Friday, May 1, 2015

Nat'l Bus. Law Scholars Conf. Line up & Extended Deadline

National Business Law Scholars Conference

Thursday & Friday, June 4-5, 2015 (Seton Hall University School of Law, Newark, NJ)

The organizers have put together a great line up of speakers and this conference is becoming (has already become) an intellectual highlight for the summer.  Keynote speakers include:  SEC Commissioner Troy Paredes, and Boston College Law  Professor Kent Greenfield.

In addition to the call for papers, which has been extended to May 8th (email Eric Chaffee), the conference will feature a Plenary Panel on the Extraterritorial Application of Federal Financial Markets Regulations with the following participants: 

Colleen Baker (view bio)
Lecturer, University of Illinois, College of Business

Sean Griffith (view bio)
T.J. Maloney Chair in Business Law; Director, Fordham Corporate Law Center

Eric Pan (view bio)
Associate Director, Office of International Affairs, U.S. Securities & Exchange Commission

Joshua White (view bio)
University of Georgia, Terry College of Business

For those of you unfamiliar with the NBLSC, here's a conference description from the organizers: 

This is the sixth annual meeting of the NBLSC, a conference which annually draws together legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate. For additional information, please email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu.

-Anne Tucker

 

 

 

 

PLENARY PANEL - THE EXTRATERRITORIAL APPLICATION OF FEDERAL FINANCIAL MARKETS REGULATIONS


Colleen Baker
 (view bio)
Lecturer, University of Illinois, College of Business

Sean Griffith (view bio)
T.J. Maloney Chair in Business Law; Director, Fordham Corporate Law Center

Eric Pan (view bio)
Associate Director, Office of International Affairs, U.S. Securities & Exchange Commission

Joshua White (view bio)
University of Georgia, Terry College of Business

CALL FOR PAPERS (EXTENDED UNTIL MAY 8, 2015)

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by May 8, 2015. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator.

CONFERENCE ORGANIZERS

Barbara Black (The University of Cincinnati College of Law, Retired)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff Solomon (The University of California Berkeley Law School)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)

HOTEL INFORMATION


Hilton Penn Station
 | Online Reservations Availalbe Here
Located one block from Seton Hall Law School

  • Located adjacent to Newark Penn Station (Amtrak and New Jersey Transit Rail Lines)
  • Four miles from Newark Liberty International Airport – Complimentary shuttle service
  • $209 + tax per night
  • Reservations may be made online here or by calling 973-622-5000
  • Reference: SETON HALL UNIVERSITY SCHOOL OF LAW
  • Location: Gateway Center – Raymond Boulevard, Newark, New Jersey
  • Hilton Penn Station will release rooms on May 13, 2015.


Courtyard Marriott Newark Downtown

Located in downtown Newark (ten minute walk)

  • Located in the heart of downtown Newark adjacent to the Prudential Center and easily accessible to all major transportation
  • Four miles from Newark Liberty International Airport – Complimentary shuttle service
  • $139 + tax per night
  • Reservations may be made by calling: 973-848-0070
  • Reference: SETON HALL LAW SCHOOL
  • Location: 858 Broad Street, Newark, New Jersey
  • Courtyard Newark Downtown will release rooms on May 13, 2015.

LOCAL ATTRACTIONS AND INFORMATION

Visit and explore Seton Hall Law and its surrounding area.

May 1, 2015 in Anne Tucker, Call for Papers, Law School, Teaching | Permalink | Comments (0)

Wednesday, April 29, 2015

What's in a Title?

Perhaps this post would have been timelier before the spring submission cycle, but hopefully it will be helpful in framing title options for pieces being developed this summer.  One of the many benefits of co-authorship is learning substantive and procedural knowledge from your collaborators.  On a recent article, I worked with three economists who have different skill sets, perspectives, and discipline standards.  When we were trying to finalize our title, we came up with several different categories or types of article titles—a framework that I will utilize again in the future and which I am sharing with you today.  We selected the “themed” based title for our article, Institutional Investing When Shareholders Are Not Supreme, and a play on words, Institutional Investors’ Appetite for Alternatives, for a shorter piece appearing on Columbia Blue Sky Blog.

 Title Framework:

SOBER: Institutional Investing after Constituency Statutes

QUESTION:  Does Changing Shareholder Value Maximization Standards Change Institutional Investors’ Behavior?

CONTRAST:  Institutional Investors Behavior Before and After Constituency Statutes

PLAY ON WORDS:  Appetite for Alternatives:  Institutional Investors’ Behavior in the Fact of Shareholder Value Maximization Pressures

FORWARD THINKING:  What Does Institutional Investors Behavior after Constituency Statutes Tell Us Regarding Benefit Corporations?

HISTORICAL:  The Changing Landscape of Directorial Duties: Constituency States to Alternative Purpose Firms

SLATE/OP-ED:  Who’s Afraid of Alternative Purpose Firms?

THEME:  Agency Investing When Shareholders Are Not Supreme

For those interested and perhaps to put the title options in perspective, here is a little background on our article, Institutional Investing When Shareholders Are Not Supreme.  In an earlier BLPB post, I linked to our short piece appearing in Columbia Blue Sky Blog.  Our article examines institutional investors’ response to corporate director duty changes embodied in constituency statutes and links our findings to current questions of institutional investors’ potential acceptance of alternative business entities. Our paper surveys the 30+ year literature debate on directors’ duties to maximize shareholder value, a case law analysis of constituency statute litigation, and an empirical study (utilizing a difference-in-differences approach) of institutional investors’ divestment of stock held in companies incorporated in constituency statute jurisdictions.  We first verified that courts enforced constituency statutes, or in other words, that constituency statutes represented at least a small change to directors’ legal duties. In our empirical section, we found no statistically significant departure of institutional investors after the passage of constituency statutes, focusing specifically on institutions with high fiduciary duties. If institutional investors had fled constituency statute investments, which are subject to lower director duties changes than with say benefit corporations, then there would be grounds to think that institutional investors would not invest in alternative purpose firms.  Finding no such negative reaction to constituency statutes does not conclusively indicate institutional investor’s acceptance of alternative purposes firms, especially given the greater deviation from shareholder value maximization by requiring (rather than permitting) directors to consider nonshareholder interests codified in benefit corporation statutes.  It does suggest, however, some latitude for institutional investors to consider alternative purpose firm investments without running afoul of fiduciary duties.  If I were explaining the results to a student, I would say that our study could have produced strong evidence shutting the door on this possibility, but instead the findings leave the door open. This paper is valuable in the absence of direct information on the question, and will certainly give way to findings utilizing empirical data directly on point with publicly-traded benefit corporations and/or B Corporations.

-Anne Tucker

April 29, 2015 in Anne Tucker, Corporate Finance | Permalink | Comments (4)

Monday, April 27, 2015

Columbia Blue Sky Blog: Institutional Investors’ Appetite for Alternatives

The following guest blog post on my recent article,  Institutional Investing When Shareholders Are Not Supreme, is available at Columbia's Blue Sky Blog discussing institutional investors' attitudes towards alternative business forms and similar issues raised by Etsy's IPO.

-Anne Tucker

April 27, 2015 in Anne Tucker, Business Associations, Corporate Finance, Corporate Governance, Corporations, Financial Markets, Securities Regulation | Permalink | Comments (0)

Wednesday, April 22, 2015

Etsy IPO and the revival of the Shareholder Primacy Debate

Last week the New York Times hosted a debate about the Public Corporation's Duty to Shareholders.  Contributors include corporate law professors Stephen Bainbridge, Tamara BelinfanteLynn StoutDavid Yosifan and Jean Rogers, CEO of Sustainability Accounting Standards Board.

This collection of essays is not only more interesting than anything that I could write, but it is also the type of short, assessable debate that would be a great starting point for discussion in a seminar or corporations class.  

-Anne Tucker

April 22, 2015 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Current Affairs, Delaware, Social Enterprise | Permalink | Comments (0)

Wednesday, April 15, 2015

"Best Interest Contracts"--Proposed DOL Regulation of Retirement Brokers

In an earlier BLPB post, I wrote about President Obama's call for greater regulation of retirement investment brokers.  The proposed reforms focused on elevating the current standard that brokers' investment advice must be "suitable" to something closer to an enforceable fiduciary duty to counter financial incentives for some brokers to channel investors into higher-fee investment options.  

Yesterday, the U.S. Department of Labor released new proposed rules (Proposed Rule), which would classify brokers as "fiduciaries" under ERISA but allow them to continue to receive brokerage commissions and fees (a practice that would otherwise violate ERISA conflict-of-interest rules) so long as the brokers and customers enter into a  "Best Interest Contract".

The exemption proposed in this notice (“the Best Interest Contract Exemption”) was developed to promote the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners, and small plans.  Proposed Rule at 4.

In 1975, the DOL issued rules defining investment advice for purposes of triggering fiduciary status under ERISA and the attended duties and conflict-of-interest prohibitions.  That 1975 definition is still in use, is narrow, and excludes much of paid-for investment advice, particularly that provided in the self-directed retirement space (i.e., 401(k) and IRA).  

The narrowness of the 1975 regulation allows advisers, brokers, consultants and valuation firms to play a central role in shaping plan investments, without ensuring the accountability ... [and] allows many advisers to avoid fiduciary status.... As a consequence, under ERISA and the Code, these advisers can steer customers to investments based on their own self-interest, give imprudent advice, and engage in transactions that would otherwise be prohibited by ERISA and the Code. Proposed Rule at 12.

The proposed rule expands the definition of investment advise (see Proposed Rule at 13) making brokers "fiduciaries" under ERISA, but then creates an exemption (which allows  for the continued collection of commissions and fees), requiring: 

the adviser and financial institution to contractually acknowledge fiduciary status, commit to adhere to basic standards of impartial conduct, warrant that they have adopted policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, and disclose basic information on their conflicts of interest and on the cost of their advice. The adviser and firm must commit to fundamental obligations of fair dealing and fiduciary conduct – to give advice that is in the customer’s best interest; avoid misleading statements; receive no more than reasonable compensation; and comply with applicable federal and state laws governing advice. Proposed Rule at 6.

Under the proposed exemption, all participating financial institutions must provide notice to the U.S. DOL of their participation, as well as collect and report certain data. 

As justification for the proposed rules, the DOL asserted that:

In the absence of fiduciary status, the providers of investment advice are neither subject to ERISA’s fundamental fiduciary standards, nor accountable for imprudent, disloyal, or tainted advice under ERISA or the Code, no matter how egregious the misconduct or how substantial the losses. Retirement investors typically are not financial experts and consequently must rely on professional advice to make critical investment decisions. In the years since then, the significance of financial advice has become still greater with increased reliance on participant directed plans and IRAs for the provision of retirement benefits. Proposed Rule at 11.

Critics claim that these rules will limit small investors' access to sophisticated financial advice for investments, while proponents consider this a powerful tool against the eroding effects of high fees on long-term retirement savings.  

I think this is a symbolically important change.  It modernizes the regulatory framework to more closely reflect why many people invest in the stock market (as a tax incentivized alternative to pension plans), the purpose that these investments serves (long-term retirement savings) and the information asymmetries (born of financial illiteracy) confronting the average investor, as well as the changes to the financial services industry.  The enforcement mechanism is placed on the individual investor, who will have limited monitoring resources and and other disincentives to fiercely serve that role, which is why my initial reaction that this is a good "symbolic" measure that has potential to fulfill a more meaningful role.

-Anne Tucker

April 15, 2015 in Anne Tucker, Corporations, Financial Markets, Securities Regulation | Permalink | Comments (0)

Wednesday, April 8, 2015

Remote Tippees and *Civil* Insider Trading Liability

In December, 2014 the Second Circuit in US v. Newman addressed liability of remote tippees.  In Newman, a lawyer told a friend who told a roommate information regarding the sale of SPSS Inc. to IBM that found its way into later trades by a cohort of analysts at hedge funds and investment firms. (Op. at 5-7).  The Second Circuit in  Newman  vacated insider trading convictions and narrowed the standard for "improper benefit", reconsideration of which was denied last week, and thus stands pending review by the U.S. Supreme Court.  To qualify as an improper benefit under Newman, there must be proof of a meaningfully close relationship, where the "the personal benefit received in exchange for confidential information must be of some consequence." (Op. at 22).  Newman also made clear that liability standards are the same whether the tippee's liability arises under the classical or the misappropriate theories. (Op. at 11).

Judge Jed S. Rakoff, of Federal District Court in Manhattan, issued an order denying a motion to dismiss the SEC's civil charges against Daryl Payton and Benjamin Durrant III, defendants in Newman who received their information from the roommate of the friend of the lawyer.  This is the first case to examine the impact of the Newman opinion in the civil context.  Judge Rakoff wrote:

Significantly while a person is guilty of criminal insider trading only if that person committed the offense “willfully,” i.e., knowingly and purposely, a person may be civilly liable if that person committed the offense recklessly, that is, in heedless disregard of the probable consequences.  (Op. at 2)

 Judge Rakoff concluded that the SEC's "Amended Complaint more than sufficiently alleges that defendants knew or recklessly disregarded that Martin received a personal benefit in disclosing information to Conradt, and that Martin in doing so breached a duty of trust and confidence to the owner of the information. (Op. at 16).

Peter J. Henning, a professor at Wayne State University Law School, writes in his article in the DealB%k that:

Judge Rakoff’s analysis provides at least some guidance on how to assess the new landscape under the Newman opinion. Courts tend to apply securities law decisions interchangeably in criminal and civil cases, so the Justice Department can cite his opinion as a favorable precedent in other cases involving tippees. 

This and other insider trading enforcement actions by the SEC can be tracked here.

-Anne Tucker

April 8, 2015 in Anne Tucker, Corporate Governance, Securities Regulation | Permalink | Comments (1)

Wednesday, April 1, 2015

Regulation A+: facilitating small company access to capital

On March 25, 2015, the SEC Commissioners unanimously adopted final rules amending Regulation A, effective in 60 days,  extending an existing exemptions for smaller issues as required under Title IV of the Jumpstart Our Business Startups (JOBS) Act.  SEC information on the new regulations are available here and commentary is available here.

The SEC Release states that:

The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. 

***

The final rules, often referred to as Regulation A+, provide for two tiers of offerings:  Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The final rules pre-empt states from reviewing and approving Tier 2 offerings to "qualified purchasers."  For a further discussion on merit review and preemption, see The SEC's New 'Regulation A+' and the States' 'M' Word, posted on JDSupra. 

Supporters have commended the change as decreasing reliance on costly gate keepers to capital such as investment bankers, and facilitating an easier path to raise capital by allowing qualifying companies to offer their stock directly to the public. Initial reaction quotes in the alternative finance world are available here.

-Anne Tucker

April 1, 2015 in Anne Tucker, Corporate Finance, Current Affairs, Securities Regulation | Permalink | Comments (0)

Wednesday, March 25, 2015

Macaroni & Cheers!

Today marks my return to blogging after a brief (3 weeks) respite, and what better way to be welcomed back than with news of a mega-merger?!?  Today, Kraft Foods, a publicly traded company, and H. J.Heinz, owned by Warren Buffett's Berkshire Hathaway and Brazilian private equity firm 3G, signed a multi-billion dollar merger agreement to create what will become the third largest food company in North America. 

Under the proposed merger Kraft shareholders will receive 49% of the stock in the newly merged company, plus a cash dividend of $16.50 per share, representing a reported 27% premium on Kraft's trading stock price as of Tuesday, March 24th which closed at around $61.33/share.  

The stock market reacted positively to the news with Kraft stock opening around $81/share and climbing up to $87 and settling down in the low $80's (it was trading at $82/share around 2:00 pm). You can track the stock price here.  The immediate bump in price casts some shadows on the Kraft stock premium agreed to in the deal.

Among the possible legal hurdles are antitrust concerns, but the deal doesn't raise red flags on its face given the little overlap between the two companies.
 
The bigger, and more interesting corporate governance question will be the Kraft shareholder approval process requiring a proxy statement.  Kraft Foods is a Virginia corporation (see Articles of Incorporation), and thus the merger and Kraft's shareholders' rights are governed by the Virginia Corporation Act.  Because Kraft is a public corporation, shareholders will not have appraisal rights under Va. Code Ann. § 13.1-730 (West) and those rights have not be altered in the Articles of Incorporation.  So the legal challenges, if any and given the size of the deal are likely, will have to assert that the transaction itself is flawed (either under duty of care or loyalty) or that the proxy process was defective in failing to disclose material information.  
-Anne Tucker
 
 

March 25, 2015 in Anne Tucker, Corporate Governance, Corporations, Financial Markets | Permalink | Comments (0)

Tuesday, February 24, 2015

Proposed Fiduciary Duties for Retirement Investment Advisers and Brokers

On Monday the White House released a report on The Effects of Conflicted Investment Advise on Retirement Savings which highlights the unique constraints of many retirement investors.  The current "suitable" investment advise standard leaves room for financial service provides to channel retirement investors into investments with higher fees paid by the investor but higher commissions earned by the professional.  Higher fees paid on investments can reduce the return on savings an average of 12% over the life of the retirement account.  In other words, paying less in fees could mean that retirement savings could last an average of an additional 5 years.  This has major implications for individual financial stability as well as our national retirement policy, which is increasingly dependent upon self-directed retirement savings in the form of 401(k)s and IRAs.

To reduce the conflict of interest and lessen the likelihood that retirement investors will "select" higher-fee investment vehicles based on the self-interested advise of financial services providers, the White House is asking the Department of Labor to impose a fiduciary duty standard requiring the advise provided to be consistent with the best interests of the investor.  This is such an intuitive position that many investors think that financial advisers and brokers are already subject to this requirement.  The proposal would bring the legal reality and enforceable duty in line with the public perspective.  This is not to say that there won't be significant opposition from financial services providers who argue that the industry is already highly regulated.

The announcement and the focus on both retirement investors and the impact of fees on retirement savings is of particular interest to me.  I have written three law review articles on related topics.  

  • Citizen Shareholders and Modernizing the Agency Paradigm (2012) articulates the ways in which retirement investors (I call them Citizen Shareholders) are different from traditional corporate law shareholders;
  • The Retirement Revolution (2013) describes how the fundamental shift in the retirement landscape imposed additional risks onto the retirement investors; and 
  • The Outside Investor (2014) explores how the intersection of corporate law and ERISA standards leave many retirement investors exposed to additional market risks rather than intuitive guess that these investors would be more protected.

-Anne Tucker

February 24, 2015 in Anne Tucker, Business Associations, Corporations, Financial Markets | Permalink | Comments (0)

Wednesday, February 18, 2015

Updated Social Enterprise Map

My colleague at Georgia State, Cass Brewer, posted on SOCENT (social enterprise) Law, an update to his incredibly useful social enterprise map.  On this blog and in other fora, I have discussed with many of you teaching BA whether you cover social enterprises and, if so, to what extent.  This is a great resource if you do anything in the area.  

How cool is this?

 

-Anne Tucker

February 18, 2015 in Anne Tucker, Business Associations, Social Enterprise | Permalink | Comments (0)

Wednesday, February 11, 2015

Proxy Season: A Gendered View & A Book Recommendation

Andrew Ross Sorkin at the DealBook in his column, Do Activist Investors Target Women C.E.O.'s?, asked earlier this week  if the gender of the CEO influences the target of activist shareholders.  

Only 23 women lead companies in the Standard & Poor’s 500-stock index. Yet at least a quarter of them have fallen into the cross hairs of activist investors.

The article references Patricia Sellers observations in Fortune last month regarding corporate raider Nelson Peltz and his targeted attacks on PepsiCo lead by Indra Nooyi and Mondelez International lead by CEO Irene Rosenfeld as well as his current demands on DuPont, with Ellen Kullman as chairman and CEO.

In the absence of correlating data about female CEO's and weaker company performance, the question lingers is there something besides performance that prompts the targeting of these companies?  To explain the question the article references several studies that report perception differences in competence, risk and performance based solely on gender, with, women on the losing end of these perception biases.

As I think is a common tendency, I gravitate towards information that relates to what I am personally thinking about, experiencing or interested in at the moment.  Earlier on this blog, I wrote about gender issues in the classroom.  On my current reading list, is the book What Works for Women at Work written by Joan Williams and Rachel Dempsey, that (1) reviews the existing literature about pervasive gender bias, (2) articulates how unconscious bias influences outcomes (acknowledging that for the most part society has moved past explicit and overt gender discrimination), (3) identifies four patterns where these biases consistently emerge based in part on her interviews with 127 "successful" women, and (4) discusses how the workplace (meaning men and women) can move beyond the limitations of these implicit biases.  Several colleagues and friends are reading this book along with me as well.  And the best part:  not everyone reading the book is (and not everyone should be) a women.  

-Anne Tucker

February 11, 2015 in Anne Tucker, Corporate Governance, Corporations, Current Affairs | Permalink | Comments (2)

Wednesday, February 4, 2015

Conferences

I am a list maker.  I make daily to do lists, grocery lists, research plans, workout schedules (that quickly get jettisoned) and  complicated child care matrices necessary in two-career families.  How else am I supposed to remember and keep on my radar all of the things that I am supposed to be doing now, or doing when I have time, or things that I can't forget to do in the future?  One area where I feel deficient is in planning my conference travel/attendance. It always feels either a little ad hoc (ohh I got an invitation and I never say no to those!) or a little out habit (once you have presented at a conference it is easier to be asked to participate in future panels). Rarely does it feel like a part of an intentional plan for the year where I set out to prioritize conference A or break into conference B.  

Realizing that this year there are 3 corporate law events within 10 days of each other is seriously making me reconsider my approach.  I need a conference list-- a way to plan for the coming year, prioritize opportunities and frankly, schedule grandparent visits (read: child care) when I need to travel for more than a night or two.  

Below is my running list of annual or nearly annual events, but I know that I am missing big pieces of the conference puzzle.  Please contribute in the comments so we can create a list of some standard corporate law events (great for new teachers, great for those looking to expand their research circles, etc.).  Updated to reflect suggestions in comments & put in approximate order of timing.

 

-Anne Tucker

February 4, 2015 in Anne Tucker, Business Associations, Call for Papers, Conferences, Law and Economics, Securities Regulation, Teaching, Unincorporated Entities | Permalink | Comments (6)

Wednesday, January 28, 2015

New Article Highlight: The (Un)Enforcement of Corporate Officers' Duties

New reading recommendation:  The (Un)Enforcement of Corporate Officers' Duties, by Megan Shaner at Univ. of Oklahoma COL, published in UC Davis Law Review, November 2015.

Abstract:  

Over the past few decades, officers have arguably become some of the most important individuals in the corporation. From the implosions of Enron and WorldCom, to the success of companies like Apple and Microsoft, to the Wall Street crisis that sunk the world into near global recession, corporate officers have played a role in each of these storylines and countless (albeit lesser known) others. In spite of the well-publicized scandals, officers continue to be given wide latitude to carry out their role of managing the day-to-day operations of their companies. The primary constraint on this power under state corporate law is the imposition of fiduciary obligations. Fiduciary duties thus play a vital role in checking the considerable power and authority of officers. Fiduciary duties will only affect officer behavior, however, if there is an effective enforcement scheme that holds officers accountable. This Article discusses how the development of corporate doctrine, coupled with the dynamic in today’s corporate management has created impediments and disincentives for the enforcement of officer fiduciary duties. In light of the problematic state of the current enforcement scheme, this Article evaluates possible changes that would alleviate deterrents in the enforcement process. This Article concludes that in order to regulate officer behavior with fiduciary duties, there must be a collective correction to the enforcement mechanisms in place for internal enforcers beginning with reevaluating stockholder derivative litigation burdens.

This is a great article for the arguments advanced and careful observations made.  It also provides such a thorough and useful discussion of officers that I plan to add it to a seminar reading list.  Professor Shaner's article also earned the top prize at the 2014 George Washington University C-LEAF Junior Faculty Workshop.

-Anne Tucker

 

Megan Shaner at the University of Oklahoma College of Law first workshoped this paper at George Washington's CLEAF Junior Faculty Workshop last spring.  

January 28, 2015 in Anne Tucker, Business Associations | Permalink | Comments (0)

Wednesday, January 21, 2015

Dark Pools

One week after the SEC levied the largest dark pool trading violation fine against USB, a group of nine banks (including Fidelity, JP Morgan, BlackRock, etc.) introduced a new dark pool platform, an independent venture called Luminex Trading & Analytics.  Dark trading pools are linked to the role of high frequency trading and the notion that certain buyers and sellers should not jump the queue and shouldn't be the first to buy or sell in the face of a large order. The financial backers of Luminex were quoted in a Bloomberg article describing it as a platform "where the original purpose of dark pools, letting investors buy and sell shares without showing their hand to others, will go on without interference."

The announcement raises public scrutiny about dark pools, but among financial circles (like those at ZeroHedge, it is being touted as a smart self-regulatory move by the major mutual funds to prevent the money leach to HFT's, which some seeing as the beginning of the end for HFTs. 

If you are looking for more resources on dark pools and HFTs-- there are two brand new SSRN postings on the subject:

-Anne Tucker

January 21, 2015 in Anne Tucker, Financial Markets, Securities Regulation, Technology, Web/Tech | Permalink | Comments (0)

Wednesday, January 7, 2015

BA/Corporations -- New Media Teaching Resources

I had very limited time at AALS this year (unfortunately) but I still walked away with some great ideas (and a chance to say hello to a few, but not enough, friendly faces).  I am borrowing from many ideas shared in the panel cited below, as well as a few of my own.  As many of you prepare to teach BA/Corporations for the spring (or making notes on how to do it next time), here are a few fun new resources to help illustrate common concepts:

  • HBO's The Newsroom.  A hostile takeover, negotiations with a white knight-- all sorts of corporate drama unfolded on HBO's Season 3 of The Newsroom.   I couldn't find clips on youtube, but episode recaps (like this) are available and provide a good reference point/story line/hypo/exam problem for class.
  • This American Life-- Wake Up Now Act 2 (Dec. 26, 2014).  This brief radio segment/podcast tells the story of two investors trying to reduce the pay of a company CEO.  The segment discusses board of director elections, board duties, board functions and set up some large questions about whether or not shareholders are the owners of the corporation and their profit maximization is the ultimate goal for a company.  This could be followed with Lynn Stout's 2012 NYT Dealbook article proposing the opposite view.
  • HBO's Silicon Valley.  For all things tech, start up, entrepreneurship and basic corporate formation, clips (you will want to find something without all of the swears, I suspect) and episode recaps from this popular show illustrate concepts and connect with students.  Again, great for discussion, hypos, and exam fact patterns.
  • The Shark Tank!.  I have to thank Christyne Vachon at UD for this idea.  There are tons of clips on youtube and most offer the opportunity to talk about investors bringing different things to the table, how to apportion control, etc.  Here is an episode involving patent issues. I think that I am going to open my experiential Unincorporated/Drafting class with a Shark Tank clip on Monday.  
  • Start Up Podcasts.  These 30-minute episodes cover a wide range of topics. Here is one podcast on how to value a small business.   At a minimum, I will post some of these to my course website this spring.  (Thank you Andrew Haile at Elon for this recommendation.).
  • Planet Money.  The podcasts are a great resource, but what I love is the Planet Money Twitter page because it is a great way to digest daily news, current events and topical developments that may be incorporated into your class.
  • Wall Street Journal--TWEETS.  (that felt like an oxymoron to write). Aside from the obvious, I find the Twitter feed to be the most useful way to use/monitor the WSJ.  I will admit it, I don't "read" it every day, but this is my proxy.

Special thanks to the participants in the Agency, Partnership & the Law's panel on Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax

Moderator: Jeffrey M. Lipshaw, Suffolk University Law School
Speakers:
Lawrence A. Cunningham, The George Washington University Law School
Andrew J. Haile, Elon University School of Law
Usha R. Rodrigues, University of Georgia School of Law
Christyne Vachon, University of North Dakota School of Law
Eric C. Chaffee, University of Toledo College of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law

And Happy New Year BLPB Readers!

-AT

January 7, 2015 in Anne Tucker, Business Associations, Corporations, Current Affairs, Entrepreneurship, LLCs, M&A, Unincorporated Entities | Permalink | Comments (3)

Wednesday, December 31, 2014

The Cost of Long-term Investing in Mutual Funds

We are all familiar with a distinguishing features of investing in operating companies and investing in mutual funds: sale of stock in operating companies and redemption at NAV (net asset value) in mutual funds.  An interesting article (Mutual Fund Liquidity and Fiduciary Conflicts of Interest)1 was recently brought to my attention which argues that the liquidity costs of the redemption model disadvantages long-term investors-- those investors who stay in the fund.  

Redemption of mutual fund shares requires the fund to maintain liquidity (uninvested assets) in order to supply the NAV to any departing investor.  The required liquidity extracts a small cost on the fund for each exit.  This cost, small when evaluated for a single trade, becomes significant in the aggregate.  Trading and liquidity cost estimates range from $10-17 billion annually, costs that are born exclusively by the investors who stay in the fund. This means that long-term investors, particularly those investors who are relatively locked into their mutual funds such as retirement investors (a group I refer to in my scholarship as Citizen Shareholders) are subsidizing the dominance of the exit strategy for other retail investors.  This has deep implications for the arguments advanced by John Morley and Curtis Quinn in their 2010 article Taking Exit Rights Seriously,2  where they argue that exit is the dominant strategy over voting and litigation in mutual funds.  If exit is the dominant strategy for mutual fund investors, and there is a cost associated with that exit, who should bear the cost?  I have an essay forthcoming this spring that further addresses question of exit rights as they pertain to Citizen Shareholders.

One novel solution advanced by Sacks Equalization Model, Inc., is a patented algorithm that assigns a small liquidity cost to all selling investors and to all new investors to push the transaction cost on those investors engaging in the transaction, not the stable, long-term investors.

-Anne Tucker

[1] Miles Livingston and David Rakowski, Mutual Fund Liquidity and Conflicts of Interest, Journal of Applied Finance, Vol. 23, No. 2, pp 95-103 (2013).

[2] John Morley & Quinn Curtis, Taking Exit Rights Seriously: Why Governance and Fee Litigation Don’t Work in Mutual Funds, 120 Yale L.J. 84 (2010).

 

December 31, 2014 in Anne Tucker, Business School | Permalink | Comments (0)

Tuesday, December 16, 2014

Yale/Stanford/Harvard 16th Junior Faculty Forum--Request for Submissions

Yale, Stanford, and Harvard Law Schools announce the 16th session of the Yale/Stanford/Harvard Junior Faculty Forum to be held at Harvard Law School on June 16-17, 2015 and seek submissions for its meeting.  The request for submissions is available at this link: Download JFF final call for submissions.

-AT

 

 

December 16, 2014 in Anne Tucker, Conferences | Permalink | Comments (0)

Wednesday, November 26, 2014

Writing (and grading) Exam Questions

This is the time of year when we craft exam questions and grading grids in anticipation of exams.

Aside from Teaching Law by Design (a fabulous resource that I recommend for all new teachers as a great continuing resource for even those grizzled from years in the trenches), I have used few formal resources to guide my exam writing and grading process. Fortunately, I work with creative, collaborative and generous colleagues who all shared lots of samples and tips when I first started writing exams.  Before committing myself to my Corporations exam this year, I decided to see what is out there to guide exam construction and grading. Finding little that was useful on SSRN or Westlaw, I turned to a broader search, which brought me to a general test instruction guideline produced by Indiana University, aptly titled: How to Write Better Tests.  It had the following information regarding essay exams that serve as a useful reminder about why we are so meticulous in constructing our grading rubrics and creating grading schemes that, to the greatest extent possible, reduce our individual biases.

Consider the limitations of the limitations of essay questions:

1. Because of the time required to answer each question, essay items sample less of the content.

2. They require a long time to read and score.

3. They are difficult to score objectively and reliably. Research shows that a number of factors can bias the scoring:

A) Different scores may be assigned by different readers or by the same reader at different times

B) A context effect may operate; an essay preceded by a top quality essay receives     lower marks than when preceded by a poor quality essay.

C) The higher the essay is in the stack of papers, the higher the score assigned.

D) Papers that have strong answers to items appearing early in the test and weaker answers later will fare better than papers with the weaker answers appearing first.

To combat these common issues the guidelines recommend:

  • anonymous grading (check)
  • grading all responses to question 1 before moving on to question 2, and so on (check)
  • reorganizing the order of exams between questions (check)
  • deciding in advance how to handle ambiguous issues (check, thanks to my grading rubric)
  • be on the alert for bluffing (CHECK!)

If anyone has found a particularly useful resource regarding exam construction and grading, please share in the comments. I am sure everyone would benefit.

Happy Thanksgiving BLPB readers!

-AT

November 26, 2014 in Anne Tucker, Business Associations, Law School, Teaching | Permalink | Comments (3)

Wednesday, November 19, 2014

Stock Drop Cases, ERISA & Securities Laws

In June 2014, the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer holding that fiduciaries of a retirement plan with required company stock holdings (an ESOP) are not entitled to any prudence presumption when deciding not to dispose of the plan’s employer stock.  The presumption in question was referred to as the Moench presumption and had been adopted in several circuits.  You may have heard of these cases as the stock drop cases, as in the company stock price crashed and the employee/investors sue the retirement plan fiduciaries for not selling the stock.  The Supreme Court opinion didn’t throw open the courthouse doors for all jilted retirement investors, and limited recovery to complaints (1) alleging that the mispricing was based on something more than publically available information, and also (2) identifying an alternative action that the fiduciary could have taken without violating insider trading laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

The Supreme Court in Fifth Third recognized the required interplay between ERISA and securities laws stating:

 [W]here a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.

The Ninth Circuit decided Harris v. Amgen in October based upon the Fifth Third decision. In Harris, the plaintiffs’ claim alleged a breach of fiduciary duty based on the failure to stop buying additional stock in the ESOP based on non-public information.  The Ninth Circuit found that plaintiffs alleged sufficient facts to withstand a motion to dismiss that defendant fiduciaries were aware (1) of non-public information, which would have affected the market price of the company stock and (2) the stock price was inflated.  These same facts supported a simultaneously-filed securities class action case.

To understand the interplay between securities laws and ERISA fiduciary rules, as established in Fifth Third, one ERISA consulting firm observed that

The Ninth Circuit appeared to reach the conclusion that, if ‘regular investors’ can bring an action under the securities laws based on the failure to disclose material information, then ‘ERISA investors’ in an ERISA-covered plan may, based on the same facts, bring an action under ERISA:

"If the alleged misrepresentations and omissions, scienter, and resulting decline in share price ... were sufficient to state a claim that defendants violated their duties under [applicable federal securities laws], the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA." 

The Harris opinion invokes a sort of chicken and egg problem.  If the plan had dumped the stock it would have signaled to the market and pushed the share prices lower.  In addressing this concern, however, the Ninth Circuit stated that:

Based on the allegations in the complaint, it is at least plausible that defendants could have removed the Amgen Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants. 

. . . The efficient market hypothesis ordinarily applied in stock fraud cases suggests that the ultimate decline in price would have been no more than the amount by which the price was artificially inflated. Further, once the Fund was removed as an investment option, plan participants would have been protected from making additional purchases of the Fund while the price of Amgen shares remained artificially inflated. Finally, the defendants' fiduciary obligation to remove the Fund as an investment option was triggered as soon as they knew or should have known that Amgen's share price was artificially inflated. That is, defendants began violating their fiduciary duties under ERISA by continuing to authorize purchases of Amgen shares at more or less the same time some of the defendants began violating the federal securities laws.

The argument, in part, is that if Amgen had stopped the ESOP stock purchases it would have signaled to the market regarding price inflation and perhaps prevented the basis for the securities fraud violations harm alleged in the separate suit.

For those who follow securities litigation, there is a potential for investors purchasing in an ESOP to have a secondary and perhaps superior claim for fiduciary duty violations based upon the same facts giving rise to company stock mispricing arising under securities laws.

This raises the question, as one ERISA consulting firm noted,

Are an issuer/plan fiduciary's disclosure obligations to participants greater than its disclosure obligations to mere shareholders? Isn't that letting the ERISA-disclosure tail wag the securities law-disclosure dog – will it not result in the announcement of market-moving material information to plan participants first, before it is announced to securities buyers-and-sellers generally?

I have long been interested in how what happens in the defined contribution (DC) context intersects with what we think of traditional corporate law and how, as the pool of DC investors grows, there will be an ever increasing influence of the DC investor in the corporate law arena.

-AT

November 19, 2014 in Anne Tucker, Corporations, Financial Markets, Law School, Securities Regulation | Permalink | Comments (2)

Wednesday, October 22, 2014

Corporate Law Professors Comment on Proposed HHS Definition of "Eligible Organization" for Hobby Lobby Accommodation

In response to the Department of Health and Human Services' Proposed Regulation and Request for Comments regarding the definition of "eligible organization" (see earlier post here) at least two groups of law professors have weighed in on the issue.

The first comment letter, available here, was submitted by the U.C. Berkeley corporate law professors and encourages the Department to adopt a definition based upon the veil piercing theory.  "We ... propose that for purposes of defining an “[W]e ... suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego."  The comments argue that utilizing the veil-piercing theory avoids the consequences of a setting an arbitrary number of shareholders thus creating a rule that would be "seriously under-and-over-inclusive, capturing corporations that meet the numerical test but for which shareholders are not the alter egos of the corporation, as well as failing to capture corporations with a relatively large number of shareholders that are all united in their interests and are alter egos of one another."

The second comment letter on which I worked and was joined by some editors of this blog as signatories, is available here.  This comment letter, signed by 43 corporate law professors, was produced through the coordinating efforts of the The Public Rights / Private Conscience Project at Columbia Law School headed by  Katherine Franke, and the project's executive director,  Kara Loewentheil.   This letter too encourages the HHS to adopt an approach that requires an "identity of interests."  These comments suggest a blueprint for establishing an identity of interest, namely a focus on "entities (1) with a limited number of equity holders/owners, (2) that demonstrate religious commitment, and (3) submit evidence of unanimous consent of equity holders to seek an accommodation on an annual basis."  The comments provide additional criteria under each of these three elements to operationalize the holding in Hobby Lobby.

-Anne Tucker

October 22, 2014 in Anne Tucker, Constitutional Law, Corporate Governance, Current Affairs | Permalink | Comments (0)