Tuesday, December 16, 2014
In September, Myles Udland wrote an article citing Burton G. Malkiel and his book, A Random Walk Down Wall Street, noting, "The past history of stock prices cannot be used to predict the future in any meaningful way." This is a great point.
I also saw Udland's article from today, which notes oil prices (and stock prices) have gone bonkers. Both prices have fluctuated wildly, and oil has been mostly trending mostly downward. As I have said before, I don't expect prices to stay low (sub-$70 per barrel) for long, but time will tell.
Low oil and gas prices are certainly having an impact on markets and economies. The big one right now is Russia, which is struggling, in major part because of low oil prices. The ruble has taken a beating, and the nation's central bank raised interest rates from 10.5 to 17 percent. Wow.
The bulk of U.S. oil production appears safe well in the low- to mid-$40 per barrel price range, and I don't think it will stay below $55 for long. Then again, as much as I follow all of this, I am still a law professor, and not a financial analyst, so keep that in mind.
Anyway, having read all of this, I was reminded that people are sometimes inclined to view stock prices and commodities markets similarly. That would be wrong. Despite my views that oil is likely to go back up, at least some, it's also worth noting that using history as a predictor of markets is a dangerous game. It's reasonable to assume that, eventually, a market will go up, but whether it will take three weeks, three months, or three years (or more) is hard to say.
One recent report notes that oil price histories suggest we're near the bottom, and that (on average) prices should rebound significantly. The timing here is unpredictable, too, but the history of oil prices do suggest a rebound will happen sooner rather than later, even with global markets struggling.
Uland's articles keep the issues separate, but still, lest anyone get confused (and history suggest they might), it is worth noting that charting commodity markets is different than charting stock prices. As Professor Bainbridge's Safety Tip of the Day: Charting Doesn't Work from ten years ago notes, "Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy." Bainbridge similarly cites Burton G. Malkiel, A Random Walk Down Wall Street (1996) in that post, and in an earlier one from 2003, Random stock traders and the ECMH; with a review of Malkiel's Random Walk.
I learned a lot about stock markets (and Business Organizations) from reading the good professor's writing, and I thought it worthwhile to continue to spread the message: Even though some people like to think that stock prices will follow historical trends and that stocks are like commodities and currencies, you follow their lead at your own peril.
Monday, December 15, 2014
. . . here's a relatively new Dodge Challenger commercial (part of a series) that you may find amusing. I saw it during Saturday Night Live the other night and just had to go find it on YouTube. It, together with the other commercials in the series, commemorate the Dodge brand's 100-year anniversary. "They believed in more than the assembly line . . . ." Indeed!
You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case. The essay provides significant background information about and commentary on the court's opinion. It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally. Great stuff.
On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case). In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit"). The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:
[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Thursday, December 11, 2014
In many companies, executives and employees alike will give a blank stare if you discuss “human rights.” They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?
The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act. The Principles operationalize a "protect, respect, and remedy" framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.
Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014. A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra's Huffington Post piece.
What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.
But what about the role of business? Here are five observations from my trip to Geneva:
1) It's not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).
2) It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle. (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.
3) Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.
4) Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.
5) Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.
On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.
In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links. I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.
December 11, 2014 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Thursday, December 4, 2014
I had planned to blog about the UN Forum on Business and Human Rights this week, but my head is overflowing with information about export credits, development financing, a possible international arbitration tribunal, remarks by the CEOs of Nestle and Unilever, and the polite rebuff to the remarks by the Ambassador of Qatar by a human rights activist in the plenary session. Next week, in between exam grading, I promise to blog about some of the new developments that will affect business lawyers and professors. FYI, I apparently was one of the top live tweeters of the Forum (#bizhumanrights #unforumwatch) and gained many valuable contacts and dozens of new followers.
In the meantime, I recommend reading this great piece from the Legal Skills Prof Blog. As I prepare to teach BA for the third time (which I hear is the charm), I plan to refine the techniques I already use and adopt others where appropriate. The link is below.
Thursday, November 27, 2014
As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.
As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.
I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.
In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.
Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.
I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.
November 27, 2014 in Ann Lipton, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Haskell Murray, International Business, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Monday, November 24, 2014
Happy Thanksgiving you all! With my co-blogger colleagues here on the BLPB writing various Thanksgiving posts on retail-related and other holiday-oriented business law issues (here and here), I find myself in a Thanksgiving-kind-of-mood. I honestly have so much to be thankful for, it's hard to know where to start . . . . But apropos of the business law focus of this blog, I am choosing today to be thankful for my students. They make my job really special.
This semester, I have been teaching Business Associations in a new three-credit-hour format (challenging and stressful, but I have wanted to teach Business Associations in this format for fifteen years) and Corporate Finance (which I teach as a planning and drafting seminar). I have 69 students in Business Associations and ten in Corporate Finance. I have two class meetings left in each course.
The 69 students in Business Associations have been among the most intellectually and doctrinally curious folks to which I have taught this material. I have talked to a lot of them after class about the law and its application in specific contexts. Two stayed after class the other day to discuss statutory interpretation rules with me in the context of some problems I gave them. This large group also includes a number of students who have great senses of humor, offering us some real fun on occasion in class meetings and on the class TWEN site. They are not always as prepared as I would like (and, in fact, some of the students have expressed to me their disappointment in their colleagues' lack of preparedness and participation), but they pick up after each other when one of them leaves a mess in his or her wake (volunteering to be "co-counsel" for a colleague--a concept I introduce in class early in the semester). I enjoy getting up on Monday mornings to teach them at 9:00 am.
Corporate Finance includes a more narrow self-selected group. Almost all of these students have or are actively seeking a job in transactional or advocacy-oriented business law. They handed in their principal planning and drafting projects a bit over a week ago, projects that they spend much of the semester working on. (These substantial written projects are described further in this transcribed presentation.) Now, each student is reviewing and commenting on a project drafted by a fellow student. Both the project and the review are constructed in a circumscribed format that I define. I am excited to read their work on these projects, given the great conversations I have had with a number of them over the course of the semester as they puzzled through financial covenants, indemnification provisions, antidilution adjustments, and the like. Great stuff. I teach this class from 1:00 pm to 2:15 pm two days a week--a time in the day when I generally am most sleepy/least enthusiastic to teach. But these folks ask good questions and seem to genuinely enjoy talking about corporate finance instruments and transactions, making the experience much more worthwhile.
So, I am very thankful for each and all of these 79 students. I may not feel that way after I finish all the grading I have to do, but for now, I am both grateful and content. And I didn't consume a single calorie getting there (which is more than I will be able to say Thursday night . . .). Just looking at the picture at the top of this post makes my stomach feel full and me feel heavier. Ugh.
Saturday, November 22, 2014
CALL FOR PAPERS
Fourth European Research Conference on Microfinance
1-3 June 2015
Geneva School of Economics and Management, University of Geneva
Access to suitable and affordable finance is a precondition for meeting basic human needs in incomes and employment, health, education, work, housing, energy, water and transport. Microfinance – and more broadly, financial inclusion – will continue to be on the research and policy agenda. 2015 will be a special occasion to question received notions about the link between access to finance and welfare. In 2015 the Millennium Development Goals will make place for the Sustainable Development Goals. A broad debate and exchange on micro, macro and policy topics in financial inclusion will advance our knowledge and ultimately improve institutional performance and policy. This applies in particular to issues of financial market organization, but also patterns, diversity and trade-offs in institutional performance, scope for fiscal instruments, impact of technology on efficiency and outreach etc.
The European Research Conference on Microfinance is a unique platform of exchange for academics involved in microfinance research. The three former conferences organized by the Centre for European Research in Microfinance (CERMI) at the Université Libre de Bruxelles in 2009, by the University of Groningen in the Netherlands in 2011 and the University of Agder in Norway in 2013 brought together several hundred researchers, as well as practitioners interested in applied research. The upcoming Fourth Conference is organized by the University of Geneva, in cooperation with the European Microfinance Platform (www.e-mfp.eu) and in association with the University of Zurich and the Graduate Institute of Geneva.
To provide cutting-edge insights into current research work on microfinance and financial inclusion and to enrich the conference agenda we invite papers on the following topics:
- Client-related issues: consumer behavior, client protection, financial education, household-enterprises and entrepreneurship
- Financial products: credit, insurance, deposits, domestic and cross-border payments
- Non-financial services
- Microfinance adjacencies: Millennium Development Goals
- Institutional issues: management, governance, legal form, transformation, growth, mission drift
- Market: monopolies, competition, alliances and cooperation, mergers and acquisitions, crowding-in and crowding-out issues
- Funding: subsidies (smart and other), investments (public and private) in microfinance institutions
- Policy and regulatory issues
- International governance
Papers will be selected for presentation at the conference by the Scientific Committee, based on criteria of academic quality.
Members of the Scientific Committee include, amongst others: Arvind Ashta (Burgundy School of Business), Bernd Balkenhol (U Geneva), Georges Gloukoviezoff (U Bordeaux and U College Dublin), Isabelle Guerin (IRD, Cessma), Begona Gutierrez-Nieto (U Zaragoza), Malcom Harper (Cranfield School of Management), Valentina Hartarska (U Auburn, USA), Marek Hudon and Ariane Szafarz (CERMI and Solvay School of Business Brussels), Susan Johnson (U Bath), Annette Krauss (U Zürich), Marc Labie (CERMI and University of Mons), Roy Mersland (U Agder), Christoph Pausch (European Microfinance Platform Luxembourg), Trond Randoy (U Agder), Daniel Rozas (European Microfinance Platform Luxembourg), Jean Michel Servet (Graduate Institute Geneva) and Adalbert Winkler (Frankfurt School of Finance and Management), Hans Dieter Seibel (U of Cologne).
Authors are invited to submit an abstract of their paper (not exceeding 2 pages) to email@example.com by December 20, 2014.
The full paper needs to be sent in by March 31, 2015.
Monday, November 17, 2014
Regular readers of this column know that I’m a strong supporter of a federal crowdfunding exemption, which would allow companies to sell securities online to ordinary investors without registration.
The SEC’s Foot-Dragging
The JOBS Act, passed in April 2012, included a crowdfunding exemption, but, 956 days later, the SEC still has not adopted rules to implement it. Last month, I complained about the SEC’s failure to adopt those rules. Now, I’m not so sure I want that to happen.
A Little Legislative History
Why have I changed my mind? First, a little legislative history. The House originally passed a crowdfunding bill, sponsored by Representative Patrick McHenry, that was much less regulatory than the final law. Unfortunately, the Senate amended the JOBS Act to substitute the version that was eventually enacted into law. That final version is much more regulatory than Congressman McHenry’s version, and is riddled with errors and ambiguities. The House accepted that Senate substitution, probably because fighting would have risked everything else in the JOBS Act.
As I wrote shortly after the JOBS Act passed, the exemption that came out of the Senate is flawed and unlikely to be effective. If so, it’s not the SEC’s fault. The SEC has limited discretion to fix the problems in the statute.
A Better Way
Things have changed since my last post on crowdfunding. No, the SEC still has not acted. Things have changed in other ways.
The Republicans now control both houses of Congress, and the Republican-controlled Congress will undoubtedly be friendlier to small business and more concerned about the regulatory costs involved in raising capital. The new Congress is dominated by people like Congressman McHenry.
It might be better at this point to start over, instead of waiting for the SEC to finish its exercise in regulatory futility. And, this time, Congress shouldn’t wait for SEC action. It should put the final exemption in the statute itself, with SEC input. The SEC certainly can’t argue that they need more time to study the issue.
President Obama might threaten a veto and argue that we should wait to see if the existing provisions work. But keep in mind that the Obama administration endorsed the original House bill. Was that original endorsement mere political grandstanding, or does President Obama really want to provide an effective exemption?
Congress is unlikely to override a presidential veto, so if that happens, we’ll probably have to wait for a new President to get a workable crowdfunding exemption.
Friday, November 14, 2014
In a 2012 article on securities crowdfunding, I warned about the U.S. securities law issues raised by foreign crowdfunding sites selling securities to U.S. investors. I pointed out that “some of those foreign sites also sell to U.S. investors, and some of the investments they sell would almost certainly qualify as securities under U.S. law.”
A recent SEC consent order involving Eureeca Capital shows that the SEC is well aware of the issue and willing to go after foreign sites that sell to U.S. investors.
According to the consent order, Eureeca, based in the Cayman Islands, operates a global crowdfunding platform that connects non-U.S. issuers with investors interested in buying equity securities. Eureeca had a disclaimer on its website that the securities were not being offered to U.S. residents, but it nevertheless allowed U.S. residents to invest in some of the offerings. Eureeca apparently knew these investors were Americans; they provided copies of their passports and proof of U.S. addresses before investing.
The consent order finds that these unregistered sales of securities violated section 5 of the Securities Act and also that Eureeca was acting as an unregistered broker, in violation of section 15 of the Exchange Act. Eureeca is required to pay a $25,000 fine (a fairly significant fine considering that the total amount sold to the U.S. investors, according to the order, was only $20,000).
Given the plethora of international crowdfunding platforms, I wouldn’t be surprised to see more actions like this in the future.
Monday, November 10, 2014
Received Saturday (edited slightly for publication here):
Please consider submitting your work to the Track "Crowdfunding: a democratic way for financing innovative projects" @ the RnD Management Conference 2015.
The RnD Management Conference 2015 will be held in June 23-26 at Sant’Anna School of Advanced Studies in Pisa.
You can find more information on the Conference Track and on the submission process at the following link: http://www.rnd2015.sssup.it/.
I warmly apologize for cross-posting.
Cristina Rossi Lamastra, PhD
Associate Professor at Politecnico di Milano School of Management
Phone: 0039 0223993972
Fax: 0039 0323992710
Thursday, November 6, 2014
I have previously blogged about Institutional Shareholder Services’ policy survey and noted that a number of business groups, including the Chamber of Commerce, had significant concerns. In case you haven’t read Steve Bainbridge’s posts on the matter, he’s not a fan either.
Calling the ISS consultation period “a decision in search of a process,” the Chamber released its comment letter to ISS last week, and it cited Bainbridge's comment letter liberally. Some quotable quotes from the Chamber include:
Under ISS’ revised policy, according to the Consultation, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.” Of course, there is no delineation of what these “other positive or negative aspects” may be, how they would be weighted, or how they would be applied. This leaves public companies as well as ISS’ clients at sea as to what prompted a determination that previously would have seen ISS oppose more of these proposals. This is a change that would, if enacted, fly in the face of explicit SEC Staff Guidance on the obligations to verify the accuracy and current nature of information utilized in formulating voting recommendations.
The proposed new policy—as yet undefined and undisclosed—is also lacking in any foundation of empirical support… Indeed, a number of studies confirm that there is no empirical support for or against the proposition ISS seems eager to adopt.
[Regarding equity plan scorecards] there is no clear indication on the part of ISS as to what weight it will assign to each category of assessment—cost of plan, plan features, and company grant practices… this approach benefits ISS (and in particular its’ consulting operations), but does nothing to advance either corporate or shareholder interests or benefits. The Consultation also makes clear that, for all ISS’ purported interest in creating a more “nuanced” approach, in fact the proposed policy fosters a one-size-fits-all system that fails to take into account the different unique needs of companies and their investors.
Proxy votes cast in reliance on proxy voting policies based upon this Consultation cannot—by definition—be reasonably designed to further shareholder values.
ISS had a number of other recommendations but they didn’t raise the ire of Bainbridge and the Chamber. For the record, Steve is angry about the independent chair shareholder proposals, but please read his well-documented posts and judge for yourself whether ISS missed the mark. The ISS’ 2015 US Proxy Voting Guidelines were released today. Personally, I plan to raise some of the Guidelines discussing fee-shifting bylaws and exclusive venue provisions in both my Civil Procedure and Business Associations classes.
Let’s see how the Guidelines affect the next proxy season—the recommendations from the two-week comment period go into effect in February.
November 6, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, November 4, 2014
Back in 2010, Art Durnev published a short paper, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices, available here. The article studies the interaction between national elections and corporate investment. Today is not a national election -- we get two more years before we have to choose our next president -- but it's still seems like an apt day to think about the role of elections on corporate activity.
The most interesting part of the article, to me anyway, is the test of the relationship between political uncertainty and firm performance. As the article explains,
If prices reflect future profitability of investment projects, investment-to-price sensitivity can be interpreted as a measure of the quality of capital allocation. This is because if capital is allocated efficiently, capital is withdrawn from sectors with poor prospects and invested in profitable sectors. Thus, if political uncertainty reduces investment efficiency, firm performance is likely to suffer. Consistent with this argument, we show that firms that experience a drop in investment-to-price sensitivity during election years perform worse over the two years following elections.
The conclusion: this signifies that political uncertainty significantly impacts real economic outcomes. Therefore, "political uncertainty can deteriorate company performance because of inferior capital allocation."
So, it's election day. Please vote, regardless of your views. Voting is a right, a privilege, and duty. And if you're in charge of a firm's investment decisions, consider this study. As we approach the next national election, you might want to be wary of dropping your investment-to-price sensitivity leading up to the next election. If you do, odds are your firm will do worse in the two years following the election.
And, while we're talking presidential politics, here's another study worth considering: Effects of Election Results on Stock Price Performance: Evidence from 1980 to 2008. Here's the abstract (and, please, go vote!):
We analyze whether the results of the 1980 to 2008 U.S. presidential elections influence the stock market performance of eight industries and we examine factors that are expected to affect firms’ stock returns around these elections. Our empirical analysis reflects firms’ exposure to government policies in two ways. First, to determine whether investors presume any Democratic or Republican favoritism towards or biases against certain industries we perform an event study for each of the eight industries around the eight elections. Second, we include the firms’ marginal tax rate as proxy for the firms’ exposure to uncertainty about fiscal policy in a regression analysis. We do not find a consistent pattern in industry returns when comparing the effect of Democratic versus Republican victories. However, the extent of the reaction differs among industries. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republican victories. Furthermore, a change in presidency from either a Democratic to a Republican candidate or from a Republican to a Democratic candidate causes stronger stock market effects than re-election or the election of a president from the same party. We also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. The results are relevant for academics, investors and policy makers alike because they provide insight on the question whether stock market participants respond to expected changes in policy making as a result of presidential elections.
Thursday, October 30, 2014
This paper investigates the voting patterns of shareholders on the recently enacted “Say-On-Pay” (SOP) for publicly traded corporations, and the efficacy of vote outcomes on rationalizing executive compensation. We find that small shareholders are more likely than large shareholders to use the non-binding SOP vote to govern their companies: small shareholders are more likely to vote for a more frequent annual SOP vote, and more likely to vote “against” SOP (i.e., to disapprove executive compensation). Further, we find that low support for management in the SOP vote is more likely to be followed by a decrease in excess compensation, and by a more reasonable selection of peer companies for determining compensation, when ownership is more concentrated. Hence, the non-binding SOP vote offers a convenient mechanism for small shareholders to voice their opinions, yet, larger shareholders must be present to compel the Board to take action. Thus, diffuse shareholders are able to coordinate on the SOP vote to employ the threat that large shareholders represent to management.
Friday, October 24, 2014
Ello is a Delaware public benefit corporation. The social enterprise terminology is proving difficult, even for sophisticated authors at the New York Times Dealbook. The article calls Patagonia and Ben & Jerry’s public benefit corporations. Patagonia, however, is a California benefit corporation. I wrote about the differences between public benefit corporations and benefit corporations here. Ben & Jerry’s is a certified B corporation, but, as far as I know, Ben & Jerry’s has not yet made the legal change to convert to any of the social enterprise forms. I wrote about the differences between benefit corporations and certified B corporations here and here. Just as my co-blogger Joshua Fershee remains vigilant at pointing out the differences between LLCs and corporations, so I will remain vigilant on the social enterprise distinctions.
Besides my nitpicking on the use of social enterprise terminology, there are a few other things I want to say about this article.
First, Ello raised $5.5 million dollars, which is not that much money in the financial world, but puts Ello in pretty rare company in the U.S. social enterprise world. The vast majority of U.S. social enterprises are owned by a single individual or family; some social enterprises have raised outside capital, but not many. The increasing presence of outside investors in social enterprise means two main things to me: (1) the social enterprise concept is starting to gain some traction with previously skeptical investors, and (2) we may see a shareholder derivative lawsuit in the near future, which would give us all more to write about.
Second, Ello included a clause in its charter that “forbids the company from using ads or selling user data to make money.” This provision seems a direct response to the eBay v. Newmark case. The business judgment rule provides significant protection to directors and, at least theoretically, should calm many of the fears of social entrepreneurs. But risk adverse individuals may seek additional layers of protection.
Third, Ello claims that their charter provision “basically means no investor can force us to take a really good financial deal if it forces us to take advertising.” This seems overstated. Charters can be amended, but at least the charter puts outside investors on notice. This provision in the charter does not, however, protect against a change of heart by the founders and a selling of the company (such as in the case of Ben & Jerry’s sale to Unilever).
Fourth, this October 4, 2014 article claims that Ello is pre-revenue. The NYT Dealbook article notes that “[u]sers will eventually be able to download widgets and modifications, paying a few dollars for each purchase.” (emphasis added). Ello seems to be one of the growing number of technology companies that are being valued by number of users rather than by revenues or profits. Ello “grew from an initial 90 users on Aug. 7 to over a million now, with a waiting list of about 3 million.”
Fifth, even if traditional investors are (somewhat) warming up to social enterprises, social entrepreneurs still seem to be a bit skeptical of traditional investors. When raising money, Ello "drew the attention of the usual giants in the venture capital world. . . . But Mr. Budnitz said he instead turned to investors whom he could trust to back the start-up’s mission, including the Foundry Group, whom he came to know when he lived in the firm’s hometown, Boulder, Colo.” There are increasing sources of capital for social enterprises from investors who also have a stated social goal (See, e.g., JP Morgan’s May 2014 survey of impact investors).
Some in the academic world have wondered if social enterprise is just a fad. While I am confident that the space will and must continue to evolve, if it is a fad, it has already been a long-running one. The names and details of the statutes may change, but I see a growing interest in marrying profit and social purpose, and I think that interest is likely to continue in some form.
Cross-posted at SocEntLaw.
Monday, October 20, 2014
I typically teach Corporate Finance as a planning and drafting course to 3L law students in the fall semester each academic year. (See my part of this transcription for some details.) This year is no different in that regard. I really like my Corporate Finance class this fall. The students all seem pretty motivated (although not in every class meeting) and are asking relevant "how to" questions in class.
I am in the midst of teaching my unit on convertible, exchangeable, and derivative instruments at the moment. This semester, I am teaching that unit in three 75-minute parts (after teaching one 75-minute class on hybrid instruments). The first part is an introduction to the instruments themselves. What are they and how do they operate? Where are the provisions authorizing them in state corporate law statutes? What do they look like and what are the key components of the operative (conversion, exchange, or exercise) provisions? The second part is a dive into the poison pill as an intriguing example. The third part is a look at common litigation issues affecting parties' rights under these kinds of instruments (focusing on things like the characterization of transactions not expressly provided for in determining the applicability and effect of antidilution adjustment provisions and interactions between conversion and redemption provisions).
I really enjoy teaching this part of the course, but I keep feeling like I am missing something. Do any of you teach planning and drafting in a corporate finance context? Do you focus on these instruments? If so, what topics do you teach and hone in on? I am writing a casebook for use in this kind of course and would love to make it relevant to as many folks as possible. Please respond in the comments here or in an email message. I would appreciate your feedback and guidance.
While you are at it (or even if you're not), I also would be grateful if folks would weigh in on whether hybrid instruments should be taught separately from or together with convertibles, exchangeables, and derivatives. Do you/would you teach convertibles, exchangeables, and derivatives as a type of hybrid instrument? Or would you call an instrument "hybrid" only if it, e.g., combines core elements of debt and equity at the same time? I look forward to reading what you have to say on any of this.
Wednesday, October 8, 2014
Call for Papers
ITEM 6 – Lyon
Microfinance: Coaching, Counting, and Crowding
The Banque Populaire Chair in Microfinance of the Burgundy School of Business (France) organizes the 6th edition of the annual conference “Institutional and Technological Environments of Microfinance” (ITEM) in March 2015 (17, 18, 19) in Lyon, France. This conference was initially programmed in Tunis, Tunisia within the campus of l’École supérieure du commerce de Tunis.
The 6th edition brings together--but is not limited to--three major issues that are shaping the sector of microfinance: Coaching, Counting, and Crowding.
Coaching in microfinance provides training in business and soft skills (attributes enhancing an individual's interactions and self-performance) that the poor micro-entrepreneurs rarely have. Increasingly, microfinance academics and practitioners consider building the human capital of micro-entrepreneurs as a critical ingredient of moving out of poverty.
Counting and tracking the microfinance clients and prospects with information technologies not only lessen information asymmetry, but also lower the transaction cost of financial intermediation. Corollary: information technologies can open ways for offering financial services to the poor as a normal way of doing and extending normal business and accelerate their social integration.
Crowding, based on Web 2.0 technologies, enables direct interactions between millions of lending and borrowing people. Through crowdfunding, micro and small entrepreneurs can raise the crucial funds required for their projects by a large number of individuals via social networks on the Internet. It provides an unprecedented opportunity for alleviating poverty in both developed and developing countries.
In addition to the above topics, other microfinance-related topics (such as impact measures, social governance, innovation, and sustainable development) are welcomed.
The ITEM conference provides a forum for both researchers and practitioners to discuss and exchange on financial inclusion. The conference in March 2015 seeks quantitative, qualitative, and experience-based papers from industry and academia. Case studies and Ph.D. research-in-progress are also welcomed. It encourages reflections on the potential and use of technology in microfinance in developed and developing countries.
Papers presented at the conference will also be considered for publication in partnering journals.
Proposals: All contribution types require a proposal in the first instance, including: a short abstract between 300 and 500 words; up to five keywords; the full names (first name and surname, not initials) and email addresses of all authors; and a postal address and telephone number for at least one contact author.
Submission period for the proposals: Up to November 10, 2014.
Acceptance of proposals: By November 30, 2014. As abstract selection notifications will be sent out to relevant authors, please indicate clearly if the contact author is not the lead author.
Full paper: Only required after acceptance of abstract. Papers should not to be more than 5000 words including abstract, keywords and references.
Submission period for the full papers: Up to February 16, 2015.
- Djamchid ASSADI: Djamchid.Assadi@escdijon.eu
- Maaouia BEN NASR: Maouia.Ben-Nasr@escdijon.eu
Web site: http://item6.weebly.com
Fees: Author registration and payment must be completed by February 27, 2015.
There are special discounts available for early-bird registration, students and group bookings (3 registrations). Details will be available on the ITEM 6 website.
Alibaba dominated the September business press coverage with its record-breaking IPO last month, and news of its stock price, trading at a 30% premium, continues to dominate coverage. I have been using the headline-hogging IPO in my corporations class to discuss raising capital, which I am sure many of you are doing as well. Here are a few creative uses for the class-friendly headlines:
- I used coverage of the IPO and its short-lived halo effect on other tech IPO's as a companion to the E-bay stock spinning case (taught under director fiduciary duties).
As we move into securities next week,
- Students will examine Alibaba's registration statement as we look at section 11 liability.
- Students will review portions of a 2012 10b(5) lawsuit against Yahoo alleging that Yahoo! made materially false and misleading statements regarding its holdings in Alibaba.
Please add to the list of uses in the comments section if you have any new ideas or suggestions.
Thursday, October 2, 2014
For the second time, I have assigned my BA students to write their own shareholder proposals so that they can better understand the mechanics and the substance behind Rule 14-a8. As samples, I provided a link to over 500 proposals for the 2014 proxy season. We also went through the Apple Proxy Statement as a way to review corporate governance, the roles of the committees, and some other concepts we had discussed. As I reviewed the proposals this morning, I noticed that the student proposals varied widely with most relating to human rights, genetically modified food, environmental protection, online privacy, and other social factors. A few related to cumulative voting, split of the chair and CEO, poison pills, political spending, pay ratio, equity plans, and other executive compensation factors.
After they take their midterm next week, I will show them how well these proposals tend to do in the real world. Environmental, social, and governance factors (political spending and lobbying are included) constituted almost 42% of proposals, up from 36% in 2013, according to Equilar. Of note, 45% of proposals calling for a declassified board passed, with an average of 89% support, while only two proposals for the separation of chair and CEO passed. Astonishingly, Proxy Monitor, which looked at the 250 largest publicly-traded American companies, reports that just three people and their family members filed one third of all proposals. Only 4% of shareholder proposals were supported by a majority of voting shareholders. Only one of the 136 proposals related to social policy concerns in the Proxy Monitor data set passed, and that was an animal welfare proposal that the company actually supported.
I plan to use two of the student proposals verbatim on the final exam to test their ability to assess whether a company would be successful in an SEC No-Action letter process. Many of the students thought the exercise was helpful, although one of the students who was most meticulous with the assignment is now even more adamant that she does not want to do transactional law. Too bad, because she would make a great corporate lawyer. I have 7 weeks to convince her to change her mind.
October 2, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Thursday, September 25, 2014
Professor Dionysia Katelouzou of Kings College, London has written an interesting empirical article on hedge fund activisim. The abstract is below:
In recent years, activist hedge funds have spread from the United States to other countries in Europe and Asia, but not as a duplicate of the American practice. Rather, there is a considerable diversity in the incidence and the nature of activist hedge fund campaigns around the world. What remains unclear, however, is what dictates how commonplace and multifaceted hedge fund activism will be in a particular country.
The Article addresses this issue by pioneering a new approach to understanding the underpinnings and the role of hedge fund activism, in which an activist hedge fund first selects a target company that presents high-value opportunities for engagement (entry stage), accumulates a nontrivial stake (trading stage), then determines and employs its activist strategy (disciplining stage), and finally exits (exit stage). The Article then identifies legal parameters for each activist stage and empirically examines why the incidence, objectives and strategies of activist hedge fund campaigns differ across countries. The analysis is based on 432 activist hedge fund campaigns during the period of 2000-2010 across 25 countries.
The findings suggest that the extent to which legal parameters matter depends on the stage that hedge fund activism has reached. Mandatory disclosure and rights bestowed on shareholders by corporate law are found to dictate how commonplace hedge fund activism will be in a particular country (entry stage). Moreover, the examination of the activist ownership stakes reveals that ownership disclosure rules have important ramifications for the trading stage of an activist campaign. At the disciplining stage, however, there is little support that the activist objectives and the employed strategies are a reflection of the shareholder protection regime of the country in which the target company is located.
September 25, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, M&A, Marcia Narine, Securities Regulation | Permalink | Comments (0)