm's urging, to permit it to continue to try to lobby shareholders to change their votes.
Friday, March 9, 2018
I love teaching courses that develop practical skills. This summer, I am teaching a 2-credit transactional drafting course for the first time. In the past, I have taught 2-credit skills courses that had a drafting element, but the students enrolled in those courses typically had taken business associations, and therefore we could do entity selection exercises, portions of bylaws, operating agreements, asset purchase agreements, NDAs, and employment agreement clauses. This time, BA will not be a prerequisite, and I am likely to have a number of rising 2Ls enroll.
I have a pile of proposed textbooks that I'm looking to for inspiration (and to select for the course), but I'm specifically seeking tips and best practices for teaching these skills to students who are fresh off of their 1L year. I plan to have a number of practicing lawyers speak to the students about common pitfalls in negotiating and drafting because I have the luxury of one three-hour block of time per week. At a minimum, students will draft, edit, and redline (where appropriate) a retainer letter, time sheets, a nondisclosure agreement, an independent contractor or employment agreement, and a license or settlement agreement. The goal is to have them draft some documents from scratch, some from forms, learn interviewing and negotiation techniques, and apply some business judgment to address client concerns.
What has worked (or bombed) when you've taught a transactional drafting class, especially to those who have not taken BA? For the practicing attorneys, what would you want your interns or junior associates to have worked on prior to joining you? Inquiring minds want to know. Please comment below or feel free to email me at firstname.lastname@example.org.
Thursday, March 8, 2018
The main premise behind self-regulation is that an industry has an incentive to police its ranks if industry members bear the costs of misbehavior. An organized industry won't tolerate particular industry members cheating or taking advantage to get an edge for themselves if it imposes greater costs on the industry as a whole. Notice here that profit-seeking industry self-regulators will construe “misbehavior” as actions that impose costs or reduce the profits of the industry as a whole—not necessarily as activities that generate costs elsewhere. For example, self-regulating manufacturers may not limit environmental pollution because distant customers do not bear the environmental costs generated by their operations. Their customers may even prefer pollution-spewing factories because they pay less for goods and bear no liability for the environmental cleanup.
The New York Stock Exchange's history as a self-regulating exchange bears this out. Traditionally, the NYSE aggressively policed its own ranks to prevent its members from undercutting the standard fixed commission rates. It did not, however, aggressively police its members’ extraordinarily profitable market-manipulating stock pools. The incentive to self-police, therefore, failed to check exploitation of the public for at least two reasons: (i) the NYSE members that did not participate in the stock pools still profited because of the heightened trading volume; and (ii) the stock pool operators controlled the NYSE governing committee.
The incentive to self-police and crack down on stock pool operators may also have been limited because Wall Street’s broker-dealer firms internalized only a limited portion of the costs that their misbehavior imposed on the public. In theory, contractual relationships between broker-dealer firms and their customers should allow customers to impose costs incurred from misbehavior and disloyalty on the industry. When contractual relationships do not transfer the costs of misbehavior back to the industry, this incentive to self-police diminishes. If customers lack the bargaining power to negotiate these types of contracts, the industry may under-invest in enforcement and monitoring.
Today, the brokerage industry imposes significant costs on the public through conflicted financial advice. To be sure, wronged investors can seek to recover through FINRA's arbitration forum. But winning a FINRA arbitration does not mean that an investor will always be paid. Roughly one third of arbitration awards now go unpaid because the FINRA members that do the most damage often go out of business.
The issue over unpaid awards matters because it cuts to a core premise behind self-regulation: self-regulation works well if the industry bears the costs of its misbehavior. Despite this, FINRA does not require its firms to acquire insurance to bear the costs of their operations or to maintain significant capital reserves. While FINRA does expel member firms that fail to pay arbitration awards, the individuals employed by those firms often simply relocate to another firm and continue with business as usual. While reform advocates have suggested creating a national compensation pool to address the issue, FINRA has not yet embraced the idea of internalizing the costs generated by FINRA members.
Senator Warren just introduced draft legislation to create a recovery pool and require FINRA's member firms to internalize the costs they generate. It calls for FINRA to create a pool to pick up the tab for unpaid arbitration awards. In past years, the fines FINRA assesses against its members would have covered all unpaid awards. This does not mean that fine revenues will always be sufficient. Many persons likely abandon all hope now when a FINRA member goes out of business. Since they couldn't recover, they never seek an arbitration award.
This legislation may attract some bipartisan support. Importantly, the U.S. Government does not pay these unpaid awards. FINRA and the industry will pay them. This lets the market set the right price for the privilege of self-regulation.
Wednesday, March 7, 2018
"Browning-Ferris require[s] only that an entity exercise 'indirect control' over the terms and conditions of employment at the other entity for them to be considered 'joint employers' and thus jointly liable for any labor violations." https://t.co/vqmoicM1gD #corpgov— Stefan Padfield (@ProfPadfield) March 5, 2018
"it is remarkable that no US state has experimented w/ a code & panel-based model of merger regulation. We explain ... by reference to interest group politics and ... the power of the bar to influence corporate law reforms in the United States." 35 Yale J. on Reg. 1 #corpgov— Stefan Padfield (@ProfPadfield) March 6, 2018
"Commercial trusts are one of the United States' most important types of business organizations, holding trillions of dollars of assets and operating nationally and internationally as a “mirror image” of the corporation." 69 Fla. L. Rev. 1021 #corpgov— Stefan Padfield (@ProfPadfield) March 6, 2018
"The SEC today announced that it charged the New York Stock Exchange and two affiliated exchanges with regulatory failures .... The charges ... include the first-ever charged violation of Regulation SCI [Systems Compliance and Integrity]." https://t.co/nED5jBX9as #corpgov— Stefan Padfield (@ProfPadfield) March 6, 2018
"law and policy have to be made ..., and, from a cognitive perspective, not having working assumptions as to many matters is quite costly. What fills the gap? Identity—a sense of self, of who and what “sort” of a person we [corporations?] are." https://t.co/rNVAY7YWHo #corpgov— Stefan Padfield (@ProfPadfield) March 6, 2018
Tuesday, March 6, 2018
Prof. Jena Martin's New Human Rights Paper: Applying Bystander Intervention Training to Corporate Conduct
Friend and colleague Jena Martin has posted her new paper, Easing "the Burden of the Brutalized": Applying Bystander Intervention Training to Corporate Conduct. And when I say new, I mean new. It went on SSRN within the last hour.
Prof. Martin is an expert in business and human rights, and her new paper offers a new framework for corporations that are seeking to reduce or eliminate human rights violations. Her paper is designed to help corporation beyond due diligence and reporting to allow them to "engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses." It is a timely piece with some interesting and innovative suggestions. I look forward to seeing where the final version ends up.
The last few years have borne witness to a shift regarding how to address issues of oppression and social injustice. Across many different advocacy points - from police brutality to sexual violence - there seems to be a consensus that simply engaging the oppressor or the victim is not enough to affect real social change. The consensus itself is not new: it has been at the heart of many social justice movements over the years. However, what is new is the explicit evocation of the bystander within this framework. Too often, in conversations on conflicts generally (and negative human rights impact specifically), bystanders have been relegated to the sidelines, with no defined, specific role to play and no discussion within the larger narrative. Now, however, -- through the use of bystander intervention training -- these actors are taking on a more prominent role.
In previous articles, I have stated that the rhetoric and posture that transnational corporations (TNCs) maintain vis-à-vis human rights impacts is that of a bystander. Frequently, when human rights abuses occur, TNCs find themselves in the position of having to acknowledge their presence in the area of the underlying conflict, while profusely maintaining that none of their actions caused the harm against the community. Building off this prior work, this article seeks to answer the following question: are there lessons that can be learned from bystander intervention training in other contexts, that can be used for the benefits of TNCs within the field of business and human rights? I conclude that what is lacking in the current discourse on corporate policies regarding addressing negative human rights impacts is an articulation regarding when, and under what circumstances, it is appropriate for corporations to intervene in negative human rights disputes. This goes beyond the current proposals for human rights due diligence frameworks in that, rather than merely undergoing an assessment and then reporting this information out (as is required by most current legal frameworks that address business and human rights reporting) this would help corporations – informed by a bystander intervention framework – to engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.
Monday, March 5, 2018
The first Business Law Prof Blog conference was held in Knoxville back in September. Learned a lot, and had a great time. Looking forward to future ones!
My contribution to the conference was an article on "Judicial Dissolution of the Limited Liability Company: A Statutory Analysis," 19 Tennessee Journal of Business Law 81 (2017). I took a look at the judicial dissolution statutes in all 50 states as well as the major model acts, and provided commentary on some of the more interesting differences. The article is complete with two charts (not one, but TWO), and who doesn't love charts in a law review article? If you are interested, please click on the link LLC Judicial Dissolution. I summarize the descriptive findings in the article below, but you'll have to take a look for the analysis/commentary:
The most common judicial dissolution ground in the sample is when the court decides that it is not reasonably practicable to carry on the business in conformity with the LLC’s governing documents. Fifty-four statutes include some version of this language. Interestingly, this ground is articulated in several different ways. Twenty-three of the fifty-four statutes allow for judicial dissolution if a court decides that “[i]t is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.” Another sixteen statutes provide for judicial dissolution if a court decides that “[i]t is not reasonably practicable to carry on the business in conformity with the certificate of formation or the operating agreement.” An additional twelve statutes allow a court to dissolve upon a finding that “it is not reasonably practicable to carry on the limited liability company’s activities and affairs in conformity with the limited liability company agreement.” Three more states allow for dissolution when a court concludes that “it is not reasonably practicable to carry on the company’s activities and affairs.” Finally, one state provides for dissolution when a court concludes that “it is not practicable to conduct the LLC’s business in conformance with the operating agreement and this Chapter.”
The next most common judicial dissolution ground in the sample is the presence of unlawful, illegal, or fraudulent conduct by members, managers, or the LLC itself. Twenty-nine statutes include some version of this language. The most prevalent formulation is to provide one ground that focuses on the company’s activities (“the conduct of all or substantially all of the company’s activities is unlawful”) and another ground that focuses on the behavior of the managers or members (“the managers . . . or those members in control of the company . . . have acted, are acting, or will act in a manner that is illegal or fraudulent”). Some statutes, however, limit the focus exclusively to the conduct of the managers or members in control.
Dissolution on the grounds of oppressive conduct by managers or members is included in twenty-four statutes in the sample. Most statutes articulate this ground by using the term “oppressive” or “unfairly prejudicial” action by the managers or members in control of the company. A very small number of statutes speak of conduct that is an “abuse of authority,” and a few refer to dissolution when necessary to protect the “rights and interests” of the petitioning member. I included all of these variations in this category.
Ten statutes provide for judicial dissolution when the economic purpose of the company cannot be accomplished. Most statutes articulate this ground by providing that “the economic purpose of the [LLC] is likely to be unreasonably frustrated.” One statute provides for dissolution when a court determines “that it is impossible for the company to carry on the purposes of the company,” while another is triggered when the “business of the limited liability company has been abandoned.” I included all of these variations in this category.
Other grounds for judicial dissolution include the following: (1) member conduct that makes it not reasonably practicable to carry on the company’s business with that member (seven statutes); (2) failure to purchase the petitioner’s distributional interest when required (five statutes); (3) member or manager deadlock (five statutes); (4) waste or misapplication of assets (four statutes); (5) abuse of power by the LLC contrary to the public policy of the state (one statute); and (6) “other circumstances [that] render dissolution equitable” (one statute).
CALL FOR PAPERS: Integrating Corporate Reporting
June 6, 2018
The Law Faculty of the Hebrew University of Jerusalem (HUJI)
Keynote Speaker — Prof. Baruch Lev (New York University)
Workshop submission deadline: April 10, 2018
The Hebrew University of Jerusalem (HUJI) is pleased to announce an interdisciplinary international workshop on corporate reporting to be held in Jerusalem on June 6, 2018.
The workshop will focus on corporate reporting and aims to bring together researchers in law, finance, economics, accounting and political science, whose research interests include corporate reporting and corporate regulation in general.
Abstract: Corporations are involved in vital aspects of the modern social order. From capital allocation by publicly traded companies, through the supply of essential commodities such as water and electricity by state and municipal corporations, to local government corporations that design local governance and administrative structures. Consequently, the implementation of many social policies—from levying fair taxation to ensuring equal employment opportunities and fair trade—Involve corporate regulatory issues. As regulatory regimes become more and more dependent on the information provided by corporations and their managers, corporate reporting has become important for objectives other than mere capital allocation.
Thus, in recent years, alongside “classic” reporting to investors and tax authorities, reporting practice has expanded and begun to serve a wider array of purposes, both business and social. Following these developments, “corporate reporting” is now a term that refers to a broad range of phenomena that encompass various processes through which information about the corporation is produced for parties who do not have direct access to information.
The workshop intends to bring together researchers in law, finance, economics, accounting and political science to discuss corporate reporting. Special attention will be given to the inherent tension that exists in almost all corporate reporting processes: that is, the dependence of information-consumers, investors or other stakeholders on the corporation and its managers as the main source of information regarding a corporation's financial status and operations.
Submissions Instructions: Scholars from the legal, finance, economics, accounting and political science fields are invited to submit abstracts for papers to be presented and discussed at the workshop. The deadline for submissions is April 10, 2018. Please send an abstract (of no more than 500 words) of the paper intended to be presented to the meeting organizers, Israel Klein (Iklein@huji.ac.il) and Ittai Paldor (email@example.com). Abstracts will be reviewed by the scientific committee and selected abstracts will be announced by April 15, 2018.
Funding will be available to partially cover participants’ travel expenses.
Scientific Committee: Hadas Aharoni-Barak, Keren Bar-Hava, Adam Hofri-Winogradow, Israel Klein, Ittai Paldor, Benjamin Segal.
Sunday, March 4, 2018
"According to Acritas, men working in senior in-house legal positions are typically paid 26% more than their female counterparts around the world. However, ... female chief legal roles earn the same as male peers in the US." https://t.co/raNdk96oz0 #corpgov— Stefan Padfield (@ProfPadfield) March 2, 2018
"Verification of [corporate religious] sincerity will be especially important if a religious exemption will result in a significant commercial advantage to the claimant or a burden for the public." https://t.co/JAPtFRoKbj #corpgov— Stefan Padfield (@ProfPadfield) March 2, 2018
"Like investment cuts, buybacks & M&A could be good rather than bad—but we find that vesting equity leads to the bad type. It is associated w/ higher short-term returns to both decisions, but significantly lower long-term returns" https://t.co/w2d7p2Yq2F #corpgov ht @Anderson_IPS— Stefan Padfield (@ProfPadfield) March 2, 2018
"Companies with higher proportions of women in upper management achieve higher profits, according to a recent study of 21,980 firms in 91 countries by the Peterson Institute for International Economics." https://t.co/g2k27UDKZv #corpgov ht @AnnMLipton— Stefan Padfield (@ProfPadfield) March 2, 2018
"Retaliating against a company based on its speech may be unconstitutional. Retaliating based on a company’s commercial conduct, e.g., termination of a discount, is constitutional,” says @VolokhC re: Lt. Gov's threat to Delta Air for cutting #NRA discount. https://t.co/exCPeyqIIs— UCLA School of Law (@UCLA_Law) March 2, 2018
Must-read from corporate law expert @Kentgreenfield1: "If the legislature punished Delta by taking away a state benefit because of its stand on the NRA, it would be a clear violation of the First Amendment’s restriction on viewpoint-based discrimination." https://t.co/hBdHXmhUQF— Jennifer Taub (@jentaub) March 2, 2018
Saturday, March 3, 2018
George Geis at the University of Virginia has just posted Traceable Shares and Corporate Law, exploring the implications that blockchain technology will have on various aspects of corporate law that – until now – hinged on the presumption that when one person buys a share of stock in the open market, there is no prior owner who can be identified. The ownership history of a particular share cannot, in other words, be traced.
That lack of traceability has a lot of important effects. For example, it means that if a company issued stock pursuant to a false registration statement, but also issued additional stock in another manner, plaintiffs may not be able to bring Section 11 claims because they cannot establish that their specific shares were traceable to the deficient registration. In the context of appraisal, it has led to questions of whether petitioners who obtained their shares after the record date have an obligation to show that the prior owners of the shares did not vote in favor of the merger (an impossible task). If blockchain technology makes it possible to trace the owners of a share from one transfer to another, these areas of law may be dramatically altered.
The most intriguing part of the paper, however, is where Geis goes further, and inquires whether traceability could cause us to rethink fundamental corporate doctrines. For example, he points out that fraud-on-the-market doctrine is often criticized because some shareholders may benefit from the fraud – in the form of rising share prices – but do not have to pay any damages if they sell before the crash. He provocatively suggests that with traceable shares, subsequent purchasers might have claims against the transferors – which might then incentivize selling shareholders to more closely attend to matters of corporate governance.
I find the proposal fascinating, because it would function, essentially, as a kind of targeted veil-piercing. Though I doubt legislatures and courts would have much appetite for such a rule, it makes for an interesting thought experiment to imagine how it might play out. Presumably, such a rule would not depend on inside information – insider trading prohibitions already would permit disgorgement in those circumstances – so we have to assume the selling shareholders were relying on public information when making their trades. I also assume such liability would be more palatable when imposed on institutional investors of a certain size than on retail investors. Would institutions have a defense if they showed they tried to be good corporate stewards, objected to, say, pay packages that encouraged risk-taking and the like? Especially if they could also show they used an index strategy and so engagement was their only tool to monitor their investments?
One downside, of course, would be potential losses to market efficiency. If shareholders cannot gain by selling stock of companies that they believe are overvalued, prices will become less informative. Indeed, the act of selling out may be exactly the best way to exert pressure on management to govern more responsibly.
In any event, I think Geis is correct when he predicts that traceable shares are in our future – and we may have to rethink a lot of corporate law as a result.
Friday, March 2, 2018
I live in South Florida and have friends who live in Parkland, Florida, the site of the most recent school shooting. Like many, I've found solace and inspiration in the young survivors and their families who have taken to the streets and visited Washington, D.C. to demand action to prevent the next tragedy. Who knows whether they will succeed where others have failed. I certainly hope so.
I'm more surprised though, with the reactions of major companies such as WalMart, Dicks, REI, United Airlines, Hertz, Symantec and others that have cut ties with the National Rifle Association or have changed their sales practices. Skeptics have observed that corporations take "controversial" stances only when it's cheap or easy and that this stance against the NRA isn't even that controversial. But, it certainly hasn't been "cheap" for Delta Airlines. Notwithstanding the fact that the airline employs 33,000 people in the state, Georgia has passed a bill to eliminate a proposed $50 million tax break because Delta announced plans to end its discount for NRA members.
The gun control issue is the latest in a string of public policy debates that have divided corporations over the past year. CEOs have taken positions on the travel ban, Charlottesville, the NFL protests, the Paris Climate Accord, transgender bathroom laws, and immigration. Some of these positions are more closely tied to their core business than others, and some have been driven by social media activism.
Cautious companies have guidance and momentum on their side when deciding whether to weigh in on social issues. According to the Conscious Capitalism credo, “.. business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had. But we can aspire to even more.” This movement focuses on a higher purpose than generating profits; a stakeholder orientation; leaders that cultivate a culture of care and consciousness; and a conscious culture that permeates the people, purpose, and process.
Blackrock, with $1.7 trillion under management, made that even more clear in its January 2018 letter to CEOs, which stated, among other things:
Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth...
Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?
What does this mean for the future? Is corporate social responsibility more of a business imperative than ever? Boards are now entering proxy season. Will shareholders demand more? Will state and federal governments use their power, as Georgia has, to send a message to the C-Suite? Will consumers engage in boycotts or buycotts? (See here, here, here, here) for my views on boycotts). I look forward to seeing how whether the corporations sustain this conscious capitalism over the long term even when it is no longer "cheap" and "easy."
Thursday, March 1, 2018
Yesterday, the SEC announced a settlement with Ameriprise. The SEC's order explains that Ameriprise disadvantaged retirement plan customers by "selling them more expensive share classes in certain [mutual funds] when less expensive share classes were" also available through Ameriprise. Although not a defense, Ameriprise's spokesperson correctly pointed out that this issue has been "a long-standing industry topic and numerous firms have settled with the SEC and Finra on similar matters."
Many open-ended mutual funds offer multiple share classes. Investors purchasing class A shares typically pay an up-front commission or sales load. The amount of the commission paid varies by fund. Class B and Class C shares generally charge no up-front fees, but hit investors with higher fees over time or with contingent-deferred sales charges if the investors redeem their mutual fund shares before a certain amount of time. In many instances, investors placing large orders can receive bulk discounts (called "breakpoints") on Class A shares. Ameriprise ran into trouble because it did not steer its customers into lower-fee shares when they were available and because it did not disclose that it was steering customers into expensive share classes that paid Ameriprise more money. Overall, investors paid an extra $1.7 million in fees because of Ameriprise's supervisory failures. To its credit, Ameriprise reimbursed those fees "along with $190,797.40" in interest. It also paid another $230,000 as a civil monetary penalty to the SEC to resolve the regulatory issue.
Although the numbers are not huge here, it's good to see the SEC cracking down on the exploitation of retail investors. The order and ongoing problem also show the need for the SEC to use its power under Dodd-Frank to impose a fiduciary duty on broker-dealer firms when they act as financial advisers to retail customers. Notably, the SEC's enforcement here hinges not on what Ameriprise did so much as its failure to disclose to customers that "it would earn greater compensation in recommending . . " certain share classes "because these share classes would generate additional revenue for Ameriprise."