Sunday, September 17, 2017
As I earlier reported, on Saturday, The University of Tennessee College of Law hosted "Business Law: Connecting the Threads", a conference and continuing legal education program featuring most of us here at the BLPB--Josh, me, Ann, Doug, Haskell, Stefan, and Marcia. These stalwart bloggers, law profs, and scholars survived two hurricanes (Harvey for Doug and Irma for Marcia) and put aside their personal and private lives for a day or two to travel to Knoxville to share their work and their winning personalities with my faculty and bar colleagues and our students. It was truly wonderful for me to see so many of my favorite people in one place together enjoying and learning from each other.
Interestingly (although maybe not surprisingly), in many of the presentations (and likely the essays and articles that come from them), we cite to each other's work. I think that's wonderful. Who would have known that all of this would come from our decision over time to blog together here? But we have learned a lot more about each other and each other's work by editing this blog together over the past few years. As a result, the whole conference was pure joy for me. And the participants from UT Law (faculty, students, and alums) truly enjoyed themselves. Papers by the presenters and discussants are being published in a forthcoming volume of Transactions: The Tennessee Journal of Business Law.
My presentation at the conference focused on the professional responsibility and ethics challenges posed by complexity and rapid change in business law. I will post on my related article at a later date. But if you have any thoughts you want to share on the topic, please let me know. A picture of me delivering my talk, courtesy of Haskell, is included below. (Thank you, Haskell!) So, now you at least know the title, in addition to the topic . . . . :>) Also pictured are my two discussants, my UT Law faculty colleague George Kuney and UT Law 3L Claire Tuley.
Saturday, September 16, 2017
Here at BLPB, Joan Heminway has written a couple of posts discussing comparisons between norms in corporate theory, and norms in democratic theory. A few months ago, she discussed the potential conflicts between Donald Trump’s private business interests, and his role as a “fiduciary” for the United States. As she pointed out, in corporate law, we have procedures to address potential conflicts, which include fully informed approval by the principal or unconflicted fiduciaries, and external review to determine fairness. But there is no similar procedure to address conflicts in the political realm.
Well, it appears that Joan’s not the only one thinking along these lines. I read with interest this amicus brief submitted in the Supreme Court case of Gill v. Whitford, posted by Professor D. Theodore Rave at the University of Houston. The case itself is about political redistricting, but Prof. Rave makes the intriguing argument that redistricting should be addressed the same way we address conflicts of interest in business law. Specifically – and drawing on his earlier article in the Harvard Law Review, Politicians as Fiduciaries – he proposes that districts drawn by independent commissions receive a lower level of scrutiny than districts drawn by “interested” political actors, in much the same way that we scrutinize interested business transactions more closely than disinterested ones. Under such a system, as in corporate law, political actors would retain the flexibility to draw districts as they see fit, but they would be encouraged to use certain practices over others.
From a precedential standpoint, we may have traveled too far from this path for the Supreme Court to change course now, but it’s a fascinating idea that I would love to see the Court seriously entertain.
I also note that in their article Beyond Citizens United, Nicholas Almendares and Catherine Hafer make the related argument that statutes should receive heightened judicial scrutiny if they implicate the interests of major campaign contributors. They don’t draw the comparison to corporate law directly, but they offer the same idea: conflicts in the political realm can be identified just as they are in business, and receive a closer look as a result.
Monday, September 11, 2017
Last Thursday, Jay Brown filed an amicus brief with the U.S. Supreme Court coauthored by him, me, Jim Cox, and Lyman Johnson. The brief was filed in Leidos, Inc., fka SAIC, Inc., Petitioners, v. Indiana Public Retirement System, Indiana State Teachers’ Retirement Fund, and Indiana Public Employees’ Retirement Fund, an omission case brought under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended. An abstract of the brief follows.
This Amicus Brief was filed with the U.S. Supreme Court on behalf of nearly 50 law and business faculty in the United States and Canada who have a common interest in ensuring a proper interpretation of the statutory securities regulation framework put in place by the U.S. Congress. Specifically, all amici agree that Item 303 of the Securities and Exchange Commission's Regulation S-K creates a duty to disclose for purposes of Rule 10b-5(b) under the Securities Exchange Act of 1934.
The Court’s affirmation of a duty to disclose would have little effect on existing practice. Under the current state of the law, investors can and do bring fraud claims for nondisclosure of required information by public companies. Thus, affirming the existence of a duty to disclose will not significantly alter existing practices or create a new avenue for litigants that will lead to “massive liability” or widespread enforcement of “technical reporting violations.”
At the same time, the failure to find a duty to disclose in these circumstances will hinder enforcement of the system of mandatory reporting applicable to public companies and weaken compliance. Reversal of the lower court would reduce incentives to comply with the requirements mandated by the system of periodic reporting. Enforcement under Section 10(b) of and Rule 10b-5(b) under the Securities Exchange Act of 1934 by investors in the case of nondisclosure will effectively be eliminated. Reversal would likewise reduce the tools available to the Securities and Exchange Commission to ensure compliance with the system of periodic reporting. In an environment of diminished enforcement, reporting companies could perceive their disclosure obligations less as a mandate than as a series of options. Required disclosure would more often become a matter of strategy, with issuers weighing the obligation to disclose against the likelihood of detection and the reduced risk of enforcement.
Under this approach, investors would not make investment decisions on the basis of “true and accurate corporate reporting. . . .” They would operate under the “predictable inference” that reports included the disclosure mandated by the rules and regulations of the Securities and Exchange Commission. Particularly where officers certified the accuracy and completeness of the information provided in the reports, investors would have an explicit basis for the assumption. They would therefore believe that omitted transactions, uncertainties, and trends otherwise required to be disclosed had not occurred or did not exist. Trust in the integrity of the public disclosure system would decline.
The lower court correctly recognized that the mandatory disclosure requirements contained in Item 303 gave rise to a duty to disclose and that the omission of material trends and uncertainties could mislead investors. The decision below should be affirmed.
More information about the case (including the parties' briefs and all of the amicus briefs) can be found here. The link to our brief is not yet posted there but likely will be available in the next few days. Also, I commend to you Ann Lipton's earlier post here about the circuit split on the duty to disclose issue up for review in Leidos.
Imv, this is a great case for discussion in a Securities Regulation course. It involves mandatory disclosure rules, fraud liability, and class action gatekeeping. As such, it allows for an exploration of core regulatory and enforcement tools of federal securities regulation.
Saturday, September 9, 2017
It's Saturday morning, and I'm guessing a lot of us are watching apprehensively as Irma heads for Florida (others of us are probably trying desperately to escape the storm's path, possibly receiving an impromptu lesson in dynamic pricing). Meanwhile, Jose and Katia are close behind, even as Houston faces years-long recovery efforts from Harvey, and then there's, well:
It's impossible to consider these events - which, in addition to the human toll, will inflict billions if not trillions of dollars of damage - without thinking that this is what climate change looks like.
The reason I mention it on this blog is that climate change is an increasingly popular subject for shareholder proposals. More and more, shareholders are seeking information from companies about how they are responding to climate change, including the precautions being taken, and the expected costs of disasters.
Considering that we are now being treated to a dramatic demonstration of just how climate change can have a devastating impact on economies generally and individual companies in particular, isn't it time for critics of the shareholder proposal mechanism to at least admit that climate change proposals belong in the "corporate governance" category, and not the oft-derided "social policy" category, the latter of which is alleged to have only an"attenuated connection to shareholder value"?
Saturday, September 2, 2017
So last week I posted about the problem of buyer/customer discrimination; we have laws to deal with discrimination by employers, by businesses that sell to the public, by landlords – but there isn’t much to address discrimination that runs in the other direction.
It was timely, then, that this article has been making the internet rounds:
When Penelope Gazin and Kate Dwyer decided to start their own online marketplace for weird art, they didn’t expect it to be easy. After all, the L.A.-based duo of artists were bootstrapping the project with a few thousand dollars of their own money and minimal tech skills. But it wasn’t just a tight budget that added friction to the slow crawl toward launching; the pair also faced their share of doubt from outsiders, spanning from the condescending to the outright sexist.
… After setting out to build Witchsy, it didn’t take long for them to notice a pattern: In many cases, the outside developers and graphic designers they enlisted to help often took a condescending tone over email. These collaborators, who were almost always male, were often short, slow to respond, and vaguely disrespectful in correspondence. In response to one request, a developer started an email with the words “Okay, girls…”
That’s when Gazin and Dwyer introduced a third cofounder: Keith Mann, an aptly named fictional character who could communicate with outsiders over email.
“It was like night and day,” says Dwyer. “It would take me days to get a response, but Keith could not only get a response and a status update, but also be asked if he wanted anything else or if there was anything else that Keith needed help with.”
Dwyer and Gazin continued to deploy Keith regularly when interacting with outsiders and found that the change in tone wasn’t just an anomaly. In exchange after exchange, the perceived involvement of a man seemed to have an effect on people’s assumptions about Witchsy and colored how they interacted with the budding business. One developer in particular seemed to show more deference to Keith than he did to Dwyer or Gazin, right down to the basics of human interaction.
“Whenever he spoke to Keith, he always addressed Keith by name,” says Gazin. “Whenever he spoke to us, he never used our names.”
Stories like this are pretty common; for company founders, they may be disadvantaged but they can just try to power through it – as these women did – but when the woman on the receiving end is someone else’s employee, it can affect her job performance, as illustrated by this twitter thread.
In sum, plus ça change, plus c'est la même chose.
Monday, August 28, 2017
I am excited and proud to make the following announcement about a cool (!) upcoming program being held on Saturday, September 16 at UT Law in Knoxville:
The University of Tennessee College of Law will host a conference and CLE program that will focus on trends in business law. Discussions will take place throughout the day featuring panel discussions that center upon business law scholarship, teaching and law practice.
Topics will include business transaction diagramming; risks posed by social enterprise enabling statutes; fiduciary obligations and mutual fund voting; judicial dissolution in LLCs; Tennessee for-profit benefit corporation law and reporting; corporate personality theory in determining the shareholder wealth maximization norm; and professional responsibility issues for business lawyers in the current, evolving business environment.
The presenters for the program panels are . . . well . . . us! All of the BLPB editors and contributing editors, except Anne Tucker (we'll miss you, Anne!), are coming to Knoxville to share current work with each other and conference attendees. Each editor will anchor a panel that also will include a faculty and student discussant. The BLPB blogger papers and the discussants' written commentaries will all be published in a future issue of our business law journal, Transactions: The Tennessee Journal of Business Law. We also have secured one of our former visiting professors as a lunch-time speaker.
UT Law looks forward to hosting this event. For more information, you can look here. I expect some of us will post on the conference and the conference papers at a later date.
Saturday, August 26, 2017
As Anne Tucker pointed out, there was a flurry of news items a couple of years ago suggesting that hedge fund activists were more likely to target female CEOs over male CEOs.
Well, someone’s now done a systematic study of the issue and confirmed – yes! That is a thing that happens!
In their paper, Do Activist Hedge Funds Target Female CEOs? The Role of CEO Gender in Hedge Fund Activism, authors Bill Francis, Victor Shen, and Qiang Wu control for a variety of firm characteristics, including the “glass cliff” (that women are more likely to be elevated to CEO in times of turbulence), and still find that the presence of a woman CEO makes it more likely that a company will be targeted by activists. They attribute the difference to a couple of things. First, they find that women CEOs respond differently to activist attacks: instead of going into a defensive posture, they are more likely to cooperate. As a result, activists seek cooperative measures like board seats, and settle without proxy fights. The more cooperative posture of women CEOs makes it easier – and thus more profitable – for activists to target them. This finding, they conclude, is consistent with other findings that the market does not respond as positively to activist intervention when the firm uses aggressive defensive tactics, unless the activist further increases the hostilities with even more expensive and aggressive interventions.
The study’s authors reject the notion that pure sexism is at work, because (they find) the market responds to activism at women-led companies with larger abnormal returns both in the short term and over the course of a year. According to the authors, it is implausible that the market, as well as the activists, would be misled by pure gender bias for such a prolonged period.
On this point, I’m a little more skeptical. For one thing, if I’m reading this correctly, their long-term findings of higher abnormal returns for women-led companies are less consistent across different specifications than the short-term findings. Plus, I think it’s entirely plausible that even if the activists themselves are not “motivated” in some subjective sense by gender bias, they suspect that the other investors on whose cooperation they rely may be less trustful of women CEOs. So they know that if they target those companies, other investors will respond more positively. Indeed, the authors find that activists take smaller positions in women-led companies than men-led ones, suggesting that the activists anticipate more cooperation from the existing shareholder base.
That said, I certainly find it plausible that part of activists’ motivation stems from differential responses of men and women CEOs, so there’s a great irony in the fact that women CEO responses end up adding value to the company, yet at the same time – as the study’s authors find – women end up suffering more for it, with a greater loss in compensation and higher turnover than men CEOs who find themselves targeted, even though women begin with less compensation than their men counterparts.
In addition to having interesting implications on its own terms, this study I think can be viewed as part of a larger emerging literature on the problem of customer or end-user discrimination. As Kate Bartlett and Mitu Gulati discuss in their essay on the subject, we have a variety of laws that prevent, say, employers from discriminating against employees, and businesses from discriminating against customers, but we don’t have laws that work in the opposite direction. For the most part, buyers/customers can discriminate with impunity (with limited exceptions, like programs funded by the federal government) – which in practice means that we have real discrimination problems in the gig economy. Airbnb, for example, has been trying to address discrimination by homeowners who will not rent to people of color, and people of color who sell products on eBay may receive less than white sellers (.pdf). One article reports that women gig economy workers are used to experiencing harassment by customers, and – because they are considered to be independent contractors – don’t view themselves as having many options. Of course, this is not just a gig economy phenomenon; among other things, medical patients may not want to be treated by nonwhite doctors (here is an extreme example).
And recently, there have been a spate of articles about discrimination by venture capitalists, who are much less likely to fund women-led startups and, apparently, have engaged in a pattern of serious sexual harassment against women entrepreneurs. Activists who target women CEOs seem to be another data point.
The reality may be that there are forms of discrimination that the law can’t reach, but as the Bartlett and Gulati article concludes, we might start to seriously think about areas where legal intervention could be a practical, if partial, solution.
Saturday, August 19, 2017
I did a Lexis search, and found zero citations to Dodge v. Ford in the New York Times (though it appears there was at least one online reference in 2015), and only three in the Wall Street Journal – two of which were factual recitations regarding the history of corporate governance debates.
The third was yesterday’s op-ed, arguing that the shareholders of the companies that quit Trump’s manufacturing council (an issue discussed earlier this week by Marcia), as well as shareholders of other companies that purport to take a “moral” stance, should sue corporate executives for destroying shareholder value. The authors, Jon L. Pritchett and Ed Tiryakian, argued:
Memo to activist CEOs: Dust off your notes, open your textbooks, and reread the basics of corporate finance taught at every credible university. The fiduciary responsibility of a CEO is to safeguard the company’s assets and acknowledge this overriding principle: “It’s not our money but that of the shareholders.”
In today’s heated political climate, some executives have rejected the fundamentals in favor of short-term publicity for themselves and their corporations. When several CEOs quickly resigned over the past few days from the now-disbanded White House Council on Manufacturing, they cited personal views or political disagreement as their reason for leaving. Those may be truthful reasons, but are they in the best interests of the companies they represent? Wouldn’t shareholders be better off with their interests represented in this powerful group of government officials who control regulatory policy?
In the landmark 1919 case Dodge v. Ford, the Michigan Supreme Court laid out the ruling that has guided corporate America ever since. Ford Motor Co. must make decisions in the interests of its shareholders, the court ruled, rather than in a charitable manner.
As any business law professor knows - and as Marcia made clear in her earlier post - the matter is not nearly that simple. Even if we accept a pure shareholder wealth maximization frame, what would it mean for these companies’ ability to function if they remained? #SoupNazi became a popular hashtag on Twitter to force Denise Morrison of Campbell’s Soup to quit the council; the celebrity endorsements of Under Armour may have been under threat due to Kevin Plank’s presence, and employees of Silicon Valley were in open revolt over their leaders’ cooperation with the Trump administration, which just goes to show why Dodge v. Ford is generally considered not good law, at least to the extent it proposes that courts second-guess the wisdom of business decisions.
That said, there’s the macro-level view. Political instability is bad for business. The perception that America strives for certain moral ideals, and its adherence to the rule of law, are good for business. It’s reached the point where multiple companies are listing Trump as a risk factor in their SEC filings.
America’s CEOs may have limited options for pressuring for more stability – and refusing to lend their credibility to Trump’s (largely ceremonial) business councils may be one of the few tools available.
Friday, August 18, 2017
The University of Richmond School of Law seeks to fill three tenure-track positions for the 2018-2019 academic year, including one in corporate/securities law. Candidates should have outstanding academic credentials and show superb promise for top-notch scholarship and teaching. The University of Richmond, an equal opportunity employer, is committed to developing a diverse workforce and student body and to supporting an inclusive campus community. Applications from candidates who will contribute to these goals are strongly encouraged.
Inquiries and requests for additional information may be directed to Professor Jessica Erickson, Chair of Faculty Appointments, at firstname.lastname@example.org.
Saturday, August 12, 2017
Whenever new corporate governance terms are developed that function to diminish shareholder power – like arbitration provisions, or forum selection, or loser-pays – concern develops among (at least some) investors that these terms will become the norm. It’s not about one company that does or doesn’t adopt the term; it’s about the fear that several companies will adopt them, and eventually it will become standard, so that shareholders will not be able to exert discipline by avoiding companies with the disfavored provision.
In other words, companies will behave as though they’re in a cartel when selecting these terms, and they’ll be able to do it because they can easily coordinate with each other. There are a limited set of underwriters and white shoe law firms that will advise them, and those entities will propagate the new development throughout the system. Cf. Elisabeth de Fontenay, Law Firm Selection and the Value of Transactional Lawyering, 41 J. Corp. Law 393 (2015) (explaining the value-added by elite law firms – knowledge of the latest in deal technology); Roberta Romano & Sarath Sanga, The Private Ordering Solution to Multiforum Shareholder Litigation (finding that law firm advice is behind the adoption of forum-selection clauses at the IPO stage). Investors may prefer to coordinate with each other to boycott companies that adopt these terms, but investors are widely dispersed, and have no obvious coordination mechanism.
Except it seems they do. They have ISS, for one – which doesn’t help with buying, but does help with voting. ISS, according to The Power of Proxy Advisors: Myth or Reality? 59 Emory L.J. 869 (2010), by Jill E. Fisch, Stephen J. Choi, Marcel Kahan, bases its recommendations very much on the preferences of its clients, more so than other advisory services. In other words, ISS serves as a coordination point.
And now on the buying side, we have the indexes.
As I’m sure readers of this blog are aware, a couple of major indexes, under heavy pressure from investors, decided to exclude companies with certain multiple-class share structures. The investors’ concern was that if these companies were included, indexed investors would have to buy them even if they didn’t want to. And that’s an odd argument, of course, because nothing is stopping them from setting up their own index or buying according to a modified index, though we can agree that doing so would be at the very least impractical (though it’s fascinating to contemplate why). That said, the exclusion is unusual, because index investors aren’t supposed to be actively picking stock characteristics, and – until now – the indexes did not make specific governance characteristics part of the criteria for inclusion.
So this latest move suggests that as passive investing gains more power, the indexes have become – or have the potential to become – a kind of cartel mechanism. They are a means by which dispersed investors can coordinate their buying and thereby express preferences collectively.
What happens, for example, if a company accepts Michael Piwowar’s invitation and tries to eliminate class actions via arbitration at the IPO stage? Will we see investor pressure to keep those companies out of the index as well? Time will tell, but recent events suggest this is another tool that investors can use to coordinate with each other.
Tuesday, August 1, 2017
Today, the Delaware Supreme Court issued its much-awaited decision in DFC Global Corp. v. Muirfield Value Partners, LP, et al., regarding the proper role of the deal price when determining fair value in a corporate appraisal action. In an opinion by Chief Justice Strine, the court rejected calls for a bright-line rule deferring to the price, but emphasized that market pricing is generally the best evidence of value. In one passage that struck me as curious, the court held that the purpose of an appraisal action is not to award dissenters the very highest price their shares could command, but to “make sure that they receive fair compensation for their shares in the sense that it reflects what they deserve to receive based on what would fairly be given to them in an arm’s-length transaction.” Which, you know, sounds an awful lot like deal price. And not a whole lot like valuing a company “as a going concern, rather than its value to a third party as an acquisition,” In re Petsmart, 2017 WL 2303599 (Del. Ch. May 26, 2017), which is how appraisal has previously been described.
I will leave it to others to analyze the implications of DFC for appraisal litigation going forward, but one aspect to note is that Strine summarized his point with the colorful observation that fair value “does not mean the highest possible price that a company might have sold for had Warren Buffett negotiated for it on his best day and the Lenape who sold Manhattan on their worst.” He then elaborated with the reasoning quoted below. As the kids say, shot:
Capitalism is rough and ready, and the purpose of an appraisal is not to make sure that the petitioners get the highest conceivable value that might have been procured
had every domino fallen out of the company’s way....
The real world evidence regarding public company M&A transactions underscores this. Various factors prevalent in our economy, which include Delaware’s own legal doctrines such as sell-side voting rights, Revlon, Unocal, the entire fairness doctrine, and the pro rata rule in appraisals, have caused the sellside gains for American public stockholders in M&A transactions to be robust. …[T]here is a rich literature noting that the buyers in public company acquisitions are more likely to come out a loser than the sellers, as competitive pressures often have resulted in buyers paying prices that are not justified by their ability to generate a positive return on the high costs of acquisition and of integration. As one authority summarizes:
“According to McKinsey research on 1,415 acquisitions from 1997 through 2009, the combined value of the acquirer and target increased by about 4 percent on average. However, the evidence is also overwhelming that, on average, acquisitions do not create much if any value for the acquiring company’s shareholders. Empirical studies, examining the reaction of capital markets to M&A announcements find that the value-weighted average deal lowers the acquirer’s stock price between 1 and 3 percent. Stock returns following the acquisition are no better. Mark Mitchell and Erik Stafford have found that acquirers underperform comparable companies on shareholder returns by 5 percent during the three years following the acquisitions.”
Which leads me to, chaser:
M&A deals create more value for acquiring firm shareholders post-2009 than ever before. Public acquisitions fuel positive and statistically significant abnormal returns for acquirers while stock-for-stock deals no longer destroy value. Mega deals, priced at least $500 mil, typically associated with more pronounced agency problems, investor scrutiny and media attention, seem to be driving the documented upturn. Acquiring shareholders now gain $62 mil around the announcement of such deals; a $325 mil gain improvement compared to 1990–2009. The corresponding synergistic gains have also catapulted to more than $542 mil pointing to overall value creation from M&As on a large scale. Our results are robust to different measures and controls and appear to be linked with profound improvements in the quality of corporate governance among acquiring firms in the aftermath of the 2008 financial crisis.
That last quote is from the abstract of a new paper published by G. Alexandridis, N. Antypas, N. Travlos, called Value creation from M&As: New evidence, where they find, well, new evidence that the old deals-are-bad-for-the-acquirer saw may no longer hold.
As you can see, the authors speculate that the increased acquirer-side value is due to improved post-crisis governance. I actually have a different theory on that which I’m working through, but perhaps a more important point is this: Whatever value target shareholders receive is necessarily a function of the governing law – including, as the Delaware Supreme Court says, Revlon, Unocal, and the entire fairness doctrine. But with new cases like Corwin and Kahn, those are rapidly going the way of the dodo. (See, e.g., J. Travis Laster, Changing Attitudes: The Stark Results Of Thirty Years Of Evolution In Delaware M&A Litigation; Steven Davidoff Solomon & Randall Thomas, The Rise and Fall of Delaware’s Takeover Standards). It may once have been true that acquirers overpaid for targets, but it’s dangerous to change the legal landscape and expect the market to remain the same.
Saturday, July 29, 2017
I’ve previously posted about the problem of multiforum litigation, and how it’s very much in Delaware’s interest to figure out a way to keep cases flowing to its courts. In particular, Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones. As VC Laster put it during a hearing in Avi Wagner v. Third Avenue Management, LLC, “The defendants want to get out of litigation, and the best way to do it is to fight the weak plaintiff . . . [T]hey have the plaintiff they want and the allegations they want…. This whole system of multi-forum litigation … creates a lot of systemic dysfunction. It's certainly true that things should be resolved in one forum and at one time, but it doesn't follow from that … that they should necessarily be followed under a system that incentivizes the filing of a fast complaint by a weak plaintiff so that defendants have the high ground.” (May 20, 2016).
Delaware’s latest proposal to deal with the problem came in the form of a suggestion from its Supreme Court: perhaps when derivative actions are dismissed for failure to allege demand futility, it would violate the constitutional due process rights of subsequent plaintiffs to bind them to that decision. The theory is that until the demand requirement is satisfied, a plaintiff represents only him or herself, and not the corporate entity; therefore, any dismissal only extends to that plaintiff. In January, the Supreme Court remanded to Chancery to make a determination of the constitutional law issues. See Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017).
Well, a few days ago, Chancellor Bouchard came back with an answer. He concluded that an Arkansas court’s dismissal of a derivative case on the grounds that those plaintiffs failed to show demand futility should not bar similar claims by Delaware plaintiffs.
The reason I find this fascinating is because it once again highlights Delaware’s uneasy relationship with the substantive versus the procedural aspects of its law.
We begin with the principle that state courts must give full faith and credit to decisions in other jurisdictions, which means that they must give the same preclusive effect to a judgment that the rendering court would have given. In this case, that meant determining what kind of preclusive effect Arkansas would have given to the original judgment.
Chancellor Bouchard concluded that – like most jurisdictions – Arkansas would have found the original judgment was res judicata against subsequent plaintiffs. The obvious way out of that – suggested by the Delaware Supreme Court – was to find that preclusion would violate federal due process.
And that’s sort of what Bouchard held. But he was clearly uncomfortable resting entirely on federal constitutional standards, especially given the near-universal agreement that preclusion is permissible in these circumstances. So, rather than phrase his holding purely in terms of a constitutional holding (as the Delaware Supreme Court had asked him to do), he phrased it in terms of a recommendation to the Delaware Supreme Court of the rule they should adopt. And his recommendation rested not only on federal constitutional standards, but also public policy– Delaware’s policy, and by extension Delaware’s control over its corporations. He concluded by recommending that Delaware adopt Laster’s reasoning from In re EZCORP, Inc. Consulting Agreement Derivative Litigation – which itself was based both on Delaware law and federal law. (It is significant to note at this point that when the Delaware Supreme Court remanded the case to him, it specifically held “Delaware law does not apply here, as the parties agree.” Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017)).
Which raises the same question that Trulia raises: Is this a substantive issue, or a procedural one? More specifically, do we treat the preclusive effect of derivative litigation as a matter of civil procedure, or as a matter of corporate internal affairs? Bouchard kinda straddled the line; it will be interesting to see what the Delaware Supreme Court (and other jurisdictions) choose to do.
Saturday, July 22, 2017
So Michael Piwowar inspired a bit of heartburn in the plaintiffs’ bar this week when, during a speech to the Heritage Foundation, he encouraged corporations to add mandatory arbitration provisions in their charters prior to an IPO. This is a subject on which I’ve frequently posted, but since it’s in the news again I can’t let it go by without comment.
Mandatory arbitration is an idea that terrifies plaintiffs’ attorneys because arbitration clauses typically come with a class action waiver, and that could sound the death-knell for federal securities litigation. Moreover, because the Supreme Court has interpreted the Federal Arbitration Act to bar most attempts at regulating contracts to arbitrate, see, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the fear is that once an arbitration clause makes it into the corporate governance documents, it’s pretty much game over. The plaintiffs’ bar has long taken comfort in the fact that (at least until now) the SEC has taken the position that such provisions are impermissible, which is exactly why Piwowar's remarks raised concern. Delaware, of course, recently amended its corporation law to prohibit the use of mandatory arbitration clauses in corporate charters and bylaws, see Del. Code tit. 8, § 115, but there’s some question as to whether the prohibition extends to federal securities claims, and, even if it does, whether Delaware’s law is preempted by the FAA.
But, as I explained in my article Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583 (2016) (and, to a lesser extent, my chapter Limiting Litigation Through Corporate Governance Documents, in Research Handbook on Representative Shareholder Litigation (Sean Griffith et al., eds., forthcoming 2017)) - and as I previously posted here, here, and here - I don’t think existing law permits charters and bylaws to regulate federal securities claims. And even if charters and bylaws do extend that far, I do not believe the FAA applies. To summarize briefly (you can consult older posts or Manufactured Consent for the long version):
First, corporate charters and bylaws only govern internal governance matters, i.e., the matters typically governed by the internal affairs doctrine. This makes sense; corporate law is intended to govern stockholders’ relationship to the corporation in their capacity as stockholders. It does not govern matters outside the role of the stockholder as a member of the corporate polity, such as personal torts. Federal securities law may be closely related to corporate law, but it’s a different animal, and therefore outside the scope of the state-constructed corporate entity.
Second, though it is fashionable to describe charters and bylaws as “contractual,” I do not believe they are, at least not in the manner envisioned by the FAA. Within the corporate form, shareholders are not treated as autonomous counterparties bargaining with directors over terms. Thus, the preconditions for contract envisioned by the FAA jurisprudence are not present.
All of which is to say – I don’t think Piwowar’s suggestion is viable, no matter whether the SEC has changed its views. Of course, there’s always the chance it’ll take a lot of litigation to settle the matter.
Saturday, July 15, 2017
Could this be the beginning of the end for the event study in Section 10(b) class certification?
Yes, I’m probably overstating, but still, the Second Circuit’s opinion in In re Petrobras Securities, 2017 WL 2883874 (2d Cir. July 7, 2017), definitely takes a step in that direction.
As a recap, a private plaintiff alleging fraud claims under Section 10(b) of the Exchange Act must demonstrate that he or she “relied” on the defendant’s false statements. In Basic Inc. v. Levinson, 485 U. S. 224 (1988), the Supreme Court held that reliance could be demonstrated via the fraud on the market doctrine – namely, the presumption that in an open and developed market, any material, public misstatement is likely to have impacted the market price of the security. The fraud on the market doctrine is what allows Section 10(b) claims to be brought as class actions, since it eliminates the need for plaintiffs to demonstrate reliance on an individual basis. Since Basic, then, battle has been joined between plaintiffs and defendants regarding what counts as an “open and developed” market for class certification purposes.
In recent years, it has become de rigueur for plaintiffs to use an event study to establish the necessary market conditions. An event study is a statistical analysis comparing the change in a security’s price with an event, such as the release of new company-specific information.
The event study methodology, however, has come under heavy academic criticism, the thrust of which is that while it is a useful tool for studying markets generally, its utility is greatly diminished when deployed to examine a single company. See, e.g., Alon Brav & J.B. Heaton, Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias, 93 Wash. U. L. Rev. 583 (2015).
In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the Supreme Court held that the Basic presumption represents merely a “modest premise” that public information affects prices. Commenters (including your humble blogger) interpreted Halliburton to mean that courts should loosen their criteria for identifying an “open and developed” market for Basic purposes.
Judge Scheindlin was one of the first judges to take up Halliburton’s invitation. Acknowledging the criticism of event studies, she held that plaintiffs need not submit an event study to prove the existence of an open and developed market, so long as they submit other types of evidence.
In Petrobras, the Second Circuit appeared to follow her lead. Though the Second Circuit stopped just shy of holding class certification does not require an event study – the court claimed that the issue was not squarely presented – it did acknowledge the academic critiques of event studies, and (quoting its earlier caselaw) “explicitly declined to adopt any particular test for the market efficiency of stocks or bonds.” As the court put it, “Event studies offer the seductive promise of hard numbers and dispassionate truth, but methodological constraints limit their utility in the context of single-firm analyses.” The court also noted that the various factors that go into a finding of an open and developed market – analyst coverage, trading volume, and so forth – would be of little use if in fact event studies were required in all instances.
Petrobras could have an enormous impact on securities litigation. If event studies are not required, it may be easier for plaintiffs to win certification in cases involving securities other than exchange listed stocks – such as the notes at issue in Petrobras, as well as preferred stock, over the counter stocks, and so forth. Beyond that, event studies have been critical to proving damages and loss causation; if they are suddenly deemed unreliable, it may open the door to a much wider variety of evidence on these elements, as well.
Saturday, July 8, 2017
As most readers of this blog are likely aware, Hobby Lobby is in the news again.
Hobby Lobby is a privately-held corporation that runs a chain of arts and crafts stores. Its shareholders consist of members of the Green family, who also manage the corporation on a day to day basis. The Greens are religious Christians, and Hobby Lobby’s statement of purpose declares that the company will be run in accordance with biblical principles.
When Hobby Lobby last made the news, it had just won its case in the Supreme Court, Burwell v. Hobby Lobby Stores. The Greens argued, successfully, that the Affordable Care Act impermissibly burdened their religious beliefs by requiring that Hobby Lobby provide birth control coverage to its employees. The difficulty with this argument, from a corporate law perspective, is that it draws no distinction between burdens placed on Greens in their personal capacities, and burdens placed on the Hobby Lobby corporation itself. (The Supreme Court opinion did little to clarify the matter, which is why I use it in my class as part of my introduction to business law).
Now the company making headlines again, for smuggling ancient artifacts out of Iraq.
[More under the jump]
Saturday, July 1, 2017
On Monday, the Supreme Court decided Public Employees’ Retirement System v. ANZ Securities Inc. The case resolved a critical issue of class action administration that was left hanging after the Supreme Court dismissed an earlier-granted petition in a similar case (see my earlier posts on the subject).
In American Pipe & Construction Co. v. Utah, 414 U. S. 538 (1974), the Supreme Court held that the filing of a class action tolls the statute of limitations for all members of the putative class. That way, if individual members wish to opt out and pursue their claims individually, or if the class is not certified and they are forced to file their own complaints, they are free to do so without fear of a limitations period that may have expired years earlier. The rule has long been thought of as a practical necessity for the administration of class actions. After all, class actions change over time – claims are dropped, class definitions are narrowed, class counsel may pursue remedies and settlements that don’t satisfy all class members. If individual class members were not assured that they could file their own claims if any of these events occurred, they might be forced to file prophylactic complaints in advance, thus burdening the court with unnecessary filings.
Following American Pipe, a number of questions arose regarding its precise contours (when does the tolling period expire (Taylor v. UPS, Inc., 554 F.3d 510 (5th Cir. 2008); Smith v. Pennington, 352 F.3d 884, 893 (4th Cir. 2003)); which claims are tolled (Cullen v. Margiotta, 811 F.2d 698 (2d Cir. 1987)); whether subsequent class actions, as well as subsequent individual actions, are tolled (Yang v. Odom, 392 F.3d 97 (3d Cir. 2004))), but the basic contours remained reasonably certain.
Until recently. In a pair of cases, the Supreme Court drew sharp distinctions between statutes of limitations, which are intended to force a plaintiff to act promptly once his claim accrues, and statutes of repose, which are intended to assure the defendant of “peace” once a certain time has passed since the original harmful conduct. See CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991). This raised the question: was it possible that American Pipe applied only to limitations periods, and not repose periods?
Enter ANZ. In the wake of Lehman’s bankruptcy, certain purchasers of Lehman bonds filed a class action lawsuit against the underwriters under Section 11 of the Securities Act. Section 11 contains a limitations period – providing that an “action” may be “brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence” – and a repose period, prohibiting any “such action” if “brought … more than three years” after the offering. 15 U.S.C. §77m. In the case of ANZ, after the filing, the action lay dormant for years. One class member, CalPERS – frustrated by the delay – filed its own action, which was eventually consolidated into the main action. When a settlement was proposed, CalPERS chose to opt out to pursue its claims individually, but its complaint was dismissed on the grounds that the CalPERS complaint had been filed after the expiration of the repose period.
The Supreme Court agreed. Writing for a 5-4 Court, Justice Kennedy concluded that courts have no power to toll repose periods; therefore, even after the class action complaint was filed, the repose period continued to run. Three years after the offering, then, no individuals could file their own complaints, regardless of their concerns about the conduct of the class action.
Although the logic of the opinion would seem to apply to all statutes of repose, Justice Kennedy clearly tried to keep his options open. He emphasized that some repose periods might be drafted in a manner that suggests courts have greater equitable power; presumably, then, there’s room to make an argument that American Pipe tolling could apply to some repose periods under particular statutes – though, most have assumed, not ones related to securities claims (i.e., not the 5-year repose period applicable to claims under Section 10(b)).
Writing in dissent, Justice Ginsburg argued that by filing the class action complaint, the original plaintiffs commenced the action for all members of the asserted class, and that the statute of repose was therefore satisfied for all of them, regardless of whether they chose to litigate individually.
(For more description of the case, see this post at The D&O Diary.)
There are a couple of things about this decision that leap out at me.
Most obviously, this is a wildly impractical opinion that undermines the utility of American Pipe. Three years is nothing in securities litigation time; assume there’s some delay before a complaint gets filed, then there’s maybe 3 months or more before the lead plaintiff is selected, then possibly 60 days before an amended complaint is filed, another 60 days before the motion to dismiss is filed – you’re looking at potentially more than a year before the case even makes it past the motion to dismiss. Class members simply will not have enough information before the 3-year repose period expires to make an intelligent decision about whether to opt out (either because they’re unsatisfied with the lead counsel’s performance, or because they’re unsatisfied with a settlement, or because class certification is denied). That means their only option is a “protective” filing, opting out in advance, just to preserve their rights. Justice Kennedy pooh-poohed the possibility, pointing out that investors have not filed protective complaints en masse so far, but that’s because the state of the law was uncertain and holdings refusing to toll were relatively new. Courts can now expect to be flooded with protective filings by absent institutional class members who feel they must opt out in order to fulfill their fiduciary duties to their funds. See, e.g., David Freeman Engstrom & Jonah B. Gelbach, American Pipe Tolling, Statutes of Repose, and Protective Filings: An Empirical Study, 69 Stan. L. Rev. Online 92 (2017).
Moreover, any investors who fail to opt out are now trapped if they are unhappy with the conduct of litigation. They could object, presumably, but there’s a really wide space between what an individual member might believe is in their own interest, and lead counsel performance that’s so deficient as to warrant replacement. A critical mechanism for disciplining class counsel - often accused of selling out classes for easy attorneys fees - will be lost.
By the way, when a case is settled and notice is sent to class members, must it warn them that opting out is no longer an option due to expiration of the repose period?
I also wonder what this ruling will do to the Rule 23 inquiry itself. In determining whether a class should be certified, courts must evaluate whether a class action is “superior” to individual actions. If the repose period has expired, does that mean the class action is always superior, regardless of what other defects there are in class cohesion?
Additionally, what happens if the court wants to create subclasses with new representatives, or if the current class representative is inadequate and a new one must be substituted? Often, these administrative matters are accomplished by motions to intervene – but American Pipe itself suggests that intervention by an absent class member counts as a new complaint, permissible after the expiration of the limitations period only with tolling. What about lead plaintiff selection under the PSLRA - can that happen after the repose period expires? (These are basically questions I raised when the Court first granted cert, by the way).
But aside from this parade of horribles, here’s what leaps out at me on a gut level:
The rule adopted by the majority has really nothing to recommend it practically; indeed, the defendants’ brief offers virtually no policy reasons to support their argument. The plaintiffs, of course, argued that there was simply no injustice here: all of the purposes of a statute of repose are fulfilled when the class action complaint is filed. At that time, the defendants know of the claims against them, and the identities of the plaintiffs; it hardly matters, for repose purposes, that particular class members might later choose to litigate individually.
The Court disagreed. It held that even though defendants may formally be placed on notice of the class claims, there is a practical difference between litigating a class action, and litigating individual actions as follow-ons; that difference, said the Court, increases the defendants’ burdens and potentially their liability.
Which is indisputably true. But recall the cases involving class-action waivers in the context of arbitration agreements. Frequently, plaintiffs argue that such waivers make it impossible, as a practical matter, for them to bring their substantive claims, and therefore the waivers act as a de facto – and prohibited – waiver of certain federal rights. See, e.g., Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Yet in that context, the Court has been obtrusively unsympathetic; the class action device, the Court has held, is merely a procedural mechanism for aggregating claims, and there is no dicially-cognizable difference between claims brought individually and claims brought as a class.
Obviously, these are different situations, but it seems to me that the Court is somewhat inconsistent about when it will recognize the practical realities of how the class action form affects the underlying claim, and when it will not. And the Court is far more sympathetic to practical complaints that originate from the defense side than from the plaintiffs’ side.
Saturday, June 24, 2017
The second season premiere of Queen Sugar, a television adaptation of Natalie Baszile’s novel, aired earlier this week, and if you’re the kind of person who likes to catch pop cultural depictions of business issues, this is a nice sleeper to add to your viewing list. It airs on Oprah Winfrey’s OWN network, and was created by Selma director Ava DuVernay. (Interestingly, in a departure from most Hollywood productions, every episode is directed by a woman.)
Queen Sugar is about three black siblings who inherit their father’s ailing sugarcane farm in Louisiana (I admit, there’s a bit of provincialism to my fondness for this show – it takes place just outside of New Orleans), and struggle to turn it into a viable business.
Nova, an investigative journalist specializing in the racial disparities of the Louisiana criminal justice system, has difficulty reconciling her political commitments and her romantic life. Ralph Angel, the little brother, was recently released from prison, and his efforts to raise his young son are hobbled by lingering legal limitations and what he perceives as his ongoing infantilization at the hands of his older sisters and his aunt.
Charley, the show’s main focus, is a business woman, and only a half-sibling, who has spent most of her time among the wealthy and powerful (white) Los Angeles elite. (In a telling detail, Charley is noticeably lighter-skinned than her brother and sister). Charley’s career until now has been devoted to managing her husband, a successful basketball star. When the marriage ends – due to a sexual assault scandal – Charley is forced to confront the reality that as a black woman, unmoored from her famous husband, her business savvy and experience carries far less weight. Charley’s arrogance can be counterproductive, but her anger and frustration at her diminished social status (not unlike the frustration Ralph Angel experiences) are channeled into ambition for the farm.
Thus, Queen Sugar is a family drama that revolves around the difficulties of running a small business, intersected with issues of race, class, and gender. As the siblings navigate their interfamily tensions, they must simultaneously contend with various setbacks, including their own farming inexperience, their dwindling financial resources, and an ongoing feud with the wealthy white Landry family, which controls the local sugar mill and uses its monopoly power to squeeze black farmers.
Queen Sugar’s story unfolds at a leisurely, measured pace that might not be for everyone, and the performances can veer into the stagey. Nonetheless, it tells a compelling David-and-Goliath story of small business owners versus the larger industry, featuring realistically flawed characters who are devoted to each other as family and united in purpose, but who can’t fully put their differences aside.
Wednesday, June 21, 2017
Yesterday, during a conversation with a law student about whether corporate social responsibility is a mere marketing ploy to fool consumers, the student described her conflict with using Uber. She didn’t like what she had read in the news about Uber’s workplace culture issues, sex harassment allegations, legal battles with its drivers, and leadership vacuum. The student, who is studying for the bar, probably didn’t even know that the company had even more PR nightmares just over the past ten days--- the termination of twenty employees after a harassment investigation; the departure of a number of executives including the CEO’s right hand man; the CEO’s “indefinite” leave of absence to “mourn his mother” following a scathing investigative report by former Attorney General Eric Holder; and the resignation of a board member who made a sexist remark during a board meeting (ironically) about sexism at Uber. She clearly hadn’t read Ann Lipton’s excellent post on Uber on June 17th.
Around 1:00 am EST, the company announced that the CEO had resigned after five of the largest investors in the $70 billion company issued a memo entitled “Moving Uber Forward.” The memo was not available as of the time of this writing. According to the New York Times:
The investors included one of Uber’s biggest shareholders, the venture capital firm Benchmark, which has one of its partners, Bill Gurley, on Uber’s board. The investors made their demand for Mr. Kalanick to step down in a letter delivered to the chief executive while he was in Chicago, said the people with knowledge of the situation.
… the investors wrote to Mr. Kalanick that he must immediately leave and that the company needed a change in leadership. Mr. Kalanick, 40, consulted with at least one Uber board member, and after long discussions with some of the investors, he agreed to step down. He will remain on Uber’s board of directors.
This has shades of the American Apparel controversy with ousted CEO Dov Charney that I have blogged about in the past. Charney also perpetuated a "bro culture" that seemed unseemly for a CEO, but isn't all that uncommon among young founders. The main difference here is that the investors, not the Board, made the decision to fire the CEO. As Ann noted in her post this weekend, there is a lot to unpack here. I’m not teaching Business Associations in the Fall, but I hope that many of you will find a way to use this as a case study on corporate governance, particularly Kalanick’s continuation as a board member. That could be awkward, to put it mildly. I plan to discuss it in my Corporate Compliance and Social Responsibility course later today. As I have told the students and written in the past, I am skeptical of consumers and their ability to change corporate culture. Sometimes, as in the case of Uber, it comes down to the investors holding the power of the purse.
Saturday, June 17, 2017
More Uber miscellany this week:
Last week, I posted about Uber and publicness – namely, that Uber is a private company that nonetheless is conducting itself as though it has public obligations. Of course, right after I posted things got exponentially more interesting: Uber’s board met in a marathon session to discuss the results of an internal investigation of its corporate culture, resulting in the dismissal of the CEO’s right-hand man and the CEO/founder/powerful shareholder taking an indefinite leave of absence, Uber publicly announced the recommendations generated as a result of the internal investigation, and an Uber director resigned after making a sexist comment at the employee meeting intended to address workplace sexism.
There’s an awful lot to unpack here: Uber, the legendarily valuable startup, is now operating without a CEO, CFO, or COO (Twitter joke: “I guess this is the closest it’s ever been to a self-driving car company”); the recommendations, which are telling in what they don’t tell (alcohol and controlled substances should not be consumed during business hours, yikes!); the fact that all of this was sparked by a blog post by an ex-employee detailing her sexual harassment and – amazingly enough – she was believed (one Forbes writer even recommended her for a Pulitzer); sexism that cannot be contained for the length of one employee meeting; the fact that Uber apparently is hemorrhaging talent and can’t hire more –
But mostly, just to reiterate the point I made last week, to me the truly extraordinary thing is that all of this is happening at a private company - and one that still provides an exceptionally popular service. Nonetheless, Uber felt obligated to publicize the results of an internal investigation regarding its corporate culture, and regularly updates the news media on its governance structure. Ordinarily, the whole point of staying private, roughly speaking, is to avoid this level of public scrutiny. Yet as companies stay private longer – and attract more and more capital, often from “public” investors (large mutual funds, pension funds, etc) – apparently, they are feeling the obligations of publicness. Or Uber is; we’ll see how much of a precedent it sets.
The other issue I wanted to discuss concerns this article in the New York Times, describing Uber’s, umm, unusual employee buyback plan. Uber has begun offering to buy back certain employee shares, because – in the absence of an IPO – employees have no other way to cash out. As I understand it from the article, for some employees, Uber requires that if the employees sell any portion of his/her shares back to the company, the employee must also agree to sign over the voting rights of all of his/her remaining shares to Travis Kalanick (the CEO/founder) personally.
Now, with all appropriate disclaimers about how I haven’t read the employee agreements, and I’m relying solely on one news article that lacks specifics, I say – huh?
Uber is using corporate resources to allocate additional votes to the founder personally? Which – presumably – he can then use to vote to advance his personal interests? After all, outside of specific fiduciary duties for controllers, shareholders are free to cast their votes for their own idiosyncratic reasons; for example, Kalanick could vote against a merger proposal merely because he wanted to keep control, even if the proposal would be in the best interests of Uber shareholders generally.
It's not like I expect to see any fiduciary duty lawsuits - for one thing, the amounts involved may be minimal, and I assume Uber has somewhat close relationships with its stockholders - but it's fairly textbook that corporate resources cannot be used to buy more power for the personal use of the controllers. The fact that this was (apparently) permitted seems to be another data point suggesting that Uber has deep governance issues it needs to address.
Saturday, June 10, 2017
Matt Levine at Bloomberg continually expresses his view that private markets are the new public markets. What he means by that is, given the availability of private capital (due to SEC rules and concentrations of private pools of capital in a relatively small number of hands), companies that need capital to expand can access the private markets; they only go for the public markets when private investors are ready to cash out.
Well, as the Case of Uber makes clear, “publicness” can exist in private markets, too.
“Publicness,” a concept first developed by Hillary Sale, refers to the general social obligations a corporation is perceived to have toward the public in terms of transparency and regularity of operations. Companies that conduct themselves poorly may find themselves pressured to reform by consumers, investors, and regulators, in part because they are viewed as having public obligations almost akin to those of governments. Prof. Sale explores, for example, the case of JP Morgan Chase and the London Whale scandal.
Uber is a private company, but as its various recent troubles demonstrate (and demonstrate and demonstrate and...),it is increasingly viewed through the lens of publicness – and is responding as though it recognizes, and hopes to meet, those obligations.
In other words, the public views Uber as having certain duties in terms of ethics and propriety of operations, and Uber is attempting to fulfill those duties. Uber is a private company that nonetheless has the responsibilities associated with publicness.
In that regard, it is interesting to compare to Mylan, a public company that seems to feel no pressure of “publicness.” As a recent NYT article makes clear, Mylan has apparently adopted a business model of performing contrition in the face of public approbation, but failing to take any concrete steps to reform its operations. It will respond to legal obligations (somewhat), but not moral ones. It’s also picking a very public fight with ISS (and thus, potentially, investors) over ISS’s refusal to allow Mylan to review a draft copy of its recommendations to shareholders, which I assume is a conscious effort to buttress proposed GOP regulation of proxy advisors. (Side note: How much does the GOP want to advertise that Mylan, in particular, agrees with its proposed regulation)?
In other words, Uber – a private company – at least seems to recognize that it has public obligations, while Mylan – a public company – does not. What accounts for the difference? Is it that Mylan faces less competition due to the value of its intellectual property? Uber feels more vulnerable to shareholder demands due to operational losses that require raising new capital?
This is ultimately a question of corporate theory, and as private becomes the new public (and as the federal government retreats from a regulatory role), it will become increasingly important.