Saturday, November 21, 2015
... but going back to corporations for a moment - a while ago, I speculated that corporate forum-selection bylaws could unfairly work to favor management, because management can choose to invoke them at will - they can deploy them to dismiss cases when it will benefit them, but also can refuse to invoke them when it would work to their advantage to have plaintiffs' firms compete with each other in different jurisdictions.
Alison Frankel now reports that the FX company is doing just that. According to her report, FX enacted a forum-selection bylaw choosing Utah as the forum; but now, faced with shareholder lawsuits in Nevada and Utah, it is choosing not to enforce the bylaw - precisely because, according to the Utah plaintiffs, it benefits management to have the plaintiffs compete for the opportunity to settle the case on sweetheart terms.
The basic problem is that these bylaws do not resemble contractual forum selection clauses, in that they can only be invoked by management - not plaintiffs. And at least according to Delaware, they are only valid because they allow management the freedom to choose whether to invoke them (i.e., they contain a fiduciary out). As a result, it's critical that courts police their use, and, in particular, make sure they do not bring about the forum-shopping evil they were intended to prevent. Better than that - and I realize it's heresy to suggest - multiforum litigation perhaps is not a problem that should be addressed privately, but instead should be addressed through coordinated action by the states.
Saturday, November 14, 2015
Well, it turns out Halliburton is going – you guessed it – back to the Fifth Circuit on 23(f) review.
If you recall, the Fifth Circuit overturned the district court’s class certification order in the first go-round – a decision that was vacated by the Supreme Court in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011). The district court recertified the class; the Fifth Circuit granted 23(f) review, and the Supreme Court vacated – again! And then the district court certified the class for a third time, and the defendants petitioned for 23(f) review, and the Fifth Circuit has – again! – granted the petition.
The thing that's so amazing, of course, is that this case has hit the Supreme Court twice, the district court three times, and now the Fifth Circuit three times, and it's the exact same argument, over and over and over, on the same evidence - just using slightly different words. Namely, the defendants' position that if there is no price increase at the time of an initial false statement, and no price drop in reaction specifically to news that later reveals the earlier statements to have been false at the time they were made, therefore it must be concluded that the false statements never impacted prices in the first place.
This time, however, the 23(f) grant comes with a concurrence. I’ve actually never heard of a 23(f) concurrence before – are there others? They can’t be common, and in this case, the concurrence is by Judge Dennis – who has long been hostile to the Fifth Circuit’s strict approach to class certification in Section 10(b) cases. See Erica P. John Fund, Inc. v. Halliburton Co., 2015 U.S. App. LEXIS 19519 (5th Cir. Nov. 4, 2015).
In his concurrence, Judge Dennis expresses open skepticism of the defendants’ argument that they can rebut Basic’s presumption of price impact by demonstrating that any alleged corrective disclosures were not, in fact, corrective. He chides the defendants for rehashing points that the Supreme Court rejected in the first Halliburton case, namely, that if the “truth” was never disclosed in a fraud on the market case, the class cannot be certified. But, given the issue’s importance, he “reluctantly” concurs in the panel’s decision to grant the 23(f) petition, in order to allow the Circuit to clarify the law.
In my view, Judge Dennis is absolutely correct that the defendants’ argument rehashes territory that the Supreme Court has already rejected, but, to be fair, at least some of the problem can be laid at the feet of the plaintiffs – who appear to have accepted defendants’ premise, namely, that there must be some affirmative evidence of price impact – either an upward movement when the statement is first made, or downward movement upon its correction – before a class can be certified. That, of course, is contrary to the notion of a presumption; it is the defendants’ burden, not the plaintiffs’, to show not only that any price movements were not due to the fraud, but also that even price stability means that the fraud had no effect (i.e., that the fraud did not, say, operate to keep prices level instead of falling). Or to put it another way, even if defendants are entirely right that the corrective statements did not reveal any truths, that still does not answer the question whether the initial false statements had an impact on price.
Anyway, in light of Judge Dennis’s concurrence, the defendants must be grateful that 23(f) petitions are usually transferred to a merits panel after being granted. But see Margaret V. Sachs, Superstar Judges as Entrepreneurs: The Untold Story of Fraud-on-the-Market, 48 U.C. Davis L. Rev. 1207 (2015) (arguing that Judges Easterbrook and Posner of the Seventh Circuit have chosen to assign Rule 23(f) petitions to themselves for merits review in Section 10(b) cases).
Meanwhile, we can at least look forward to seeing these issues explored in a novel setting. The Eighth Circuit recently heard oral arguments on a 23(f) appeal from the certification decision in IBEW Local 98 Pension Fund v. Best Buy Co., 2014 U.S. Dist. LEXIS 108409 (D. Minn. Aug. 6, 2014), where - again - the defendants contend that they can rebut price impact by showing that the market did not react to the false statements initially, nor were any later statements corrective of the earlier ones. The case has attracted a degree of industry attention; defense-side amicus briefs have been filed by the Chamber of Commerce and the Securities Industry and Financial Markets Association.
It's a race to see which circuit produces an opinion first; the Eighth Circuit has a large head start but then, it's not like the Fifth Circuit needs any extra time to familiarize itself with the facts.
Saturday, November 7, 2015
One of the best news stories to come in the wake of the financial crisis was L’Affaire du Chaton, in which the accusation was lobbed that Goldman Sachs literally abandoned a group of stray kittens. Goldman, apparently recognizing that there are limits to the amount of profit-seeking the public is willing to tolerate, set not one, but two spokespeople to quell the looming media disaster.
Which is what I’m reminded of when I read this story about Goldman Sachs’s investment in social impact bonds sold by Utah to fund its preschool program.
As I understand it, Utah’s Granite School District needed money to finance its preschool program – which, it believed, prevented at-risk students from needing expensive special education later.
So Utah’s United Way of Salt Lake sold Goldman bonds. The money was used to finance the preschool program, and Goldman was to be paid by the United Way and Salt Lake County to the extent that the program did result in cost-savings by reducing the need for special education.
The problem was that Utah itself set a rather specious standard for determining whether the pre-school program avoided the need for special education, by inflating the numbers of at-risk students. Because the at-risk student metric was inflated, the program appeared to be wildly successful – providing Goldman with a hefty profit.
This is fascinating on a couple of different levels. First – if I’m understanding the situation correctly – it highlights a problem with social impact bonds. I’m guessing that it's typical in politics to exaggerate the benefits of expenditures. Here, the founders of Utah’s preschool program wanted to “sell” the program to the state, and made inflated claims about how much money could be saved later. Their goals may well have been benign – they wanted funding for a good program that would help people – but in a world of political calculation, limited resources, and lobbying, they felt that they needed to overstate the benefits of their program in order to get anyone’s attention.
I assume that this is business-as-usual in politics - not a great thing, but not exactly shocking. And it’s mostly fine until Utah decides that it will pay actual cash money to an actual outside investor based on these inflated savings projections. Which, I assume, is a problem that plagues all social impact bonds.
But the other level on which this situation fascinates me is Goldman’s (apparently) kitten-abandoning level of venality. It is difficult to believe that Goldman was unaware of the flaws in the metrics when it made the investment; yet, it had no compunction about draining Utah’s school districts of funds that were intended for preschool and special education.
In this case, however, there probably aren't many people agitating for Goldman to make reparations. Utah, the United Way, and the Granite School District aren’t going to want to admit the flaws in their own metrics, so we don’t have a kitten-defending constituency. Just lots and lots of payouts to Goldman.
Maybe Goldman would have done better to have purchased social impact bonds for the kittens.
Saturday, October 31, 2015
Corporate social responsibility is a perennial topic of interest here at BLPB, and, in particular, the question whether corporations – especially publicly-traded ones - can in fact credibly commit to a non-profit-seeking goal.
Which is why I found this Financial Times column so hilarious. Lucy Kellaway gathered the “values” statements from 24 different British companies – you know, statements like “We stand for innovation and integrity!” – read them aloud at a conference of the companies’ managers, and asked the managers to identify the statements from their own companies. Only 5 were able to identify their own company, and in 3 cases, it was because they’d been the ones to draft them in the first place. The remaining nineteen managers picked the wrong one.
From this, Kellaway concludes that values statements are useless – and she notes that among FTSE100 companies, not having a values-statement is correlated with higher share prices.
I’d reframe it, though, and say that a values statement – or any corporate declaration of commitment to values – is useless unless it’s backed by real content. It has to be operationalized in specific terms that are credibly communicated to employees. The problem with the values statements that Kellaway describes is that they are so generic as to be meaningless – suggesting that the companies themselves were simply using them as PR, to cloak themselves in good feelings without any actual change in the underlying business (and ineffective PR, if you can’t tell one from the other - the companies should at least borrow from Google's playbook and choose something more memorable, like "Don't Be Evil").
And on another note, in honor of the season, here is Sally Richardson, the winner (loser?) of Tulane Law's Halloween costume drive - the professor with the most student donations has to teach class in costume:
Wednesday, October 28, 2015
Earlier this month BLPB editor Ann Lipton wrote about the Delaware Supreme Court opinion in Sanchez regarding director independence (Delaware Supreme Court Discovers the Powers of Friendship). On the same day as the Del. Sup. Ct. decided Sanchez, it affirmed the dismissal of KKR Financial Holdings shareholders' challenge to directors' approval of a buyout. The transaction was a stock-for-stock merger between KKR & Co. L.P. (“KKR”) and KKR Financial Holdings LLC (“Financial Holdings”). Plaintiffs alleged that the entire fairness standard should apply because KKR was a controlling parent in Financial Holdings. The controlling parent argument hinged on the facts that:
Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee.
Chief Justice Strine, writing an en banc opinion for the Court, upheld Chancellor Bouchard's finding that KKR could not be considered a controlling parent where "KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action."
The Delaware Supreme Court upheld the familiar standard of effective control, absent a majority, which focuses on "a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock."
Chancellor Bouchard had noted that plaintiff's complaint stemmed from dissatisfaction at the contractual relationship between KKR and Financial Holdings which limited the growth of Financial holdings. Chancellor Bouchard wrote:
At bottom, plaintiffs ask the Court to impose fiduciary obligations on a relatively nominal stockholder, not because of any coercive power that stockholder could wield over the board's ability to independently decide whether or not to approve the merger, but because of pre-existing contractual obligations with that stockholder that constrain the business or strategic options available to the corporation.
Sometimes a "nothing new" case provides a good reminder of an established standard and provides clear language for recapping the concept to students. This will become a note case on "effective" control in my ChartaCourse corporations casebook and also a good illustration of the role of private agreements in shaping how legal standards are applied.
You can read the opinion at: Corwin et al. v. KKR Fin. Holdings et al., No. 629, 2014, 2015 WL 5772262 (Del. Oct. 2, 2015).
Saturday, October 24, 2015
On the one hand:
Dropbox Inc. had no trouble boosting its valuation to $10 billion from $4 billion early last year, turning the online storage provider’s chief executive into one of Silicon Valley’s newest paper billionaires.
But the euphoria has begun to fade. Investment bankers caution that the San Francisco company might be unable to go public at $10 billion, much less deliver a big pop to recent investors and employees who hoped to strike it rich, according to people familiar with the matter.
BlackRock Inc., which led the $350 million deal that more than doubled Dropbox’s valuation, has cut its estimate of the company’s per-share value by 24%, securities filings show.
Dropbox responds that it is continuing to increase its business, added 500 employees in the past year, including senior executives, and has no need for additional capital from private or public investors.
Still, the company is a portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom. The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay....
Many U.S. based companies that went public this year have seen their stock prices suffer, posting a median return of zero compared with their IPO price.....
Since going public in December, online-lending marketplace LendingClub Corp., located 10 blocks from Zenefits in the trendy SoMa district of San Francisco, has seen its valuation shrink from $8.5 billion after its first day of trading to $5.4 billion. The share price has fallen amid concern that competition and regulation threaten LendingClub’s business model of matching borrowers with lenders.
New York City firefighter Brian Gitman bought 250 shares of LendingClub during the IPO and held on to them as the price slid. He regrets it.
Knowing that big-name investors put money into LendingClub when it was private gave Mr. Gitman, 33 years old, a false sense of security, he says. “It feels like that should be like the bumper in bowling,” he says.
meanwhile, in entirely unrelated news:
A new effort is under way to put the public back in the initial public offering.
J.P. Morgan Chase & Co. and Motif Investing Inc., an online brokerage, are joining in a program to allow individuals to invest as little as $250 in IPOs.
It is the latest of several efforts by banks and brokerage firms—including startup online broker Loyal 3 Holdings Inc., Fidelity Investments andMorgan Stanley—to make the IPO market more accessible to the smallest investors, who can find it almost impossible to buy into new stock offerings.
Since late 2013, at least 17 companies, including four billion-dollar-valued startups, have offered small portions of their IPOs to the public or customers through new online platforms. And more deals of this kind are in the works.
Thursday, October 22, 2015
Just as I was in the middle of preparing for my class on shareholder proposals - for which I have assigned the opinion in Trinity Wall Street v. Wal-Mart Stores, Inc. - I got an email notification that the Division of Corporate Finance Staff had issued a new legal bulletin announcing that it disagrees with the majority opinion in Trinity, and instead agrees with the concurring opinion.
I discussed the Trinity opinion here, but basically, the issue was whether Walmart could exclude a shareholder proposal, submitted by Trinity Wall Street, requesting that Walmart develop a policy for oversight of sales of guns with high capacity magazines (the proposal was framed to encompass harmful products broadly, but the narrative made clear it was aimed toward gun sales). In the Third Circuit opinion, the majority and the concurrence disagreed regarding the proper interpretation ordinary business exclusion for social-responsibility proposals. The majority held that to determine whether a proposal is excludable, the court must first analyze whether it concerns ordinary business, next determine whether it involves a significant issue of social policy, and finally determine whether - despite involving ordinary business - the social policy issue is so important as to "transcend" day to day business operations. The majority ultimately concluded, essentially as what appears to be a bright line rule, that certain "core" matters of business operations can never be transcended in this manner.
The concurring judge, however, believed that social policy = transcendence - i.e., that the proper inquiry is whether the social policy raised is of such significance that it inherently transcends the day to day business operations.
In its legal bulletin, the Staff agreed with the concurrence.
But that only raises more questions than it answers. As I previously posted, the concurring judge also believed that the proposal at issue in the Trinity case was not sufficiently significant to "transcend" ordinary business operations for a variety of reasons, including that the proposal was framed in terms of benefits to Walmart. I criticized this analysis because, among other things, most social responsibility proposals are framed in terms of benefits to the company - they might fail as improper under state law otherwise. The concurrence also faulted the proposal for discussing harmful products generally instead of guns specifically - a fact that did not bother the majority.
Now we know the Staff agrees with the concurrence that the inquiry hinges on the significance of the social policy itself; but we also know that the Staff earlier issued a no-action letter concluding that Trinity's proposal was excludable. So I'm left a bit baffled as to the Staff's basis for that conclusion. Did the Staff agree with the concurrence that Trinity should have framed the proposal in terms of societal benefits? That the proposal failed because it was framed in terms of harmful products rather than guns specifically? The Staff's no-action letter did not mention the significance of the social policy at all - instead, it focused solely on the business operations to which it was directed. Does that make the no-action letter inconsistent with the Staff's new bulletin?
Moreover, what is the precedential effect of Trinity now? In its opinion, the Third Circuit majority stated that only a binding SEC ruling could overrule it; the Staff's bulletin is not binding. Does this mean courts in the Third Circuit are bound by Trinity while courts outside of the Third Circuit are free to rely on the Staff bulletin as persuasive authority?
Only time will tell - but surely this adds at least some fuel to Trinity's pending cert petition. I note, however, that Walmart ultimately caved and removed assault rifles from its shelves - even without including the proposal in its proxy.
In any event, I guess this means in addition to the Third Circuit opinion, my students will be reading the Staff bulletin and the original no-action letter.
On another note - the Staff bulletin also deals with the problem of shareholder proposals that are excludable because they conflict with management proposals in the same proxy under Rule 14a-8(i)(9). Recently, some companies (*cough*Whole Foods*cough*) have tried to exclude shareholder proxy access proposals by including management-sponsored proposals with much higher - nay, unachievable - threshold ownership levels, and then arguing that the shareholder proposal conflicts with management. The Staff bulletin seems to put the kibosh on these efforts, adopting a new rule that a "conflicting" proposal is one that is irreconcilable with the management proposal, such that a reasonable shareholder could not support both.
Saturday, October 17, 2015
Jessica Erickson has just published a fascinating article on the structure of lead plaintiffs’ counsel arrangements in corporate cases.
Erickson documents how Delaware courts have formally identified “factors” that will be used to select lead counsel, but have informally sent the message that the parties must work out the leadership structure amongst themselves. This means that multiple law firms have an incentive to file claims with no intention of performing serious legal work, solely to negotiate a position in the leadership structure so that they can collect a portion of the fees.
This practice not only results in duplicative lawsuits, but allows lawyers to engage in rent-seeking – extracting fees without performing serious legal work – that can damage incentives for the “real” lawyers, and harm the class.
At this point, I just have to interject with an account of my experiences. I was at Milberg Weiss for a few years (though I was more involved in securities cases under the PSLRA than corporate cases). Milberg frequently worked with co-counsel, and most of the time – no matter which firm was formally appointed lead – Milberg was functionally in charge of the litigation. Co-counsel generally was added to the case because they had a close relationship with an institutional plaintiff, but they tended to have little skill – or even interest – in the actual litigation. Due to our fee agreements, we were required to allocate them some amount of work, and it was usually an administrative hassle – co counsel frequently failed to submit their work product by the relevant deadline, and what they did submit was often subpar and needed to be rewritten.
What this meant, of course, is that the class suffered, through duplicative and unnecessary fees.
Eventually I landed at Bernstein Litowitz, and by then, the landscape had changed. There were fewer co-lead firms, and the co-leads that existed were more functional – I could rely upon them to do serious work. So there was a real change in the landscape of securities litigation between the time when I left Milberg in 2005, and when I joined BLBG in 2009. Erickson’s article confirms my experience; she describes how, over time, judges overseeing PSLRA litigation became more suspicious of complex leadership structures that combined groups of unrelated plaintiffs.
Delaware litigation, however, has not undergone that kind of change, and remains driven by the same dynamics that governed earlier securities litigation – namely, small firms, existing mainly to file complaints, holding larger firms hostage. In the securities context, small firms could only exert that kind of leverage if they at least had enough credibility to land an institutional client; Delaware, however, doesn’t use the PSLRA’s bright line largest-loss rule, and so any firm can hold up an entire case. And because Delaware courts avoid injecting themselves in disputes among plaintiffs’ firms, as Erickson points out, firms cannot privately order their arrangements in an optimal matter.
Erickson’s central point is this: if courts are unwilling to enforce the standards they set, parties cannot bargain in the shadow of the law, and parasitic firms have correspondingly greater power. Courts must demonstrate a willingness to select a single lead counsel when no private agreement is reached, in order to enable attorneys to bargain for optimal results.
Saturday, October 10, 2015
There's been something of a debate recently about whether there's a bubble in tech startups. It is believed that 140 have reached "unicorn" status, i.e., valuations of $1 billion or more, and numerous voices have been raised questioning the legitimacy of those valuations. Venture capitalists insist the valuations are legitimate, but I think Buzzfeed's story about recently-foaled unicorn JustFab is a rather powerful demonstration that something has gone awry.
JustFab offers discount clothing and shoes on a subscription basis; shoppers pay a monthly fee to have access to the products. The problem is, according to Buzzfeed, JustFab has received thousands of complaints from consumers who claim that they were unaware they would be charged monthly subscription fees, and found themselves unable to cancel the service. JustFab recently settled a lawsuit brought by district attorneys in Santa Clara and Santa Cruz alleging that it deceived customers. Even more troubling are the allegations that JustFab's founders have a long history of forming similar companies, on a similar subscription model, that also generated considerable consumer ire - as well as complaints by credit card companies because of all the chargebacks, and an FTC complaint that settled for $50 million. At least according to BuzzFeed, JustFab's original financing came from investments by these other, now defunct, entities - prompting lawsuits by those entities' creditors.
JustFab may turn out to be a legitimate company, or it may simply be an outlier. Nonetheless, its unicorn status raises doubts about the herd.
Saturday, October 3, 2015
Yesterday, the Delaware Supreme Court held that plaintiffs had pled demand excusal under Aronson v. Lewis due in part to a director's "close friendship of over half a century with the interested party," in combination with that director's business relationship with the interested party.
Del. County Emples. Ret. Fund v. Sanchez involves a public company that is 16% owned by the Sanchez family. The plaintiffs challenged a transaction in which the company paid $78 million to a privately-held entity owned by the Sanchezes, ostensibly to purchase certain properties and fund a joint venture. The question, then, was whether plaintiffs could show that a majority of the Board was not independent, and because the Sanchezes themselves occupied 2 of the 5 seats, all eyes were on one additional Board member, Alan Jackson.
Alan Jackson, it turned out, had been close friends with the Senior Sanchez for "more than five decades," and the Delaware Supreme Court deemed this fact worthy of of judicial notice. Thus, in a heartwarming passage, the Court noted that though it had previously held in Beam v. Stewart, 845 A.2d 1040 (Del. 2004), that a "thin social-circle friendship" is not sufficient to excuse demand, "we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director's independence....Close friendships [that last half a century] are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties."
Lest it be accused of being too emotional, however, the Court was careful not to end its analysis there. Instead, it also noted that Jackson and his brother worked for another company over which the Senior Sanchez had substantial influence, and which counted the Sanchez entities as important clients.
With its tender recognition of the value of "human relationships" thus bolstered by the realer concerns of economics, the Court concluded that the plaintiffs had raised a reasonable doubt that Jackson was independent of the Sanchezes, and excused demand.
I realize it's only a baby step, but has the Snow Queen's heart begun to thaw?
In all seriousness, I do find this significant to the extent it suggests that Delaware may be trying to find some room in its caselaw for recognizing what we all know to be true, namely, that personal ties among directors may substantially influence their decisionmaking. I mean, I don't expect any radical new recognition of structural bias, but this decision could herald a more realistic approach to evaluating the impact of informal personal relationships. Or it could just be a one-off due to the extraordinary facts - we'll have to see what future cases bring.
I do note, however, that one of the more interesting aspects of the opinion is the Court's observation that a Section 220 demand is unlikely to yield results for plaintiffs who allege that personal, rather than professional, ties compromise a director's judgment. I expect that's going to get some play in plaintiffs' briefing for a while.
Saturday, September 26, 2015
I've been thinking a lot about the way technology can influence the path of the law - in terms of both judging and scholarship.
For example, the introduction of electronic legal databases like Westlaw has almost certainly changed how judges function. They may be more reliant on clerks today than they used to be, because the sheer accessibility of so much relevant case information requires assistance to sift through. I also wonder if precedent - rather than inductive or explicitly policy-based reasoning - has become more important (or is at least given greater emphasis) because of the ease with which earlier caselaw can be located.
Over at Prawfs, they're discussing Judge Posner and the ethics of independent judicial factual research - something that technology has made far easier for judges to do.
Here at BizLawProf, we've talked about the relevance of law reviews in a world where SSRN can make articles immediately available (not to mention a world where law professors can, you know, umm, blog).
A number of law professors post articles to SSRN that aren't articles so much as they are a form of advocacy - legal briefs, after a fashion, intended to sway a deliberations on a particular issue under judicial or political consideration, in situations where an amicus brief may not be procedurally appropriate or possible. (And sometimes professors just post straight-up legal briefs). Such postings could herald a shift in the law professors' role - or at least a shift in emphasis - by allowing professors to influence policy outside of traditional channels.
But there's another aspect of SSRN's technology that I think may turn out to be critically influential in the long run.
Every morning I have email delivered to my inbox that tells me about new postings in a variety of areas related to corporate and securities regulation. And of those articles, about half come from law professors - and the other half come from business professors. High theory articles are presented to me side by side with in-the-weeds empirical analysis of how slight changes in, say, CEO compensation packages result in slight changes in shareholder returns or discretionary accruals.
This mode of presentation, I think, is necessarily destined to influence legal scholarship - notwithstanding the laments of those who think the academy has gone too far in the direction of "law and." The architecture of SSRN - and its method of categorizing articles by general subject and without regard for field, method, or source - represents a nonneutral argument about what scholars should be thinking about, should be considering, when they conduct their research. And it will be interesting to see where that ultimately takes us.
Saturday, September 19, 2015
I just completed the unit on partnerships in my Business class, and we covered Page v. Page, 55 Cal. 2d 192 (Cal. 1961), the case of the warring brothers who ran a linen supply partnership. This is a semi-famous case - not as fundamental as Meinhard v. Salmon, but included in several business casebooks and discussed in many law review articles.
The opinion itself is maddeningly short on details of the relationship between the brothers, and how it is that this family dispute came to end up in a courtroom.
What we know from the California Supreme Court is this:
George Page was the sole owner of a corporation that supplies linen and machinery for the operation of industrial linen businesses.
George entered into an oral partnership agreement with his brother, H.B., in 1949. That partnership was to operate a linen supply business serving Santa Maria. Each brother contributed $43,000 of capital to the business that apparently went to purchase a few basic assets. Day to day operations, however, depended on services and materials supplied by George’s corporation. The partnership was unprofitable for its 10 years of existence, and ultimately came to owe George’s corporation $47,000 for the materials it supplied.
When the Vandenberg Air Force base was established in Santa Maria, the partnership finally began to turn a profit. Only a few months later, however, George proclaimed that he wanted to dissolve the partnership, and sought declaratory judgment that the partnership was at-will, giving him free rights of withdrawal. H.B. opposed, arguing that the partnership was intended to last until all obligations were paid, and that George was only trying to dissolve now so that he could take sole advantage of the opportunities afforded by the air force base. Among other things, H.B. pointed out that a previous partnership between him and George explicitly provided it was to terminate only when obligations were paid off, and therefore this partnership should be interpreted similarly.
Ultimately, the court concluded that the partnership was at-will, but allowed that H.B. might be able to demonstrate a breach of fiduciary duty if George intended to appropriate for himself benefits properly allocated to the partnership.
The opinion offers no further insight into the George/H.B. arrangement, which leaves it to teacher’s manuals to speculate – and two in particular offer wildly divergent interpretations.
[More under the cut]
Saturday, September 12, 2015
Further to Joan’s and Steve’s posts regarding the value that transactional lawyers can add to deals, Elisabeth de Fontenay at Duke has recently posted an article to SSRN, Law Firm Selection and the Value of Transactional Lawyering, which explores a new dimension along which lawyers can add value for clients: their unique, experience-based knowledge of deal terms.
de Fontenay’s argument is that for complex deals, it may not be readily apparent what the value or cost is for each term, and that lack of transparency impedes bargaining. Experienced transactional lawyers have a unique knowledge base from which to draw upon, allowing parties to learn of new deal possibilities and value their alternatives. de Fontenay points out, however, that this model is in tension with traditional notions of client confidentiality, because the lawyer’s value to the client is a function of the lawyer’s ability to pool knowledge drawn from other engagements. The model also explains why elite law firms continue to be able to charge a premium for their services, and why they have combined into such large organizations: their size allows them to grow their knowledge base, and elite firms, by virtue of their experience, are able to perpetuate their informational advantages.
Friday, September 11, 2015
Claire Moore Dickerson, a much-loved member of the Tulane faculty, passed away recently. I did not have the privilege to know her personally (though I have been grateful to her for her notes while designing my Business Enterprises class), and I know how much she will be missed by my colleagues.
There will be a burial service tomorrow and a memorial service in Rye, New York on October 17. Christine Hurt at The Conglomerate has more.
Saturday, September 5, 2015
The Delaware Chancery Court recently issued its opinion in the Dole Food Stockholder litigation (.pdf), and it’s a doozy.
The précis, as has been reported extensively, is that according to the court, Dole’s Chair, CEO, and 40% controlling shareholder David Murdock conspired with C. Michael Carter, another Dole officer, to make Dole look less profitable than it actually was, so that Murdock could buy out the public stockholders at a bargain price.
The opinion is well worth reading if only for the entertainment value – the machinations involved, and the court’s commentary, make for a riveting tale – but I can’t help but read this and wonder, can we expect to see a follow on Section 10(b) complaint? And what would that look like?
[tl;dr analysis under the cut]
Thursday, September 3, 2015
Has Wal-Mart reformed? Last week I blogged about whether conscious consumers or class actions can really change corporate behavior, especially in the areas of corporate social responsibility or human rights. I ended that post by asking whether Wal-Mart, the nation’s largest gun dealer, had bowed down to pressure from activist groups when it announced that it would stop selling assault rifles despite the fact that gun sales are rising (not falling as Wal-Mart claims). Fellow blogger Ann Lipton did a great post about the company’s victory over shareholder Trinity over a proposal related to the sale of dangerous products (guns with high capacity magazines). There doesn’t appear to be anything in the 2015 proxy that would necessitate even the consideration of a change that Wal-Mart fought through the Third Circuit to avoid.
So why the change? Is it due to the growing public weariness over mass shootings? Did they feel the sting after Senator Chris Murphy praised them for ceasing the sale of Confederate flags but called them out on their gun sales? Even the demands of a Senator won’t overcome the apparent lack of political will to enact more strict gun control, so fear of legislation is not a likely factor either. Selling guns doesn't even conflict with the very specific initiatives in their comprehensive GRI-referenced global responsibility report.
Maybe the CEO just wants to do what he believes is the right thing. After all, he announced to great fanfare in February that the retailer would be raising minimum wages for associates. But just this week the chain announced that it would be cutting back on worker hours in many stores. Was the pay raise a “cruel PR stunt” as some have complained or it good business sense for a company that has failed to live up to investor expectations and needs to retain good talent and reduce turnover?
A few weeks ago when I did a crash course in US corporate law and governance in Panama, I had a lengthy debate with the head of CSR for a Latin American company. I (cynically) told her that in my ideal(ist) world, companies should adopt a stakeholder view and look beyond profit maximization. However, I believed that most large companies in fact implemented CSR programs to enhance reputation, avoid onerous legislation, and mitigate enterprise risks. The company that builds the school or the drinking well in a remote area of a third-world country does good for the community but it also has workers who can send their children to school, educates the next generation of employees, and makes sure that the community has potable water so that workers don't get sick. Its CSR builds good will in the community that can be worth more than gold. The smart company makes sure that it has a social license to operate as well as legal license.
So back to Wal-Mart. Does the retailer need a social license to boost sagging sales or does it just need different merchandise? In other words is the retailer trying to get more customers by stopping the sale of assault rifles? Was that announcement timed to blunt the effect of the announcement about cutting back hours? Or is Doug McMillon simply doing what he believes makes sense for the shareholders and the stakeholders? The cynic in me says that there’s a business reason other than low sales for the change in position on guns and that there was always a business reason for the rise in wages.
September 3, 2015 in Ann Lipton, Commercial Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Legislation, Marcia Narine, Shareholders | Permalink | Comments (1)
Saturday, August 29, 2015
Apparently, Paul Hastings is planning to bring lawyer cubicles to New York. First and second year associates won't get an office; instead, they'll get a cubicle. The firm pitches this as a move to enhance creativity; conveniently, it also saves expenses on office space.
Whenever I hear about moves like this - which include offices with glass walls, or offices shares by multiple people - I always wonder: But how will they sleep?
Leaving aside the sleep research demonstrating the cognitive benefits of naps, I know from personal experience that I cannot get through a full working day - let alone the kind of long day that lawyers often must work - without one or two 20-minute naps. I've talked to other lawyers and I've heard the same thing; they loathe glass walls and other open-office plans not simply for the lack of privacy, but because they need space to sleep.
Google is famous for, among other things, counterbalancing shared offices and glass walls with sleeping pods - which likely benefits employee productivity (and also, presumably, is part of a strategy to keep employees from ever leaving the complex). I suppose Paul Hastings could try something similar, but I'm guessing the cultural taboos against napping - especially among lawyers, who take punishing hours are taken as proof of commitment to the firm - would inhibit their use.
I get why firms may feel the need to cut costs - and lots of attorneys, as well as workers in other fields, have long toiled in cubicles or at shared desks - but won't someone think of the nappers?
Saturday, August 22, 2015
As Marcia just discussed, the D.C. Circuit recently issued its decision in its rehearing in National Association of Manufacturers v. SEC (“NAM”), and it once again held that neither the SEC nor Congress may require public companies to disclose whether they use in their products certain “conflict minerals” that originated in the Democratic Republic of Congo or adjoining countries. Marcia has a really important discussion of the question whether a disclosure requirement is even likely to be effective to accomplish Congress’s goals, but I also find the new opinion fascinating and fraught in its own right – and, incidentally, deeply disdainful toward the en banc opinion in American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (“AMI”). Probably not coincidentally, neither of the two judges in the NAM majority were part of the en banc decision in AMI, because both have senior status (the third member of the NAM panel, Judge Srinivasan, was in the AMI majority, and dissented in NAM).
[More after the jump]
Saturday, August 15, 2015
The school year begins soon, and I'll be teaching Business Enterprises. (That's what Tulane calls the basic BA/Corps class.)
One of my first tasks was to select a casebook. There are a lot of options, and it was interesting for me to analyze how each reflects the philosophy/policy preferences of its authors. I suppose I should have predicted that the Klein/Ramseyer/Bainbridge book would open its discussion of corporations with the Boilermakers case, and its characterization of corporate governance documents as a "contract" among shareholders. The Allen/Kraakman/Subramanian book heavily emphasizes economic analyses. Unsurprisingly, the casebook partially authored by my co-blogger Joan Heminway (i.e., the Branson/Heminway/Loewenstein/Steinberg/Warren book) demonstrates a particular interest in alternative entities, and Hazen/Markham seems to feel derivative actions have dominated far too much academic attention (and also that Dodge v. Ford Motor Co. needs to be retired).
One significant point of variation is how far the books go in integrating state and federal law. As federal securities regulation expands, it clearly poses a problem for casebook authors (and business professors!) in terms of organizing the material in a coherent fashion. It's harder to simply divide the class into state governance law and federal disclosure law (which is how I remember learning it, anyway), and the casebook authors all have different approaches. Ultimately, I chose the Hazen/Markham book, in part because organizationally, it comes closest to reflecting how I think about matters in my own head, so I figured it would be easiest for me to teach.
I'm still assigning Dodge, though.
Saturday, August 8, 2015
In Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 2015 U.S. App. LEXIS 12800 (2d Cir. July 24, 2015), the Second Circuit reversed the district court’s dismissal of state law fraud claims arising out of the sale of hybrid CDOs. The court spent an extraordinary amount of time discussing the concept of loss causation, although to be honest, I’m not at all confident that the extended discussion actually clarifies matters, at least in those circuits that already follow Second Circuit law on the subject.
(There is currently a circuit split on the definition of loss causation under the federal securities laws, and a newly-filed cert petition asking the Supreme Court to resolve it. But I digress.)
What I actually was excited to see was the Second Circuit’s discussion of the conditions under which plaintiffs should be permitted to amend their pleadings.
As I previously posted, courts are all over the map about allowing amended pleadings in securities fraud cases. Some courts are extremely permissive; others essentially grant plaintiffs only one bite at the apple (although that standard is usually more applicable to federal, rather than state, claims). Many courts have held that if plaintiffs want the opportunity to replead their claims in order to meet particularity requirements, they must proffer their proposed amendments prior to the ruling on the motion to dismiss. The theory is, plaintiffs should not be allowed to sit on relevant evidence, let the court make its ruling, and only then announce that they have new facts in their possession; instead, plaintiffs should promptly alert the court if they have additional facts that bolster their allegations.
That rule sounds logical but, as I argued in my prior post, is actually tremendously unfair in practice, because the particularity requirements for pleading securities fraud – whether under the federal rules or under the PSLRA – are so idiosyncratic that it is very difficult for plaintiffs to be able to tell, in advance, what deficiencies might exist in their complaint and what new facts might fill the holes. Making matters worse, any newly-proffered facts offered prior to an initial ruling on the motion to dismiss would introduce extensive delays into the process.
Well, in Loreley, the Second Circuit agreed with me (vindication!!). As the court wrote:
[T]he procedure by which the district court denied leave to amend was improper. The court required the parties to attend a pre-motion conference and to exchange, in preparation, letters of no more than three pages regarding Defendants' anticipated motion to dismiss for failure to state a claim. The Federal Rules of Civil Procedure do not speak to the use of pre-motion conferences. Such conferences are not in themselves problematic, however, and indeed may in many instances efficiently narrow and/or resolve open issues, obviating the need for litigants to incur the cost of more extensive filings. The impropriety occurred not when the district court held the pre-motion conference but when, in the course of the conference, it presented Plaintiffs with a Hobson's choice: agree to cure deficiencies not yet fully briefed and decided or forfeit the opportunity to replead. Without the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies.
Our opinion today, of course, leaves unaltered the grounds on which denial of leave to amend has long been held proper, such as undue delay, bad faith, dilatory motive, and futility—none of which were a basis for the denial here. No improper purpose is alleged. And while leave may be denied where amendment would be futile, the approach taken by the district court was not rooted in futility. Rather, the court treated Plaintiffs' decision to stand by the complaint after a preview of Defendants' arguments—in the critical absence of a definitive ruling—as a forfeiture of the protections afforded by Rule 15. This was, in our view, premature and inconsistent with the course of litigation prescribed by the Federal Rules…
I totally agree.