Friday, August 22, 2014
I love a good debate and appreciate the opportunity (provided by Professor Bainbridge’s thoughtful post yesterday) to engage a bit more deeply on the thesis of Wednesday’s post suggesting an approach for how to incorporate Citizens United and Hobby Lobby into the survey BA/Corporations course.
By way of recap and ruthless summary, Stephen Bainbridge wants nothing to do with these issues (or other constitutional law questions) in his course because of the:
- Existing emphasis of public law over private law and resulting imbalance in law school curriculum;
- False impression that constitutional law is the holy grail of law teaching and practice;
- These cases present a hornet’s nest of controversial and divisive topics; and
- Coverage constraints. The menu options of what we can (should) teach is already more ambitious than time allows.
And to no surprise to anyone, anywhere: Stephen Bainbridge is right on the money with all of these points.
As a survey course and one that almost every student in my law school (Georgia State) takes, I feel a responsibility to provide context for the subject matter that we teach and to do my best to “hook” students who didn’t come to my class with an interest in corporate law.
First, hear me now when I say that corporate law matters. It matters to the business owners who form and operate a firm. It matters to the individuals and other businesses who interact with the firm as a supplier or customer or creditor or employee. These first two points are significantly incorporated into the traditional BA syllabus. Corporate law also matters to general members of society because corporations wield tremendous power in elections, in lobbying (regulatory capture anyone?), in shaping retirement savings, in religious and reproductive rights debates and setting other cultural norms around issues like corruption, sustainability, living wage, etc. Multi-national corporations with ubiquitous brand recognition aren’t the only powerful actors. The Hobby Lobby ruling tells us that those creatures governed largely by private law—the closely held corporation—also play a major role. To teach corporate law in a vacuum that ignores this broader context is to teach nuclear physics without discussing the atom bomb and its consequences (if I can use hyperbole). Should the broader context be the focus of the class? Absolutely not. Can it be woven into context setting discussions or used as a way to elicit student participation? In my class at least.
Second, not every student in BA enrolled out of pure self-interest; not everyone has a business background. I consider my course to be a great equalizer in law school: we take the health sciences majors, the B-schoolers, the political science and the anthropology kids and at the end of the semester everyone can explain basic financial concepts, the different menu options of firms, proxy fights, and even poison pills. We do this best when we can engage all of the students, which sometimes means helping students see why it might matter to them and how the subject connects with the things that they care about. For some that will be the clever ways you can use private agreements to shape outcomes and hedge against risk, for others it will be seeing why corporate law matters even if you don’t care about corporations (see paragraph above).
My last point is that being an effective classroom teacher generally requires a sense of self-awareness about your comfort zone, your strengths, and your weaknesses (among other things). I have lots of colleagues, at GSU and other institutions (many of them BLPB editors), whom I admire, but if I tried to teach class the way that they did, I would fall short of the mark. We teach to our own strengths and infuse classes with a sense of our own personality and passion. I don’t think I have convinced anyone not previously inclined to incorporate these materials; and I wonder if Stephen has caused any course corrections with his thoughts. We may have just reinforced the positions that you already held. Either way, happy teaching to all readers who have started or are preparing to start the new semester and the new school year.
Thursday, August 21, 2014
Two news articles about the Dodd-Frank whistleblower law caught my eye this week. The first was an Op-Ed in the New York Times, in which Joe Nocera profiled a Mass Mutual whistleblower, who received a $400,000 reward—the upper level of the 10-30% of financial recoveries to which Dodd-Frank whistleblowers are entitled.
Regular readers of this blog may know that I met with the SEC, regulators and testified before Congress before the law went into effect about what I thought might be unintended effects on compliance programs. I have blogged about my thoughts on the law here and here.
The Mass Mutual whistleblower, Bill Lloyd, complained internally and repeatedly to no avail. Like most whistleblowers, he went external because he felt that no one at his company took his reports seriously. He didn’t go to the SEC for the money. As I testified, people like him who try to do the right thing and try resolve issues within the company (if possible) deserve a reward if their claims have merit.
The second story had a different ending. The Wall Street Journal reported on the Second Circuit opinion supporting Siemens’ claim that Dodd-Frank’s anti-retaliation protection did not extend to its foreign whistleblowing employees. In that case, everything-- the alleged wrongful conduct, the internal reporting, and the termination--happened abroad. The employee did disclose to the SEC, but only after he was terminated, and therefore his retaliation claim relates to his internal reports. The court's reasoning about the lack of extraterritorial jurisdiction was sound, but this ruling may be a victory for multinationals that may unintentionally undermine the efforts to bring certain claims to internal compliance officers.
I proudly serve as a “management representative” on the Department of Labor’s Whistleblower Protection Advisory Committee with union members, outside counsel, corporate representatives, and academics. Although Dodd-Frank is not in our purview, two dozen other laws, including Sarbanes-Oxley are, and we regularly hear from other agencies including the SEC. I will be thinking of these two news articles at our next meeting in September.
I will also explore these issues and others as the moderator of the ABA 8th Annual Section of Labor and Employment Law Conference, which will be held in Los Angeles, November 5-8, 2014. Panelists include Sean McKessey, Chief of the SEC’s Office of the Whistleblower, Mike Delikat of Orrick, Herrington & Sutcliffe LLP, and Jordan A. Thomas of Labaton Sucharow LLP.
The program is as follows:
Program Title: Whistleblower Rewards: Trends and Emerging Issues in Qui Tam Actions and IRS, SEC & CFTC Whistleblower Rewards Claims
Description: This session will explore the types of claims that qualify for rewards under the False Claims Act and the rewards programs administered by the Securities & Exchange Commission, Commodity Futures Trading Commission, and Internal Revenue Service, the quantity and quality of evidence needed by the DOJ, IRS, SEC, and CFTC to investigate a case successfully, and current trends in the investigation and prosecution of whistleblower disclosures. The panel also will address, from the viewpoint of in-house counsel, the interplay between these reward claims and corporate compliance and reporting obligations.
If you can think of questions or issues I should raise at either the DOL meeting in DC next month or with our panelists in November, please email me at firstname.lastname@example.org or leave your comments below.
Tuesday, August 19, 2014
At West Virginia University College of Law, we started classes yesterday, and I taught my first classes of the year: Energy Law in the morning and Business Organizations in the afternoon. As I do with a new year coming, I updated and revised my Business Organizations course for the fall. Last year, I moved over to using Unicorporated Business Entities, of which I am a co-author. I have my own corporations materials that I use to supplement the book so that I cover the full scope of agency, partnerships, LLCs, and corporations. So far, it's worked pretty well. I spent several years with Klein, Ramseyer and Bainbridge's Business Associations, Cases and Materials on Agency, Partnerships, and Corporations (KRB), which is a great casebook, in its own right.
I did not make the change merely (or even mostly) because I am a co-author. I made the change because I like the structure we use in our book. I had been trying to work with KRB in my structure, but this book is designed to teach in with the organization I prefer, which is more topical than entity by entity. I'll note that a little while ago, my co-blogger Steve Bradford asked, "Are We Teaching Business Associations Backwards?" Steve Bainbridge said, "No." He explained,
I've tried that approach twice. Once, when I was very young, using photocopied materials I cut and pasted from casebook drafts the authors kindly allowed me to use. Once by jumping around Klein, Ramseyer, and Bainbridge. Both times it was a disaster. Students found it very confusing (and boy did my evaluations show it!). It actually took more time than the entity by entity approach, because I ended up having to do a lot of review (e.g., "you'll remember from 2 weeks ago when we discussed LLCs most recently that ...."). There actually isn't all that much topic overlap. Among corporations, for example, you've got the business judgment rule, derivative suits, "duty" of good faith, executive compensation, the special rules for close corporations, proxies, and so on, most of which either don't apply to LLCs etc.... or don't deserve duplicative treatment.
I have great respect for Prof. Bainbridge, and his writing has influenced me greatly, but (not surprisingly), I come out more closely aligned with my perception of Larry Ribstein on such issues, and with Jeff Lipshaw, who commented,
I disagree about the lack of topic overlap, and suspect Larry Ribstein is raging about this in BA Heaven right now. . . .
This may reflect differences among student populations, but the traditional corporate law course, focusing primarily on public corporations, is less pertinent in many schools where students are unlikely to be doing that kind of work when they graduate. It's far more likely that they'll need to be able to explain to a client why the appropriate business form is a corporation or an LLC, and what the topical differences between them are.
I completely agree, and I would go another step to say that I find the duplication to be a valuable reinforcement mechanism that is worth (what I have seen as limited) extra time. I am teaching a 4-credit course, though, which gives me time I never had in my prior institution's 3-credit version.
One thing I am doing differently this year is my first assignment, which seeks to build on what I see as a need for students here. That is, I think many of them will need to be able to explain entity differences and help clients select the right option.
I had my students fill out the form for a West Virginia Limited Liability Company (PDF here). I had a few goals. First, I don't like to have students leave any of my classes without handling at least some of the forms or other documents they are likely to encounter in practice. Second, I did it without any instruction this time (I have used similar forms later in the course) because I thought it would help me tee up an introduction to all this issues I want them thinking about with regard to entity choice. (It did.) Finally, I like getting students to see the connection between the form and the statute. We can link though and see why the form requires certain issues, discuss waivable and nonwaivable provisions, and talk about things like entity purpose, freedom of contract, and the limits of limited liability.
If nothing else, the change kept things fresh for me. I welcome any comments and suggestions on any of this, and I wish everyone a great new academic year.
Friday, August 15, 2014
I have updated our Business Law Professors on Twitter List with some professors I met at the ALSB conference last week.
Tweets from the recent professor additions to the list are below.
Men hold 82% of s&p board seats. Are legal mandates the answer? http://t.co/p6piAY0D2e— Kabrina Chang (@ProfessorChang) August 12, 2014
Out today! Teaching an Old Dog New Tricks: Adapting Public Utility Commissions to Meet Twenty-First Century Climate …http://t.co/wYWFunn94R— Inara Scott (@NewEnergyProf) August 13, 2014
Thursday, August 14, 2014
A brief ten-question survey is one of the most effective tools I have used in my three years as an academic. I first used one when teaching professional responsibility and then used it for my employment law, corporate governance seminar, and business associations courses. I’m using it for the first time with my civil procedure students. I count class participation in all of my classes for a portion of their grade, and responding to the survey link by the first day of class is their first “A” or first “F” of the semester.
I use survey monkey but other services would work as well. The survey serves a number of uses. First, I will get an idea of how many students actually read my emails before next Tuesday’s first day of class—interestingly as of Thursday morning, 62% of my incoming 1Ls have completed their survey, while 42% of the BA students have done theirs. Second, my BA students work in mini law firms for a number of drafting exercises and simulations. The students can pick their own firms, but I designate a “financial expert” to each firm based upon the survey responses. I remind them that they should never leave the classroom thinking they are “experts” in the real world-- they are just experts compared to the "terrified." I use this tactic to avoid having all of the MBAs and bitcoin owners (yes, I had some last year) sit together and unintentionally intimidate the other firms with their perceived advantage.
Third, I get an idea of how students have learned about business prior to BA and what news sources they use. Fourth, I tailor my remarks and hypotheticals (when appropriate) to reach the litigators or those who plan to specialize in nontransactional work. I want them to know how BA will relate to the practice areas they think they will enter. I tell them on the first day that I went to Columbia for college because it didn’t have a math requirement and I planned to do public interest work, went to law school because the LSAT was the only graduate school entrance exam that had no math on it (ok- my professor Jack Greenberg at Columbia also said I should go). I tell them that I became a litigator to avoid business and spent my first years as a non-corporate person having to learn about FASB and the definition of a "security" because I was a big-firm commercial litigator. I tell them that when I went in-house I had to take accounting for lawyers and although I don’t love the accounting, we will discuss some basics because they never know where they will end up. Many of them mat even represent entrepreneurs. My first day speech is meant to reach the 79% of my students (as of this morning) who say they want to be litigators.
Finally, I feel as though I’m not walking in on the first day completely ignorant of my students. I often use the names or storylines from popular shows or movies in class when I can. The show Suits, by the way, is the runaway favorite for my 1Ls and I know my BA students watch it as well. My BA survey questions are below. If you are interested in seeing my Civ Pro questions, email me at email@example.com.
1. Please enter your first and last name. If your name is hard to pronounce, please provide a phonetic spelling as well (rhymes with ___ or NUH-RHINE for Narine).
2. Have you had any experience working in a legal setting (firm, court, agency, clinic, other) BEFORE coming to law school or DURING law school? Please answer yes or no and then describe the experience if you answered "yes".
a) Yes- please complete comment box
Other (please specify)
3. Which type of practice appeals to you more?
a) Planning (e.g. transactional)
b) Dispute resolution (e.g. litigation)
c) I do not plan to practice law after graduation
Other (please specify)
4. Have you or a close family member ever owned a business?
Yes, and I have been completely involved in management and/or business discussions
Yes, and I have been somewhat or occasionally involved in management and/or business discussions
Yes, but I have had no involvement in management and/or business discussions
5. Do you own any stocks, bonds, other types of securities (individually or through a mutual fund or trust) or bitcoin?
6. Choose up to THREE fields of law in which you would most prefer to practice
b) civil rights/constitutional law
c) corporate and securities law (including business planning)
d) criminal law (prosecution)
e) criminal law (defense)
f) labor and employment law
g) trusts and estates
h) family law
i) health law
k) intellectual property
l) real estate/land use
m) litigation (plaintiff side)
n) litigation (defense side)
o) sports and entertainment
q) other, please describe
Other (please specify)
7. Do you have an MBA, business, finance, accounting, or economics degree?
8. Do you read any business related newspapers, magazines or blogs? Do you watch any business-related television shows or listen to podcasts or radio shows? If so, please name them.
9. Other than to pass the class, what are your learning goals for this course? Are there particular topics that interest or frighten you?
10. Please describe your level of familiarity with business, finance and/or accounting.
I am an expert and could teach this class
I have some experience, but could use a refresher
I have no experience, but am willing to learn
I am completely terrified
My goals this year: help my students think like business people so that they can add value, help them pass the bar, and most important, help them realize that business isn't so terrifying. Now I just have to get my Civ Pro students to realize that the show Franklin and Bash is probably not the best way to learn about legal practice.
August 14, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Law School, Marcia Narine, Securities Regulation, Teaching, Television | Permalink | Comments (3)
Tuesday, August 12, 2014
Kinder Morgan, a leading U.S. energy company, has proposed consolidating its Master Limited Partnerships (MLPs) under its parent company. If it happens, it would be the second largest energy merger in history (the Exxon and Mobil merger in 1998, estimated to be $110.1 billion in 2014 dollars, is still the top dog).
Motley Fool details the deal this way:
Terms of the deal
The $71 billion deal is composed of $40 billion in Kinder Morgan Inc shares, $4 billion in cash, $27 billion in assumed debt.
Existing shareholders of Kinder Morgan's MLPs will receive the following premiums for their units (based on friday's closing price):
- Kinder Morgan Energy Partners: 12%
- Kinder Morgan Management: 16.5%
- El Paso Pipeline Partners: 15.4%Existing unit holders of Kinder Morgan Energy Partners and El Paso Pipeline Partners are allowed to choose to receive payment in both cash and Kinder Morgan Inc shares or all cash.
The most important man in the American Energy Boom wears brown slacks and a checkered shirt and sits in a modest corner office with unexceptional views of downtown Houston and some forgettable art on the wall. You would expect to at least see a big map showing pipelines stretching from coast to coast. Nope. “We don’t have sports tickets, we don’t have corporate jets,” growls Richard Kinder, 68, CEO of Kinder Morgan, America’s third-largest energy firm. “We don’t have stadiums named after us.”
August 12, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Merger & Acquisitions, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)
Sunday, August 10, 2014
The following paragraph is an excerpt from Micro-Symposium on Competing Theories of Corporate Governance, 62 UCLA L. Rev. Disc. 66, which can be found online (here) and is also available via Westlaw.
On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance…. This conference provided a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines. In addition to an oral presentation, each conference participant was invited to contribute a very brief essay of up to 750 words (inclusive of footnotes) on their topic to this micro-symposium being published by the UCLA Law Review’s online journal, Discourse. These essays provide a concise but powerful overview of the current state of corporate governance thinking….
The included essays:
- Stephen M. Bainbridge, An Abridged Case For Director Primacy
- George S. Georgiev, Shareholder vs. Investor Primacy in Federal Corporate Governance
- David Millon, Team Production Theory: A Critical Appreciation
- Usha Rodrigues, David and Director Primacy
- Stefan J. Padfield , Citizens United, Concession Theory and Corporate Social Responsibility (CSR)
- Christopher M. Bruner, Corporate Governance Theory and Review of Board Decisions
- Robert T. Miller, The Board Veto and Efficient Takeovers
- Lisa M. Fairfax, Toward a Theory of Shareholder Leverage
- Iman Anabtawi, Shadow Directors
- Michael D. Guttentag, Shareholder Primacy and the Misguided Call for Mandatory Political Spending Disclosure by Public Companies
- James J. Park, Averages or Anecdotes? Assessing Recent Evidence on Hedge Fund Activism
Shameless self-promotion excerpt:
In extremely truncated form, my argument proceeds as follows. While both director primacy and shareholder primacy differ in terms of who should control corporate decisionmaking, both identify shareholder wealth maximization as the positive and normative goal of corporate governance. In addition, while team production theory tempts advocates of CSR, in the end it also falls short of supporting mandatory CSR. As for the theories of corporate personality, both aggregate theory and real entity theory view the corporate entity as standing in the shoes of natural persons to some meaningful degree (typically the shareholders in the case of aggregate theory and the board of directors in the case of real entity theory), thereby providing corporations a basis for resisting government regulation. Only concession theory, which views the corporation as fundamentally a creature of the state created to serve public ends, can support mandatory CSR as a normative matter. Thus, the advocates of mandatory CSR should use concession theory, with its emphasis on the public roots of corporations, to provide the compelling narrative necessary to move our corporate law beyond its exclusive focus on shareholder wealth maximization.
Stefan J. Padfield , Citizens United, Concession Theory and Corporate Social Responsibility (CSR), 62 UCLA L. Rev. Disc. 84, 86 (2014).
Saturday, August 9, 2014
Below is a call for abstracts from Professor Amy Sepinwall (Wharton).
Call for Abstracts for the Normative Business Ethics Workshop Series of the Carol and Lawrence Zicklin Center for Business Ethics Research:
Over the 2014-2015 academic year, the Carol and Lawrence Zicklin Center for Business Ethics Research at the Wharton School, University of Pennsylvania, will be convening a regular works-in-progress series for scholars working in normative business ethics (NBE).
The series is part of an effort to foster, and increase the prominence of, normative business ethics in the academy and the public sphere. This particular initiative has two key objectives: First, it endeavors to provide a regular forum for scholars working on business ethics from a normative perspective. The community of such scholars is relatively small, and dispersed across numerous institutions, and there are few opportunities for these individuals to convene and share work. This series is an effort to connect these scholars, and enrich their shared intellectual life. Second, the series aims to be especially valuable to junior faculty, by providing them with feedback from, and opportunities to interact with, more established members of the normative business ethics community. To that end, we hope to have one junior author and one senior author at each session.
The workshop will meet roughly once a month over the academic year, for a total of 6 sessions per year. Anyone with an interest in normative business ethics is invited to attend the sessions. Faculty interested in having their paper discussed at the workshop should submit an abstract and list, in order of preference, the date(s) they could present from those listed below. (Further information about submission can be found under the “Call for Abstracts” below.) Two draft papers will be selected for each session. Complete draft papers will be circulated at least one week in advance of each session and participants will be expected to have read them carefully, and to arrive at the workshop prepared to offer constructive feedback.
The sessions will be structured so as to maximize the opportunity for paper improvement through the comments of a community of scholars committed to normative business ethics. To that end, authors will not present at the session for which their paper has been assigned. Instead, those gathered will go around the table and each participant will offer a few points of feedback on the paper.
An author whose paper is selected for presentation in a given semester will bear an obligation to attend the other two sessions that semester or to send feedback via email to the authors whose papers are presented at any session that she is unable to attend. In this way, each author will be assured of a good number of responses to her paper.
The Zicklin Center will provide the room and refreshments for each session. Attendees will be asked to pay for their own travel expenses. Some travel funding is available for paper authors for the session at which their paper will be discussed.
For Fall 2014, the workshop will be held on the following dates:
Friday, October 10, 2014, 2:00-4:30 PM.
Friday, November 14, 2014, 2:00-4:30 PM.
Friday, December 5, 2014, 2:00-4:30 PM.
Call for Abstracts
We invite individuals interested in workshopping a paper in normative business ethics to submit a paper abstract. The abstract should be a maximum of 500 words, and the accompanying email should indicate preferred dates of presentation from those listed above. Please send these to Lauretta Tomasco, firstname.lastname@example.org, by September 1, 2014. Individuals will be notified about whether their paper has been selected for presentation by September 15, 2014.
Please address all questions to Amy Sepinwall, email@example.com.
Friday, August 8, 2014
Maybe having a suitcase that has more books in it than clothes is a sign that I need to follow Steve Bradford's lead and get an e-reader.
This week I am in Seattle for the 2014 ALSB conference, which I may blog about when I return. In my suitcase, in addition to a few clothes, are:
- Bain, What the Best College Teachers Do
- Bainbridge, Corporate Governance after the Financial Crisis
- Bruner, Corporate Governance in the Common-Law World
- Edmondson, Ice Cream Social: The Struggle for the Soul of Ben & Jerry's
- Klein, et al., Business Organization and Finance
- O'Hara and Ribstein, The Law Market
- Subramanian, Dealmaking: The New Strategy of Negoti-Auctions
Some of these, like Bainbridge, Klein, and O'Hara's books, I have already read, but I thought they would be worth revisiting while I wait on some new books I recently ordered.
Monday, July 28, 2014
As many readers (and all of my friends) know, I am a bit of a sports fan. Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games. I even served on The University of Tennessee's Athletics Board for a few years. But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.
I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends). I have friends in the industry and find aspects of it truly fascinating. I even used to subscribe to Women's Wear Daily, the fashion industry trade rag. I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.
This personal background is prelude to my interest in two current events stories that I see as parallels. I am trying to sort them through on a number of levels. Maybe you can help. Here are the top lines of each story.
- Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
- The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
Sunday, July 27, 2014
An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby
I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:
This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.
I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.
As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:
1. Are corporations capable of exercising religion?
As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.
2. Is the exercise of religion by corporations ultra vires?
Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.
3. Can corporations sacrifice shareholder wealth to further religious exercise?
So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.
Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”
So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.
Friday, July 25, 2014
We welcome Eric Orts (Wharton) to the "blawgosphere." Professor Orts has begun blogging at Ortsian Thoughts and Theories. I have already added his blog to my favorites, and I am sure I will become a regular reader. His new book, Business Persons: A Legal Theory of the Firm should be in my mailbox soon, and I am looking forward to reading it as well. (H/T David Zaring at the Conglomerate).
Thursday, July 24, 2014
As I explore the future of Berkshire Hathaway in my forthcoming book Berkshire Beyond Buffett: The Enduring Value of Values, one topic I address for Berkshire post Buffett is whether the company should remain public or be taken private.
After all, once Bufffett is gone, you might expect activist shareholders to urge liberalizing its dividend policy (hasn't paid a dividend in fifty years), divest weaker subsidiaries (it has never sold a subsidiary in forty years), and break-up the diverse conglomerate (engages in hundreds of different lines of business).
Venture entrepreneurs and seasoned executives alike often weigh the pros and cons of a U.S. company being privately held or publicly listed. That goes for start-ups trying to decide to make an initial public offering as it does for listed companies trying to decide whether to go private.
Everyone considers the transaction costs of such a switch high because IPOs and going private transactions are complicated, requiring paying accountants, appraisers, lawyers and other professionals. They are also time-consuming.
So setting aside transaction costs, let’s highlight the usual pros and cons, to do an IPO or stay public:
● access to capital
● liquidity for shareholders
● a currency (stock) to pay managers or make acquisitions
● cache from the sign of business maturity or stature
● the public arena invites the threat of hostile takeovers via proxy battles or tender offers
● rigid governance requirements, especially board size, independence and oversight
● Wall Street analyst attention that drives focus on short-term results, not long-term prosperity
● required disclosure, posing direct administrative costs and potential indirect costs as to competitive matters
● exposure to securities lawsuits by disgruntled stockholders
Although disclosure may be a “con” to a company, from a social perspective, watchdogs value the transparency, especially as to matters of stewardship and corporate social responsibility of larger institutions.
Assuming such a list is roughly complete, how should you evaluate the situation for Berkshire Hathaway? Stipulate that it had good reasons for public company status in its early days, the 1970s and 1980s, even the 1990s. Is it still worth it today?
As to the usual advantages of being a U.S. public company, most are inapplicable to Berkshire or less valuable compared to other public companies:
● Berkshire is a net supplier of capital, generating oceans of it from 60+ insurance and non-insurance operations and investments in marketable securities
● if Berkshire needed or desired external capital, its decentralized structure would pinpoint the particular subsidiary of interest which could directly offer public debt to supply it, as its Mid-American Energy subsidiary does
● Berkshire shareholders, as a group and by self-selection, are long-term holders, the company boasting below-average share turnover, reducing the value of liquidity for existing holders and remitting the typical market liquidity value to aspiring shareholders
● Berkshire never uses its stock to compensate anyone
● Berkshire rarely uses its stock in acquisitions, strongly preferring cash to the associated dilutive effects, and limiting use to a component of consideration paid in very large acquisitions where it is valued such as for tax advantages (the $44 billion acquisition of BNSF rail is a good example)
● Berkshire does not need any cache from a public market listing (though it may have valued slightly being added to the S&P 500 in 2010 to replace BNSF after acquiring it)
As for cons, the threat of a hostile takeover effort at Berkshire is remote, either so long as Buffett (or The Gates Foundation succeeding him) remain controlling shareholder(s) or a concentrated group of Buffett-Berkshire traditionalists command majority voting power. (Built-in deterrence includes Berkshire’s ownership of large regulated subsidiaries in the fields of energy, insurance and rail.)
But other cons are more acute in Berkshire’s case than at most companies:
● part of its historic success is due to a board in place for several decades, a small, close-knit group of insiders, family members and friends, a structure made illegal by the Sarbanes-Oxley Act of 2002 which imposed rigid governance requirements on public company boards
●one of Berkshire’s most valuable traits is its long-term horizon (50 years by mandate of corporate headquarters), accepting quarterly and annual earnings swings that competitors avoid at the expense of long term value
Finally, even the watchdogs don’t get the usual payoff in disclosure quality, because so much of what happens at any subsidiary (even if highly material to any given one) is simply immaterial in the Berkshire context.
Among pros of a public listing that are peculiar to Berkshire: hundreds of thousands of shareholders available to attend Berkshire’s famous annual meeting, which would be reduced to fewer than 300 after a going private transaction.
But if such are the only reasons for a magnificent company such as Berkshire to stay public—stock for the occasional deal and a flock of holders—one moral is the need to reexamine our faith in rigid governance requirements and our allergies to earnings volatility.
Wednesday, July 23, 2014
As someone who teaches and researches both business law and energy law, I often focus on the overlap of the two areas, which I find to be significant. One of my most recent projects has been to write a new casebook, Energy Law: A Context and Practice Casebook, which will be available for courses taught this fall. I wrote a detailed description of the book in a guest post at the Energy Law Professor blog, but here I wanted to highlight the business aspects of the book.
The second chapter of my book is titled The Business of Energy Law. That chapter begins with some key vocabulary, and I then provide students with a client issue to frame the reading for the chapter. The issue:
Your firm has just taken on a new client who is a large shareholder in many companies. She is particularly concerned about her holdings in Energex, Inc., a publicly traded energy company. Energex was founded in 1977 by a oil and gas man from Louisiana who is still the CEO and a member of the board of directors. The client is concerned that the CEO is taking opportunities for himself that she thinks belong to Energex. As you read the following sections, consider: (1) What are the potential conflicts of interest the CEO might have? (2) Is it a conflict of interest if the activity is permitted under the CEO’s employment contract? (3) What kind of documents might be publicly available for review and where would you find them? (4) If it goes to litigation, what other information might you seek? From whom?
The first part of the chapter covers Business Organizations and Employment Law as Energy Law, including derivative suit and executive compensation contracts. The chapter also has the following sections: Antitrust as Energy Law, Mergers and Acquisitions, and Entity Structure and Fiduciary Duties.
Over the years, as I have taught my Energy Law Survey course and Business Organizations (as I do again this fall), I found that I can help make sense of things for students in each class when I borrow examples from the other class. My book helps make the connection concrete, and I hope it will help students understand more of the "why "to go along with the "what." As I often tell (preach to?) students, understanding business organizations is critical to all aspects of practice, regadless of where you intend to focus, whether it's energy law, environmental law, criminal law, or even family law.
This fall should be fun. For me, at least.
Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has an interesting article on antitrust in the DealBook today: Changing Old Antitrust Thinking for a New Gilded Age. Professor Solomon argues that a new wave of mergers in the tech and telecommunications industries mirror the consolidation wave of the Gilded Age a century ago which lead to our current antitrust laws. These mergers leave competition in tact, albeit among a few huge companies, and therefore facially meet the competition requirements under antitrust law. He argues that "[t]his calculus, however, excludes the political and other power that a concentrated industry can wield with government and regulators." Citing to industry-based nonprofits and the ability to participate in political spending in a post-Citizens United world, professor Solomon concludes that antitrust may become a question of power, not just competition.
"[R]ight now there is simply no real government ability to review the industry consolidation that is occurring today in which industries become dominated by a handful of major players. Yet it is becoming increasingly apparent that size and industry concentration affect American society even if competition still exists."
I think that this is an interesting lens through which to view, and teach, current market trends in mergers and acquisitions and related questions of antitrust law.
Tuesday, July 22, 2014
You may think of Warren Buffett as a savvy stock picker but his greater accomplishment is in configuring an exceptionally strong corporation that defies widespread conceptions of effective corproate governance.
Since early in his career, Buffett adopted what he calls the double-barreled approach to capital allocation, meaning both stock picking and business buying. He gained prominence primarily as an investor in stocks, championing a contrarian investment philosophy.
Attracting three generations of devoted followers to a school of thought called “value investing,” he doubted the market’s efficiency and deftly exploited it. Buffett bought stocks of good companies at a fair price, assembling a concentrated portfolio of large stakes in a small number of firms. Today, nearly three-fourths of Berkshire’s stock portfolio consists of just seven stocks.
But late in his career, beginning around 2000, Buffett shot more often through the other half of his double-barreled approach: buying 100 percent of companies run by trusted managers given great autonomy. True, Berkshire early on bought all the stock of companies such as Buffalo News and See’s Candies. But, through the 1990s, the first barrel dominated, with Berkshire consisting 80 percent of stocks and 20 percent owned companies. That mix gradually reversed and recently flipped, making subsidiary ownership the defining characteristic of today’s Berkshire.
Owning primarily subsidiaries rather than merely stocks gives Berkshire a different shape compared to its previous character as the holding company of a famed investor. After all, even for a buy-and-hold investor, stocks come and go. Berkshire has sold the stocks of many once-fine companies, including Freddie Mac, McDonald’s, and The Walt Disney Company.
In contrast, aside from a few Berkshire subsidiaries that it acquired from the Buffett Partnership in the 1970s, Berkshire has never sold a subsidiary and vows to retain them through thick and thin. Despite their variety, moreover, Berkshire companies are remarkably similar when it comes to corporate culture, which is the central discovery I document and elaborate in my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.
When Berkshire consisted mostly of the stock portfolio of a famed stock picker, you could expect that, once that investor departed, the portfolio would naturally be unwound and the company dissolved. Now, however, with Berkshire made of companies not stocks, its life expectancy stretches out in multiple decades, not mere years. It certainly goes beyond the stock picker who founded it. That's not an accident either, as the dominant cultural motif at Berkshire and its subsidiaries is a sense of permanence--the longest possible time horizon imaginable.
Monday, July 21, 2014
As I promised on Friday, I am posting a question and answer segment with Larry Cunningham, author of the forthcoming book: Berkshire Beyond Buffett: The Enduring Value of Values. Larry will be guest blogging with us this week to talk more about the interesting findings he shares in the book and their implications for business and the research, teaching, and practice of business law.
Q: Why did you write this book and what did you find?
A: Widespread praise for Warren Buffett has become paradoxical: Buffett set out to build a permanent institution at Berkshire Hathaway and yet even great admirers, such as Steven Davidoff, doubt that the company can survive without him. I found that viewpoint intriguing since companies who are identified with iconic founders often have trouble after a succession, as Tom Lin has written. I wanted to investigate how the situation will look for Berkshire after Buffett leaves the scene, collapse and breakup or prosperity coupled with continued expansion? What I found was a culture so distinctive and strong, that the company’s future is bright well beyond Buffett.
Q: How did you reach that conclusion? What was your research method?
A: I focused on Berkshire’s fifty operating subsidiaries, which define the company today, representing 80 percent of its value. Incidentally, that is a flip from decades passed, when 80 percent of Berkshire’s value resided in minority stock investments. I began with Buffett’s historical statements about those subsidiaries and Berkshire’s corporate culture, research that in some ways dates to the 1997 Cardozo Law Review symposium I hosted on Buffett’s shareholder letters, which developed into my book, The Essays of Warren Buffett: Lessons for Corporate America. Still, for this project, focusing on the subsidiaries, I gathered and studied specific information about each—biographies, autobiographies, research reports, encyclopedic entries, press releases, public filings. Then, with Buffett’s permission, I surveyed all current Berkshire subsidiary chief executives and interviewed many, along with former managers and large shareholders of subsidiaries. In addition, I surveyed a large number of Berkshire shareholders to gain additional insight and to make sure I was asking the right questions.
Q: What culture did you find, what common traits do the subsidiaries share?
A: That’s the striking discovery. As I profiled each subsidiary, a pattern emerged in which the same traits began to appear repeatedly, nine altogether, including budget-consciousness, earnestness, kinship, entrepreneurship, autonomy, and a sense of permanence. Not every subsidiary had all nine, but many did, and the vast majority manifested at least five or six of the nine. A portrait of Berkshire culture crystalized, one that is distinctive and durable. And that culture, I argue in the book, will allow the company to thrive even after Buffett’s departure.
The discovery is suggested by the book’s subtitle: The Enduring Value of Values. “Value of values” refers to how the traits that bind Berkshire’s subsidiaries all share a common feature: all are intangible virtues that managers transform into economic gain. The most general manifestation of the “value of values” occurs in business acquisitions when the exchange of economic values measured using traditional standards leaves a wide gap—a price higher or lower than economic value.
A salient example from Berkshire’s history concerns Bill Child, patriarch of his family home furnishings company, RC Willey. He sold the company to Berkshire for $175 million, declining rival offers as high as $200 million. Why? Because his family valued the managerial autonomy and sense of permanence that define Berkshire culture.
The book contains more than one hundred examples of myriad ways that Berkshire subsidiaries translate intangible qualities into economic value, whether in research & development, customer service, employee compensation and benefits, corporate finance, or internal policies and practices.
Q: What makes the value of values enduring?
A: By reaping returns on capital from intangible virtues, Berkshire practices a philosophy of capitalism that does well by doing good, is sensitive but unsentimental, lofty yet pragmatic, and public-spirited but profitable. This attitude is neither altruistic nor moralistic, but practical, economic, and long-term. It’s a way of doing business that matches today’s zeitgeist, with its sense of stewardship and fair play, and also has a timeless horizon, as business leaders from Robert Mondavi to John Mackey of Whole Foods champion variations on these themes.
Q: What is the audience for the book?
A: Everyone involved in shaping American business: managers, entrepreneurs, owners, shareholders, directors, policymakers, scholars of corporate stewardship—and business lawyers and business law professors, of course. It’s a broad audience because Berkshire’s approach is distinctive but not inimitable and valuable yet underappreciated.
Q: What surprises did you find?
A: Many, mostly concerning the various subsidiaries, but several rising to the level of Buffett and Berkshire. As a recent headline in USA Today put it, “New Book Rewrites Buffett Legacy in Three Ways.” The book explains why Buffett’s place in American history is even more significant than currently assumed. Besides being a “legendary investor,” as he is often identified by journalists, Buffett has built a formidable corporation, demonstrated unsung managerial prowess, and chartered a course for American capitalism that widens the meaning of “value investing.”
While everyone knows that Buffett owes a lot to Ben Graham, his investments teacher at Columbia Business School, this book also makes clear his debt on the management side to Tom Murphy, the legendary corporate icon and head of ABC who is now a Berkshire director. When I asked Buffett who should write the foreword to this book, he instantly suggested Tom, and I’m grateful that Tom accepted the invitation—his foreword alone is worth the price of the book!
Q: Care to give us a thumbnail sketch of the book’s outline?
A: Sure. The opening chapters cover Berkshire’s origins and foundations, with surprises even for those most familiar with this terrain, including rich connections between Berkshire’s early acquisitions and the conglomerate today. While Berkshire appears vast, diverse, and sprawling, this synthesis of corporate culture shows instead a close-knit organization linked by discrete values.
The middle chapters, the heart of the book, take a series of deep dives into fifty Berkshire subsidiaries to illuminate each of the traits and how they give Berkshire its identity and destiny. I was delighted that, when circulating the manuscript for comment among Berkshire devotees, even the most avid readers found new facts, fresh insights, and a whole new way of thinking not only about Berkshire but about Buffett.
The closing chapters reflect on what Berkshire’s corporate culture means for Buffett’s legacy. They explore the elaborate succession plan at Berkshire, which most people misunderstand, and identify challenges Berkshire will face. I also draw specific lessons for investors, managers, and entrepreneurs who can benefit from Berkshire’s distinctive approach—lessons that business lawyers and policymakers will want to learn as well.
Q: Can Berkshire Beyond Buffett be assigned for any university classes?
A: Yes, and I think it will be a good companion to The Essays of Warren Buffett, which has been adopted at many law and business schools for courses on corporate governance, investments (portfolio management), and mergers & acquisitions. This book would suit those courses as well as courses in business ethics and corporate social responsibility. I am planning a seminar next spring in which these two books will be on the reading list, along with other contemporary books offering fresh examinations of venerable themes, such as Eric Orts’ Business Persons; Lynn Stout’s Shareholder Value Myth; or Curtis Milhaupt & Katharine Pistor’s Law & Capitalism.
Q: Berkshire Beyond Buffett appears to be full of lessons and important principles. Which do you propose to explore for us during the coming week?
A: I’m looking forward to sharing insights on topics such as corporate governance, corporate purpose, and succession planning. Among the book’s many lessons, these will likely be of greatest interest to readers of the Business Law Prof Blog, and I thank you for the opportunity to introduce the book and these themes here this week.
Q: Thanks so much, Larry. Those certainly are all topics that interest me (and infuse my ongoing scholarship and teaching). I look forward to your posts this week.
A: You're welcome. I am grateful for the opportunity to share what I have learned.
Friday, July 18, 2014
At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today. It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things. Enjoy or not, as you so please . . . .
The Business Law Prof Blog is delighted to have as a guest blogger next week our friend and colleague Lawrence A. Cunningham (known to me as Larry!), of George Washington University Law School, who has just finished writing a new book being released in October called Berkshire Beyond Buffett: The Enduring Value of Values. He will offer a few posts about aspects of the book during the week. We will kick it off Monday with some questions and answers.
Larry is the Henry St. George Tucker III Research Professor at GW. He teaches accounting, contracts, and corporate governance and has written extensively in all those areas. He previously taught at Boston College Law School, where he served a term as Academic Dean, and Cardozo Law School, where he directed the Samuel and Ronnie Heyman Center on Corporate Governance.
Among his most cited articles are these scholarly jewels:
The Sarbanes-Oxley Yawn Heavy Rhetoric, Light Reform (And it Might Just Work) (Connecticut Law Review, 2003)
All are great reads. Among his most notable books other than Berkshire Beyond Buffett (which is sure to be a hit!) are the following:
The Essays of Warren Buffett: Lessons for Corporate America (self-published and distributed by Carolina Academic Press, 3d ed. 2013)
Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press, 2012)
Berkshire Beyond Buffett is now in the production and pre-ordering phase, garnering early attention among readers in both the investing and corporate governance communities, including: The Motley Fool (which also posted a written interview and video interviews here, here, here, and here); BeyondProxy; and USA Today. We look forward to our Q&A with Larry next week followed by his posts!
James Woulfe, who was involved in the legislative process around Connecticut benefit corporations, and I have had a number of interesting conversations about social enterprise law over the past few years. Recently, I asked James to share his thoughts on the new Connecticut benefit corporation law for the blog. His contribution is below.
After two previous tries, Connecticut recently became the 24th state in the Union to pass benefit corporation legislation. While some may argue that the fact it took Connecticut so long to pass the bill is a sign of problems with the legislature, our state’s business climate, etc., coming a little late to the game was actually an asset. Waiting to pass the legislation gave lawmakers an opportunity to take a look at national and international trends in social enterprise legal structures, and experiment. As a result, Connecticut tweaked the “model” benefit corporation legislation passed in other states, and included an innovative first in the nation clause in Connecticut’s statute, called a “legacy preservation provision.”
Connecticut’s legacy preservation provision gives social entrepreneurs the opportunity to preserve their company’s status as a benefit corporation in perpetuity, despite changes in company leadership or ownership. In other words, the (optional) provision locks in the company’s social or environmental mission as a fundamental part of its legal operating structure. The provision may be adopted following a waiting period of two years and unanimous approval from all shareholders, regardless of their voting rights. Once the provision is adopted, it requires the company, if liquidated, to distribute all assets after the settling of debts to one or more benefit corporations or 501(c)3 organizations with similar social missions.
To learn more about Connecticut’s benefit corporation statute, and to take a look at the specific language of the legacy preservation provision, you can visit CTBenefitCorp.com.
About the Author:
James Woulfe is the Public Policy and Impact Investing Specialist at reSET - Social Enterprise Trust, a Hartford, Connecticut-based 501(c)3 non-profit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.
Cross-posted at SocEntLaw.