March 26, 2011
Would Howry Have Survived If It Was a Partnership?
Over at The Washington Post, Steven Pearlstein is suspicious:
For me, it is of symbolic and substantive importance that law firms are no longer partnerships in the strict legal sense. Most, like Howrey, had transformed themselves into “limited liability corporations” or “limited liability partnerships,” a new hybrid form of business organization. Unlike old-fashioned partners, those in an LLC or LLP are shielded from individual responsibility for the liabilities of the firm. That means that they are apt to be less careful in making decisions about what risks and expenses to take on, knowing they do not face the prospect of losing all of their net worth. They also have less incentive to commit themselves to a long and difficult turnaround when the firm gets into trouble.
The article also provides an interesting overview of the evolution of the business of biglaw.
March 25, 2011
AT&T Deal Highlights
Steven M. Davidoff, at the New York Times Dealbook, has a great outline of the AT&T - T-Mobile Deal. It's really worth a read (here). He explains how different the deal is for a private sale. And, if you are someone new to all of this, it helps provide an explanation for public company complexities. My favorite part is this:
AT&T and Deutsche Telecom have negotiated an elaborate risk-sharing arrangement with respect to divestiture and other steps AT&T and Deutsche Telekom must take to obtain regulatory clearance of the T-Mobile purchase.
The agreement requires that AT&T take “reasonable best efforts” to obtain regulatory clearance. This is the standard formulation. But as you would expect in this controversial deal, it gets much, much more complicated after that.
See -- I took the "easy" part.
Excuse me for linking to something that's a week old, but I have been out of town and this one is too good not to point out. Pages and pages of deposition transcript regarding what a photocopying machine is. (Not sure why the plaintiff's lawyer didn't just ask if the county had any machine that makes paper copies of documents.)
For those of you who, like me, have suffered through obstructionist deposition tactics, this may raise painful memories. The rest of you should be glad you're not litigators.
(Note: I'm not sure, but a Wall Street Journal on-line subscription may be required to read the entire article.)
March 24, 2011
J. Robert Brown on "The Politicization of Corporate Governance"
Jay Brown has posted "Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors" on SSRN. Here is the abstract:
The role of the Securities and Exchange Commission in the corporate governance process has shifted dramatically in recent years. The Commission has increasingly supplanted state law in determining substantive standards of corporate governance. The replacement of states with the Commission will have significant consequences.
For one thing, the regulatory philosophy will change. For another, governance practices will become increasingly politicized and volatile. The volatility will be less apparent with respect to rulemaking and more apparent with respect to staff interpretations, particularly those under Rule 14a-8, the shareholder proposal rule.
This is particularly clear in connection with changes to the interpretation of the “ordinary business” exclusion in Rule 14a-8. As a case study, the piece examines the phenomena in the context of proposals calling for shareholder approval of outside auditors. In 2005, the staff abandoned more than 50 years of consistent interpretation and found that proposals calling for shareholder ratification of auditors could be deleted from proxy statements under the “ordinary business” exclusion. The explanation for the shift is less likely changes in SOX that gave audit committees of some public companies the authority to select auditors and more likely a desire to reflect the views of the Commission.
Volatility imposes costs. The article recommends a number of changes to Rule 14a-8 that are designed to reduce staff discretion and the risk of political shifts in practice.
March 23, 2011
Similarities Between Materiality and Pornography
The United State Supreme Court yesterday ruled in Matrixx Initiatives, Inc. v. Siracusano (No. 09-1156) (Mar. 22, 2011) (pdf) that the test for materiality from Basic Inc. v. Levinson, 485 U. S. 224 (1988) lives on. The Court declined to accept the suggestion that a possible concern about a company's primary revenue generator must be "statistically significant" before it is deemed material. The Court explained that the
materiality requirement is satisfied when there is “‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’” Id., at 231–232 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976)). We were “careful not to set too low a standard of materiality,” for fear that management would “ ‘bury the shareholders in an avalanche of trivial information.’” 485 U. S., at 231 (quoting TSC Industries, 426 U. S., at 448–449).
. . . We observed that “[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.” Id., at 236. We thus rejected the defendant’s proposed rule, explaining that it would “artificially exclud[e] from the definition of materiality information concerning merger discussions, which would otherwise be considered significant to the trading decision of a reasonable investor.”
I find it somehow very satisfying to have a unanimous Court affirm this definition of materiality, even if the standard does have a lingering Justice Potter Stewart feel to it.
March 21, 2011
I have been spending a few days in Salt Lake City, visiting one of the best granddaughters anyone could ever have, and I have been struck by how much more vibrant and entrepreneurial the business environment is here than in Nebraska, where I reside. I realize that Utah is more populous than Nebraska, but even on a per-capita basis, there's just a lot more going on in Utah.
Not only is there a lot of business construction, but much of it is small businesses, not just more chain outlets (although there's that, too). As one would expect when there's a lot of entrepreneurialism, there's also a lot of failure. But the empty stores I have seen all have signs for new businesses coming in to replace them. It's exactly what the Austrian economists would predict.
I don't know why things are so different, but I can think of a number of possibilities:
- Culture: Utah's culture is very different from Nebraska's. Perhaps the people in Utah are just more entrpreneurial on average.
- State regulation: Perhaps Utah's state regulatory structure is more conducive to small business. Nebraska has populist origins and, although it's heavily Republican now, you can still see those populist origins in state regulation. There's a strong anti-government sentiment in Utah.
- Relative age: Utah's average age is significantly lower than Nebraska's. Perhaps people are more likely to be entrepreneurial when they're younger and have less to risk.
Whatever it is, we ought to try and bottle it and ship it to the rest of the country. It would do the United States good.
The Perils of Insider Trading: Are Executives Unclear on the Risks?
Regardless of one's views on insider trading laws, the potential consequences remain very real. Some executives at Steel Technologies, Inc. (STTX) are finding that out, as the SEC recently filed charges against four executives and their tippees. (Press release here, complaint pdf here.)
The SEC alleges that the four STTX executives traded on confidential information about a pending acquisition by Mitsui & Co. (USA) Inc. The SEC also claims that three of the executives illegally helped family members or friends trade on the confidential information, too. All together, the charged traders purchased $578,000 of STTX stock in the month before to the acquisition was announced publicly, which earned them $320,000 in illegal profits.
Sometimes it amazes me what some executives try to do. Even if it is permissible (and this case still must work through the process), the risks hardly seem to justify the actions. As an example, one of the executives in this case, David Mark Calcutt, was and is an Officer and Vice President of Sales for STTX’s Southeast Region. According to the complaint, Calcutt spent the early part of January 2007 selling off stock in STTX. Then, after a hunting trip and other communications with STTX's President and Chief Operating Officer, the SEC states that Calcutt started buying STTX stock. In late January and early February, he started buying the stock at a higher price than the price he received for the shares a few weeks earlier.
If Calcutt had sold his stock at $17.38/share in early January, then bought it back at $16.75/share in late January, he would have to forfeit his profits under the short-swing profit rules of § 16(b) of the Securities Exchange Act of 1934. Here, however, Calcutt's subsequent purchases were made at $17.75/share and $18.50/share. Did he think that no one would notice because his trades fell outside § 16(b)? Or worse, that it was okay to do so because § 16(b) did not apply?
It is, of course, possible that there is a good explanation for all of this that doesn't involve the use of inside information or otherwise implicate Calcutt and the charged traders. But it doesn't look good. And when dealing with your company, and your livelihood, and your freedom, it makes sense to tread lightly.
Oh, and if I were with the acquiring company, I'd be absolutely furious right about now.
March 20, 2011
Bipartisan Bill to Regulate Online Poker Introduced in House
"Given that millions of Americans currently play online poker, states across the country are recognizing the value in licensing and regulating the game and many are introducing their own laws ... while collecting millions in tax revenue," said Poker Player Alliance Chairman and former Sen. Alfonse D'Amato, R-N.Y. . . . Instead of a patchwork of state laws protecting only players in those states, D'Amato urged Congress "to step up and pass federal legislation."
The full story is here.