Monday, January 29, 2018
At The University of Tennessee College of Law, we have a four-credit-hour, four-module course called Representing Enterprises that is one of three capstone course offerings in our Concentration in Business Transactions. In Representing Enterprises, each course module focuses on a different aspect of transactional business law, often a specific transaction or task. We try to both ask the enrolled students to apply law that they have learned in other courses (doctrinal and experiential) and also introduce the students to applied practice in areas of law to which they have not or may not yet have been exposed.
I have been teaching the first module over the past few weeks. We finish up tomorrow. My module focuses on disclosure regulation. I have five class meetings, two hours for each meeting, to cover this topic. Each class engages students with a hypothetical that raises disclosure questions.
The first class focused on general rule identification regarding the applicable laws governing disclosure in connection with the purchase of limited liability membership interests. Specifically, our client had bought out his fellow members of a member-managed Tennessee limited liability company at a nominal price and without giving them full information about a reality television opportunity our client had with his wife. As things turned out, the television show was picked up and popularized the brand name of the limited liability company, making the husband and wife, over the next few years, significant income. Now, of course, the former limited liability company members are contending that, had they known the complete facts, they would have demanded a higher price for their limited liability membership interests from our client. The students did some nice, creative thinking here in identifying applicable legal rules, pointing to Tennessee limited liability company fiduciary duty law (although they missed our closely held limited liability company doctrine), federal and state securities law, business torts, potential contract law issues, etc.
Subsequent class meetings broke disclosure law down into component pieces commonly seen in a business transactional law context. The second class centered on work for another client, a Delaware corporation, concerning fiduciary duty disclosure issues under Delaware corporate law in connection with a merger. The third class focused on a client's obligations under mandatory disclosure and antifraud elements of the federal securities laws. The fourth class involved a hypothetical that raises specialized disclosure regulation questions for a talent agency that is an indirect subsidiary of a New York Stock Exchange ("NYSE") listed company. I may post later about the fifth class meeting, which will take place tomorrow. It involves Uber's recently publicized data security breach and related disclosure matters.
I want to focus today on the fourth class meeting. In that class, one of the things the students had to wrestle with was determining how the parent's status and regulation as a NYSE-listed firm might impact or be impacted by disclosure compliance at the subsidiary level. The NYSE Listed Company Manual provides, e.g.,
The market activity of a company's securities should be closely watched at a time when consideration is being given to significant corporate matters. If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect. It is obvious that if such a public statement is contemplated, management should be checked prior to any public comment so as to avoid any embarrassment or potential criticism. If rumors are correct or there are developments, an immediate candid statement to the public as to the state of negotiations or of development of corporate plans in the rumored area must be made directly and openly. Such statements are essential despite the business inconvenience which may be caused and even though the matter may not as yet have been presented to the company's Board of Directors for consideration. . . .
Having identified this and other related rules, we posited situations in which operations or activities at the subsidiary level might require disclosure by the parent company under the NYSE listed company rules. We dug in most specifically on what might lead to market rumors or cause unusual market activity. Having just discussed in the prior class meeting disclosure standards under the federal securities laws, the students understood that materiality was a distinct, separate disclosure-triggering standard and that the parent firm might have different--even conflicting--disclosure obligations under the federal securities laws and the NYSE listed company rules. With these observations as a foundation, I asked the students what types of conduct or information at the subsidiary level might generate market rumors or unusual market activity.
Given that the firm was a talent agency, I was not surprised when one of the first answers referenced the allegations against Harvey Weinstein. The disparate pay issues relating to the Mark Wahlberg/Michelle Williams affair that I wrote about in a different context a few weeks ago (w/r/t which the same talent agency advised both actors) also came up. In each case we tried to envision what the subsidiary should be disclosing to the parent, and when, to enable the parent to satisfy its NYSE obligations. Among other things, we discussed the financial and non-financial impacts of the facts we were generating on the trading price and volume of parent's stock. It was a great brainstorming session, imv. By the end of class, we could see that a communication-oriented compliance plan for the subsidiary seemed to be in order.
Interestingly, the Steve Wynn story then broke the next day. I was pleased in the aftermath to see this article in The New York Times that validated the nature of our discussion and the complexity involved in assessing market risk in these kinds of situations.
The question, though, is what specifically investors are now pricing in. One risk is that regulators make it difficult for Wynn Resorts to expand. The Massachusetts gaming watchdog said on Friday that it would review plans for a new casino in Boston.
The threat of parting ways with an influential executive, until now a reasonable steward of shareholder value, is also potent. Over the past decade, Wynn Resorts’ average 10.5 percent shareholder return is a shade higher than that of the Standard & Poor’s 500-stock index — despite a slump in 2014 after China toughened rules on holiday gamblers.
Investors’ strong response to the reports is now the problem of Wynn Resorts’ 10-person board, which contains just one woman. Others surely will learn from how the Wynn board responds.
My students did identify regulatory risk (and the rest of the class was spent talking about California and New York laws regulating talent agencies, which are regulated and require licensure) and the risks associated with an iconic founder or chief executive at the heart of a controversy. I love it when current events dovetail with classroom activities!
Have any of you taught a course or course component like this before? I would be interested to know. I found it hard to teach the securities regulation issues to the students who were not interested in securities regulation work. I tried to break the legal foundations down into relatively small policy and doctrinal chunks, and I told them that every business lawyer needs to know a little bit about securities regulation, whether advising or litigating in connection with business transactions. But those who had not taken and were not taking our Securities Regulation course (a majority of the class) seemed to mentally almost shut down. Some of that may be 3L-itis. But I am rethinking how to engage students more happily with this part of the course. I will be asking the students for help on this. But any thoughts you have from your own experience (or otherwise) would be a great help to me as I think this through.