December 12, 2011
A Reason People Hate Corporate Lawyers or Why the Packers Should Be an LLC
On Friday, I asked whether the sale of Green Bay Packers stock should be considered a security. A few people asked whether I really think the Packers stock could be a security. The answer, under Wisconsin law, is almost certainly no, especially given that that Green Bay Packers, Inc., "is organized as a Wisconsin nonprofit stock corporation." And that's probably the case for almost any other state, too, and under federal law.
But just because the outcome is pretty clear, it doesn't mean that there aren't policy implications that are worth thinking about. I think the biggest one is this: lawyers and business people should say what they mean. Mixing marketing and corporate law is not always a good idea. I find it more than a little silly that the cover of the Packers offering documents says:
Green Bay Packers, Inc.
Common Stock Offering Document
COMMON STOCK DOES NOT CONSTITUTE AN INVESTMENT IN “STOCK” IN THE COMMON SENSE OF THE TERM. PURCHASERS SHOULD NOT PURCHASE COMMON STOCK WITH THE PURPOSE OF MAKING A PROFIT.
So, you see, the word stock without quotes is different than stock with quotes. In my view, you shouldn't call something stock if it's not stock, even if you can under securities laws. There's no doubt that the Landreth court, interpreting Forman, said that stock is not a security just because the company said it issued stock:
[I]n Forman we eschewed a "literal" approach that would invoke the [Securities] Acts' coverage simply because the instrument carried the label "stock." Forman does not, however, eliminate the Court's ability to hold that an instrument is covered when its characteristics bear out the label.
Now, before these cases, one could argue that something labeled "stock" is always a security, as per § 2(1) of the 1933 Act:
"The term `security' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, . . . investment contract, voting-trust certificate,. . . or, in general, any interest or instrument commonly known as a `security.' " 15 U. S. C. § 77b(1).
In Landreth, the court cited Louis Loss, Fundamentals of Securities Regulation 211-212 (1983), providing the following excerpt:
It is one thing to say that the typical cooperative apartment dweller has bought a home, not a security; or that not every installment purchase `note' is a security; or that a person who charges a restaurant meal by signing his credit card slip is not selling a security even though his signature is an `evidence of indebtedness.' But stock (except for the residential wrinkle) is so quintessentially a security as to foreclose further analysis."
And, in fact, before Landreth, SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943) indicated that notes or bonds could possibly be deemed securities "by proving [only] the document itself." The Forman court said that interpretation was dictum as to stock, and the Landreth confirmed that was not true for stock (leaving that question as to notes and bonds "until another day"). Thus, the Supreme Court said, we must look to the economic realities to determine whether stock is a security.
Which bring me back to this: If the Packers are really just selling a $250 (plus handling) certificate (suitable for framing), they shouldn't call it stock. And they shouldn't start their offering letter: "Dear Future Owner of the World Champion Green Bay Packers." It should say: "Dear Future Owner of a Certificate saying 'World Champion Green Bay Packers.'"
In my view, the Packers are using the sense of ownership to secure investors and people who have a connection with the team. I think that's fine; I actually rather like the idea. But I don't like the idea that they can use the term stock, the sense of ownership, provide voting rights and the opportunity to attend Annual Meetings, restrict gifting or sales, and then disclaim that what they are selling is a security simply because the primary upside is that past purchases helped "ensure the team survived and remained in Green Bay" and the new purchases will fund an "expansion [that] has been designed to keep the crowd noise in the stadium and maximize our home-field advantage."
So, I admit my argument is largely academic (a luxury I have), but I do think there is value in not allowing people to muddy the waters. Suppose, for the sake of argument, the Packers committed a massive fraud and used the money to invest in Greek debt. The debt tanks, the Packers can't have a stadium upgrade, and the home field advantage begins to fade. The team suffers, and shareholders sue under 10b-5. The court says, nope, you didn't buy a security because you only had voting rights, without ecomomic rights. The court would probably be right under Landreth (notice my continuing, apparently unavoidable, hedge). And it would be reasonable under the actual terms of the offering document, if you read it. But it would still make a bunch of lawyers and judges look like jerks.
To me, this would all be better done as an LLC, with a granting of an owership unit clearly defining the terms. Then it's plainly (or should be) contractual, and it's not stock, and we have very little problem with confusion with traditional stock or other securities. Frankly, isn't that confusion the main reason the Packers are calling it stock? I think so. This is just one more reason we should start respecting and using the LLC for creative entities, and leave the off-the-rack stuff for corporations.
[Update: Professor Bainbridge wanted an answer to the real question of whether Packers stock is a security. My answer is that I don't think a federal court would find this to be a security, especially with the appropriate disclaimers that have been made. But I reserve my right to think they should. In the interest of full disclosure, I am a life-long Lions fan.]
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