Friday, July 3, 2015
Among the DGCL amendments this year were a number of amendments to the Delaware Public Benefit Corporation (“PBC”) Law.
I refer to the Delaware PBC amendments as “The Etsy Amendments” because I believe (without being sure) that a main motivation in passing these amendments was to make it easier for Etsy (among other companies) to become a Delaware PBC. These amendments are effective as of August 1, 2015.
As mentioned in a previous post, Etsy is a certified B corporation and a Delaware C-corporation. According to B Lab’s terms for certified B corporations, Etsy will have to convert to a Delaware PBC by August 1, 2017 or forfeit its certification. This assumes that B Lab will not change its requirements or make an exception for publicly-traded companies.
The amendments to the PBC law are summarized below:
- Eliminates requirement of "PBC" or "Public Benefit Corporation" in the entity’s formal name. This amendment makes it easier and less costly for existing entities to convert, but the amendment also makes it more difficult for researchers (and the rest of the public) to track the PBCs. In addition to the cost of changing names, Rick Alexander notes in his article below that the previous naming requirement was causing issues when PBCs registered in other states because “[s]ome jurisdictions view the term as referring to nonprofit corporations. Other jurisdictions view the phrase ‘'PBC'’ as insufficient to signal corporate identity.”
- Reduces amount of shareholders that must approve a conversion from a traditional corporation to a PBC from 90% to 2/3rds of shareholders. This amendment brings Delaware PBC law in line with most of the benefit corporation statutes and gives Etsy a more realistic shot at converting. The requirement in Delaware to convert from a PBC to a traditional corporation was already approval by 2/3rds of shareholders.
- Provides a “market out” exception to appraisal rights when a corporation becomes a PBC. This amendment brings the Delaware PBC law in line with their general appraisal provision in DGCL 262. This amendment also means that Etsy shareholders would not receive appraisal rights if Etsy converts to a PBC.
Additional posts about the amendments are available below:
- Gregory Williams (Richards, Layton & Finger)
- Rick Alexander (B Lab & Morris Nichols) (Written Prior to Amendments Passing)
Thursday, July 2, 2015
It's barely July and I have received a surprising number of emails from my incoming business association students about how they can learn more about business before class starts. To provide some context, I have about 70 students registered and most will go on to work for small firms and/or government. BA is required at my school. Very few of my graduates will work for BigLaw, although I have some interning at the SEC. I always do a survey monkey before the semester starts, which gives me an idea of how many students are "terrified" of the idea of business or numbers and how many have any actual experience in the field so my tips are geared to my specific student base. I also focus my class on the kinds of issues that I believe they may face after graduation dealing with small businesses and entrepreneurs and not solely on the bar tested subjects. After I admonished the students to ignore my email and to relax at the beach during the summer, I sent the following tips:
If you know absolutely NOTHING about business or you want to learn a little more, try some of the following tips to get more comfortable with the language of business:
1) Watch CNBC, Bloomberg Business, or Fox Business. Some shows are better than others. Once we get into publicly traded companies, we will start watching clips from CNBC at the beginning of every class in the "BA in the News" section. You will start to see how the vocabulary we are learning is used in real life.
2) Read/skim the Wall Street Journal, NY Times Business Section or Daily Business Review. You can also read the business section of the Miami Herald but the others are better. If you plan to stay local, the DBR is key, especially the law and real estate sections.
3) Subscribe to the Investopedia word of the day- it's free. You can also download the free app.
4) Watch Shark Tank or The Profit (both are a little unrealistic but helpful for when we talk about profit & loss, cash flow statement etc). The show American Greed won't teach you a lot about what we will deal with in BA but if you're going to work for the SEC, DOJ or be a defense lawyer dealing with securities fraud you will see these kinds of cases.
5) Listen to the first or second season of The Start Up podcast available on ITunes.
6) Watch Silicon Valley on HBO- it provides a view of the world of re venture capitalists and funding rounds for start ups.
7) Read anything by Michael Lewis related to business.
8) Watch anything on 60 Minutes or PBS' Frontline related to the financial crisis. We will not have a lot of time to cover the crisis but you need to know what led up to Sarbanes-Oxley and Dodd-Frank.
9 Watch the Oscar-winning documentary "Inside Job," which is available on Netflix.
10) Listen to Planet Money on NPR on the weekends.
11) Listen to Marketplace on NPR (it's on weekday evenings around 6 pm).
12) Read Inc, Entrepreneur, or Fast Company magazines.
13) Follow certain companies that you care about (or hate) or government agencies on Twitter. Key agencies include the IRS, SEC, DOJ, FCC, FTC etc. If you have certain passions such as social enterprise try #socent; for corporate social responsibility try #csr, for human rights and business try #bizhumanrights. For entrepreneurs try #startups.
14) Join LinkedIn and find groups related to companies or business areas that interest you and monitor the discussions so you can keep current. Do the same with blogs.
As I have blogged before, I also send them selected YouTube videos and suggest CALI lessons throughout the year. Any other tips that I should suggest? I look forward to hearing from you in the comments section or at email@example.com.
Tuesday, June 30, 2015
Last week, S.E.C Commissioner Daniel M. Gallagher, gave a speech, Activism, Short-Termism, and the SEC: Remarks at the 21st Annual Stanford Directors’ College. I agree with many of Commissioner Gallagher's views on short-termism, and (I will semi-shamelessly note) he cited one of my earlier posts about the role of activists on board decision making. In his remarks, he said, with regard to short-termsim (i.e., companies operating for short term rather than long-term gains):
The current picture is bleak . . .
Clearly, there’s a way for all the parties . . . to co-exist peacefully. The SEC sets a level playing field; companies manage themselves for the long-term with the vigorous oversight of the board; and activists put pressure on those companies that fall short of that ideal. Unfortunately, we are not in that happy place. Rather, there seems to be a predominance of short-term thinking at the expense of long-term investing. Some activists are swooping in, making a lot of noise, and demanding one of a number of ways to drive a short-term pop in value: spinning off a profitable division, beginning a share buy-back program, or slashing capital expenditures or research and development expenses. Having inflated current returns by eliminating corporate investments for the future, these activists can exit their investment and move on.
. . . .
 See, e.g., Joshua Fershee, Shareholder Activists Can Add Value and Still Be Wrong (Apr. 28, 2015) (positing that activists can signal to boards when the company’s strategy may be inefficient; it is then the board’s responsibility to “use the tools before it to make decisions in the best interests of the entity” — that shareholder activists can improve long-term value even if following their recommendations blindly would not).
I absolutely agree with the Commissioner that too many companies are using a short-term philosophy to guide their decision making and that directors are allowing non-controlling institutional investors too much influence in the boardroom. But, as a believer in director primacy, I see that as a director failure, not an S.E.C. failure or an institutional investor/activist failure. Directors need to make the decisions for the entity based on their view of what is best for the entity, not on someone else's view.
Commissioner Gallagher is spot on when he notes his concern "that some institutional investors are paying insufficient attention to their fiduciary obligations to their clients when they determine whether to support a particular activist’s activity."
That concern, though, has nothing to do with how the board of a company responds to its activist institutional investors that urge short-termist actions. The institutional investor activist in that case should be held accountable to its clients, and perhaps it should not be urging such behavior, but that is not relevant to how a board of a company in which an institutional investors owns stock responds to such pressure.
It could be that some boards really believe that short-termism is how best to run a company. The level of complaining about activists suggests otherwise, but then it is up to boards to reject the activist's requests. If boards are being unduly influenced by non-controlling outside forces, then shareholders need to take a break from their rational apathy, and do something. If controlling shareholders are pushing short termism to the detriment of non-controlling shareholders, boards should not follow the controlling shareholder's request or (again) non-controlling shareholders need to push back to ensure the board and the controlling shareholders are honoring their fiduciary obligations.
If it's just that directors like short termism as a strategy, though, and it's not a decision made for any other reason than directors think it's the right one, I believe those directors are wrong. But that's not my call. I'm not on the board.
Thursday, June 25, 2015
In my final post on the subject of “respectability” of lawyers (the first four can be found here, here, here and here), I’d like to tie my thoughts together, discussing what the various parties can do to make Bird and Orozco’s thesis of assimilation of lawyers into corporate business teams the “new normal”. This should give lawyers more career opportunities in the future, slow the loss of influence of the legal profession in businesses, and make legal education a more attractive choice. Much of the discussion in academia has ignored the in-house counsel approach as being a viable option for the woes of the legal industry. Below the fold, this post will discuss the roles that academia, in-house counsel, and business firms each may play in increasing the potential for success of a new model for business lawyers.
It’s always nice to blog and research about a hot topic. Last week I wrote about compliance challenges for those who would like to rush down to do business in Cuba- the topic of this summer’s research. Yesterday, Corporate Counsel Magazine wrote about the FCPA issues; one of my concerns. Earlier this week, I attended a meeting with the Greater Miami Chamber of Commerce and the United States International Trade Commission. Apparently, on December 17th, the very same day that President Obama made his surprise announcement that he wanted to re-open relations with Cuba, Senator Ron Wyden coincidentally sent a request to the USITC asking for an investigation and report on trade with Cuba and an analysis of restrictions. Accordingly, the nonpartisan USITC has been traveling around the country speaking to lawyers and business professionals conducting fact-finding meetings, in order to prepare a report that will be issued to the public in September 2015. Tomorrow the Miami Finance Forum is holding an event titled the New Cuba Revolution.
This will be my third and final post on business and Cuba and in this post I will discuss the focus of my second potential law review article topic. My working thesis is as follows: As relations between the United States and Cuba thaw, American businesses have begun exploring opportunities on the island. Cuba, however, remains a communist nation with a human rights record criticized by exiles, NGOs, and even members of the United States Congress. The EU has taken a "common position" on Cuba stating that the objective of the European Union in its relations with Cuba is to encourage a process of transition to a pluralist democracy, require a respect for human rights and fundamental freedoms, as well as sustainable recovery and improvement in the living standards of the Cuban people." Individual EU member states are free to conduct business with Cuba and many European companies have joined Canadian firms in investing through joint ventures and other state-sanctioned vehicles. This Article will examine whether the US should follow the EU's model in trying to spur reform or whether allowing American firms to do business in Cuba without human rights concessions will in fact perpetuate the status quo.
As I discussed in last week’s blog post, one reason that the U.S. is unlikely to lift the embargo is the nearly 7 billion in claims for confiscated US property. Another reason is Cuba’s human rights record. For example, the island is notorious for violations of rights to freedom of press, association, assembly, and imprisonment of political protesters. The Cuban government continues to control all media limiting the access to information on the Internet due to content-based restrictions and technical limitations. Independent journalists are systematically subjected to harassment, intimidation, and detention for reporting information that was not sanctioned by the state apparatus. My colleague Jason Poblete writes often and critically about the Obama administration’s rapprochement with Cuba. (I highly recommend him for legal advice about Cuba by the way).
Depending on whom you talk to the embargo will be lifted next year, in five year or in ten years. Personally, I don't know that the EU Common Position has been particularly effective in pressuring the Castro brothers to make human rights reforms. I don’t think the U.S. government will be any more successful either. The embargo is Exhibit A.
Most of my academic research thus far has been on what drives corporations to act in the absence of legal obligations vis a vis human rights. With that in mind, I plan to examine a few options related to Cuba. First, I am researching the effect of bilateral investment treaties. A bilateral investment treaty is an "agreement between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country.” These typically grant significant rights to foreign investors, provide safeguards to investments against foreign governments, and allow foreign investors to have investment disputes adjudicated outside of the country, which will be critical for those investing in Cuba. The problem is that these BITS rarely have human rights conditions. Accordingly, some scholars have recommended that they require adherence to the Universal Declaration of Human Rights, the United Nations International Covenant on Civil and Political Rights, the ILO Declaration on Fundamental Principles and Rights at Work, the United Nations Convention Against Corruption, the and the Rio Declaration on Environment and Development. I would also recommend reference to the UN Guiding Principles on Business and Human Rights and the OECD Guidance.
Another option is to condition any renewal of a development bank such as the US’s Ex-Im Bank on requiring human rights impact assessments. The Ex-Im bank is the official export credit agency of the US. It’s used when private sector lenders are unable or unwilling to provide financing to companies entering politically or commercially risky countries. Its charter is set to expire on June 30th although its supporters claim that it financed billions in exports, which supported 200 thousand jobs last year. Opponents claim that it financed exports in countries with abysmal human rights records and/or that it supports corporate welfare. I propose that Ex-Im and other lenders follow the lead of many European financers that require human rights disclosures. I (naively?) believe labor may be the only human right remotely and partially in the control of US companies operating in Cuba in the future.
I have some other ideas but those will have to wait for the upcoming article. In the meantime, if you have some thoughts or critiques of these early ideas, please comment below or send me an email at firstname.lastname@example.org. I’m off to Guatemala on Saturday for a week with a group of academics studying business and human rights (another research topic for this summer). We will be exploring climate change, the extractive industries, maquiladoras, corporate social responsibility, and the effects on the rights of indigenous peoples. You can be sure I will be writing about that in a future post.
Wednesday, June 24, 2015
I had the privilege of sitting in on a stimulating paper session on "Private Fiduciary Law" at the Law and Society Association conference in Seattle last month. The program featured some super work by some great scholars. My favorite piece from the session, however, is a draft book chapter written by Gordon Smith that he recently posted to SSRN. Aptly entitled The Modern Business Judgment Rule, the chapter grapples with the current state of the business judgment rule in Delaware by tracing its development and reading the disparate doctrinal tea leaves. Here is a summary of his "take," as excerpted from his abstract (spoiler alert!): "The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference."
In the mere 18 pages of text he uses to engage his description, analysis, and conclusion, Gordon gives us all a great gift. His summary is useful, his language is clear, and his analysis and conclusions are incredibly useful, imho. I am no soothsayer, but I predict that this will be a popular piece of work.
Gordon posted on his paper the other day on The Glom. He is inviting comments, and I know him to be serious in wanting to receive and incorporate them. So, have at it!
Friday, June 19, 2015
The book is much more “popular press” than academic, as should be clear from the splashy subtitle “liberating the heroic spirit of business.” There is a bit of academic influence in the appendix and notes, but it is mostly social business advocacy and story telling. In fact, the authors state that the primary purpose of the book “is to inspire the creation of more conscious businesses: businesses galvanized by higher purposes that serve and align the interests of all their major stakeholders.” (pg. 8). The book is interesting, passionate, and may accomplish its primary purpose.
The authors paint a compelling picture of Whole Foods Market and similar companies like Trader Joe's, The Container Store, Costco, and Southwest Airlines. These companies appear to take a long-term view and consider what is best for all their stakeholders. I would have appreciated, however, more attention to the struggles the companies must have faced in attempting to satisfy all of their stakeholders. After finishing the book, I was left wishing the authors would have spent more time discussing how to make decisions in situations where certain stakeholder interests irreconcilably conflict.
I may have more to say about this book in future posts, but as someone who has been researching in the social business area for a few years, I continue to be amazed at the proliferation of terms. The authors describe four tenants of their term “conscious capitalism”: (1) Higher Purpose (beyond just generating profits); (2) Stakeholder Integration (“optimizing value creation for all of them”); (3) Conscious Leadership (leaders “motivated primarily by service to the firm’s higher purpose and creating and creating value for all stakeholders.”); (4) Conscious Culture and Management (culture and management centering around traits like “trust, accountability, transparency, integrity, loyalty, egalitarianism, fairness, personal growth, and love and care.) (pg. 32-35)
The authors try to differentiate their term of “conscious capitalism” from similar terms, as discussed below. While some of the distinctions make sense, I wish that these various social business movements would agree on a common vocabulary and work together more consistently. Unfortunately and ironically, many associated with the social business movements seem especially territorial. Perhaps, the lack of focus on financial returns causes some to seek personal returns in the form of recognition and influence. Quotes in the bullet points below come from pages 38, 291-97 in the book.
- Corporate social responsibility. The authors note that CSR is often “grafted onto traditional business model, usually as a separate department or part of public relations," but for Conscious Capitalism “[s]ocial responsibility is at the core of the business.” The authors are not the first to note this difference between CSR and the more recent social business movements, and I think it is a fair distinction, at least in some cases.
- Natural Capitalism. According to the authors, “Conscious Capitalism included the valuable insights that natural capitalism offers about the environment and transcends them with a more comprehensive view of the entire business and economic system.” The authors seem to suggest that their term is more holistic, not merely focused on the environment, and more focused on human ingenuity than simply preserving the environment.
- Triple Bottom Line. The authors seem to think that Conscious Capitalism has a more inclusive view of stakeholders than TBL’s “people, profit, planet.” I don’t think the authors make their case for this distinction, failing to note stakeholders that don’t fall in one of TBL’s three buckets. The authors then note that their theory pays more attention to “purpose, leadership, management, and culture.” I also think this is stretching for distinctions; most of the TBL proponents I know recognize the importance of “purpose, leadership, management, and culture.” The authors admit that the TBL movement is "a fellow traveler," but I think TBL and Conscious Capitalism are roughly synonymous.
- Shared-Value Capitalism. SVC, championed by Michael Porter and Mark Kramer, focuses on creating economic value for shareholders and all of society. Conscious Capitalism, the authors claim, does not only focus on economic value like SVC, but expands to human values and includes “emotional and spiritual motivators” lacking with SVC.
- Creative Capitalism. Bill Gates popularized this term in 2008 at the World Economic Forum, claiming that certain companies can use variable pricing to make products affordable to those at the “base of the pyramid” and still make a profit. The authors claim Creative Capitalism seems like an “add on” similar to CSR, only applies certain companies, and over-focuses on the reputational benefits, rather than changing the core business purpose.
- B Corporations. The authors do not seem optimistic about “[certified] B corporations” which they unfortunately use interchangeably with “benefit corporations,” even though the two terms are distinct. The main reason the authors offer for their pessimism toward B corporations is that “B corporations appear to violate the important principle that owners [shareholders] should ultimately control the corporation.” Most legal readers will notice problems with that statement. First, shareholders don’t control corporations, boards of directors do (see, e.g., DGCL 141(a)). Second, to the extent the authors are talking about aspects of corporate governance like the shareholders’ ability to elect the directors and bring derivative suits, those powers remain for shareholders of both certified B corporations and benefit corporations. Giving the authors (neither of whom are legally trained) the benefit of the doubt – perhaps they are talking about the deprioritization of shareholders in the benefit corporation statutes (shareholders are simply one of many stakeholders that the board must consider in its decision making). The authors seem concerned that shareholders, the most vulnerable of the stakeholders (according to them), will be relatively unprotected. This is a fairly common concern, but the Conscious Capitalism model seems to deprioritize shareholders as well, and even in traditional corporate law, the business judgment rule provides significant protection to the board of directors. Delaware law does give shareholders more power in the M&A context, but benefit corporations and corporations committed to Conscious Capitalism that are incorporated in a constituency statute state seem like they would operate similarly, even in the M&A context. In short, the authors do not clearly express a strong grasp of the benefit corporation statutes, and throughout the book the authors actually seem to advocate operating corporations in line with the benefit corporation statutes (considering all stakeholders in decisions).
While I am a bit critical in some of my comments above, I did appreciate learning more about Whole Foods Market and similar companies. The companies discussed are some of my favorite companies and are certainly making the world better for many of their stakeholders. The book also made a number of claims that spurred additional thinking, for which I am grateful, and which made reading the book worthwhile.
Thursday, June 18, 2015
Last week I posted the first of three posts regarding doing business in Cuba. In my initial post I discussed some concerns that observers have regarding Cuba’s readiness for investors, the lack of infrastructure, and the rule of law issues, particularly as it relates to Cuba’s respect for contracts and debts. Indeed today, Congress heard testimony on the future of property rights in Cuba and the claims for US parties who have had billions in property confiscated by the Castro government- a sticking point for lifting the embargo. (In 1959, Americans and US businesses owned or controlled an estimated 75-80% of Cuban land and resources). Clearly there is quite a bit to be done before US businesses can rush back in, even if the embargo were lifted tomorrow. This evening, PBS speculated about what life would be like post-embargo for both countries. Today I will briefly discuss the Cuban legal system and then focus the potential compliance and ethical challenges for companies considering doing business on the island.
Cuba, like many countries, does not have a jury system. Cuba’s court system has a number of levels but they have both professional judges with legal training, and non-professional judges who are lay people nominated by trade unions and others. Cubans have compulsory service to the country, including military service for males. Many law graduates serve part of their compulsory service as judges (or prosecutors) and then step down when they are able. The lay judges serve for five years and receive a full month off from their employer to serve at full pay. Although there is a commercial court, only businesses may litigate there and are then they are at the mercy of the lay judges, who have equal power to the professional jurists. This lay judge system exists even at the appellate level. Most lawyers and law firms are controlled by the Cuban government, unless they work for a non agcricultural cooperative. More important, although I have received differing opinions from counsel, it is possible that hiring and paying a local lawyer there could violate US law related to doing business in Cuba. Notwithstanding these obstacles, many companies are trying to get an OFAC license to do business in Cuba right away or are planning for the eventual life of the embargo. In my view, getting there is the easy part. The hard part will be complying with US law, not because Cuba is in a nascent state of legal and economic development, but because of the sheer complexity of doing business with a foreign government.
The first challenge that immediately comes to mind is compliance with the Foreign Corrupt Practices Act, which makes it illegal for a person or company to make “corrupt payments” or provide “anything of value” to a foreign official in order to obtain or retain business. Since almost everything is a state-owned enterprise or a joint venture with a state owned enterprise, US firms take a real risk entering into contracts or trying to get permits. There is no de minimis exception and facilitation payments- otherwise known as grease payments to speed things along- while customary in many countries- are illegal too. Legal fees and fines for FCPA violations are prohibitively expensive, and those companies doing business in Cuba will surely be targets.
Another concern for publicly-traded US companies is compliance with the Sarbanes-Oxley and Dodd-Frank whistleblower rules. Unless the law changes, most US companies will have to follow the model of Canadian and EU companies and enter into joint ventures or some contractual relationship with the Cuban government or a Cuban company (which may be controlled by the government). Most US employees are afraid to report on their own private employers in the US. How comfortable will a Cuban employee be using a hotline or some other mechanism to report wrongdoing when his employer is in some measure controlled by or affiliated with the Cuban government? As I will discuss next week, the biggest criticism of Cuba is its human rights record related to those who dissent. I have personally dealt with the challenge establishing and working with hotlines in China and in other countries where speaking out and reporting wrongdoing is not the cultural norm. I can imagine that in Cuba this could be a herculean task.
The last concern I will raise in this post relates to compliance with a company’s own code of conduct. If a company has a supplier code of conduct that mirrors its own, and those codes discuss freedom of association and workers’ rights that may be out of step with the Cuban law or culture, should the US firm conform to local rules? Even if that is legal, is it ethical? Google's code is famous for its “don’t be evil”credo and it has received criticism in the past from NGOs who question how it can do business in China. But Google was in Cuba last week testing the waters. Perhaps if Google is able to broaden access to the internet and the outside world, this will be a huge step for Cubans. (Of note, Cubans do not see the same TV as the tourists in their hotels and there are no TV commercials or billboards for advertisements).
There are a number of other compliance and ethics challenges but I will save that for my law review article. Next week’s post will deal with the role of foreign direct investment in spurring human rights reform or perpetuating the status quo in Cuba.
Monday, June 15, 2015
On June 11, 2015, the Delaware House of Representatives joined the Delaware Senate in passing a bill that would prohibit fee-shifting bylaws by Delaware stock corporations. The bill awaits signature by Delaware Governor Jack Markell. Nonetheless, the panel provides a nice debate, between practicing attorneys, and is available here. The information from the Chancery Daily is below.
Fordham Law School hosted a panel on Fee Shifting in Shareholder Litigation, featuring three members of the corporate law council of the Delaware State Bar Association, which submitted proposed amendments to the Delaware General Corporation Law that would preclude the adoption of fee-shifting provisions in corporate instruments, on Thursday, March 26, 2015. A webcast video of the panel is now available online here.Professor Sean J. Griffith - Fordham Law School
Panelists:Frederick Alexander - Morris Nichols Arsht & Tunnell
Chris Cernich - Institutional Shareholder Services
Kurt Heyman - Proctor Heyman Enerio
Mark Lebovitch - Bernstein Litowitz Berger & Grossman
Norman Monhait - Rosenthal Monhait & Goddess
Andrew Pincus - Mayer Brown
Thursday, June 11, 2015
Cuba has been in the news a lot lately. I’ve just returned from ten days in Havana so I could see it first hand both as a person who writes on business and human rights and as an attorney who consults occasionally on corporate issues. The first part of the trip was with the International Law Section of the Florida Bar. The second was with a group of art lovers. I plan to write two or three blog posts about the prospects of doing business in Cuba if and when the embargo is lifted. Because I do some consulting work, I want to make clear that these views are my own as an academic and should not be attributed to anyone else.
In this post I will just briefly list some basic facts about Cuba and foreign investment. Next week I will talk a bit more about investment, introduce the Cuban legal system, and talk about some of the business and compliance challenges. That's the subject of my research this summer. The following week I will address human rights in Cuba and how various governments and businesses are addressing those issues, the subject of another article I am working on.
Some Cuba basics:
- The island has 11 million people
- The average monthly wage is $25-45 per month
- The government is just starting to develop a comprehensive tax code
- The government is now allowing the sale of private property but the concept of mortgages is undeveloped
- 86% of people work for the government in some form but the government is now allowing “self employment” and cooperatives (small private businesses such as agricultural farms, salons, and restaurants)
- 5% of population has access to internet or a cell phone
- The government is seeking foreign investment- except in health, education, or military sectors
- Cuba is not an OECD member state. It does sit on the UN Human Rights Council
- The GDP is 62.7 billion
- The literacy rate is 99.8% and the country scores high on the human development index
- The country is in the middle of the pack in terms of the Corruption Perception Index, which measures bribery
- There are now over 60 bilateral investment treaties in place but they are not all in force
- Most lawyers and law firms work for the Cuban government
There are now three possible methods of international investment:
1) International Economic Association Contract (AEI). 49% of the companies in the 2015 registry are AEIs. This is a contract that does not create a new company and there is no sharing of profits. Certain changes of parties require government approval;
2) Full Foreign Capital Company. This is almost never approved but the foreign company has total control of the enterprise; and
3) Joint venture with the Cuban government. These are 45% of the companies in the 2015 registry. Often the hotels and other EU businesses are JVs with the government.
In the preamble to Cuba’s 2014 Laws on Foreign Investment (LFI), the Cuban National Assembly makes clear that the underlying basis for the law is: “Cuba's need to provide greater incentives to attract foreign capital, new technologies, and know-how to increase domestic production and better position Cuba to export to international markets.” The new law halves the profits tax from 30 to 15% and exempts investors from paying it for eight years. But the new law also appears to withhold many of the tax benefits from companies that are 100% foreign-owned.
Although Cuba changed its law last year, many people believe that Cuba is not ready for investment. Clearly rule of law concerns and the lack of infrastructure are real barriers. I’ll give more of my opinion on compliance and investment challenges and opportunities next week.
Wednesday, June 10, 2015
Last week, I attended the National Business Law Scholars Conference at Seton Hall University School of Law in Newark, NJ. It was a great conference, featuring (among others) BLPB co-blogger Josh Fershee (who presented a paper on the business judgment rule and moderated a panel on business entity design) and BLPB guest blogger Todd Haugh (who presented a paper on Sarbanes-Oxley and over criminalization). I presented a paper on curation in crowdfunding intermediation and moderated a panel on insider trading. It was a full two days of business law immersion.
The keynote lunch speaker the second day of the conference was Kent Greenfield. He compellingly argued for the promotion of corporate personhood, following up on comments he has made elsewhere (including here and here) in recent years. In his remarks, he causally mentioned B corporations and social enterprise more generally. I want to pick up on that thread to make a limited point here that follows up somewhat on my post on shareholder primacy and wealth maximization from last week.
June 10, 2015 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joan Heminway, Litigation, Social Enterprise | Permalink | Comments (6)
Friday, June 5, 2015
This week, while preparing for and attending the National Business Law Scholars Conference, I have had to deal with a Tennessee corporate law "brushfire" of sorts generated by a Nashville Business Journal (NBJ) article published earlier this week. The article, written by a Nashville lawyer, took a somewhat alarmist--and substantively inaccurate--view of a recent addition to the Tennessee Business Corporation Act drafted by the Business Entity Study Committee (BESC) of the Tennessee Bar Association, of which I am a member (and about which I have written here in the past, including here, here, and here). Specifically, the author asserted that Tennessee's adoption of the text of Model Business Corporation Act Section 14.09 creates new liability for Tennessee corporate directors--especially directors of insolvent Tennessee corporations. Somewhat predictably, calls and emails from directors, executives, and the Tennessee Secretary of State's office (which, itself, received many calls) ensued.
By design, and (we believe) by effect, the statutory section at issue clarifies the duties of directors of dissolved Tennessee corporations and establishes a safe harbor from liability. Accordingly, the drafting team from the BESC (me included) believed we had to jump in and correct the mischaracterizations in the article, which the author apparently was unwilling to retract or self-correct. The NBJ, greatly to its credit, understood our concerns and published a rebuttal from the BESC chair, which the BESC collaborated in drafting and co-signed. In addition, the Chattanooga Times Free Press published an article that outlines the debate (in which the BESC chair and I am quoted).
So, folks do pay attention to corporate law--and they think it matters! Unfortunately, sometimes, they get it wrong. This leads to a number of lessons . . . . Apropos of that thought, it's important that a lawyer measure twice and cut once, especially when writing a critical exposé intended and destined to receive attention from an important audience--one personally affected by the contents of the exposé. Moreover, the need for experienced corporate legal counsel--lawyers steeped in the structure and function of corporate law--continues to be important in the drafting of, and public education regarding, complex corporate legal rules.
The New Yorker recently ran an interesting article entitled Patagonia’s Anti-Growth Strategy. Patagonia is a certified B corporation and a California benefit corporation.
As a customer, Patagonia is my favorite company for casual/outdoor clothing, and one of my favorite companies in any industry. Initially, I thought Patagonia's clothes were insanely expensive, but their clothes have been much cheaper on a “cost-per-wear” basis than any other clothes I have bought. In an age of cheap products and rampant consumerism, Patagonia is striking a chord with those who wish to buy fewer, quality products.
A taste of the article follows, but go read the entire thing.
The company’s anti-materialistic stance ramped up on Black Friday, 2011, with a memorable full-page advertisement in the Times that read, “Don’t Buy This Jacket.” The ad’s text broke down the environmental costs of the company’s top-selling R2 fleece sweater and asked consumers to think twice before buying it or any other product. The attention the ad received helped to bump Patagonia’s 2012 sales significantly. . . . Patagonia is trying second-hand-clothing sales at its shop in Portland, Oregon, and has made product repair and recycling a growing part of its business model. It recently invested in Yerdle—a Web startup whose stated mission is to reduce new-product purchases by twenty-five per cent—as a way for people, and even the company itself, to swap or give away used Patagonia gear.
Despite being a customer for about two decades, I haven’t needed the Patagonia repair services yet, but I love the idea.
As the article above mentions, “[a]ll of this would be jet fuel for the engines of modern cynicism, if not for the fact that Patagonia, a privately owned corporation now in its fifth decade, has a distinguished record of environmental philanthropy and investment.” Patagonia may eventually experience mission drift, but the trust they have created with their customers is invaluable. While Patagonia’s anti-consumerism stance may seem to be against the firm's self-interest, “anti-consumerism is clearly helping to build the Patagonia brand. Indeed, the company is seeing double-digit annual growth.”
Wednesday, June 3, 2015
I just returned early Monday from this year's Law and Society Association conference. I presented my paper on LLC operating agreements as contracts--about which I later will blog here--on a panel as part of a CRN (Collaborative Research Network) on corporate and securities law. I enjoyed the conference and being in Seattle (a city I rarely get a chance to visit).
I noticed something in a number of the sessions I attended, however, that I want to share here. A number of scholars referenced, in their presentations or in comments to the presentations of others, "shareholder primacy." As I listened, it was clear these folks were referring to the prioritizing of shareholder interests--especially financial interests--ahead of the interests of other stakeholders in corporate decision-making, rather than the elements of corporate control (few as there are) enjoyed by shareholders. As I began to recognize this, several things happened in rapid succession.
First, I remembered David Millon's recent paper on this subject, which (among other things) tells a history of the use of the "shareholder primacy" term. It's well worth a read. Or a re-read!
Second, I remembered Steve Bainbridge's earlier work on this same topic. Ditto on that paper; read it or re-read it. His chart in Figure 1 of that paper is an amazing visual summary.
Third, and largely as a result of those two papers, I wondered why we use the same term for these two aspects of corporate modeling (whether you label them them radical versus traditional shareholder primacy, shareholder protection versus monitoring, corporate ends versus means, or anything else). It's confusing! I kept wanting to interrupt, as folks were using "shareholder primacy," to ask: "which kind?" to move my understanding and analysis further forward faster.
Here's my pitch. I advocate moving away from using the term "shareholder primacy" when a more specific term is available. In the alternative, I advise defining the use of "shareholder primacy" in context when it is used, whether orally or in writing. Am I alone in being unsettled by this? Am I being too pedantic or controlling in my advocated solution or advice? I welcome your views.
Yesterday Martin Lipton, of Wachtell, Lipton, Rosen & Katz, posted "Dealing with Activist Hedge Funds" at the Harvard Law School Forum on Corporate Governance and Financial Reform. This is more like a checklist included at the end of a treatise than a typical blog post and it promises many different uses from new associate training to inclusion in a corporate governance seminar syllabus (CHECK!), to helping clients understand the landscape of activist hedge funds. The post summarized common activist attack methods like proxy fights, withhold votes, proxy resolutions, and PR campaigns, etc. It also provides a company/target defense checklist addressing major categories of action such as:
- Creating designated corporate teams
- Shareholder relations
- Board of Director management strategies
- Stock & financial monitoring
Additionally, the post categorizes, in some detail, the various response options available to targets as well as documents the shifting landscape of hedge fund activism:
Many major activist attacks involve a network of activist investors (“wolf pack”) which supports the lead activist hedge fund, but attempts to avoid the disclosure and other laws and regulations that would hinder or prevent the attack if they were, or were deemed to be, a “group” that is acting in concert. Not infrequently, at the fringe of the wolf pack are some of the leading institutional investors, not actively joining in the attack, but letting the leader of the pack know that it can count on them in a proxy fight. The outcome of a proxy contest at most of the larger public companies is often, as a practical matter, determined by the votes of the three major passive investors: BlackRock, State Street and Vanguard. Major investment banks, law firms, proxy solicitors, and public relations advisors are now representing activist hedge funds and eagerly soliciting their business.
No question is this making my corporate governance seminar syllabus. I am so excited by this post that I am sharing it wholesale and encourage you to do so some productive procrastination or downtime between tasks by reading this article.
Tuesday, June 2, 2015
Earlier I blogged (on the BLPB here and CLS Blue Sky Blog here) about my co-authored piece, Institutional Investing When Shareholders Are Not Supreme--a 30-year empirical and case review study analyzing institutional investors' response to constituency statutes as one lens into the question of institutional capital available for alternative purpose firms, like benefit corporations. On Monday, I wrote a short post on our article for the Harvard Law School Forum on Corporate Governance and Financial Reform, which is available here.
Wednesday, May 27, 2015
This week I have found myself reading the co-authored, empirical piece by C.N.V. Krishnan, Frank Partnoy, and Randall Thomas titled, Top Hedge Funds and Shareholder Activism. Through their sample they observe that top hedge funds have repetitional capital in that the market responds more positively to announcements by certain hedge funds with certain features, like a longer track record, larger assets under management and management participation through board of director seats. Its an interesting and insightful article on the role, and value, of hedge funds. The authors conclude that
The market appears to anticipate the superior performance of these top hedge funds even before announcement of intervention. Moreover, post-intervention target-firm operating performance associated with these top hedge funds is significantly superior to that of other hedge fund activists.
The focus on reputation reminded of Elisabeth de Fontenay's good work on reputation in private equity. Her article, Private Equity Firms as Gatekeepers, 33 Review of Banking & Financial Law 115-189 (2014). de Fontenay argues in her piece that:
private equity firms act as gatekeepers in the debt markets. As repeat players, private equity firms use their reputations with creditors to mitigate the problems of borrower adverse selection and moral hazard in the companies that they manage, thereby reducing creditors’ costs of lending to these companies. Private equity-owned companies are thus able to borrow money on more favorable terms than standalone companies, all else being equal. By acting as gatekeepers, private equity firms render the debt markets more efficient and provide their portfolio companies with an increasingly valuable borrowing advantage.
Updated to add: Frank Partnoy informed me that he and Elisabeth presented these 2 papers collaboratively to the Duke law faculty with each commenting on the other. This either proves once again that I have no original ideas OR this validates my insights about the overlapping observations in these papers.
Friday, May 22, 2015
I haven’t met Hollywood producer Edward Zwick, who brought the movie and the concept of Blood Diamonds to the world’s attention, but I have had the honor of meeting with medical rock star, and Nobel Prize nominee Dr. Denis Mukwege. Both Zwick and Mukwege had joined numerous NGOs in advocating for a mandatory conflict minerals law in the EU. I met the doctor when I visited Democratic Republic of Congo in 2011 on a fact finding trip for a nonprofit that focuses on maternal and infant health and mortality. Since Mukwege works with mass rape victims, my colleague and I were delighted to have dinner with him to discuss the nonprofit. I also wanted to get his reaction to the Dodd-Frank conflict minerals regulation, which was not yet in effect. I don’t remember him having as strong an opinion on the law as he does now, but I do remember that he adamantly wanted the US to do something to stop the bloodshed that he saw first hand every day.
The success of the Dodd-Frank law is debatable in terms of stemming the mass rape, use of child slaves, and violence against innocent civilians. Indeed, earlier this month, over 100 villagers were raped by armed militia. A 2014 Human Rights Watch report confirms that both rebels and the Congolese military continue to use rape as a weapon of war to deal with ethnic tensions. I know this issue well having co-authored a study on the use of sexual and gender-based violence in DRC with a medical anthropologist. With all due respect to Dr. Mukwege (who clearly know the situation better than I), that research on the causes of rape, but more important, my decade of experience in the supply chain industry have lead me to believe that the US Dodd-Frank law was misguided. The law aims to stem the violence by having US issuers perform due diligence on their supply chains. I have spoken to a number of companies that have told me that it would have been easier for the US to just ban the use of minerals from Congo because the compliance challenges are too high. Thus it was no surprise that last year’s SEC filings were generally vague and uninformative. It remains to be seen whether the filings due in a few weeks will be any better.
To me Dodd-Frank is a convenient way for the US government to outsource human rights enforcement to multinational corporations. Due diligence and clean supply chains are good, necessary, and in my view nonnegotiable, but they are not nearly enough to deal with the horrors in Congo. Nonetheless, in a surprise move, the EU Parliament voted this week to go even farther than the US law. According to the Parliament’s press release:
Parliament voted by 400 votes to 285, with 7 abstentions, to overturn the Commission's proposal as well as the one adopted by the international trade committee and requested mandatory compliance for "all Union importers" sourcing in conflict areas. In addition, "downstream" companies, that is, the 880, 000 potentially affected EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products, will be obliged to provide information on the steps they take to identify and address risks in their supply chains for the minerals and metals concerned… The regulation applies to all conflict-affected high risk areas in the world, of which the Democratic Republic of Congo and the Great Lakes area are the most obvious example. The draft law defines 'conflict-affected and high-risk areas' as those in a state of armed conflict, with widespread violence, the collapse of civil infrastructure, fragile post-conflict areas and areas of weak or non-existent governance and security, characterised by "widespread and systematic violations of human rights".
(emphasis mine). I hope this proposed law works for the sake of the Congolese and all of those who live in conflict zones around the world. The EU member states have to sign off on it, so who knows what the final law will look like. Some criticize the law because the list of “conflict-affected areas” is constantly changing. Although that’s true, I don’t think that criticism should affect passage of the law. The bigger flaw in my view is that there are a number of natural resources from conflict-affected zones- palm oil comes to mind- that this regulation does not address. This law, like Dodd-Frank does both too much and not enough. In an upcoming book chapter, I propose that governments use procurement and other incentives and penalties related to executive compensation and clawbacks to drive human rights due diligence and third-party audits (sorry, I'm prohibited from posting a link to it but it's forthcoming from Cambridge University Press).
In the meantime, I will wait for the DC Circuit to rule on constitutional aspects of the Dodd-Frank bill. I will also be revising my most recent law review article on the defects of the disclosure regime to address the EU development. I will post the article next week from Havana, Cuba, where I will spend 10 days learning about the Cuban legal system and culture. Given my scholarship and the recent warming of relations between the US and Cuba, I may sneak a little research in as well, and in two weeks I will post my impressions on the challenges and opportunities that US companies will face in the Cuban market once the embargo is lifted. Adios!
May 22, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Legislation, Marcia Narine, Securities Regulation, Travel | Permalink | Comments (0)
Thursday, May 21, 2015
My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts. I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders. This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant. Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate. But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”
Denial of Responsibility. Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.” Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control. White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.
Denial of Injury. This rationalization focuses on the injury or harm caused by the illegal or unethical act. White collar offenders may rationalize their behavior by asserting that no one will really be harmed. If an act’s wrongfulness is partly a function of the harm it causes, an offender can excuse her behavior if no clear harm exists. The classic use of this technique in white collar crime is an embezzler describing her actions as “borrowing” the money—by the offender’s estimation, no one will be hurt because the money will be paid back. Offenders may also employ this rationalization when the victim is insured or the harm is to the public or market as a whole, such as in insider trading or antitrust cases.
Denial of the Victim. Even if a white collar offender accepts responsibility for her conduct and acknowledges that it is harmful, she may insist that the injury was not wrong by denying the victim in order to neutralize the “moral indignation of self and others.” Denying the victim takes two forms. One is when the offender argues that the victim’s actions were inappropriate and therefore he deserved the harm. The second is when the victim is “absent, unknown, or abstract,” which is often the case with property and economic crimes. In this instance, the offender may be able to minimize her internal culpability because there are no visible victims “stimulat[ing] the offender’s conscience.” White collar offenders may use this rationalization in frauds against the government, such as false claims or tax evasion cases, and other crimes in which the true victim is abstract.
Condemning the Condemners. White collar offenders may also rationalize their behavior by shifting attention away from their conduct on to the motives of other persons or groups, such as regulators, prosecutors, and government agencies. By doing so, the offender “has changed the subject of the conversation”; by attacking others, “the wrongfulness of [her] own behavior is more easily repressed.” This rationalization takes many forms in white collar cases: the offender calls her critics hypocrites, argues they are compelled by personal spite, or asserts they are motivated by political gain. The claim of selective enforcement or prosecution is particularly prominent in this rationalization. In addition, white collar offenders may point to a biased regulatory system or an anticapitalist government.
Appeal to Higher Loyalties. The appeal to higher loyalties rationalization occurs when an individual sacrifices the normative demands of society for that of a smaller group to which the offender belongs. The offender does not necessarily reject the norms she is violating; rather, she sees other norms that are aligned with her group as more compelling. In the white collar context, the group could be familial, professional, or organizational. Offenders rationalizing their behavior as necessary to provide for their families, protect a boss or employee, shore up a failing business, or maximize shareholder value are employing this technique. Notably, female white collar offenders have been found to appeal to higher family loyalties more than their male counterparts.
Metaphor of the Ledger. White collar offenders may accept responsibility for their conduct and acknowledge the harm it caused, yet still rationalize their behavior by comparing it to all previous good behaviors. By creating a “behavior balance sheet,” the offender sees her current negative actions as heavily outweighed by a lifetime of good deeds, both personal and professional, which minimizes moral guilt. It seems likely that white collar offenders employ this technique, or at least have it available to them, as evidenced by current sentencing practices—almost every white collar sentencing is preceded by a flood of letters to the court supportive of the defendant and attesting to her good deeds.
Claim of Entitlement. Under the claim of entitlement rationalization, offenders justify their conduct on the grounds they deserve the fruits of their illegal behavior. This rationalization is particularly common in employee theft and embezzlement cases, but is also seen in public corruption cases.
Claim of Relative Acceptability/Normality. The final white collar rationalization entails an offender justifying her conduct by comparing it to the conduct of others. If “others are worse” or “everybody else is doing it,” the offender, although acknowledging her conduct, is able to minimize the attached moral stigma and view her behavior as aligned with acceptable norms. In white collar cases, this rationalization is often used by tax violators and in real estate and accounting frauds.
I’ve identified the use of these rationalizations by white collar offenders such as Rajat Gupta, Peter Madoff, Allen Stanford, and others. But I’d be interested to hear from readers where they’ve seen “vocabularies of motive” in the white collar world. (If you’re not sure, try starting with Bloomberg's oral history of Drexel Burnham Lambert, in what has to be the largest collection of rationalizations ever assembled.)
Business and Human Rights Junior Scholars Conference