December 9, 2011
Is Stock in the Green Bay Packers a Security?
Building on my business law and the NFL geekdom: The Green Bay Packers recently offered to sell 250,000 shares at $250 per share. See here: http://packersowner.com/. The opportunity to own a portion of any major sports team is a big deal. Just ask Professor Bainbridge -- he even reconsiderd his allegiance to that team from Washington now that he is an owner of one share of the Packers. Of course, as merely a shareholder, he has no fiduciary obligations not to root for his old team. There's just very little upside.
The Packers Offering Document is available here. The Packers make very clear:
The Common Stock does not constitute an investment in “stock” in the common sense of the term because (i) the Corporation cannot pay dividends or distribute proceeds from liquidation to its shareholders; (ii) Common Stock is not negotiable or transferable, except to family members by gift or in the event of death, or to the Corporation at a price substantially less than the issuance price, under the Corporation’s Bylaws; and (iii) Common Stock cannot be pledged or hypothecated under the Corporation’s Bylaws. COMMON STOCK CANNOT APPRECIATE IN VALUE, AND HOLDERS OF COMMON STOCK CANNOT RECOUP THE AMOUNT INITIALLY PAID FOR COMMON STOCK, EITHER TROUGH RESALE OR TRANSFER, OR THROUGH LIQUIDATION OR DISSOLUTION OF THE CORPORATION.
The Offering Document further makes clear their view of the securities law issue:
Because the Corporation believes Common Stock is not considered “stock” for securities laws purposes, it believes offerees and purchasers of Common Stock will not receive the protection of federal, state or international securities laws with respect to the offering or sale of Common Stock. In particular, Common Stock will not be registered under the Securities Act of 1933, as amended, or any state or international securities laws.
Okay, but can they just do that? I'll concede at the outset that it's unlikely a court would find this to be a security, but it's not (or shouldn't be) a foregone conclusion. Like partnerships or agency relationships, just because the participants disclaim something, it doesn't mean the court will agree. As the court in Chandler v. Kelley, 141 S.E. 389 (Va. 1928), explained in the agency context, even where the parties "denied the agency . . . the relationship of the parties does not depend upon what the parties themselves call it, but rather in law what it actually is."
Certainly it's true that the Packers stock could fail some elements of the Howey test, which says something is a security when there is "a contract, transaction or scheme whereby a person invests money, in a common enterprise, and is led to expect profits solely from the efforts of the promoter or a third party.” SEC v. WJ Howey Co., 328 US 293 (1946). So here, the failure would be be that the purchaser is not led to expect profits.
In 1985, the Supreme Court determined in Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985):
[T]he fact that instruments bear the label “stock” is not of itself sufficient to invoke the coverage of the Acts. Rather, we concluded that we must also determine whether those instruments possess “some of the significant characteristics typically associated with” stock, id., at 851, 95 S.Ct., at 2060, recognizing that when an instrument is both called “stock” and bears stock's usual characteristics, “a purchaser justifiably [may] assume that the federal securities laws apply,” id., at 850, 95 S.Ct., at 2059. We identified those characteristics usually associated with common stock as (i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability; (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; and (v) the capacity to appreciate in value.
The Packers' stock only has one of these characteristics -- the voting rights. But stock comes with two essential rights: economic rights and voting rights. It's clear that non-voting preferred stock is still stock, even though the purchasers of that stock have given up their voting rights to enhance their economic rights. Why can't it work the other way? While I admit all "non-voting" stock I have seen has some conversion right or a right to vote if dividends are not paid for a certain period of time, it's not clear to to me it necessarily has to be that way.
Furthermore, under the Howey test, traditionally the "profit expectation" prong is very low. Tax-mitigation arrangements, for example, can be deemed securities. It's really a question of whether there is some benefit conferred on the investor, not how the bottom-line profit is calculated. The Packers' offering site provides this:
in the great American story
in hard work and determination
in ordinary people doing extraordinary things
in the possibilities when people pull together
in pride, passion and perseverance
in legendary excellence
/ become a shareholder in what you believe
That sure seems like an awful lot of benefit to me. And the new owners seem to agree.
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I am not a securities law expert, but based on what I do know, the answers seems pretty clearly "no." This benefit is quite different that a tax mitigation benefit, which, unlike Packers stock, directly leads to some monetary savings at the end of the day.
Posted by: HMurray | Dec 9, 2011 12:00:51 PM
The answer is assumed to be no, and I think that's probably right. Still, on the margins, the Packers are taking the money of what appear to be investors for the purpose of owning shares of stock in the company. In exchange, shareholders get to attend annual meetings and vote. I think it can at least be reasonably argued that the benefit is real enough that it's worth thinking about. After all, the Packers have raised at least $43 million on this offering so far. A whole lot of people are putting up a whole lot money for something the Packers themselves call "stock."
Posted by: Joshua Fershee | Dec 9, 2011 12:17:42 PM
Has there ever been a case holding (or suggesting) that the benefit can be non-monetary? Interesting post, especially for me as a football fan, but I never thought there was much to debate surrounding the Packers' "stock." That said, I was on the M&A side of the house in practice and the securities folks were on an entirely different floor, so maybe I am just uninformed.
Posted by: HMurray | Dec 9, 2011 2:20:54 PM
I am reminded of a time in my practice career when a partner sent back a draft letter for more work, telling me that a legal opinion should "opine something." ;-)) If you had to write a cold comfort letter, which side would you come down on?
Posted by: Stephen Bainbridge | Dec 12, 2011 9:39:48 AM
HMurray, the answer to your question is no -- there's not really a debate, and there is no Wisconsin case that would imply it is stock. I'm simply running through a few ideas. You didn't miss anything. If there's a problem here, it's about policy and expectations, not the law.
Professor Bainbridge: fair point -- It's not a security, but I still hate it. I'm really getting at a policy discussion, part of which is now here: http://lawprofessors.typepad.com/business_law/2011/12/a-reason-people-hate-corporate-lawyers-or-why-the-packers-should-be-an-llc.html
Posted by: Joshua Fershee | Dec 12, 2011 2:44:08 PM