December 10, 2011
The World Economics Association on Pluralism
The World Economics Association recently published its first newsletter (here) dedicated to plurality.
A central theme that you will see emphasised throughout this newsletter is the issue of pluralism, the idea that there is more than one way to look at an issue. So why is pluralism important? …
The use of language to frame issues is important. Fairclough (1995) refers to “ideological-discursive formations” (IDFs) in which groups have their preferred terms. These serve to define debate in a way that supports their perspective. This may arise unintentionally, but the shift from “doctor and patient” to “service provider and consumer”, say, is still a redefinition of a relationship. If there is a dominant IDF whereby other alternatives are not heard, it can be seen as “reality”, “the truth”. Any alternatives that then arise may be labelled apocryphal or ideological. If there is poor communication across academic groups, as Kuhn suggests, then each group can, internally, see itself as owning the “truth” for its area. Implicitly, then, other groups’ perspectives are flawed or irrelevant.
This is not conducive to a pluralist approach. Perhaps we should all be saying that we are constructing artificial representations (analogies) of the real world. If we are not careful, we may believe that our models and theories do actually represent the real world. They don’t. They are simplifications and generalisations which, we hope, give us some insights into the real world. We need to be aware of the limitations of our perspectives and of the multitude of possible alternative perspectives which may be useful.
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.
December 8, 2011
De Angelis on the Importance of Internal Control Systems in the Capital Allocation Decision: Evidence from SOX
David De Angelis has posted "On the Importance of Internal Control Systems in the Capital Allocation Decision: Evidence from SOX" on SSRN. Here is the abstract:
I examine the effect of information frictions across corporate hierarchies on internal capital allocation decisions, using the Sarbanes-Oxley Act (SOX) as a quasi-natural experiment. SOX requires firms to enhance their internal control procedures in order to improve the reliability of financial reporting across corporate hierarchies. I find that after SOX, the capital allocation decision in conglomerate firms is more sensitive to performance as reported by the business segments. The effects are most pronounced in conglomerates that are prone to information problems within the organization, such as conglomerates with more segments and conglomerates that restated their earnings in the past, and least pronounced in conglomerates that still suffer from material weaknesses in their internal controls after SOX. In addition, I find that conglomerates’ productivity and market value relative to stand-alone firms increase after SOX. My results support the argument that inefficiencies in the capital allocation process are partly due to information frictions across corporate hierarchies. My findings also shed light on the importance of SOX on the efficiency of capital allocation decisions in large firms.
December 7, 2011
Buxbaum on Securities Law
Hannah L. Buxbaum has posted Remedies for Foreign Investors Under U.S. Federal Securities Law on SSRN with the following abstract:
In its 2010 decision in Morrison v. National Australia Bank, the Supreme Court held that the general anti-fraud provision of U.S. securities law applies only to (a) transactions in securities listed on domestic exchanges and (b) domestic transactions in other securities. That decision forecloses the use of the “foreign-cubed” class action, and in general precludes the vast majority of claims that might otherwise have been brought in U.S. court by foreign investors. This article assesses the post-Morrison landscape, addressing the question of remedies in U.S. courts for investors defrauded in foreign transactions. It begins by reviewing the current case law, analyzing the approaches that courts have used in applying Morrison and highlighting certain weaknesses in the transaction-based test adopted in that case. It then investigates two potential paths for foreign investors: litigation brought in U.S. federal courts under foreign, rather than domestic, securities law; and participation in FAIR fund distributions ordered by the Securities and Exchange Commission.
-- Eric C. Chaffee
Veil Piercing the Rule Even When It's Not
I just stumbled across the United States Supreme Court decision from June of this year: Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011). The case was essentially a personal jurisdiction case, in which the plaintiffs sought to sue European affiliates of Goodyear in North Carolina courts. The plaintiffs' child was killed in a bus accident in France and European-manufactured tires were allegedly the culprit.
So what does this have to do with business law? Well, a unanimous Supreme Court explained, in denying jurisdiction:
Respondents belatedly assert a “single enterprise” theory, asking us to consolidate petitioners' ties to North Carolina with those of Goodyear USA and other Goodyear entities. See Brief for Respondents 44–50. In effect, respondents would have us pierce Goodyear corporate veils, at least for jurisdictional purposes. See Brilmayer & Paisley, Personal Jurisdiction and Substantive Legal Relations: Corporations, Conspiracies, and Agency, 74 Cal. L.Rev. 1, 14, 29–30 (1986) (merging parent and subsidiary for jurisdictional purposes requires an inquiry “comparable to the corporate law question of piercing the corporate veil”). But see 199 N.C.App., at 64, 681 S.E.2d, at 392 (North Carolina Court of Appeals understood that petitioners are “separate corporate entities ... not directly responsible for the presence in North Carolina of tires that they had manufactured”). Neither below nor in their brief in opposition to the petition for certiorari did respondents urge disregard of petitioners' discrete status as subsidiaries and treatment of all Goodyear entities as a “unitary business,” so that jurisdiction over the parent would draw in the subsidiaries as well. Brief for Respondents 44. Respondents have therefore forfeited this contention, and we do not address it. This Court's Rule 15.2; Granite Rock Co. v. Teamsters, 561 U.S. ––––, ––––, 130 S.Ct. 2847, 2861, 177 L.Ed.2d 567 (2010).
December 6, 2011
From Street Activism to Shareholder Activism
The Occupy protests over the last few months have gotten me thinking about methodology lately. Suppose someone has a criticism, legitimate or not, against a corporation. (At this point, I don’t mean to challenge the rationales behind the protests.) Certainly, there are some practical advantages to drawing up a sign and simply camping. Anyone can do it: it imposes minimal effort costs on the participant and minimal political costs in that two participants can agree to disagree while together contributing to and benefitting from the overall effect of a mass movement (e.g., public visibility, occupying enough physical space to impede infrastructure). And acting in a cohesive group provides morale benefits in the form of camaraderie and social reinforcement. But what is puzzling is not so much the strategies in the arsenal as much as the one strategy palpably missing from it. Why haven’t more protesters turned to shareholder activism?
Take, for example, the use of SEC Rule 14a-8 (shareholder proposals). Though limited to 500 words and one submission per year, these proposals enable relatively small-time investors to campaign in annual meetings and distribute literature to all the stakeholders, on the company’s dime, about issues “significantly related” to a company’s business. And members of the 99% can participate even if they do not have the investment capital of a pension plan or a social-responsibility fund: at the relatively low price of $2,000.
If the purpose of protest is to bring the message to a forum where it will be heard by the decisionmakers, this method potentially generates a lot of bang for one’s buck. If the purpose is to gain bargaining power, a lawsuit after a no-action letter will create more headaches for a company than physical occupation of property. If the purpose is to gain media attention for one’s demands, this method provides an additional means of attracting such attention and specifically using it to apply public relations pressure against a targeted corporation, when coupled with a visible movement.
Granted, requests to circulate shareholder proposals in proxy statements often, in themselves, entail a legal battle, and proposals are rarely successful when put to a vote. Although Rule 14a-8 no longer expressly prohibits social or political proposals, it would take some careful thought to frame the proposal in such a way to convince the SEC that the proposal isn’t about a pet cause and that it has some relevance to the business of the company, without crossing the line into becoming a management function. And some topics would be more suitable as proposal subject matter than others. (For example, resolutions calling for corporate transparency, investigations into the benefits of certain compensation structures, or recommendations on the desirability of certain company policies might have greater success than standalone proposals exhorting the corporation to embrace certain moral principles.) But even if a proposal loses at the lawsuit stage or garners only a small percentage of the votes, the point, for protestors, isn’t necessarily to win, but to acquire a loudspeaker and a bargaining chip. Cf. D.A. Jeremy Telman, Is the Quest for Corporate Responsibility a Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd., 44 Akron L. Rev. 479 (2011), http://www.uakron.edu/dotAsset/1849639.pdf. That article gives an interesting account of aftereffects that favor the activist shareholder, even if the proposal never reaches a vote or the vote fails, including the fact that, often, proposals are withdrawn as moot because the company adopts them sans vote. (Another interesting example of well-organized shareholder activism: http://www.csjsl.org/news/nuns-who-wont-stop-nudging-shareholder-activism.php.)
To be clear, I am not saying that shareholder meetings are hotbeds of democratic process and dialogue. Most shareholders are passive, most professionally managed funds won’t poll their constituents about their preferences, and most institutional investors have a fiduciary duty to their members to focus narrowly on profit maximization, even if incidentally a majority of their members, if asked, would rather not invest in certain weapon production or oil exploration in a politically unstable country. But at least some differences of opinion between management and an activist investor may come from information asymmetry: some suggestions are desirable to both, but the management does not know to pursue it until someone speaks up. Or, even if the management is only thinking of cold hard profit, the undesirability of a highly publicized campaign airing out the company’s dirty laundry may persuade it to make concessions and to correctly value the reputational risk of not compromising with some of the more reasonable, socially favored demands.
And though a proposal loses, it may confer other benefits too. For example, if uniform demands are made to several major companies in an industry regarding executive compensation, it may create a norm (if enough companies pledge to meet the demands) or articulate a standard (even if the demands are not met). Just as marketers use product differentiation to educate consumers about the differences between Company A and B, communicating expectations has inherent value in creating a tangible point of differentiation. (For example, I might not know to buy a car with a certain airbag configuration as opposed to another, but if someone simplifies the analysis and tells me that expensive Car A meets 2012 safety standards while cheap Car B does not, I will buy Car A over B.) Reputational risk increases when norms are clearly communicated.
Certainly, such a world would come with costs. A well-executed campaign and lawsuit would require a company to respond by redirecting profits into counterattacking, and critics may observe that a relatively small but active stakeholder may exercise undue influence over a company, at the expense of the passive majority of stakeholders that have no agenda other than profit. It’s possible that an ill-advised but popular idea might pressure a board into following a bad course of action. Decisionmakers will still have to weigh the costs, benefits, and risks of alternatives, even though a successful campaign may cause it to rethink the weight it gives to principles it undervalued before, or the company’s long-term relationships with employees, consumers, and communities. A protestor, similarly, may have to come to terms with the fact that many investors, even those not part of the 1%, do not share his views. But protestor participation as shareholders may create a better forum for dialogue between the two sides.
And there are obstacles. The average protestor knows more about political activism than shareholder activism, whether navigating Rule 14a-8 or engaging a proxy services firm. And some protestors may find participation in the capital market, itself, distasteful. (After all, one is contributing to the demand for a particular company’s stock, not because the company is worthy of approval, but simply because the company is influential.) In order to have any impact, this brand of activism may require some like-minded protestors to agree on certain modest priorities, to pool resources, and to coordinate closely with a larger campaign designed to amplify the private dialogue between shareholder and management into a public one.
But whether because of distrust in the market system itself or lack of leadership, expertise, and consensus, it does not appear that protestors are supplementing their methods with any serious attempts at shareholder activism. Using the power of numbers, Occupy protestors have garnered media attention, sparked public dialogue, and even shut down facilities. But, despite symbolically occupying ground near financial institutions and centers of commerce, there does not appear to be much dialogue with (or pressure against) the perceived adversary---the corporations themselves, and the people who run or own them.
Cohen on Academic Writing
Glenn Cohen has an interesting post over at PrawsBlawg on the writing process. I especially like this piece of advice:
Many flock to legal academia away from a more rigid job in the legal world, but there is something to be said for rigidity and not waiting for the muse to whisper in your ear. I try to treat legal writing as a job, come in at 9, leave at 5 on most days and work consistently throughout. This helps me be both productive and sane, but perhaps I am an aardvark in this respect.
I often talk to productive scholars about what makes them productive, and they almost invariable say that treating writing like a job is the key to their success.
-- Eric C. Chaffee
Postal Service Slow Down: Can't Credit Complaints Without Cash
My local paper, the inimitable Grand Forks Herald, provided this opinion piece today: Stop the Postal Service’s ‘panic selling’. The piece argues that the Post Office has refused to listen to thousands of complaints about the proposal to make financial cuts that will lead to slower mail delivery. They argue:
These changes are coming too fast and with too little thought being put into them. Furthermore, they’re being driven not by any sense of the public good but simply by money — namely, the Postal Service’s financial crisis. ...
[T]he trouble is, the Postal Service is not just another business. It may be a quasi-private organization, but it’s also one with a centuries-old public-service mission: delivering America’s mail.
Perhaps, although it's my understanding that the Post Office isn't getting taxpayer funding. It seems to me this piece gives too much credance to complaints about the Postal Service's proposal without asking one more key question: Are you willing pay enough to pay to keep the status quo?
If not, the plan is the best option. And that's business, folks.
December 5, 2011
Weekend Reading: On Politics, Poetry, and Finances
I had the opportunity to spend some time on a plane with Sunday's New York Times Magazine this weekend. It was a particularly good read. Here are some highlights that have some applicability to business and business law:
Mitt Romney’s campaign has decided upon a rather novel approach to winning the presidency. It has taken a smart and highly qualified but largely colorless candidate and made him exquisitely one-dimensional: All-Business Man, the world’s most boring superhero.
The excessive love of individual liberty that debases our national politics? It found its original poet in Ralph Waldo [Emerson]. . . .
The larger problem with [“Self-Reliance”], and its more lasting legacy as a cornerstone of the American identity, has been Emerson’s tacit endorsement of a radically self-centered worldview. It’s a lot like the Ptolemaic model of the planets that preceded Copernicus; the sun, the moon and the stars revolve around our portable reclining chairs, and whatever contradicts our right to harbor misconceptions — whether it be Birtherism, climate-science denial or the conviction that Trader Joe’s sells good food — is the prattle of the unenlightened majority and can be dismissed out of hand.
“A man is to carry himself in the presence of all opposition,” Emerson advises, “as if every thing were titular and ephemeral but he.” If this isn’t the official motto of the 112th Congress of the United States, well, it should be. The gridlock, grandstanding, rule manipulating and inability to compromise aren’t symptoms of national decline. We’re simply coming into our own as Emerson’s republic.
[T]he bottom line is simple: Europe’s problems are a lot like ours, only worse. Like Wall Street, Germany is where the money is. Italy, like California, has let bad governance squander great natural resources. Greece is like a much older version of Mississippi — forever poor and living a bit too much off its richer neighbors. Slovenia, Slovakia and Estonia are like the heartland states that learned the hard way how entwined so-called Main Street is with Wall Street. Now remember that these countries share neither a government nor a language. Nor a realistic bailout plan, either.
This article on the Euro also notes that Lord Wolfson, CEO of Next (a European retailer) is offering a £250,000 prize to anyone who can "answer the question of how to manage the orderly exit of one or more member states from the European Monetary Union." The PDF announcement is here. Why does this matter? As the Times Magazine article explains:
Q: Will the euro survive?
It’s a dangerous question to ask out loud. Suppose a credible rumor spread throughout Greece that, rather than accept the harsh terms of another bailout package, the government was plotting to revert to the drachma. Fearing the devaluation of their savings, Greeks would move their money somewhere safer, like a German bank. The Greek banking system would then, in all likelihood, implode.
But Greece’s economy is too small for an isolated collapse to cause any significant damage throughout the continent. (Even a collapse confined to Greece, Ireland and Portugal couldn’t take down Europe.) So the concern about a run on the Greek banking system is largely about whether a panic might spread to Spain or — worse — Italy, which could topple Europe’s financial system.
If you have any ideas on how to orchestrate a reasonably smooth exit of one or more countries from the European Monetary Union, you could line your pockets with some British currency, while stabilizing European markets. That'd be a good day's work.
December 4, 2011
Campbell on Normative Justifications for Lax (or No) Corporate Fiduciary Duties
Rutheford B. Campbell Jr. has posted "Normative Justifications for Lax (or No) Corporate Fiduciary Duties: A Tale of Problematic Principles, Imagined Facts and Inefficient Outcomes" on SSRN. Here is the abstract:
Corporate fiduciary duty standards are at an all time low.
Normative justifications offered to support lax corporate fiduciary duty standards, however, are weak. The justifications fail adequately to provide a persuasive reason for abandoning the economic principle widely applied in society, which is to hold actors accountable for the economic loss caused by their actions. Such accountability is thought to provide an incentive for efficient conduct.
This paper offers a critical analysis of two arguments for allowing corporate managers to act without accountability for the full economic loss caused by their mismanagement. The two arguments have been largely unchallenged and today garner broad support from influential quarters.
One argument is that corporate managers should not be accountable for a lack of due care in their decisions, and the justification for this position is a claim that eliminating the duty of care obligation provides an incentive for managers to take value creating risks on behalf of the company and its shareholders. The second argument is that corporate managers should be free to allocate and re-allocate unlimited amounts of corporate wealth among various corporate stakeholders, and this position is justified by a claim that such a rule provides an incentive for the investment of efficient levels of firm specific capital by the corporate stakeholders who provide monetary and human capital to corporations.
The normative justifications offered in support of these arguments depend on multiple, essential factual assumptions that not only are unproven empirically but also are counterintuitive and seem to get only more factually improbable when unpacked and analyzed closely. In short, these factual assumptions – which heretofore appear largely to have been accepted without question or analysis – amount to a thin reed and do not meet the burden that should be required of those who propose abandoning or broadly limiting corporate managerial accountability.
A strong version of corporate fiduciary duties provides an economic incentive for efficient and fair outcomes.