Tuesday, June 12, 2018

A Private Ordering and Dual Class Share Structures in IPOs (and Beyond)

Bernie Sharfman's paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, was just published, and I think he has a point. In fact, as I read his argument, I think it is consistent with arguments I have made about the difference between restrictions or unconventional terms or practices that exist at purchase versus such changes that are added after one becomes a member or shareholder.  Here's the abstract: 

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.

In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.

The recommended citation is Bernard S. Sharfman, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1 (2018).

I find his argument compelling, as I lean toward allowing contracting parties to enter into agreements as they so choose. I find this especially compelling at start-up or the IPO stage.  I might take a more skeptical view of changes made after start-up. That is, if dual-class shares are voted created after an IPO by the majority insiders, there is a stronger bait-and-switch argument. Even in that case, if the ability to create dual-class shares by majority vote was allowed by the charter/bylaws, it might be reasonable to allow such a change, but I also see a self-dealing argument to do such a thing post-IPO. At the outset, though, if insiders make clear that, to the extent that a dual-class share structure is self-dealing, the offer to potential purchasers is, essentially, "if you want in on this company, these are our terms." I can work with that. 

This is consistent with my view of other types of disclosure. For example, in my post: Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure, I discussed the ability to waive the duty of loyalty in Delaware LLCs:

At formation . . . those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty.  This is part of the bargain, and any member who does not agree to the terms need not become a member.  Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated.

It was my view, and remains my view, that there some concerns about such changes after one becomes a member that warrant either restrictions or at least some level of clear disclosures of the possibility of such a change after the fact, though even in that case, perhaps self-dealing protections in the form of the obligations of good faith and fair dealing would be sufficient. 

Similarly, in my 2010 post, Philanthropy as a Business Model: Comparing Ford to craigslist, I explained: 

I see the problem for Henry Ford to say, in essence, that his shareholders should be happy with what they get and that workers and others are more his important to him than the shareholders. However, it would have been quite another thing for Ford to say, “I, along with my board, run this company the way I always have: with an eye toward long-term growth and stability. That means we reinvest many of our profits and take a cautious approach to dividends because the health of the company comes first. It is our belief that is in the best interest of Ford and of Ford’s shareholders.”

For Ford, there seemed to be something of a change in the business model (and how the business was operated with regard to dividends) once the Dodge Brothers started thinking about competing. All of a sudden, Ford became concerned about community first. For craigslist, at least with regard to the concept of serving the community, the company changed nothing. And, in fact, it seems apparent that craiglist’s view of community is one reason, if not the reason, it still has its “perch atop the pile.”

Thus, while it is true craigslist never needed to accept eBay’s money, eBay also knew exactly how craigslist was operated when they invested. If they wanted to ensure they could change that, it seems to me they should have made sure they bought a majority share.  

I understand some of the concern about dual-class shares and other mechanisms that facilitate insider control, but as long as the structure of the company is clear when the buyer is making the purchase decision, I'm okay with letting the market decide whether the structure is acceptable.  

June 12, 2018 in Corporate Finance, Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Securities Regulation | Permalink | Comments (1)

Monday, May 14, 2018

A Bit More on Executive Private Lives and Fiduciary Duties

I always have loved the game of tag, and I love a challenge.  More importantly, I love a conversation about business law . . . .

Last week, Steve Bainbridge posted a follow-on to posts written by Ann and me on the application of fiduciary duties to the private lives of corporate executives.  As Steve typically does in his posts, he raises some nice points that carry forward this discussion.  In a subsequent Tweet, Steve appears to invite further conversation from one or both of us by linking to his post and writing "Tag.  You're it."

Screenshot 2018-05-14 22.50.35
I do want to make two additional points.  First, I offer an endorsement of something Steve wrote in his post.  Specifically, Steve asks (with a small typo corrected): 

 . . . to what extent should a board have Caremark duties to monitor a CEO's private life. Personally, I think Caremark is not limited to law compliance programs. A board presented with red flags relating to serious misconduct--especially misconduct in a sphere of life directly related to the corporation's business (think Weinstein)--has a duty to investigate. But, again, does that mean the board should hire private investigators to track the CEO 24/7?

I agree that a board's duty to monitor is not limited to compliance programs.  Stone v. Ritter makes it plain that the duty to monitor arises from a director's obligation of good faith, situated within the duty of loyalty.  Assuming no "intent to violate applicable positive law" or an intentionally failure to act in the face of a known duty to act (demonstrating a conscious disregard for his duties)," however, under Disney, a failure to monitor in this context likely would not rise to the level of bad faith unless the board "intentionally acts with a purpose other than that of advancing the best interests of the corporation"--which seems unlikely (although someone with more time and creativity than I have at the moment may be able to spin out some relevant facts).  Of course, the Delaware Supreme Court could add to the Disney list of actions not in good faith . . . .  But absent any of that, it is unlikely that a board of directors' failure to monitor an executive's private life will result in liability for a breach of the duty of loyalty.

Second, I want to pass on a further thought on the debate--one that is not my own.  In an email message to me, co-blogger Stefan Padfield observed that corporate opportunity doctrine questions are fiduciary duty claims that extend into a fiduciary's private life--specifically, the fiduciary's usurpation of the opportunity for his or her private gain.  He also noted that from there the leap is not as far as it may seem to conceptualizing other aspects of an executive's private conduct as being within the scope of his or her fiduciary duties to the corporation.  This certainly provides more food for thought.

I want to thank Ann for stimulating all these ideas.  Her original post raised a nice question--one that obviously provokes and has encouraged engagement in thoughtful conversation.  While we have not yet resolved the issue, we have staked out some important ground that may be covered in extant or forthcoming cases.  As Ann's and Steve's posts point out, there are a number of intriguing fact patterns at the intersection of executives' private lives and fiduciary duties that may force courts to wrestle some of this to the ground.  I, for one, will be watching to see what happens.

May 14, 2018 in Ann Lipton, Corporate Governance, Corporations, Joan Heminway, Stefan J. Padfield | Permalink | Comments (4)

Monday, May 7, 2018

Yes, Ann. I believe that CEOs have private lives . . . .

I was fascinated by Ann Lipton's post on April 14.  I started to type a comment, but it got too long.  That's when I realized it was actually a responsive blog post.  

Ann's post, which posits (among other things) that corporate chief executives might be required to comply with their fiduciary duties when they are acting in their capacity as private citizens, really made me think.  I understand her concern.  I do think it is different from the disclosure duty issues that I and others scope out in prior work.  (Thanks for the shout-out on that, Ann.)  Yet, I struggled to find a concise and effective response to Ann's post. Here is what I have come up with so far.  It may be inadequate, but it's a start, at least.

Fiduciary duties are contextual.  One can have fiduciary duties to more than one independent legal person at the same time, of course, proving this point. (Think of those overlapping directors, Arledge and Chitiea in Weinberger.  They're a classic example!)  What enables folks to know how to act in these situations is a proper identification of the circumstances in which the person is acting.

So, for example, an agent’s duty to a principal exists for actions taken within the scope of the agency relationship. The agency relationship is defined by the terms of the agreement between principal and agent as to the object of the agency. The principal controls the actions of the agent within those bounds based on that agreement.

Similarly, a director’s or officer's conduct is prescribed and proscribed within the four corners of the terms of their service to the corporation. They owe their duties to the corporation (and in Revlon-land or other direct-duty situations, also to the stockholders). The problem then becomes defining those terms of service. For directors, a quest for evidence of the parameters of their service should start with the statute and extend to any applicable provisions of the corporate charter, bylaws, and board policies and resolutions more generally. For officers, the statute typically doesn’t provide much content on the nature or extent of their services. The charter may not either. Typically, the bylaws and board policies and resolutions, as well as any employment or severance agreement (the validity of which is largely a matter outside the scope of corporate law), would define the scope of service of an officer.

I have trouble envisioning that the scope of service (and therefore, reach of fiduciary duties) for a typical director or officer would extend to, e.g., private ownership of other entities and decisions made in that capacity.  Yet, even where there is no technical conflicting interest or breach of a duty of loyalty, there is a clear business interest in having corporate managers—especially highly visible ones—act in a manner that is consistent with corporate policy or values when they are not “on the job.”  While voluntary corporate policy or private regulation may have a role in policing that kind of director or officer activity (through service qualifications or employment termination triggers, e.g.), I do not think it is or should be the job of corporate law—including fiduciary duty law—to take on that monitoring and enforcement role.

Nevertheless, I remain convinced that better (more accurate ad complete) disclosure of (at least) inherent conflicts of interest may be needed so investors and other stakeholders can evaluate the potential for undesirable conduct that may impact the nature or value of their investments in the firm.  As Ann notes, significant privacy rights exist in this context, too.  There's more work to be done here, imv.

Thanks for making me think, Ann.  Perhaps you (or others) have a comment on this riposte?  We shall see . . . .

May 7, 2018 in Ann Lipton, Business Associations, Corporate Governance, Corporations, Joan Heminway, Management | Permalink | Comments (4)

Monday, April 30, 2018

Social Enterprise and the Traditional For-Profit Corporation

My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review.  I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October.  The essay is entitled "Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise," and the SSRN abstract is included below:

The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).

The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.

Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne.  Evidence of a business law Vulcan mind meld?  You decide . . . .  

Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.

April 30, 2018 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Joshua P. Fershee, Social Enterprise, Stefan J. Padfield | Permalink | Comments (2)

Monday, April 23, 2018

AALS 2019 - Section on Business Associations Call for Papers

Call for Papers for the

Section on Business Associations Program on

Contractual Governance: the Role of Private Ordering

at the 2019 Association of American Law Schools Annual Meeting

The AALS Section on Business Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Contractual Governance: the Role of Private Ordering.  The program will explore the use of contracts to define and modify the governance structure of business entities, whether through corporate charters and bylaws, LLC operating agreements, or other private equity agreements.  From venture capital preferred stock provisions, to shareholder involvement in approval procedures, to forum selection and arbitration, is the contract king in establishing the corporate governance contours of firms?  In addition to paper presenters, the program will feature prominent panelists, including SEC Commissioner Hester Peirce and Professor Jill E. Fisch of the University of Pennsylvania Law School.

Our Section is proud to partner with the following co-sponsoring sections: Agency, Partnership, LLC's and Unincorporated Associations; Contracts; Securities Regulation; and Transactional Law & Skills.

Submission Information:

Please submit an abstract or draft of an unpublished paper to Anne Tucker, amtucker@gsu.edu on or before August 1, 2018.  Please remove the author’s name and identifying information from the submission. Please include the author’s name and contact information in the submission email.

Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Papers presenters will be responsible for paying their registration fee, hotel, and travel expenses.

Any inquiries about the Call for Papers should be submitted to: Anne Tucker, Georgia State University College of Law, amtucker@gsu.edu or (404) 413.9179.

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[Editorial note: As some may recall, the BLPB hosted a micro-symposium on aspects of this issue in the limited liability company context in anticipation of a program held at the 2016 AALS annual meeting.  The initial post for that micro-symposium is here, and the wrap-up post is here.  This area--especially as writ broadly in this proposal--remains a fascinating topic for study and commentary.]

April 23, 2018 in Anne Tucker, Business Associations, Call for Papers, Conferences, Contracts, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, LLCs, Nonprofits, Partnership | Permalink | Comments (0)

Saturday, April 21, 2018

Can Contract Clauses Stop Human Trafficking?

Last week, I blogged blogged about lawsuits against chocolate makers alleging unfair and deceptive trade practices for failure to disclose that the companies may have used child slaves to harvest their products. Today, I want to discuss steps that the Business Law Section of the American Bar Association is taking to provide more transparency in supply chain practices.

In 2014, the ABA House of Delegates adopted Model Principles on Labor Trafficking and Child Labor developed by over 50 judges, in-house counsel, outside counsel, academics, and NGOs. The Model Principles address the UN Guiding Principles on Business and Human Rights and other hard and soft law regimes. At last week’s ABA Business Law Spring Meeting, academics David Snyder and Jennifer Martin presented on human rights issues in supply chains alongside practicing lawyers and in-house executives. Many of them (and several others) had formed a Working Group to Draft Human Rights Protections in Supply Contracts. The Group aims to provide contract clauses that are “legally effective” and “operationally likely.”

As a former Deputy GC for a supply chain management company, I can attest that the ABA’s focus is timely as companies answer questions from customers, regulators, shareholders, and other stakeholders. Human rights issues play out in dozens of regulations, including, but not limited to: the Foreign Corrupt Practices Act, Trafficking Victims Protection Act, Dodd-Frank Conflict Minerals Act, California Transparency in Supply Chains Act, the UK Modern Slavery Act, the Trade Facilitation and Trade Enforcement Act, and the updated Federal Acquisition Regulations. Australia and at least seven EU countries are currently working on their own regulations. Savvy lawyers have use the Alien Tort Statute, RICO, negligence, and false advertising allegations to state claims, with varying success.

The following statistics may provide some context. Thanks to e. Christopher Johnson, Jr., CEO of the Center for Justice, Rights, and Dignity.
- there are 21 million victims of human trafficking
- Human trafficking provides $150 billion in profit
- Women and girls are 55% of the victims, and children 17 and under are 26%

To help companies mitigate their supply chain risks, the Business Law and UC Article 1 and Article 2 Committees have drafted more specific model clauses to incorporate human rights provisions in certain contracts. The Committees are also establishing an information exchange with NGOs and developing a Toolkit for Canadian lawyers.

One of the most practical features of the Group’s work is Schedule P, the warranties and remedies to protect human rights in the supply chain. The Working Group’s Report provides guidance on how to use the clauses as well as potential limitations. It’s a long read but I recommend that you look at the report and consider whether the model clauses and Schedule P, an appendix to supplier agreements, will help in the fight to combat human trafficking and forced labor. 

April 21, 2018 in Compliance, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Tuesday, April 17, 2018

LLCs Are Not Corporations & You Can't Have A Parent-Subsidiary Relationship When There is Only One Entity

Oh boy. A 2010 case just came through on my "limited liability corporation" WESTLAW alert (that I get every day).  This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those. 

CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of Association or as any other form of organization. Instead, OPRA simply served as the name used to describe a committee of registered national securities exchanges.”).
REALTIME DATA, LLC d/b/a/ IXO, Plaintiff, v. CME GROUP INC., ET AL., Defendants. Additional Party Names: Chicago Bd. Options Exch., Inc., No. 6:09-CV-327-LED-JDL, 2010 WL 11601868, at *1–2 (E.D. Tex. Aug. 27, 2010) (emphasis added).
 
Okay, so first, we should get the LLC name right. That's old news. Important, but old news. An LLC is still not a corporation.  Second, LLCs, as non-corporate entities, do not engage in corporate governance and have significantly fewer formal entity obligations. Third, LLCs do not have "partnership agreements," they generally have operating agreements. 
 
In addition, partnerships don't need formal "partnership agreements," either, though to be a partnership there is always the agreement of two or more people to operate a business as co-owners seeking profit.  The court explains that "CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation," and states that OPRA had been in operation since 1975, when it was established by "directive from the Securities and Exchange Commission (“SEC”) designating OPRA to facilitate the distribution of options pricing information." Id. This suggests that perhaps OPRA is a partnership formed by the CBOE and the other six exchanges.  That would make CBOE (and the other six exchanges) potentially liable for the actions of OPRA and any resulting damages.  No one seemed to make that claim. 
 
Instead, CBOE was pursued under some version of an alter ego or business enterprise claim, seeking to merge OPRA into CBOE.  The court explains further: 
CBOE fails to identify grounds for institutional independence from OPRA at the time this suit was filed, and Realtime presents sufficient evidence to impute OPRA's contacts [for obtaining personal jurisdiction] to CBOE.
*5 In applying the Texas long arm statute, courts in this Circuit have followed the rule established by the Supreme Court in 1925 that “so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other.” Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th Cir. 1983) (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925)). In this case, however, at the time the lawsuit was filed there were no clear legal boundaries to affirmatively identify a parent-subsidiary or sister-sister corporate relationship. . . .  It is undisputed that prior to January 1, 2010, OPRA did not seek the protections of incorporation, RESPONSE, EXH. 13, OPRA LLC AGREEMENT (Doc. No. 238-14), and based on the current record, Realtime has put on more than a minimal showing that OPRA was under the managerial and day-to-day control of CBOE. See, e.g., Oncology Therapeutics Network v. Virginia Hematology Oncology PLLC, No. C 05-3033-WDB, 2006 WL 334532 (Feb. 10, 2006 N.D. Cal.) (noting, in the context assessing whether two related entities formed a single enterprise, that “At this juncture, plaintiff merely has to allege a colorable claim. Plaintiff does not have to prove the claim.”). Therefore, the strict separateness required under Cannon need not be applied here because OPRA did not seek protections to formally divide its dealings from that of its counterpart CBOE.
Id. at *4–5  (emphasis added). Rather than working to find entity status here, I would think the better claim would the existence of a partnership, as noted above, or even a principal-agent relationship, where CBOE is the agent of OPRA or vice versa.  The court goes on: 
Instead, these facts make it appropriate to apply the single business enterprise doctrine. The single business enterprise doctrine applies when two or more business entities act as one. Nichols, 151 F. Supp.2d at 781–82 (citing Beneficial Personnel Serv. of Texas v. Rey, 927 S.W.2d 157, 165 (Tex. App.- El Paso 1996, pet. granted, judgm't vacated w.r.m., 938 S.W.2d 717 (Tex. 1997)). Under the doctrine, when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, “each corporation may be held liable for debts incurred during the pursuit of the common business purpose.”Western Oil & Gas J.V., Inc., v. Griffiths, No. 300-cv-2770N, 2002 WL 32319043, at *5 (N.D. Tex. Oct. 28, 2002) (internal citations omitted). Being a part of a single business enterprise imposes partnership-style liability. Id. The facts presented here demonstrate that OPRA and CBOE operate as a single business entity, at least for the threshold inquiry of establishing jurisdiction.
Id. (footnotes omitted) (emphasis added). How does this doctrine apply when, at the time of filing, the court has already acknowledged that there were not even tow entities? If there is one entity, then CBOE is directly connected.  If OPRA is clearly some form of entity, the court should figure out which one it is (hint: it's likely a partnership).  If, as the court says, they are a single entity, then CBOE (as a clearly defined entity) is the only entity. The court acknowledges this reality but does not concern itself with it.   
Traditionally, courts have applied this doctrine when two corporations are acting as one. However, despite OPRA not having a defined corporate status at the time this suit was filed, there is demonstrable proof that CBOE was controlling OPRA's “business operations and affairs,” permitting the two entities to be fused for jurisdictional purposes.
Id. (emphasis added). This description suggests that CBOE might be the principal and OPRA might be the agent or that OPRA is simply part of CBOE. The facts seem to suggest a separateness that makes the latter a more difficult claim (at least the court is acting that way). An agency relationship, in at least some circumstances, can support indirect personal jurisdiction. See EBG Holdings LLC v. Vredezicht's Gravenhage 109 B.V., No. CIV.A. 3184-VCP, 2008 WL 4057745, at *10 (Del. Ch. Sept. 2, 2008) (stating that there are two "indirect bases under which a parent entity may be subject to jurisdiction through a subsidiary . . . the agency theory and the alter ego theory); but see Daimler AG v. Bauman, 571 U.S. 117, 139, 134 S. Ct. 746, 762, 187 L. Ed. 2d 624 (2014) (stating that due process did not permit the exercise of general jurisdiction over an international parent corporation in California).  
 
It seems to me that using an agency relationship to establish personal jurisdiction in the CBOE case should be somewhat easier than a parent-subsidiary case given the lack of a parent-subsidiary relationship and OPRA's lack of entity status. Instead, establishing the agency relationship should be sufficient. As a reminder, an agency relationship must

include: (1) the agent having the power to act on behalf of the principal with respect to third parties; (2) the agent doing something at the behest of the principal and for his benefit; and (3) the principal having the right to control the conduct of the agent). 

Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 169 n.130 (Del. Ch. 2003) (citing J.E. Rhoads & Sons, Inc. v. Ammeraal, Inc., 1988 WL 32012, at *4 (Del. Super. Mar. 30, 1988)). 

Anyway, it appears the court may have been right to assert personal jurisdiction over CBOE, but I don't think the analysis was proper.  And that should matter, too. One day, the same analysis will lead to an incorrect outcome.  
 

April 17, 2018 in Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (0)

Tuesday, April 10, 2018

Preventing CEO Distraction by Restricting Outside Board Service

Last week, the Neel Corporate Governance Center at UT Knoxville hosted one of UT Knoxville's alums, Ron Ford, as a featured speaker.  He gave a great talk on boards of directors, from his unique vantage point--that of a CFO.  In the course of his remarks, he mentioned a public company corporate gpvernance policy that I had not earlier heard of: a CEO limit or prohibition on outside board service (other than local, small nonprofit board service).  A 2017 study found that:

Only 22% of S&P 500 boards set a specific limit in their corporate governance guidelines on the CEO’s outside board service; 65% of those boards limit CEOs to two outside boards, and 32% set the limit at one outside board. One board does not allow the company CEO to serve on any outside corporate boards, and two boards allow their CEO to serve on three outside corporate boards.

This may be why I had not heard about governance policies limiting board service; it seems these policies may be relatively uncommon.  I know from experience that CEOs do serve on outside boards and often consider that service an important way to learn valuable things that can be implemented at the firm that enjoys them.

What is the ostensible purpose of a policy restricting the outside board service of a firm's CEO?  Perhaps it is obvious.  It seems that most firms imposing this kind of restriction on CEOs desire to prevent the CEO from spending significant time on his or her service as a board member of another firm to the detriment of the firm by which he or she is employed as chief executive.  An online article succinctly captures the capacity for distraction.

. . . CEOs must weigh . . . the potential disadvantage of having to navigate a crisis. David Larcker, a professor at Stanford Law School and senior faculty at the university’s corporate governance center, says that while most CEOs would say that serving on an outside board is highly valuable, everything changes if either company comes up against a big challenge.

“Where it gets really complicated for a sitting CEO is if something happens,” Larcker says. “You’re a takeover target. You have a big restatement. You’re replacing a CEO. That’s harder to predict and takes up a lot of time.”

Are there CEOs who have experienced this kind of distraction?  Yes.  A Forbes contributor offers a well-known example in an article entitled "All Operating Executives Should Never Serve On Any Outside Boards":

A good poster child of outside board distractions was Meg Whitman in her final 2 years at the helm of eBay (EBAY). During this time, she joined the boards of Proctor & Gamble and DreamWorks Animation. EBay flew Meg around to Cincinnati and LA board meetings on their private jet. EBay's stock sank. Meg bought Skype. It didn't help.

The same article also calls out two Yahoo! CEOs as further examples.  And there are others.  See also, e.g.here.

Continue reading

April 10, 2018 in Corporate Governance, Corporations, Joan Heminway, Management | Permalink | Comments (2)

Friday, March 30, 2018

Corporate Boycotts, A Change of Heart from CEOs, and H & M's Diversity Initiative- A Roundup of The Week's News Stories

Within the past 24 hours, I've seen at least three news article that led me to reflect on my past blog posts. Rather than write a full post on each article, I've decided to note some observations.

The Tweet That Launched A Boycott (And Maybe a Buycott)

I've been skeptical in the past about whether boycotts work.  Perhaps times are changing. This week, Parkland shooting survivor David Hogg tweeted that advertisers on Laura Ingraham's cable show should pull out after she tweeted,  "David Hogg Rejected By Four Colleges To Which He Applied and whines about it. (Dinged by UCLA with a 4.1 GPA...totally predictable given acceptance rates.) https://www.dailywire.com/news/28770/gun-rights-provocateur-david-hogg-rejected-four-joseph-curl "  On March 28th, the 17-year old activist responded with "Soooo what are your biggest advertisers ... Asking for a friend. ." He then provided a list of her top twelve sponsors.

As of 8:00 p.m. tonight, the following companies dumped the Fox show, eleven after the talk show host had apologized, stating “On reflection, in the spirit of Holy Week, I apologize for any upset or hurt my tweet caused him or any of the brave victims of Parkland... For the record, I believe my show was the first to feature David immediately after that horrific shooting and even noted how ‘poised’ he was given the tragedy ... As always, he’s welcome to return to the show anytime for a productive discussion.”

The companies that have pulled their advertising include Nutrish, Office Depot, Jenny Craig, Hulu, TripAdvisor, Expedia, Wayfair, Stitch Fix, Nestlé, Johnson & Johnson, Jos A Bank, Miracle Ear, Liberty Mutual and Principal. But will they ever return to the show after the attention moves to something else? Will the sponsors face a "buycott," where Ingraham's fans boycott the boycotters or increase their support of the advertisers that Hogg specifically named but have chosen to stay with Ingraham? Time will tell. 

Silicon Valley CEOs Warm to President Trump

Last year, I posted about various CEOs choosing to distance themselves from President Trump by resigning from advisory councils because they disagreed with his actions or positions on everything from immigration to his reaction to the events in Charlottesville. Today, the New York Times reported that some of the same CEOs that bemoaned Trump's election and/or publicly condemned him have now had a change of heart. Apparently, they have more common ground than they thought on areas of tax reform, infrastructure, and looser regulation. I look forward to seeing whether any of these companies or CEOs refrain from criticizing him in the future or, more tellingly, whether they choose to use PAC money or personal funds to support his re-election. 

H & M Asks One of Its Lawyers To Lead Diversity Initiative

H & M has lots of problems from underperforming designs (billions in unsold clothes) to continued fallout from its "coolest monkey in the jungle" hoodie. As you may recall, in January, a number of consumers, public figures, and other called for a boycott of the company after a young black boy advertised a green hoodie with the word "monkey." H & M even had to close its store in South Africa.  The fast fashion company has now turned to one of its in-house lawyers to lead a 4-person team to focus on diversity and inclusiveness. The lawyer will report directly to the CEO in Stockholm. Notably, the board is all white. Should the board diversify as well? It's hard to say. While I support diversity in the executive ranks and the boardroom,  there is no evidence that the monkey hoodie led to the 62% drop in operating profit in Q1. Instead, experts note that consumers just didn't like the selections, even at steep discounts. Further, the average H & M customer probably has no idea about this new diversity initiative and even if the customer knew, it'sdoubtful that would change buying habits. Even so, I applaud H & M for taking concrete steps. The company already produces a compelling Sustainability Report. I look forward to seeing if the company can return to profitabiity while keeping its commitment to diversity. 

 

 

 

March 30, 2018 in Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Marcia Narine Weldon, Shareholders | Permalink | Comments (2)

Monday, March 26, 2018

Teaching Corporate Law Globally - Recommended Text

I am committed to introducing my business law students to business law doctrine and policy both domestically and internationally.  The Business Associations text that I coauthored has comparative legal observations in most chapters.  I have taught Cross-Border Mergers & Acquisitions with a group of colleagues and will soon be publishing a book we have coauthored.  And I taught comparative business law courses for four years in study abroad programs in Brazil and the UK.  

In the study abroad programs, I struggled in finding suitable texts, cobbling together several relatively small paperbacks and adding some web-available materials.  The result was suboptimal.  I yearned for a single suitable text.  In my view, texts for study abroad courses should be paperback and cover all of the basics in the field in a succinct fashion, allowing for easy portability and both healthy discussion to fill gaps and customization, as needed, to suit the instructor's teaching and learning objectives.

And so it was with some excitement--but also some healthy natural skepticism--that I requested a review copy of Corporations: A Comparative Perspective (International Edition), coauthored by my long-time friend Marco Ventoruzzo (Bocconi and Penn State) and five others (all scholars from outside the United States), and published by West Academic Publishing.  I am pleased to say that if/when I teach international and comparative corporate governance and finance (especially in Europe) in the future, I will/would assign this book.  It is a paperback text that, despite its 530 pages, is both reasonably comprehensive and manageable.

The book is divided into ten chapters, starting with basic "building blocks" of comparative corporate law and ending (before some brief final thoughts) with unsolicited business combinations.  U.S. law is, for the most part, the centerpiece of the chapters, which consist principally of original text, cases, statutes, law journal article excerpts, and (in certain circumstances) helpful diagrams.  The methodological introduction, which I found quite helpful and user-friendly, notes that the coauthors "often (not always) start our analysis with the U.S. perspective."  (xxvi)  Yet, despite the anchoring use of U.S. law throughout the book, it somehow has a very European feel.  The coauthors note the emphasis on "U.S., U.K., major European continental civil law systems (France, Germany, Italy) and European Union law, and Japan," (id.) but my observation is that the words and phrasing also have a European flair.  Of course, this is unsurprising, given that all but one of the coauthors hail from European universities.  I note this without praise or criticism, but I mention it so others can assess its impact in their own teaching environments.

I recommend that those teaching in study abroad (or other courses focusing on comparative corporate law) review a copy of this book.  I will look forward to teaching from it the next time I need an international or comparative law teaching text for use in or outside the United States.

March 26, 2018 in Business Associations, Comparative Law, Corporate Finance, Corporate Governance, Corporations, International Business, International Law, Joan Heminway, Teaching | Permalink | Comments (0)

Tuesday, March 6, 2018

Prof. Jena Martin's New Human Rights Paper: Applying Bystander Intervention Training to Corporate Conduct

Friend and colleague Jena Martin has posted her new paper, Easing "the Burden of the Brutalized": Applying Bystander Intervention Training to Corporate Conduct.  And when I say new, I mean new.  It went on SSRN within the last hour.  

Prof. Martin is an expert in business and human rights, and her new paper offers a new framework for corporations that are seeking to reduce or eliminate human rights violations.  Her paper is designed to help corporation beyond due diligence and reporting to allow them to "engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses."  It is a timely piece with some interesting and innovative suggestions.  I look forward to seeing where the final version ends up. 

Abstract

The last few years have borne witness to a shift regarding how to address issues of oppression and social injustice. Across many different advocacy points - from police brutality to sexual violence - there seems to be a consensus that simply engaging the oppressor or the victim is not enough to affect real social change. The consensus itself is not new: it has been at the heart of many social justice movements over the years. However, what is new is the explicit evocation of the bystander within this framework. Too often, in conversations on conflicts generally (and negative human rights impact specifically), bystanders have been relegated to the sidelines, with no defined, specific role to play and no discussion within the larger narrative. Now, however, -- through the use of bystander intervention training -- these actors are taking on a more prominent role.

In previous articles, I have stated that the rhetoric and posture that transnational corporations (TNCs) maintain vis-à-vis human rights impacts is that of a bystander. Frequently, when human rights abuses occur, TNCs find themselves in the position of having to acknowledge their presence in the area of the underlying conflict, while profusely maintaining that none of their actions caused the harm against the community. Building off this prior work, this article seeks to answer the following question: are there lessons that can be learned from bystander intervention training in other contexts, that can be used for the benefits of TNCs within the field of business and human rights? I conclude that what is lacking in the current discourse on corporate policies regarding addressing negative human rights impacts is an articulation regarding when, and under what circumstances, it is appropriate for corporations to intervene in negative human rights disputes. This goes beyond the current proposals for human rights due diligence frameworks in that, rather than merely undergoing an assessment and then reporting this information out (as is required by most current legal frameworks that address business and human rights reporting) this would help corporations – informed by a bystander intervention framework – to engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.

March 6, 2018 in Corporate Governance, Corporate Personality, Corporations, CSR, Human Rights, Joshua P. Fershee | Permalink | Comments (0)

Friday, March 2, 2018

Will Conscious Capitalism Succeed? Corporate America and Guns

I live in South Florida and have friends who live in Parkland, Florida, the site of the most recent school shooting. Like many, I've found solace and inspiration in the young survivors and their families who have taken to the streets and visited Washington, D.C. to demand action to prevent the next tragedy. Who knows whether they will succeed where others have failed. I certainly hope so.

I'm more surprised though, with the reactions of major companies such as WalMart, Dicks, REI, United Airlines, Hertz, Symantec and others that have cut ties with the National Rifle Association or have changed their sales practices. Skeptics have observed that corporations take "controversial" stances only when it's cheap or easy and that this stance against the NRA isn't even that controversial. But, it certainly hasn't been "cheap" for Delta Airlines. Notwithstanding the fact that the airline employs 33,000 people in the state, Georgia has passed a bill to eliminate a proposed $50 million tax break because Delta announced plans to end its discount for NRA members. 

The gun control issue is the latest in a string of public policy debates that have divided corporations over the past year. CEOs have taken positions on the travel ban, Charlottesville, the NFL protests, the Paris Climate Accord, transgender bathroom laws, and immigration. Some of these positions are more closely tied to their core business than others, and some have been driven by social media activism. 

Cautious companies have guidance and momentum on their side when deciding whether to weigh in on social issues. According to the Conscious Capitalism credo, “.. business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had. But we can aspire to even more.” This movement focuses on a higher purpose than generating profits; a stakeholder orientation; leaders that cultivate a culture of care and consciousness; and a conscious culture that permeates the people, purpose, and process.

Blackrock, with $1.7 trillion under management, made that even more clear in its January 2018  letter to CEOs, which stated, among other things: 

Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth...

Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?

What does this mean for the future? Is corporate social responsibility more of a business imperative than ever? Boards are now entering proxy season. Will shareholders demand more? Will state and federal governments use their power, as Georgia has, to send a message to the C-Suite? Will consumers engage in boycotts or buycotts? (See  herehereherehere) for my views on boycotts). I look forward to seeing how whether the corporations sustain this conscious capitalism over the long term even when it is no longer "cheap" and "easy."

 

 

March 2, 2018 in Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Marcia Narine Weldon, Shareholders | Permalink | Comments (1)

Friday, February 16, 2018

Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era

This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:

With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration. 

Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.

February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Tuesday, February 13, 2018

These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind

I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.

To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals.  I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale.  Anyway, I hope you'll forgive the self-promotion and give the paper a look.  Here's the abstract: 

Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.

The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.

February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)

Saturday, February 3, 2018

Time's Up for Board Members: Sexual Misconduct Allegations Against CEOs of Wynn and the Humane Society Should Send a Message

Perhaps I'm a cynic, but I have to admit that I was stunned when the news of hotelier  Steve Wynn's harassment allegations at the end of January caused a double-digit drop in stock price.  What began as an unseemly story of a $7.5 million settlement to a manicurist at one his of his resorts later morphed into a story about his resignation as head of the finance chair of the Republican National Committee. Not only did he lose that job, he also lost at least $412 million (the company at one point lost over $3 billion in value). His actions have also led regulators in two states to scrutinize his business dealings and settlements to determine whether he has violated "suitability standards."  Nonetheless, Wynn has asked his 25,000 employees to stand by him and think of him as their father. The question is, will the board stand by him as it faces potential liability for breach of fiduciary duty?

The Wynn board members should take a close look at what happened with the Humane Society yesterday. That board chose to retain the CEO after ending an investigation into harassment allegations. A swift backlash ensued. Major donors threatened to pull funding, causing the CEO to resign. A number of board members also reportedly resigned. However, not all of the board members resigned out of principle. One female director resigned after stating, " Which red-blooded male hasn’t sexually harassed somebody? ... [w]omen should be able to take care of themselves.” Unfortunately, the reaction of this board member did not surprise me. She's in her 80s and in my twenty years practicing employment law on the defense side, I've heard similar sentiments from many (but not all) men and women of that generation. Indeed, French actress Catherine Deneuve initially joined other women in denouncing the #MeToo movement before bowing to public pressure to apologize. We have five generations of people in the workplace now, and as I have explained here, companies need to reexamine the boundaries. What may seem harmless or "normal" for some may be traumatic or legally actionable to someone else. 

As the Wynn and the Humane Society situations illustrate, the sexual harassment issue is now front and center for boards so general counsels need to put the issue on the next board agenda. As I wrote here, boards must scrutinize current executives as well as those they are reviewing as part of their succession planning roles to ensure that the executives have not committed inappropriate conduct. Because definitions differ, companies must clarify the gray areas and ensure everyone knows what's acceptable and what's terminable (even if it's not per se illegal).This means having the head of human resources report to the board that company policies and training don't just check a box. In fact, board members need to ask about the effectiveness of policies and training in the same way that they ask about training on bribery, money laundering, and other highly regulated compliance areas. Boards as part of their oversight obligation must also ensure that there are no uninvestigated allegations against senior executives. Prudent companies will review the adequacy of investigations into misconduct that were closed prematurely or without corroboration.Companies must spend the time and the money with qualified, credible legal counsel to investigate claims that they may not have taken seriously in the past. Because the #MeToo movement shows no signs of abating, boards need to engage in these uncomfortable, messy conversations. If they don't, regulators, plaintiffs' counsel, and shareholders will make sure that they do. 

February 3, 2018 in Compliance, Corporate Governance, Corporations, Current Affairs, Employment Law, Ethics, Marcia Narine Weldon, Shareholders | Permalink | Comments (3)

Monday, January 29, 2018

Stemler and Edelman on Federal Limitations on Regulating Online Marketplace

Indiana University legal studies professor Abbey Stemler sent along this description of an article she co-wrote with Harvard Business School Professor Ben Edelman. They recently posted the article to SSRN and would love any feedback you may have, in the comments or via e-mail. 

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Perhaps the most beloved twenty-six words in tech law, Section 230 of the Communications Decency Act of 1996 has been heralded as a “masterpiece” and the “law that gave us the modern Internet.” While it was originally designed to protect online companies from defamation claims for third-party speech (think message boards and AOL chat rooms), over the years Section 230 has been used to protect online firms from all kinds of regulation—including civil rights and consumer protection laws.  As a result, it is now the first line of defense used by online marketplaces to shield them from state and local regulation.

In our article recently posted to SSRN, From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces, we challenge existing interpretations of Section 230 and highlight how it and other federal laws interfere with state and local government’s ability to regulate online marketplaces—particularly those that dramatically shape our physical realities such as Uber and Airbnb.  We realize that the CDA is sacred to many, but as Congress pays renewed attention to this law, we hope our paper will support a richer discussion about what the CDA should and should not be expected to do. 

January 29, 2018 in Business Associations, Corporate Governance, Corporations, Current Affairs, Haskell Murray, Research/Scholarhip, Technology, Web/Tech | Permalink | Comments (0)

Friday, January 26, 2018

Should a Board Have Access To A CEO's Health Information?

On Wednesday, I spoke with Kimberly Adams, a reporter for NPR Marketplace regarding CSX's decision to require its CEO to disclose health information to the board. I don't have a link to post, sorry. As you may know, CSX suffered a significant stock drop in December when its former CEO died shortly after taking a medical leave of absence and after refusing to disclose information about his health issues. CSX has chosen the drastic step of requiring an annual CEO physical in response to a shareholder proposal filed on December 21st stating, “RESOLVED, that the CEO of the CSX Corporation will be required to have an annual comprehensive physical, performed by a medical provider chosen by the CSX Board, and that results of said physical(s) will be provided to the Board of Directors of the CSX Corporation by the medical provider.” Adams asked my thoughts about a Wall Street Journal article that outlined the company's plans. 

I'm not aware of any other company that asks a CEO to provide the results of an annual physical to the board. As I informed Adams, I hope the board has good counsel to avoid running afoul of the Americans with Disabilities Act, HIPAA, the Genetic Information Nondiscrimination Act of 2008, and other state and federal health and privacy laws. While I believe that the board must ensure that it takes its role of succession planning seriously, I question whether this is the best means to achieve that. I also remarked that although a CEO would know in advance that this is a condition of employment and would negotiate with the aid of counsel what the parameters would be, I was concerned about the potential slippery slope. How often would the CEO have to update the board on his/her health condition? Who else would have access to the information? Will this deter talented executives from seeking the top spot at a corporation?

One could argue that the health of the CEO is material information. But if that's the case, why haven't more shareholders made similar proposals? Perhaps there haven't been more of these proposals because the CSX situation was extreme. Shareholders were asked to bless the $84 million compensation package of a man who was so ill that he required a portable oxygen tank but who refused to disclose his condition or prognosis. Hopefully, other companies won't take the same approach. 

 

 

January 26, 2018 in Compliance, Corporate Governance, Corporations, Current Affairs, Employment Law, Marcia Narine Weldon, Shareholders | Permalink | Comments (1)

Friday, January 19, 2018

Comment Responses, Benefit Corps., and Planned Obsolescence

On a previous post about Etsy dropping its B corp. certification, because of the B Lab requirement to convert to a public benefit corporation, I received the following comments:

  • "I simply believe that, in most ways, being a public benefit entity is more about a marketing strategy than a business plan." (Tom N.)
  • "I had my students read the NY Times articles on Etsy as a part of their last class in my clinic this semester (thanks to my fellow Joe Pileri who alerted me to the article). We represent social enterprises in the clinic so this was a perfect wrap-up. The questions that I posed to my students: what social enterprise isn't a soft target like Etsy? Won't they all eventually cave to profit maximization?" (Alicia Plerhopes)
  • "I agree with To[m] N ... Also, no theory of CSR actually requires an explicit weighting of the various stakeholders of a firm, so in reality, if the interests of shareholders are receiving the greatest weight, then Milton Friedman was right all along!" (Enrique)

I wanted to respond to these thoughtful comments, briefly, above the line.

Tom, I think the marketing benefits of becoming a PBC, currently, are weak. How many of your non-lawyer friends know what a public benefit corporation is? Even among lawyers, if they know what the form is, their knowledge is usually limited, and they are usually quite skeptical. But I agree, that simply becoming a PBC, without more, does not get you very far and will not substitute for a good business plan. Becoming a PBC, however, may help in takeover situations and it may help change the shareholder wealth maximization norm among directors.

Alicia, You are right, I think, that publicly traded benefit corporations would often be soft targets. That said, their PBC status, in connection with other takeover defenses, could help them fend off unwanted advances. Given the history of social enterprise sell-outs, however, one does wonder how long these companies, public or private, can stay on mission.

Enrique, You may be correct on most theories of CSR not requiring an explicit weighting of stakeholder interests, but the benefit corporation statutes do generally require “consideration” or “balancing” of stakeholder interests. You are right, however, that the statutes do not give instructions on how much weight is to be given to each stakeholder group. The benefit corporation statutes do generally say that the purpose of benefit corporations must be to materially benefit “society and the environment;” and some of the statutes say/suggest that shareholders can not be the predominant interest.

While I am not a big proponent of the current benefit corporation statutes, I do commend the drafters for moving the conversation forward and taking action. And hopefully we can agree that something needs to be done about the current state and focus of many American businesses. This holiday season confirmed to me how cheaply most things are made these days and how poor customer service has become. Toys from my childhood era are outlasting most of the toys my wife and I buy our children. Appliances now seem to last 1/5 of the time they lasted a generation ago. Ignoring or mistreating the customer has become the rule. Even Apple, which I think of as one of the positive exceptions, is now being accused on planned obsolescence, and their customer service has declined over the years, in my view. Maybe the above makes sense from a purely financial perspective; maybe customers buy mainly on price. But I would argue that what made Apple great was holding themselves to an even higher standard of quality and innovation than their customers did initially. I am not sure if benefit corporation law will help businesses make more quality products, and treat their employees and customers better, but I do think we should give businesses the latitude to explore.

January 19, 2018 in Corporate Governance, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink | Comments (3)

Friday, January 12, 2018

Overnighters - Purpose, Priorities, and Process

The-overnighters

Over the break, I watched the documentary Overnighters on Netflix. 

In short, the documentary chronicles the story of a pastor who opens the church to migrant workers in North Dakota during the energy boom in that state. The pastor faces pushback from his congregation, neighbors, and city officials who do not appreciate having these men - some with criminal records - housed so close. 

In my opinion, the pastor is right, and the congregants are wrong, about the purpose of a church. The church should be in a community to serve, especially its needy neighbors. That said, the logistics of how to serve may be up for debate. Also, it is at least arguable that by serving the migrant workers the church strayed from serving its congregation. It would have been helpful if the church had a clear statement on its purpose and priorities. Many social enterprises have extremely vague purpose statements, which I do not think are very helpful. Benefit corporations are often required by statue to "benefit society and the environment." A purpose statement like that would not have helped the church in Overnighters much at all. A statement that showed that those in need would be prioritized over the comfort of the congregants (or vice-versa) would have been more helpful.  

The more valid complaint from the congregation, is the claim that an appropriate process for initiating the housing program was not followed. Sometimes even if stakeholders agree on the ultimate action taken by the organization, the stakeholders will still be upset if they are not included, or listened to, in the decision making process. I think this complaint is likely also found in businesses. Assuring the proper processes are set forth and followed can be quite important for businesses, especially in closely-held and family run businesses, where the stakeholders are deeply invested. 

The documentary is depressing and does not paint a pretty picture of human nature, but I do think things would have worked out a bit better for most of those involved if purpose, priorities, and process were paid more attention.  Of course, that is much easier written than done. 

January 12, 2018 in Corporate Governance, Current Affairs, Haskell Murray, Real Property, Social Enterprise | Permalink | Comments (0)

Monday, January 8, 2018

AALS 2018 Wrap-Up

AALS2018(SHProposalPanel)

Last week, I had the privilege of attending and participating in the 2018 annual meeting of the Association of American Law Schools (#aals2018).  I saw many of you there.  It was a full four days for me.  The conference concluded on Saturday with the program captured in the photo above--four of us BLPB co-bloggers (Stefan, me, Josh, and Ann) jawing about shareholder proposals--as among ourselves and with our engaged audience members (who provided excellent questions and insights).  Thanks to Stefan for organizing the session and inspiring our work with his article, The Inclusive Capitalism Shareholder Proposal.  I learned a lot in preparing for and participating in this part of the program.

Earlier that day, BLPB co-blogger Anne Tucker and I co-moderated (really, Anne did the lion's share of the work) a discussion group entitled "A New Era for Business Regulation?" on current and future regulatory and de-regulatory initiatives.  In some part, this session stemmed from posts that Anne and I wrote for the BLPB here, here, and here.  I earlier posted a call for participation in this session.  The conversation was wide-ranging and fascinating.  I took notes for two essays I am writing this year.  A photo is included below.  Regrettably, it does not capture everyone.  But you get the idea . . . .

  AALS2018(Regulation)
In between, I had the honor of introducing Tamar Frankel, this year's recipient of the Ruth Bader Ginsburg Lifetime Achievement Award, at the Section for Women in Legal Education luncheon.  Unfortunately, the Boston storm activity conspired to keep Tamar at home.  But she did deliver remarks by video.  A photo (props to Hari Osofsky for getting this shot--I hope she doesn't mind me using it here) of Tamar's video remarks is included below.

Tamar(Video-HariO)

Tamar has been a great mentor to me and so many others.  She plans to continue writing after her retirement at the end of the semester.  I plan to post more on her at a later time.

On Friday, I was recognized by the Section on Business Associations for my mentoring activities.  On Thursday, I had the opportunity to comment (with Jeff Schwartz) on Summer Kim's draft paper on South Korean private equity fund regulation.  And on Wednesday, I started the conference with a discussion group entitled "What is Fraud Anyway?," co-moderated by John Anderson and David Kwok.  My short paper for that discussion group focused on the importance of remembering the requirement of manipulative or deceptive conduct if/as we continue to regulate securities fraud in major part under Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, as amended.

That summary does not, of course, include the sessions at which I was merely in the audience.  Many of the business law sessions were on Friday and Saturday.  They were all quite good.  But I already am likely overstaying my welcome for the day.  Stay tuned here for any BLPB-reated sessions for next year's conference.  And in between, there's Law and Society, National Business Law Scholars, and SEALS, all of which will have robust business law programs.

Good luck in starting the new semester.  Some of you, I know, are already back in the classroom.  I will be Wednesday morning.  I know it will be a busy 14 weeks of teaching!

January 8, 2018 in Ann Lipton, Anne Tucker, Conferences, Corporate Governance, Joan Heminway, Joshua P. Fershee, Securities Regulation, Shareholders, Stefan J. Padfield | Permalink | Comments (0)