Wednesday, August 17, 2016
If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.
What Is Appraisal Arbitrage?
Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.
In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.
The Issue Is the “Fungible Bulk” of Modern Trading Practices
In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.
August 17, 2016 in Anne Tucker, Business Associations, Case Law, Corporate Finance, Corporate Governance, Corporations, Delaware, Financial Markets, Private Equity, Shareholders | Permalink | Comments (0)
Thursday, July 21, 2016
Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;
■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.
I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.
Thursday, July 14, 2016
Two weeks ago, I blogged about the potential unintended consequences of (1) Dodd-Frank whistleblower awards to compliance officers and in-house counsel and (2) the Department of Justice’s Yates Memo, which requires companies to turn over individuals (even before they have determined they are legally culpable) in order to get any cooperation credit from the government.
Today at the International Legal Ethics Conference, I spoke about the intersection of state ethics laws, common law fiduciary duties, SOX §307 and §806, and the potential erosion of the attorney-client relationship. I posed the following questions regarding lawyer/whistleblowers and the Yates Memo at the end of my talk:
- How will this affect Upjohn warnings? (These are the corporate Miranda warnings and were hard enough for me to administer without me having to tell the employee that I might have to turn them over to the government after our conversation)
- Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ?
- Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ?
- Will companies turn people over to the government before proper investigations are completed just to save the company?
- Will executives cooperate in an investigation? Why should they?
- What’s the intersection with the Responsible Corporate Officer Doctrine (which Stephen Bainbridge has already criticized as "running amok")?
- Will there be more claims/denials for D & O coverage?
- Will individuals who cooperate get cooperation credit in their own cases?
- Will employees turn on their superiors without proper investigation?
- How will individuals/companies deal with parallel civil/criminal enforcement proceedings?
- What about indemnification clauses in employment contracts?
- Will there be more trials because there is little incentive for a corporation to plead guilty?
- What about data privacy restrictions for multinationals who operate in EU?
- How will this affect voluntary disclosure under the US Federal Sentencing Guidelines for Organizational Defendants, especially in Foreign Corrupt Practices Act cases?
- What ‘s the impact on joint defense agreements?
- As a lawyer for lawyers who want to be whistleblowers, can you ever advise them to take the chance of losing their license?
I didn’t have time to talk about the added complication of potential director liability under Caremark and its progeny. During my compliance officer days, I used Caremark’s name in vain to get more staff, budget, and board access so that I could train them on the basics on the US Federal Sentencing Guidelines for Organizations. I explained to the Board that this line of cases required them to have some level of oversight over an effective compliance program. Among other things, Caremark required a program with “timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning the [company’s] compliance with law and its business performance.”
I, like other compliance officers, often reviewed/re-tooled our compliance program after another company had negotiated a deferred or nonprosecution agreement with the government. These DPAs had an appendix with everything that the offending company had to do to avoid prosecution. Rarely, if ever, did the DPA mention an individual wrongdoer, and that’s been the main criticism and likely the genesis of the Yates Memo.
Boards will now likely have to take more of a proactive leadership role in demanding investigations at an early stage rather than relying on the GC or compliance officer to inform them of what has already occurred. Boards may need to hire their own counsel to advise on them on this and/or require the general counsel to have outside counsel conduct internal investigations at the outset. This leads to other interesting questions. For example, what happens if executives retain their own counsel and refuse to participate in an investigation that the Board requests? Should the Board designate a special committee (similar to an SLC in the shareholder derivative context) to make sure that there is no taint in the investigation or recommendations? At what point will the investigation become a reportable event for a public company? Will individual board members themselves lawyer up?
I will definitely have a lot to write about this Fall. If you have any thoughts leave them below or email me at email@example.com.
Thursday, July 7, 2016
SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”
Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:
- whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
- whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
- whether, and if so how, we could revise our requirements to enhance the protection of investors;
- whether our current requirements appropriately balance the costs of disclosure with the benefits;
- whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
- whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
- any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.
As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:
[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:
- Investment beliefs and investment policy development
- Manager selection and monitoring
- Portfolio-wide exposure to material ESG risks
- Education and analysis on macro and micro issues
- Proxy voting and engagement
This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.
SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.
Monday, July 4, 2016
Anne Tucker (who, together with Haskell Murray, me, and many others, attended the 8th Annual Berle Symposium in Seattle a week ago) penned an excellent post last week on the importance of shareholder value under Delaware law. Her post covers important outtakes from the symposium presentation given by former Delaware Chancellor William (Bill) Chandler and Elizabeth Hecker, both lawyers in the Wilmington, Delaware office of Wilson Sonsini Goodrich & Rosati. In the post, Anne accurately and succinctly summarizes a key take-away from the former Chancellor's remarks:
[A] Delaware court will invalidate a board of directors' other serving actions only if they are in conflict with shareholder value, but never when it is complimentary. And there is a expanding appreciation of when "other interests" are seen as complimentary to, and not in competition with, shareholder value maximization.
Specifically, as Anne's summary indicates, Chancellor Chandler stated his view that a Delaware corporate board must place shareholder financial wealth (whether in the short term or the long term) ahead of any other value in its decision making. This is hardly a surprise to anyone who follows Delaware corporate law judicial opinions (although the former Chancellor's statement of the law was among the clearest and most definite I have heard). After all, Chancellor Chandler's opinion in the eBay case is widely cited for this proposition.
The Berle symposium focused on benefit corporations this year, and my draft paper for the symposium highlights the central importance of a corporation's charter-based corporate purpose in that type of firm. So, I asked the former Chancellor for his personal view on how a Delaware court might handle a specific type of corporate purpose clause in a non-benefit-corporation Delaware corporate law context. The specific corporate purpose clause I had in mind is one that expresses a clear "second bottom line" (other than the promotion of shareholder value) and clearly indicates that neither bottom line is to be given constant or presumed precedence over the other in decisions made by the board of directors or the corporate officers.
Friday, July 1, 2016
This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.
Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:
…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing, as a former in house counsel and compliance officer, I believe that those with a fiduciary duty should be excluded and have an “up before out” requirement to inform the general counsel, compliance officer or board of the substantive allegation or any inadequacy in the compliance program before reporting externally.
Thankfully, the final rule does have some limitations, in part, I believe because of my testimony and the urgings of the Association of Corporate Counsel, the American Bar Association and others. In a section of the SEC press release on the program discussing unintended consequences released a few weeks after the testimony, the agency stated:
However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:
- The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
- The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
- At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.
At least two compliance officers or internal audit personnel have in fact received awards—one for $300,000 and another for $1,500,000. When I served on a panel a couple of years ago with Sean McKessy, Chief of the Office of the Whistleblower, he made it clear that he expected lawyers, auditors, and compliance officers to step forward and would not hesitate to award them.
Compliance officers have even more incentive to be diligent (or become whistleblowers) because of the DOJ Yates Memo, which requires companies to serve up a high ranking employee in order for the company to get cooperation credit in a criminal investigation. I blogged about my concerns about the Memo’s effect on the attorney-client relationship here, stating:
The Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?
The US Chamber of Commerce shares my concerns and issued a report last month that echoes the thoughts of a number of defense attorneys I know. I will be discussing these themes and the Dodd-Frank Whistleblower aspect at the International Legal Ethics Conference on July 14th at Fordham described below:
Current Trends in Prosecutorial Ethics and Regulation
Ellen Yaroshefsky, Cardozo School of Law (US) (Moderator); Tamara Lave, University of Miami Law School (US); Marcia Narine, St. Thomas University School of Law (US);Lawrence Hellman, Oklahoma City University School of Law (US); Lissa Griffin, Pace University Law School (US); Kellie Toole, Adelaide Law School (Australia); and Eric Fish,Yale Law School (US)
Nationally and internationally, prosecutors' offices face new, as well as ongoing, challenges and their exercise of discretion significantly affects individuals and entities. This panel will explore a wide range of issues confronting the modern prosecutor. This will include certain ethical obligations in handling cases, organizational responsibility for wrongful convictions, the impact of the exercise of prosecutorial discretion in whistleblower cases, and the cultural shifts in prosecutors' offices.
To be clear, I believe that more corporate employees must go to jail to punish if not deter abuses. But I think that these mechanisms are the wrong way to accomplish that goal and may have a chilling effect on the internal investigations that are vital to rooting out wrongdoing. If you have any thoughts about these topics, please leave them below or email me at firstname.lastname@example.org. My talk and eventual paper will also address the relationship between Sarbanes-Oxley, the state ethical rules, and the Catch-22 that in house counsel face because of the conflicting rules and the realities of modern day corporate life.
July 1, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Wednesday, June 29, 2016
Former Delaware Chancellor William (Bill) Chandler and Elizabeth Hecker, a fellow lawyer at Wilson Sonsini Goodrich & Rosati presented on benefit corporations and Delaware law at the Berle VIII conference. I cannot fully communicate how exciting it was to hear a distillation of Delaware law generally and several opinions specifically from a judge involved in the cases. In short: it was thrilling.
Former Chancellor Chandler discussed the Delaware case law interpretation of shareholder value and its place in analyzing corporate transactions. While these aren't words that he used, I have been thinking a lot about this tension as a question of complimenting or competing. The simple message was that the "inc." behind corporate names means something. But the question, is what does that mean? It signals, among other things, that a Delaware court will invalidate a board of directors' other serving actions only if they are in conflict with shareholder value, but never when it is complimentary. And there is a expanding appreciation of when "other interests" are seen as complimentary to, and not in competition with, shareholder value maximization.
Former Chancellor Chandler reminded us that shareholder value can include long term interests as the Delaware Chancery Court concluded in February 2011 in the Airgas case where Delaware upheld a board's defensive actions taken, in part, on the belief that the offer didn't include the full long-term value. The Airgas opinion is available here. The original $5.9B bid for Airgas, which the BOD said, despite an informed shareholder vote in its favor, didn't capture the full value of the company. The market validated Airgas' board's position and the Delaware court's adoption of that view. Airgas completed its merger with Air Liquide in May, 2016 for $10.3B.
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
Monday, June 27, 2016
I am still at Berle VIII with Haskell Murray and Anne Tucker. One more day of my June Scholarship and Teaching Tour to go--and I have a final presentation to do. Then, back to Knoxville to stay until late in July. Whew!
As you may recall or know, my Berle appearance this week follows closely on the heels of a talk on the same work (on corporate purpose and litigation risk in publicly held U.S. benefit corporations) that I made at last week's 2016 National Business Law Scholars conference. While I am thinking about this conference, please join me in saving the date for the next one: the 2017 National Business Law Scholars conference. Next year's conference will be held June 8-9 at The University of Utah S. J. Quinney College of Law, with Jeff Schwartz hosting. I will post more information and the call for papers, etc. once I have it.
June 27, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Haskell Murray, Joan Heminway, Research/Scholarhip, Teaching | Permalink | Comments (0)
Friday, June 24, 2016
Recently, I came across this discussion on Poverty Inc. by Bill Easterly (NYU Economics) and the film's creators (Michael Matheson Miller and Mark Weber). I posted on one of Bill Easterly's books here.
In the discussion at NYU, I especially liked this quote from Michael Matheson Miller: "We tend to treat poor people as objects--as objects of our charity, objects of our pity, objects of our compassion.--instead of subjects...Poor people are not objects; they are subjects and they should be the protagonists in their own stories of development." The personal story Mark Weber tells of his trip while he was studying at Notre Dame was moving, but you will have to watch the discussion to hear it, as it would be tough to summarize. Some of the audience questions are a bit long-winded, but I think the panel does a nice job deciphering and answering.
The film's trailer, the discussion, and the Q&A with the audience are all worth watching.
Thursday, June 23, 2016
The Cuba Conundrum: Corporate Governance and Compliance Challenges for U.S. Publicly-Traded Companies
My latest article on Cuba and the US is out. Here I explore corporate governance and compliance issues for US companies. In May, I made my third trip to Cuba in a year to do further research on rule of law and investor concerns for my current work in progress.
In the meantime, please feel free to email me your comments or thoughts at email@example.com on my latest piece
The abstract is below:
The list of companies exploring business opportunities in Cuba reads like a who’s who of household names- Starwood Hotels, Netflix, Jet Blue, Carnival, Google, and AirBnB are either conducting business or have publicly announced plans to do so now that the Obama administration has normalized relations with Cuba. The 1962 embargo and the 1996 Helm-Burton Act remain in place, but companies are preparing for or have already been taking advantage of the new legal exemptions that ban business with Cuba. Many firms, however, may not be focusing on the corporate governance and compliance challenges of doing business in Cuba. This Essay will briefly discuss the pitfalls related to doing business with state-owned enterprises like those in Cuba; the particular complexity of doing business in Cuba; and the challenges of complying with US anti-bribery and whistleblower laws in the totalitarian country. I will also raise the possibility that Cuba will return to a state of corporatism and the potential impact that could have on compliance and governance programs. I conclude that board members have a fiduciary duty to ensure that their companies comply with existing US law despite these challenges and recommend a code of conduct that can be used for Cuba or any emerging markets which may pose similar difficulties.
June 23, 2016 in Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, Law Reviews, Marcia Narine, Research/Scholarhip | Permalink | Comments (0)
Wednesday, June 22, 2016
Today is the rare day where I feel like a professor. Dressed in jeans and drinking coffee in my office, I have been reading Colin Mayer's book Firm Commitment in advance of the Berle VIII Symposium in Seattle next week (you can also see Haskell's post & Joan's post about Berle). That's not a typo, my agenda for the day is reading. And not for a paper or to prep for class, I am just reading a book--cover to cover. I can hardly contain my joy at this.
I have been struck by the elegantly simple idea that corporations' true benefit is to advance (and therefore) balance commitment and control. I have long viewed the corporate binary as between accountability and control. Under my framework the two are necessary to balance and contribute to the checks and balances within the corporate power puzzle of making the managers, who control the corporation, accountable to the shareholders. Colin Mayer posits that the one directional accountability of the corporation to shareholders without reciprocity of commitment from the shareholders to the corporation is a corrosive element in corporate design.
"The most significant source of failure is the therefore that we have created a system of shareholder value driven companies who detrimental effects regulation is supposed to but fails to correct, and in response we week greater regulation as the only instrument that we believe can address the problem. We are therefore entering a cycle of the pursuit of ever-narrower shareholder interests moderated by steadily more intrusive but ineffective regulation."
In developing the notions of commitment and control, I have found the following passages particularly thought-provoking:
"The financial structure of the corporation is of critical importance...The commitment of owners derives from the capital that is employed in the corporation. What is held within it is fundamentally different from what remains outside as the private property of its owners. What is distributed to owners as dividends is no longer available as protection against adverse financial conditions and what is provided in the form of debt from banks and bondholders as against equity form shareholders is secure only as long as the corporation has the means with which to service it."
"While incentives and control are centre stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy and regulation are their basic toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana. Of course, economics recognizes the problems of time inconsistency in us doing today what yesterday we promised we would not conceive of doing today; of reputations in us continuing to do today what we promised to do yesterday for fear of not being able to do it tomorrow, and of capital and collateral in making it expensive for us to deviate from what we said yesterday we would do today and tomorrow. But these are anomalies. Economics does not recognize the fundamental role of commitment in all aspects of our commercial as well as our social lives and the way in which institutions contribute to the creation and preservation of commitment. It does not appreciate the full manner in which choice, competition and liquidity undermine commitment or the fact that institutions are not simply mechanisms for reducing costs of transaction, but on the contrary means to establish and enhance commitment at the expense of choice, competition, and liquidity. Commitment is the subject of soft sentimental sociologists, not of realistic rational economists. The sociologists' are the words of Shakespeare's 'Love all, trust few. Do wrong to none', the economists' those of Lenin: 'Trust is good, control is better.'"
Monday, June 20, 2016
Having helped a few Tennessee bar applicants get straight on their knowledge of agency, unincorporated business associations, and personal property law last Friday at my BARBRI lecture (such a nice group present at the taping to keep me company!), it's now time for me to wrap up my June Scholarship and Teaching Tour with a twofer--a week of travel to two of my favorite U.S. cities: Chicago, for the National Business Law Scholars Conference and Seattle for Berle VIII. At both events, I will present my draft paper (still in process today, unfortunately) on publicly held benefit corporations, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations. Here's the bird's-eye view from the introduction:
Benefit corporations—corporations organized for the express purpose of realizing both financial wealth for shareholders and articulated social or environmental benefits—have taken the United States by storm. With Maryland passing the first benefit corporation statute in 2010, legislative growth of the form has been rapid. Currently, 31 states have passed benefit corporation statutes.
The proliferation of benefit corporation statutes and B Corp certifications can largely be attributed to the active promotional work of B Lab Company, a nonprofit corporation organized in 2006 under Pennsylvania law that supports social enterprise (“B Lab”). B Lab works with individuals and interest groups to generate attention to social enterprise generally and awareness of and support for the benefit corporation form and B Corp certification (a social enterprise seal of approval, of sorts) specifically. B Lab also supplies model benefit corporation legislation, social enterprise standards that may meet the requirements of benefit corporation statutes in various states, and other services to social enterprises.
Benefit corporation statutes have not, by and large, been the entity law Field of Dreams. Despite the legislative popularity of the benefit corporation form, there have not been as many benefit corporation incorporations as one might expect. In the first four years of benefit corporation authority, for example, Maryland reported the existence of fewer than 40 benefit corporations in total. Tennessee’s benefit corporation statute came into effect in January 2016, and as of May 2, 2016, Secretary of State filings evidence the organization of 26 for-profit benefit corporations. However, a review of these filings suggests that well more than half were erroneously organized as benefit corporations. Colorado, another recent adopter of the benefit corporation, does appear to have a large number of filings (90 in total as of June 12, 2016 based on the list of Colorado benefit corporations on the B Lab website). However, as with Tennessee, a number of these listed corporations appear to be erroneously classified. These anecdotal offerings indicate that published lists of benefit corporations—even those constructed from state filings—over-count the number of benefit corporations significantly.
Research for this article identified no publicly held U.S. benefit corporations. For these purposes (and as referenced throughout this article), the term “publicly held” in reference to a corporation is defined to mean a corporation (a) with a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (“1934 Act”), or (b) otherwise required to file periodic reports with the Securities and Exchange Commission under Section 13 of the 1934 Act. Yet, benefit corporations may be subsidiaries of publicly held corporations (as Ben & Jerry's Homemade Inc., New Chapter Inc., and Plum, PBC have demonstrated), and corporations certified as B Corps have begun to enter the ranks of publicly held corporations (perhaps Etsy, Inc. being the most well known to date). It likely is only a matter of time before we will see the advent of publicly held U.S. benefit corporations.
With the likely prospect of publicly held U.S. benefit corporations in mind, this article engages in a thought experiment. Specifically, this article views the publicly held U.S. benefit corporation from the perspective of litigation risk. It first situates, in Part I, the U.S. benefit corporation in its structural and governance context as an incorporated business association. Corporate purpose and the attendant managerial authority and fiduciary duties are the key points of reference. Then, in Part II, the article seeks to identify the unique litigation risks associated with publicly held corporations with the structural and governance attributes of a benefit corporation. These include both state and federal causes of action. The reflections in Part III draw conclusions from the synthesis of the observations made in Parts I and II. The closing thoughts in Part III are intended to be of use to policy makers, academic observers, and advisers of corporations, among others.
As Haskell mentioned in an earlier post, he and Anne and I will be together at the Berle VIII event. What a great way to end my June tour--with my friends and colleagues from the Business Law Prof Blog! I look forward to it.
Friday, June 17, 2016
On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.
As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.
I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care more about ethical sourcing than they report in surveys. Further, there are conflicting views on the efficacy of Dodd-Frank in particular. Some, like me, argue that it has little effect on the Congolese people it was designed to help. Others such as the law’s main proponent Enough, assert that the law has had a measurable impact.
The EU's position on conflict minerals is a compromise and many NGOs such as Amnesty International, an organization I greatly respect, are not satisfied. Like its US counterpart, the EU rule requires reporting on tin, tantalum, tungsten, and gold, which are used in everything from laptops, cameras, jewelry, light bulbs and component parts. Unlike Dodd-Frank, the rule only applies to large importers, smelters, and refiners but it does apply to a wider zone than the Democratic Republic of Congo and the adjoining countries. The EU rule applies to all “conflict zones” around the world.
Regular readers of my blog posts know that I teach and research on business and human rights, and I have focused on corporate accountability measures. I have spent time in both Democratic Republic of Congo and Guatemala looking at the effect of extractive industries on local communities through the lens of an academic and as a former supply chain executive for a Fortune 500 company. I continue to oppose these disclosure rules because they take governments off the hook for drafting tough, substantive legislation. Nonetheless, I look forward to seeing what lessons if any that the EU has learned from the US when the member states finally implement and enforce the new rule. In coming weeks I will blog on recent Form SD disclosures and the progress of the drafting of the final EU rule.
June 17, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Law, Legislation, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Thursday, June 16, 2016
8th Annual Berle Symposium - Benefit Corporations and the Firm Commitment Universe - June 27-28, 2016 - Seattle, WA
Three Business Law Prof Blog editors (myself included) are presenting at the upcoming Berle Symposium on June 27-28 in Seattle.
Colin Mayer (Oxford) is the keynote speaker, and I look forward to hearing him present again. I blogged on his book Firm Commitment after I heard him speak at Vanderbilt a few of years ago. The presenters also include former Chancellor Bill Chandler of the Delaware Court of Chancery. Given that Chancellor Chandler's eBay v. Newmark decision is heavily cited in the benefit corporation debates, it will be quite valuable to have him among the contributors. The author of the Model Benefit Corporation Legislation, Bill Clark, will also be presenting; I have been at a number of conferences with Bill Clark and always appreciate his thoughts from the front lines. Finally, the list is packed with professors I know and admire, or have read their work and am looking forward to meeting.
More information about the conference is available here.
June 16, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Governance, Corporations, CSR, Delaware, Financial Markets, Haskell Murray, Joan Heminway, Law School, Social Enterprise | Permalink | Comments (0)
Tuesday, June 14, 2016
The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience. The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.
Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1 The post that follows suggests how to consider Trump's business history and place that history in a political context.
Wednesday, June 8, 2016
If you've been slamming away on a writing deadline then perhaps you've missed the opportunity (like me) to dive into the recent Chancery Court of Delaware Dell appraisal rights opinion (downloadable here). Have no fear, your summary is here.
Vice Chancellor Laster valued Dell’s common stock at $17.62 per share, reflecting a 28% premium above the $13.75 merger price that was paid to Dell shareholders in October 2014 in a going private transaction lead by company-founder Michael Dell. Dell's going private transaction was opposed by Carl Icahn and this juicy, contentious transaction has its own required reading list. When conceding defeat, Carl Icahn sent the following letter to Dell Shareholders:
New York, New York, September 9, 2013
Dear Fellow Dell Inc. Stockholders:
I continue to believe that the price being paid by Michael Dell/Silver Lake to purchase our company greatly undervalues it, among other things, because:
1. Dell is paying a price approximately 70% below its ten-year high of $42.38; and
2. The bid freezes stockholders out of any possibility of realizing Dell’s great potential.
Fast forward nearly 3 years later and it seems Vice Chancellor Laster agrees. VC Laster reached his undervaluation decision despite no finding of significant fault with the company’s directors' conduct or a competing bidder. Instead, VC Laster focused on the fall in the company’s stock price, and a failure to determine the intrinsic value of Dell before negotiating the buyout. The business press and law blogs have exploded with articles, a few of which are highlighted below:
- For a good summary of the ruling see this succinct Delaware Chancery Court blog post and Andrew Ross Sorkin's NY Times article.
- For a good discussion of how appraisal remedies were applied in Dell, see Steven Davidoff Solomon's NY Times article here.
- For a discussion of the increase in shareholder appraisal actions and contributing factors (arbitrage) and the future of appraisal rights, see this ABA article.
Monday, May 30, 2016
This year, my research and writing season has started off with a bang. While grading papers and exams earlier this month, I finished writing one symposium piece and first-round-edited another. Today, I will put the final touches on PowerPoint slides for a presentation I give the second week in June (submission is required today for those) and start working on slides for the presentation I will give Friday.
All of this sets into motion a summer concert conference, Barbri, and symposium tour that (somewhere along the line) got a bit complicated. Here are the cities and dates:
New Orleans, LA - June 2-5
Atlanta, GA - June 10-11
Nashville, TN - June 17
Chicago, IL - June 23-24
Seattle, WA - June 27
I know some of my co-bloggers are joining me along the way. I look forward to seeing them. Each week, I will keep you posted on current events as best I can while managing the research and writing and presentation preparations. The topics of my summer research and teaching run the gamut from insider trading (through by-law drafting, agency, unincorporated business associations, personal property, and benefit corporations) to crowdfunding. A nice round lot.
This coming week, I will be at the Law and Society Association annual conference. My presentation at this conference relates to an early-stage project on U.S. insider trading cases. The title and abstract for the project and the currently envisioned initial paper (which I would, of course, already change in a number of ways) are as follows:
May 30, 2016 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Research/Scholarhip, Securities Regulation, Social Enterprise, Teaching, White Collar Crime, Writing | Permalink | Comments (0)
Saturday, May 28, 2016
A former law student of mine who practices in Delaware just alerted me to this Delaware Online article.
The article describes the proposed bill as follows:
House Bill 371 would restrict the number of corporate shareholders who can petition the court for a stock appraisal to only those who own $1 million or more of a company's stock or 1 percent of the outstanding shares, depending on which is less. Currently, any shareholder can ask the court to appraise their shares. Those motions are typically filed when a company is the target of an all-cash acquisition and the shareholder wants to ensure the buyer is paying a fair price for the stock. (emphasis added)
Corporate governance expert Charles Elson is quoted as saying:
. . . he understands the argument on both sides. "Anytime you attempt to restrict the rights of a smaller shareholder, it is going to be controversial whether or not the approach is warranted"
The article cites co-authored work by my Nashville neighbor, Randall Thomas (Vanderbilt Law):
A study published earlier this month by four noted corporate law professors, including Wei Jang of Columbia Business School and Randall S. Thomas of Vanderbilt Law School, found that hedge funds have accounted for nearly 75 percent of the amount awarded in all appraisal actions over the last few years. The study also found that 32 percent of the cases involved stakes below $1 million or 1 percent of a company's stock.
Go read the entire article.
Friday, May 13, 2016
Yesterday, I presented on negotiation theory and stakeholder engagement at the Center for Nonprofit Management's Bridge to Excellence Conference.
At a session after mine, I was directed to a PowerPoint entitled What Every Board Member Should Know: A Guide for Tennessee Nonprofits. The PowerPoint was authored by the Tennessee Attorney General, the Tennessee Secretary of State, and the President of the Center for Nonprofit Management. The document is rather simple, but might be useful as a primer for nonprofit board members in Tennessee.
The conference attendees appeared to be a few hundred nonprofit practitioners and only about three or four professors, two of whom were among the presenters. After my morning presentation, I stuck around and listened to some of the other speakers and enjoyed an excellent lunch. I am a sucker for free food.
At the conference, I was struck by how nonprofit board members were discussed by some of the speakers and attendees. One question that was posed was - "how do you deal with a board member who is not pulling his or her weight as a fundraiser?" I guess I knew that nonprofit board members were chosen, at least in part, for their ability to give or raise money, but I never really saw fundraising as a major or primary role. The blunt phrase used was "give, get, or get off." Most of my thinking has been on for-profit board members and their role in governance, so this significant focus on another role was a bit unexpected.
Another question asked was - "how do you deal with a board member that is over-involved and thinks he or she is the executive director of the nonprofit?" Again, because of my focus on for-profit boards, this question hasn't been one that surfaced for me; I am usually thinking about how to get board members more involved. In fairness, I do recognize that officers are responsible for the day-to-day running of the organization, and I could see how a board member might overstep. Thankfully, the flip-side, the problem of the under-involved board member, was also discussed.
I left the conference wondering how effective nonprofit board members will be in governing when so much emphasis is put on their fundraising role, and when they are warned to not become over-involved in the operational side of the organization.
Board diversity was also a major topic - race and gender, and also age (there is evidently a push to get the next generation involved on nonprofit boards instead of just the "same old suspects") and skills and even personality type and political views. I didn't hear any discussion, outside of my session, on socio-economic diversity on boards, which is interesting given the communities that are often served by nonprofits, but maybe not surprising giving the role of fundraising. In my session, I did discuss the role of stakeholder boards, which I am writing on in the for-profit context, as a way to give voice to all major constituents, not just donors.
I may reflect further on this conference in future posts as it was certainly an interesting and useful day.