Monday, April 17, 2017
As Haskell earlier announced here at the BLPB, The first U.S. benefit corporation went public back in February--just before publication of my paper from last summer's 8th Annual Berle Symposium (about which I and other BLPB participants contemporaneously wrote here, here, and here). Although I was able to mark the closing of Laureate Education, Inc.'s public offering in last-minute footnotes, my paper for the symposium treats the publicly held benefit corporation as a future likelihood, rather than a reality. Now, the actual experiment has begun. It is time to test the "visioning" in this paper, which I recently posted to SSRN. Here is the abstract.
Benefit corporations have enjoyed legislative and, to a lesser extent, popular success over the past few years. This article anticipates what recently (at the eve of its publication) became a reality: the advent of a publicly held U.S. benefit corporation — a corporation with public equity holders that is organized under a specialized U.S. state statute requiring corporations to serve both shareholder wealth aims and social or environmental objectives. Specifically, the article undertakes to identify and comment on the structure and function of U.S. benefit corporations and the unique litigation risks to which a publicly held U.S. benefit corporation may be subject. In doing so, the article links the importance of a publicly held benefit corporation's public benefit purpose to litigation risk management from several perspectives. In sum, the distinctive features of the benefit corporation form, taken together with key attendant litigation risks for publicly held U.S. benefit corporations (in each case, as identified in this article), confirm and underscore the key role that corporate purpose plays in benefit corporation law.
Ultimately, this article brings together a number of things I wanted to think and write about, all in one paper. While many of the observations and conclusions may seem obvious, I found the exploration helpful to my thinking about benefit corporation law and litigation risk management. Perhaps you will, too . . . .
April 17, 2017 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Current Affairs, Haskell Murray, Joan Heminway, Litigation, Management, Social Enterprise | Permalink | Comments (0)
Wednesday, March 29, 2017
The Section on Agency, Partnership, LLCs and Unincorporated Associations is pleased to announce a Call for Papers for the Section’s program on The Challenges and Opportunities of Exotic Hybrids—Series LLCs, Up-C’s and Master Limited Partnerships. In addition to featuring invited speakers, we seek speakers (and papers) that will be selected from this call. The AALS Sections on Taxation, Securities Regulation, and Business Associations are co-sponsoring this program.
Business entity structures continue to evolve as legal innovations mature into recognized business association forms. For example, variants on LLC and limited partnership forms can be used to maximize asset protection, leverage tax advantages, access capital markets, and achieve other business objectives. The program will introduce attendees to several “exotic” hybrid structures and discuss the challenges and opportunities associated with each. The program will be informative—inviting subject matter experts to educate audience members—and exploratory, critically examining the tax, governance, private ordering, securities, and policy implications of new entity structuring tools.
Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 15, 2017. The Executive Committee of the Section on Agency, Partnership, LLCs and Unincorporated Associations, in consultation with co-sponsors, will review all submissions and select up to two papers by July 15, 2017.
All submissions and inquiries should be directed to Anne Tucker, Georgia State University College of Law, firstname.lastname@example.org .
Monday, March 27, 2017
Call for Participants
Proposed Discussion Group
A New Era for Business Regulation?
Joan MacLeod Heminway, The University of Tennessee College of Law
Anne Tucker, Georgia State University College of Law
2018 AALS Annual Meeting
San Diego, CA
January 3-6, 2018
This is a call for participants in a proposed discussion group on “A New Era for Business Regulation?” at the 2018 Association of American Law Schools (“AALS”) Annual Meeting.
In January 2017, the president signed an Executive Order on Reducing Regulation and Controlling Regulatory Costs. The order uses budgeting powers to constrict agencies and the regulatory process by requiring that two regulations must be eliminated for each new regulation adopted. The order also mandates that “the total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero.” While the executive order does not cover independent agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission, agencies that crafted many of the rules required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, these agencies and their regulatory agendas will likely be the subject of future reform. The co-organizers of this proposal are looking for full-time faculty of AALS member or fee-paid schools to engage in a discussion at the AALS annual meeting about changes in the business regulatory environment and assess the consequences—good and bad—of regulatory reform affecting businesses. We invite participants from diverse legal backgrounds including, but not limited to, financial regulation, securities regulation, administrative law, business finance and governance, and related fields. If there is sufficient interest in this topic, the co-organizers will submit a proposal for this discussion group to the AALS before the April 13, 2017 deadline.
To indicate your interest in participating, please send an expression of interest by email to either Joan MacLeod Heminway, The University of Tennessee College of Law, at email@example.com or Anne Tucker, Georgia State University College of Law, firstname.lastname@example.org. In the subject line of your email, please include “AALS Business Regulation Discussion Group” and your last name. In the text of your email, please provide your name, contact information, and a one-paragraph summary of your interest in the topic, stating how it connects to your current or future research or teaching interests.
If the discussion group proposal is accepted by AALS, the co-organizers may conduct a call for additional proposals before notifying the final faculty members selected to participate. Participants will not be expected to have a formal paper, but will be asked to contribute a written treatment (5-10 pages) prior to the annual meeting.
Monday, February 27, 2017
Later this week, I will head to Indiana to present at and attend a social enterprise law conference at The Law School at the University of Notre Dame. The conference includes presentations by participating authors in the forthcoming Cambridge Handbook of Social Enterprise Law, edited by Ben Means and Joe Yockey. The range of presentations/chapters is impressive. Fellow BLPB editors Haskell Murray and Anne Tucker also are conference presenters and book contributors.
Interestingly (at least for me), my chapter relates to Haskell's post from last Friday. The title of my chapter is "Financing Social Enterprise: Is the Crowd the Answer?" Set forth below is the précis I submitted for distribution to the conference participants.
Crowdfunding is an open call for financial backing: the solicitation of funding from, and the provision of funding by, an undifferentiated, unrestricted mass of individuals (the “crowd”), commonly over the Internet. Crowdfunding in its various forms (e.g., donative, reward, presale, and securities crowdfunding) may implicate many different areas of law and intersects in the business setting with choice of entity as well as business finance (comprising funding, restructuring, and investment exit considerations, including mergers and acquisitions). In operation, crowdfunding uses technology to transform traditional fundraising processes by, among other things, increasing the base of potential funders for a business or project. The crowdfunding movement—if we can label it as such—has principally been a populist adventure in which the public at large has clamored for participation rights in markets from which they had been largely excluded.
Similarly, the current popularity of social enterprise, including the movement toward benefit corporations and the legislative adoption of other social enterprise business entities, also stems from populist roots. By focusing on a double or triple bottom line—serving social or environmental objectives as well as shareholder financial wealth—social enterprises represent a distinct approach to organizing and conducting business operations. Reacting to a perceived gap in the markets for business forms, charters, and tax benefits, social enterprise (and, in particular, benefit corporations) offer venturers business formation and operation alternatives not available in a market environment oriented narrowly around the maximization or absence of the private inurement of financial value to business owners, principals, or employees.
Perhaps it is unsurprising then, that social enterprise has been relatively quick to engage crowdfunding as a means of financing new and ongoing ventures. In addition, early data in the United States for offerings conducted under Regulation CF (promulgated under the CROWDFUND Act, Title III of the JOBS Act) indicates a relatively high incidence of securities crowdfunding by social enterprise firms. The common account of crowdfunding and social enterprise as grassroots movements striking out against structures deemed to be elitist or exclusive may underlie the use of crowdfunding by social enterprise firms in funding their operations.
Yet, social enterprise’s early-adopter status and general significance in the crowdfunding realm is understudied and undertheorized to date. This chapter offers information that aims to address in part that deficit in the literature by illuminating and commenting on the history, present experience, and future prospects of financing social enterprise through crowdfunding—especially securities crowdfunding. The chapter has a modest objective: to make salient observations about crowdfunding social enterprise initiatives the based on doctrine, policy, theory, and practice.
Specifically, to achieve this objective, the chapter begins by briefly tracing the populist-oriented foundations of the current manifestations of crowdfunding and social enterprise. Next, the chapter addresses the financing of social enterprise through crowdfunding, focusing on the relatively recent advent of securities crowdfunding (including specifically the May 2016 introduction of offerings under Regulation CF in the United States). The remainder of the chapter reflects on these foundational matters by contextualizing crowdfunded social enterprise as a part of the overall market for social enterprise finance and making related observations about litigation risk and possible impacts of securities crowdfunding on social enterprise (and vice versa).
Please let me know if you have thoughts on any of the matters I am covering in my chapter or resources to recommend in finishing writing the chapter that I may not have found. I seem to find new articles that touch on the subject of the chapter every week. I will have more to say on my chapter and the other chapters of the Handbook after the conference and as the book proceeds toward publication.
Wednesday, February 22, 2017
Here is a rundown of recent business news headlines:
The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.
In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash.
Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger. While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury.
A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making. Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests.
Wednesday, February 8, 2017
Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v. Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court. The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever: "By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open."
Point #1: Master Class in Persuasive Legal Writing: Framing the Issue
Reversal Framing: "This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process."
Affirmance Framing: "This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale."
Point #2: Summary of Brief Supporting Fair Market Valuation: Why the Court of Chancery should defer to the deal price in an arm's length auction
- It would reduce litigation and simply the process.
- The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that's a rough point to make).
- Appraisal does not properly incentivize the use of arm's length auctions if they are not sufficiently protected/respected.
- Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range. The inquiry should be whether the transaction price is within the range of a fair price. A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
- Appraisal process is flawed because the court discounted the market price in its final valuation. The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
- Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of "real" valuations.
- The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process. Evidence of this is the creation of appraisal closing conditions.
Point #3: Summary of Brief Supporting Appraisal Actions: Why the Court of Chancery should reject a rule that the transaction price—in an arm's length auction—is conclusive evidence of fair price in appraisal proceedings.
- Statutory interpretation requires the result. Delaware Section 262 states that judges will "take into account all factors" in determining appraisal action prices. To require the deal price to be the "fair" price, eviscerates the statutory language and renders it null.
- The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the "all factors" language.
- The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
- There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
- The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
- Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
- Any distortion of the THE market by appraisal actions is a feature, not a bug. All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts. Any affect that appraisal actions create have social benefits and are an intended benefit.
- Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.
My thinking in the area more closely aligns with the "keep appraisal action full review" camp on the theory--both policy and economic. Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!). I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow. I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome. Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief. These are all points that I invite readers to weigh in on the comments--especially those with experience litigating these cases.
I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty. This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.
For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic-- these two briefs distill the relevant case law and competing theories with considerable force.
Monday, February 6, 2017
This post comments on the method for managing regulation and regulatory costs in the POTUS's Executive Order on Reducing Regulation and Controlling Regulatory Costs.
I begin by acknowledging Anne's great post on the executive order. She explains well in that post the overall scope/content of the order and shares information relevant to its potential impact on business start-ups. She also makes some related observations, including one that prompts the title for her post: "Trumps 2 for 1 Special." In a comment to her post, I noted that I had another analogy in mind. Here it is: closet cleaning and maintenance.
You've no doubt heard that an oft-mentioned rule for thinning out an overly large clothing collection is "one in, one out." Under the rule, for every clothing item that comes in (some limit the rule's application to purchased items, depending on the objectives desired to be served beyond keeping clothing items to a particular number), a clothing item must go out (be donated, sold, or simply tossed). Some have expanded the rule to "one in, two out" or "one in, three out," as needed. The mechanics are the same. The rule requires maintaining a status quo as to the number of items in one's closet and, in doing so, may tend to discourage the acquisition of new items.
Articulated advantages/values of this kind of a rule for wardrobe maintenance include the following:
- simplicity (the rule is easy to understand);
- rigor (the rule instills discipline in the user);
- forced awareness/consciousness (the rule must be thoughtfully addressed in taking action); and
- experimentation encouragement (the rule invites the user to try something new rather than relying on something tried-and-true).
Disadvantages and questions about the rule include those set forth below.
- The rule assumes that it is the number of items that is the problem, not other attributes of them (i.e., age, condition, size, suitability for current lifestyle, etc.).
- Once new items are acquired, the rule assumes that existing ones are no longer needed or are less desirable.
- The rule operates ex post (it assumes the introduction of a new item) rather than ex ante (allowing the root problem to be addressed before the new item is introduced).
- The rule encourages an in/out cycle that incorporates the root of the problem (excess shopping) rather than addressing it.
- Definitional questions require resolution (e.g., what is an item of clothing).
Regulation is significantly more complex than clothing. But let's assume that we all agree that the list of advantages/values set forth above also applies to executive agency rule making. Let's also assume the validity and desirability of the core policy underlying the POTUS's executive order on executive agency rule making, as set forth below (and excerpted from Section 1 of the executive order).
It is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources. In addition to the management of the direct expenditure of taxpayer dollars through the budgeting process, it is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations.
How do the closet organization disadvantages or questions stack up when applied in the executive agency rule-making context? Here's my "take."
Wednesday, February 1, 2017
On Monday President Trump signed an Executive Order on Reducing Regulation and Controlling Regulatory Costs. The Order uses budgeting powers to constrict agencies and the regulatory process requiring that for each new regulation, two must be eliminated and that all future regulations must have a net zero budgeting effect (or less). The Order states:
"Unless prohibited by law, whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed."
Two points to note here. First, the Executive Order does not cover independent agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission, agencies that crafted many of the rules required by the 2010 Dodd-Frank Wall Street reform law--an act that President Trump describes as a "disaster" and promised to do "a big number on". The SEC, the CFTC and Dodd-Frank are not safe, they will just have to be dealt with through even more sweeping means. Stay tuned. The 2-for-1 regulatory special proposed on Monday is a part of President Trump's promise to cut regulation by 75%.
Second, the Order is intended to remove regulatory obstacles to Americans starting new businesses. President Trump asserted that it is "almost impossible now to start a small business and it's virtually impossible to expand your existing business because of regulations." Facts add nuance to this claim, if not paint an all-together different story. The U.S. Department of Labor Statistics documents a steady increase in the number of new American businesses formed since 2010. The U.S. small business economy grew while regulations were in place. President Trump asks us to believe that they will grow more without regulation. Some already do. The U.S. Chamber of Commerce "applauded" the approach decrying the "regulatory juggernaut that is limiting economic growth, choking small business, and putting people out of work."
Yet, as shocking as this feels (to me), the U.K. and Canada both have experience with a similar framework. The U.K.'s two for one regulation rule has been touted as saving businesses £885 million from May 5, 2015 to May 26, 2016 and there is now a variance requiring three regulations to be removed for each one. Canada takes a more modest one in- one out approach. No information is available yet on any externalities that may be caused by decreased regulations. For some, and I count myself in this camp, the concern is that the total cost of failed environmental protection, wage fairness, safety standards, etc. may outweigh individual gains by small business owners.
The 2-for-1 special evokes some odd memories for me (Midwestern, of modest means) of a K-Mart blue-light special. The Trump Administration is flashing a big, blue light with the promise to cut regulation by 75% without reference to the content of those regulations. The first tool, a "two for one approach" strikes me as a gimmick where the emphasis is on marketing the message of deregulation through quantity, not quality. Not to mention the arbitrariness of the numerical cut off (why not 1 or 13?). It is the type of solution, that if offered in answer to a law school hypo, would quickly be refuted by all of the unanswered questions. Can it be any two regulations? Can the new regulation just be longer and achieve the work of several? Should there be a nexus between the proposed regulation and the eliminated ones? What is the administrative process and burden of proof for identifying the ones to be removed? The Executive Order, targeted at business regulation, but in doing so has created the most "significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981." Hold on folks, this is going to be a bumpy ride.
Wednesday, January 25, 2017
Spoiler alert: wrongful refusal of demand and bad faith standards are the same in recent Delaware Court of Chancery case: Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017, Op by VC Montgomery-Reeves).
But sometimes a reminder that the law is the same and can be clearly stated is worth a blog post in its own right. Professors can use this as a hypo or case note and those in the trenches can update case citations to a 2017 (and 2016) case.
In Andersen v. Mattel, Inc., VC Montgomery-Reeves dismissed a derivative suit, holding that plaintiff did not prove wrongful refusal of pre-suit demand. The derivative action claimed that the Mattel board of directors refused to bring suit to recover up to $11.5 million paid in severance/consulting fees to the former chairman and chief executive officer who left in the wake of a falling stock price. Plaintiff challenged disclosure discrepancies over whether Stockton resigned or was terminated and the resulting entitlement to severance payments. Mattel's board of directors unanimously rejected the demand after consultation with outside counsel, 24 witness interviews and a review of approximately 12,400 documents.
The relied upon case law is unchanged, but the clear recitation of the law is worth noting:
Where, as here, a plaintiff makes demand on the board of directors, the plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand. The effect of such concession is that the decision to refuse demand is treated as any other disinterested and independent decision of the board—it is subject to the business judgment rule. Accordingly, the only issues the Court must examine in analyzing whether the board’s demand refusal was proper are “the good faith and reasonableness of its investigation. (internal citations omitted)
To successfully challenge the good faith and reasonableness of the board's investigation, Plaintiff's complaint was required to state particularized facts raising a reasonable doubt that:
(1) the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.
First, Plaintiff challenged the board's demand refusal on the grounds that they did not disclose the investigation report or the supporting documents in conjunction with the demand refusal. The Court was unpersuaded given that Plaintiff had the right to seek the report and records through a Section 220 demand, but chose not to do so.
Second, Plaintiff challenged the board's demand refusal on the grounds that it failed to form a special committee. Absent any facts that the Mattel board considering the demand was not independent, there was no requirement for the board to form a special committee.
Third, and final, Plaintiff challenged the board's good faith in rejecting the demand on the grounds that Stockton's employment was not voluntarily terminated. The court cautioned that:
[T]he question is not whether the [b]oard’s conclusion was wrong; the question is whether the [b]oard intentionally acted in disregard of [Mattel’s] best interests in deciding not to pursue the litigation the Plaintiff demanded. [T]he fact that the [b]oard’s justifications for refusing [the] demand fall within ‘the bounds of reasonable judgment’ is fatal to [the] claim that the refusal was made in bad faith. (citing to Friedman v. Maffei, (Del. Ch. Apr. 13, 2016))
Francis Pileggi at the excellent Delaware Corporate and Commercial Litigation Blog first brought this case to my attention. Practitioners and Professors alike should be certain to include his blog on your weekly round up. He is a sure source of concise and insightful summaries of the latest Delaware court developments.
Wednesday, January 18, 2017
"The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets."
Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency. While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy. As the spring proxy season approaches-- it's like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures--these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors' corporate governance leaders are "working quietly behind the scenes to advocate for greater shareholder rights" fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.
I now how a new ambition in life: get invited to the Women in Governance lunch.
FN1: See Choi et al, Voting Through Agents: How Mutual Funds Vote on Director Elections (2011)
FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).
Wednesday, January 11, 2017
The late December announcement of Carl Icahn as a special advisor overseeing regulation piqued my professional interest and raises interesting tension points for both sides of the aisle, as well as for corporate governance folks.
Icahn's deregulatory agenda has the SEC in his sights. Deregulation, especially of business, is a relatively safe space in conservative ideology. Several groups such as the Chamber of Commerce and the Business Roundtable may be pro-deregulation in most areas, but, and this is an important caveat-- be at odds with Icahn when it comes to certain corporate governance regulations. Consider the universal proxy access rules, which the SEC proposed in October, 2016. The proposed rules would require companies to provide one proxy card with both parties' nominees--here we don't mean donkeys and elephants but incumbent management and challengers' nominees. Including both nominees on a single proxy card would allow shareholders to "vote" a split ticket---picking and choosing between the two slates. The split ticket was previously an option only available to shareholders attending the in-person meeting, which means a very limited pool of shareholders. "Universal" proxy access-- a move applauded by Icahn--is opposed by House Republicans, who passed an appropriations bill – H.R. 5485 –that would eliminate SEC funding for implementing the universal proxy system. On January 9th, both the Business Roundtable and the Chamber of Commerce submitted comment letters in opposition to the rules. The Chamber of Commerce cautions that the proposed rules "[f]avor activist investors over rank-and-file shareholders and other corporate constituencies." The Business Roundtable echos the same concerns calling the move a "disenfranchisement" of regular shareholders due to likely confusion. This is a variation of the influence of big-business narrative. Here, we have pitted big business against big business. The question is who is the bigger Goliath--the companies or the investors?
President-elect Trump's cabinet and administrative choices have generated an Olympic-level sport of hand wringing, moral shock and catastrophizing. I personally feel gorged on the feast of terribles, but realize that many may not share my view. Icahn's informal role in cabinet selections (such as Scott Pruitt for EPA which favors Icahn's investments in oil and gas companies) and formal role in a deregulatory agenda foreshadows no end in sight to this royal feast. On this particular pick, both sides of the aisle may be invited to the feast. My only question is, who's hungry?
Wednesday, January 4, 2017
Ethics has been a recurrent news headline from questions of President-elect Trump's business holdings to the Republican House's "secret" vote on ethics oversight on Monday.
I want to share research from a seminar student's paper on financial regulation and the role of ethics. She made a compelling argument about the role of ethics to be a gap filler in the regulatory framework. Financial regulation, as many like Stephen Bainbridge have argued, is reactionary and reminds one of a game of whack-a-mole. Once the the regulation has been acted to target the specific bad act, that bad act has been jettisoned and new ones undertaken. Her research brought to my attention something that I find hopeful and uplifting in a mental space where I am hungry for such morsels.
In 2015, in response to a perceived moral failing that contributed to the financial crisis, the Netherlands required all bankers to take an ethics oath. The oath states: “I swear that I will endeavor to maintain and promote confidence in the financial sector, so help me God.” The full oath is available here. Moreover, “by taking and signing this oath, bank employees declare that they agree with the content of the statement, and promise that they will act honorable and will weigh interests properly . . . [by] ‘focusing on clients’ interests.’” The oath is supported by a code of conduct and disciplinary rules including fines, suspensions or blacklisting.
Georgia State University College of Law student Tosha Dunn described the role of the oath as follows:
An oath is thought of as a psychological contract: “the oath has always been the highest form of commitment, and as a social function it creates or strengthens trust between people.” However, psychological contracts are completely subjective; the meaning attached to the contract is wholly open to the interpretation of the individual involved. Social cues like rituals and public displays may impart meaning or responsibility... the very idea behind the oath is to restore confidence in the Dutch banking system: “we are renewing the way we do business, from the top of the bank to the bottom” and “a violation of the oath becomes more than simply a legally culpable act; it is, in addition, an ethical issue.”
And isn't that a lovely way to think of an oath and the ability of a social contract to elevate our behavior and promote our higher selves?
Citations from the student paper and further scholarly discussion are available with the following sources: Tom Loonen & Mark R. Rutgers, Swearing To Be A Good Banker: Perceptions of The Obligatory Banker’s Oath in the Netherlands, 15 J. Banking & Reg. 1, 3 (2016) & Denise M. Rousseau & Judi McLean Parks, The Contracts of Individuals and Organizations, 15 Research in Org. Behavior 1, 18-19 (1993).
Happy New Year BLPB readers-- here's to an ethical and enlightened 2017.
Wednesday, December 21, 2016
In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014. Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.
A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware. The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices. The full brief is available here, but this summary might provide easier reading. Reuters reports:
Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.
DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.
Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.
Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?
Wednesday, December 14, 2016
UC Irvine law professor, David Min, has a new article titled, Corporate Political Activity and Non-Shareholder Agency Costs, in theYale Journal on Regulation. Professor Min examines corporate constitutional law in recent examples such as Citizens United, through the lens of nonshareholder dissenters.
The courts have never considered the problem of dissenting nonshareholders in assessing regulatory restrictions on corporate political activity. This Article argues that they should. It is the first to explore the potential agency costs that corporate political activity creates for nonshareholders, and in so doing, it lays out two main arguments. First, these agency costs may be significant, as I illustrate through several case studies. Second, neither corporate law nor private ordering provides solutions to this agency problem. Indeed, because the theoretical arguments for shareholder primacy in corporate law are largely inapplicable for corporate political activity, corporate law may actually serve to exacerbate the agency problems that such activity creates for non-shareholders. Private ordering, which could take the form of contractual covenants restricting corporate political activity, also seems unlikely to solve this problem, due to the large economic frictions facing such covenants. These findings have potentially significant ramifications for the Court’s corporate political speech jurisprudence, particularly as laid out in Bellotti and Citizens United. One logical conclusion is that these decisions, regardless of their constitutional merit, make for very bad public policy, insofar as they preempt much-needed regulatory solutions for reducing non-shareholder agency costs, and thus may have the effect of inhibiting efficient corporate ordering and capital formation. Another outgrowth of this analysis is that nonshareholder agency costs may provide an important rationale for government regulation of corporate political activity.
In examining corporate political activity, Professor Min, expertly blends and connects agency theory to corporate theories of the firm. He rebuts traditional arguments against nonshareholder constituents such as residual interest holders (shareholders), the role of private ordering and provides 3 detailed case studies illustrating the costs of CPA on nonshareholder constituents. Among the proposals and options explored to mitigate these agency costs, Professor Min suggests that the existence of agency costs to nonshareholders--an area heretofore unexamined in corporate law--could justify a regulatory intervention.
Wednesday, December 7, 2016
Do you love charts? Do you need/want a break from grading/procrastinating/writing frantically on a deadline real or self-imposed? All of these things at once? Welcome to the month of December-- the time of year that should be a break from our schedules, but which always (and I mean ALWAYS) is my busiest time when I try to fit 6 weeks of work into 2.
My December gift to you? The Investment Company Factbook. The Investment Company Institute (ICI), is an association of regulated funds that collects and distributes data from its members. The full text of the Factbook (an annual publication) is available here, and the charts (and underlying data) are available here. I wept when I first discovered this source while writing years ago. ICI information is widely used in legal research. A quick search produced 3,265 law reviews and journal articles. For critiques of ICI's information and framing, see John C. Bogle, Mutual Funds at the Millennium: Fund Directors and Fund Myths, at http://www.vanguard.com/bogle_site/may152000.html (May 15, 2000); John P. Freeman & Stewart L. Brown, Mutual Fund Advisory Fees: The Cost of Conflicts of Interest, 26 J. Corp. L. 609, 625/26 (2001); and yours truly in Anne M. Tucker, Locked in: The Competitive Disadvantage of Citizen Shareholders, 125 Yale L.J. Forum 163 (2015).
Now back to writing/grading/procrastinating!
Wednesday, November 30, 2016
Wharton’s Legal Studies & Business Ethics Department invites submissions for its inaugural Conference on Business Law and Ethics, to take place March 31-April 1, 2017.
This is the first meeting of what will be a recurring conference: we aim to gather together each year the most cutting-edge work on law, ethics and business. Papers are invited from scholars both senior and junior, and from diverse disciplines, on the theme of “The Ethical Lives of Corporations.” Submit an abstract of an unpublished paper to Phil Nichols (email@example.com ) and Gwendolyn Gordon (firstname.lastname@example.org). The deadline for abstract submissions is January 6th, 2017.
Wednesday, November 23, 2016
I have been thinking about the long-short term investment horizon debate, definitions, empirics and governance design consequences for some time now (see prior BLPB post here and also see Joshua Fershee's take on the topic). This has been on mind so much that I am now planning a June, 2017 conference on that very topic in conjunction with the Adolf A. Berle Jr. Center on Corporations, Law & Society (founded by Charles “Chuck” O’Kelley at Seattle University School of Law). In planning this interdisciplinary conference where the goal is to invite corporate governance folks, finance and economics scholars, and psychologists and neuroscientist, I have had the pleasure of reading a lot of out-of-discipline work and talking with the various authors. It has been an unexpected benefit of conference planning. I also want some industry voices represented so I have reached out to Aspen Institute, Conference Board and a new group, Focusing Capital on the Long Term (FCLT), which I learned about through this process.
I share this with BLPB readers for several reasons. The first is that the FCLT, is a nonprofit organization, a nonprofit organization for BUSINESS issues created and funded by BUSINESSES. In July 2016, the Canada Pension Plan Investment Board, McKinsey & Company together with BlackRock, The Dow Chemical Company and Tata Sons founded FCLT. Other asset managers, owners, corporations and professional services firms (approximately 20) have joined FCLT as members. Rather than the typical application of a chamber of commerce style organization or trade industry group, here the stated missing of FCLT is to “actively engage in research and public dialogue regarding the question of how to encourage long-term behaviors in business and investment decisions.”
Second, FCLT has access to otherwise proprietary information—like C-suite executive surveys---and is conducting original research and publishing white papers and research reports on the issues of management pressures, and governance designs that may promote a long-term time horizon.
I know for some folks reading, especially those strongly aligned with a shareholder rights camp, will view this with skepticism as a backdoor campaign to promote executive/management power and bolster the reputation of professional service firms hired by those managers.** For me, though the anecdotal experience is a valuable component to considering all sides to the debate. It also helps articulate why and how the feedback loop of short-term pressures—even if it is only perceived rather than structurally quanitifable—may exist.
Third, I found some of the materials, particularly the Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016 to be a useful reading for my corporate governance seminar. It helped to explain the gap between the law and the pressure of short-termism. It also helped provide a window into at least some aspects of decision making and payoffs in the governance setting. It can be quite hard to give students a window in the C-suite and BOD dynamics that they are naturally curious about while in law school. Even if you ideologically or empirically disagree with the claim of short-termism when trying to structure balanced reading materials that provide an introduction to the full scope of measures, these are resources worth considering.
Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016, draws upon a McKinsey survey of over 1,000 global C-Suite executives and board members. The report describes increasing pressures on executives to meet short-term financial performance metrics and that the window to meet those metrics was decreasing. The shortening time horizon shapes both operations decisions as well as strategic planning where the average plan has shrunk to 2 years or less. Culture matters. Firms with self-reported long-term cultures reported less willingness to take actions like cut discretionary spending or delay projects when faced with a likely failure to meet quarterly benchmarks compared with firms that didn’t self-report a long-term culture. Sources of the pressure are perceived to come from within the board and executives, but also cite to greater industry-wide competition, vocal activist investors, earning expectations and economic uncertainty. The article concludes with 10 elements of a long-term strategy as a mini action plan.
Straight talk for the long term: How to improve the investor-corporate dialogue published in March 2015.
Investing for the future: How institutional investors can reorient their portfolio strategies and investment management to focus capital on the long term, published in March 2015. The paper identifies 5 core action areas for institutional investors focusing on investment beliefs, risk appetite statement, bench-marking process, evaluations and incentives and investment mandates to evaluate investment horizons.
A roadmap for focusing capital on the long term: A summary of ideas for asset owners, asset managers, boards of directors, and corporate management to focus on long-term value creation, published March 2015.
Long-term value summit in 2015 with a published discussion report made available February 2016. “120 executives, investors, board members, and other leaders from around the world gathered in New York City for the Long-Term Value Summit. Their mandate: to identify the causes and mechanisms of the short-term thinking that has come to pervade our markets and profit-seeking institutions and, more importantly, to brainstorm actionable solutions”
**The initial board of directors, announced on September 28, 2016 at the first board meeting, include some well positioned folks within BlackRock (Mark Wiseman), McKinsey & Co. (Dominic Barton), Dow Chemical (Andrew Liveris), Unilever (Paul Polman) and more. The BOD will be advised by Larry Fink, Chairman and CEO of BlackRock, as well.
Wednesday, November 16, 2016
Last week on the eve of the election, I shared a series of predictions regarding the market's response to a Trump or Clinton presidential election victory. Almost all of the predictions were for a swift and negative reaction to a Trump victory. Immediate market predictions, like polling predictions, were, in a word: WRONG.
From the Wall Street Journal:
Stocks were mixed on Friday, taking a pause to end an eventful week that pushed the Dow industrials to their best week since 2011.
The Dow climbed 0.2% on Friday to 0.2%, pushing the index up 5.4% for the week to 18847.66.
The S&P 500 dipped 0.1% on Friday to 2164.45, while the Nasdaq Composite jumped 0.5% to 5237.11.
I find myself so disorientated in this post-election reality.
Monday, November 7, 2016
As we gear up for the final show down and hopefully the end of the 2016 election (please, please, please let it end) I write today about the relationship between the markets and politics. It is apparently THE business angle in the news cycle this week. This is an admitted punt on substantive work and am instead providing you with a host of hyperlinks to nervously check and re-check in between nervously checking and re-checking polling estimates and vote counts. Please note, I am passing along a compilation of articles, a list that I have not editted to reflect a certain viewpoint.
Historical Accounts of the Relationship between politics and the markets
Merrill Lynch, How Presidential Elections Affect the Markets
Predictions regarding market reactions to the outcome of the 2016 election
Wednesday, November 2, 2016
General Electric (GE) and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations. GE and Baker Hughes will form a partnership, which will own a publicly-traded company. GE shareholders will own 62.5% of the "new" partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share. The new company will have 9 board of director seats: 5 from GE and 4 from Baker Hughes. GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli, CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.
Reuters is describing the business synergies between the two companies as leveraging GE's oilfield equipment manufacturing ("supplying blowout preventers, pumps and compressors used in exploration and production") and data process services with Baker Hughes' expertise in " horizontal drilling, chemicals used to frack and other services key to oil production."
Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.
As I plan to tell my corporations students later today: this is real life! A high-profile, late-semester merger of two public companies is a wonderful gift. The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.