Monday, April 14, 2014
In an opinion released earlier today, the D.C. Circuit Court struck down the SEC's Dodd-Frank Conflict Mineral Rule under the compelled speech doctrine for failing the least restrictive alternative prong.
We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
Not striking down the need for information about conflict minerals, but rather the required approach, the Court suggested that:
[A] centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers. The Commission has failed to explain why (much less provide evidence that) the Association’s intuitive alternatives to regulating speech would be any less effective.
In August, 2012, the SEC released final Dodd-Frank rules for conflict minerals "requir[ing] companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country."
Thursday, April 10, 2014
[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. -Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).
When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.”
Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission. Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission. Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997. The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.
Why is this important? The petition includes the following enlightening statistics:
1) The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.
2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.
3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).
4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.
5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.
6) The website shareholderactivist.com calls shareholder activism a "participatory sport" where investor activists submit similar proposals to multiple companies so that they can "advance a larger agenda.”
The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.
As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final? Must be the end of the semester.
April 10, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Wednesday, April 9, 2014
On March 27th, SEC commissioner Daniel M. Gallagher’s delivered the keynote address at the 26th Annual Corporate Law Institute at Tulane University Law School. Addressing the intersection of governance and securities disclosure, Commissioner’s Gallagher’s remarks (available here) are summarized below:
Dodd Frank increased the federalization of corporate law.
“This mandated intrusion into corporate governance will impose substantial compliance costs on companies, along with a one-size-fits-all approach that will likely result in a one-size-fits-none model instead.”
Shareholder proposals are costly, problematic and used by only a small group of shareholders with particular interests and agendas that may not be alligned with other shareholders. Citing first to the 41% increase in shareholder proposals post Dodd-Frank, and the meager 7% passage rate, Commission Gallagher outlined which shareholders use the proposal process and the punch line is that only 1% are brought by ordinary institutional investors.
- 34% are from organized labor;
- 25% are from social, policy or religious institutions; and
- 24% of the proposals were brought by just two individuals whom the Commissioner described as “corporate gadflies.”
The shareholder proposal process should be reformed by narrowing the scope of those eligible to bring proposals and the subject matter of the proposals.
- Increase holding amounts and time (specifics not provided);
- Clarify the application guidelines for the “ordinary business operations” exclusion and the “significant policy issue” exception to the exclusion;
- Have commissioners vote on exclusions, not leave it to the staff;
- Create greater authority to exclude misstatements; and
- Substantially strengthen resubmission thresholds (suggesting a three strikes you are out rule).
While not a heading of the remarks, another clear take away is the Commissioner’s stance against viewing climate change as a serious policy issue and that conflict mineral reports do not “provide investors with the information they need to make informed investment decisions.” To further this point, he discredited third parties, like the Sustainability Accounting Standards Board, as having no role in shaping disclosure requirements.
You should read the full remarks, if nothing else, for this line: “Mike D. of the Beastie Boys—who, by helping to bring the proposal to a vote, at least succeeded in his fight for the right to proxy.”
Sunday, April 6, 2014
Over at the Harvard LSFOCGAFR, Stephen Cooke, partner and head of the Mergers and Acquisitions practice at Slaughter and May, has posted a fascinating review of “10 Surprises for a US Bidder on a UK Takeover.” It’s a bit long for a blog post (16 printed pages on my end), but well worth the time if you have any interest at all in the subject matter. What follows is a very brief excerpt, which is really just a teaser in light of the excellent depth of treatment the post provides. Given my latest project, "Corporate Social Responsibility & Concession Theory," I find # 7 to be of particular interest.
Takeovers in the UK are in broad terms decided by the Target’s shareholders, with the Target Board rarely having decisive influence …. Unlike in the US, the Target Board is not the gatekeeper for offers. A Bidder may take its offer direct to shareholders and the Board has no power to block or delay an offer …. The Takeover Code (the “Code”) reflects this environment and, although changes were made post-Cadbury to reflect the interests of non-shareholder stakeholders, it remains a body of rules embodying the pre-eminence of shareholders….
1…. [I]n the UK: a potential Bidder may be publicly “outed” before it is ready to announce its offer; once outed, a potential Bidder is required to either announce a firm offer or withdraw (“put up or shut up”) within a specified period; and once a firm offer is made, there is a time limit within which the offer must succeed or fail….
2…. In the UK … you cannot combine … transaction structures and must either obtain 90% acceptances or proceed by way of the UK nearest equivalent to a merger…. There is no concept of statutory merger in the UK…. Therefore, any acquisition of a UK public company takes place through the acquisition of shares in the Target by the Bidder. This is effected either by a tender offer (referred to in the UK simply as “an offer”) or by the nearest UK analogue of a US-style merger, a “scheme of arrangement”.
3…. [I]n the UK … rules on equality of information require that any information or access to management provided by a Target to one Bidder or potential Bidder is made available on request to any other Bidder or bona fide potential Bidder, whether or not welcome….
4…. In … 2011, the Panel introduced a general prohibition on break fees (along with various other deal protection measures) in UK takeovers as part of its response to the demands from some quarters (following the Kraft/Cadbury takeover) that the balance of negotiation power be shifted away from Bidders and in favour of Targets….
6…. In the UK … financing conditions [are] prohibited (except in very limited circumstances) ….
7…. In the UK … a Bidder is required to disclose its intentions as regards the future of the Target’s business and the impact its bid may have on the Target’s employees in its offer document. In addition, the Bidder must make equivalent disclosures in respect of its own future business, employees and places of business where these are affected by the offer…. [T]he Panel has signalled a tougher approach to enforcement in this area and has stated that it expects to investigate complaints from any interested person, which would include trade unions, employee representatives and political representatives. It is also worth noting that breaches of this section of the Code can attract criminal liability as well as the more usual range of Panel disciplinary measures….
Sunday, March 30, 2014
Our friends at The Conglomerate recently conducted an excellent online symposium on the Hobby Lobby case.
All of the posts have been collected here.
It was refreshing to read such a thoughtful and balanced set of posts.
In my article, “The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases,” 15 U. Pa. J. Const. L. 831, I criticized the Supreme Court justices for failing to acknowledge the role of competing conceptualizations of the corporation in their corporate political speech cases. I noted, however, that former Chief Justice Rehnquist was arguably the lone modern justice to deserve at least some praise in this area.
Justice Rehnquist's stand-alone dissent in Bellotti provides arguably the sole example in these opinions of a Justice affirmatively adopting a theory of the corporation for purposes of determining the constitutional rights of corporations--though not via the express adoption of one of the traditionally recognized theories. Specifically, Justice Rehnquist relied on Justice Marshall's Dartmouth College opinion to conclude that: “Since it cannot be disputed that the mere creation of a corporation does not invest it with all the liberties enjoyed by natural persons . . . our inquiry must seek to determine which constitutional protections are ‘incidental to its very existence.”’ Thus, while it may be true that “a corporation's right of commercial speech . . . might be considered necessarily incidental to the business of a commercial corporation[, i]t cannot be so readily concluded that the right of political expression is equally necessary to carry out the functions of a corporation organized for commercial purposes.” I would argue that this is a formulation most aligned with concession theory because not only does Justice Rehnquist rely on Dartmouth College, but he also goes on to say: “I would think that any particular form of organization upon which the State confers special privileges or immunities different from those of natural persons would be subject to like regulation, whether the organization is a labor union, a partnership, a trade association, or a corporation.” Stefan J. Padfield, The Silent Role of Corporate Theory in the Supreme Court's Campaign Finance Cases, 15 U. Pa. J. Const. L. 831, 853 (2013) (quoting First Nat'l Bank of Bos. v. Bellotti, 435 U.S. 765 (1978)).
While this is only one data point, I think it suggests the former Chief Justice would have been hesitant to grant corporations any form of free exercise rights, since it is difficult to see how free exercise rights are more incidental to a corporation’s existence than political speech rights. Cf. Kent Greenawalt, Religion and the Rehnquist Court, 99 Nw. U. L. Rev. 145, 146 (2004) (“With limited qualifications, the Rehnquist Court has abandoned the possibility of constitutionally-required free exercise exemptions.”).
For more on concession theory, I shamelessly suggest my more recent article, “Rehabilitating Concession Theory,” 66 Okla. L. Rev. 327 (2014) (“the reports of concession theory's demise have been greatly exaggerated”). And if you find that of interest, you can check out my latest SSRN posting, “Corporate Social Responsibility & Concession Theory.”
Thursday, March 27, 2014
I wonder how many people are boycotting Hobby Lobby because of the company’s stance on the Affordable Health Care Act and contraception. Perhaps more people than ever are shopping there in support. Co-blogger Anne Tucker recounted the Supreme Court’s oral argument here in the latest of her detailed posts on the case. The newspapers and blogosphere have followed the issue for months, often engaging in heated debate. But what does the person walking into a Hobby Lobby know and how much do they care?
I spoke to reporter Noam Cohen from the New York Times earlier today about an app called Buycott, which allows consumers to research certain products by scanning a barcode. If they oppose the Koch Brothers or companies that lobbied against labels for genetically modified food or if they support companies with certain environmental or human rights practices, the app will provide the information to them in seconds based on their predetermined settings and the kinds of “campaigns” they have joined. Neither Hobby Lobby nor Conestoga Woods is listed in the app yet.
Cohen wanted to know whether apps like Buycott and GoodGuide (which rates products and companies on a scale of 1-10 for their health, environmental and social impact) are part of a trend in which consumers “vote” on political issues with their purchasing power. In essence, he asked, has the marketplace, aided by social media, become a proxy for politics? I explained that while I love the fact that the apps can raise consumer awareness, there are a number of limitations. The person who downloads these apps is the person who already feels strongly enough about an issue to change their buying habits. These are the people who won’t eat chocolate or drink coffee unless it’s certified fair trade, who won’t shop in Wal-Mart because of the anti-union stance, and who sign the numerous change.org petitions that seek action on a variety of social and political topics.
I had a number of comments for Cohen that delved deeper than the efficacy of the apps. The educated consumer can make informed choices and feel good about them but how does this affect corporate behavior? Although the research is inconsistent in some areas, most research shows that companies care about their reputations but the extent to which a boycott is effective depends on the amount of national media attention it gets; how good the company’s reputation was before the boycott (many firms with excellent reputations feel that they can be buffered by previous pro-social behavior and messaging); whether the issue is one-sided (child labor) or polarizing (gay marriage, Obamacare, climate change); how passionate the boycotters are; how easy it is to participate (is the product or service unique); and how the message is communicated.
Many activists have done an excellent job of messaging. The SEC Dodd-Frank conflict minerals regulation made it through Congress through the efforts of NGOs that had been trying for years to end a complex, geopolitical crisis that has killed over 5 million people. They got consumers, social media and Hollywood actors talking about “blood on the mobile” or companies being complicit in rape and child slavery in Congo because when they changed the messaging they elicited the appropriate level of moral outrage. The conflict minerals “name and shame” law depends on consumers learning about which products are sourced from the Congo and surrounding countries and making purchasing decisions based on that information. Congress believes that this will solve an intractable human rights crisis. The European Union, which has a much stronger corporate social responsibility mandate for its member states has taken a different view. Although it will also rely on consumers to make informed choices, its draft recommendations on dealing with conflict minerals makes reporting voluntary, which has exposed the EU to criticism. As I have written here, here, here here and here, relying on consumers to address a human rights crisis will only work if it leads to significant boycotts by corporations, investors or governments or if it leads to legislation, and that legislation cannot harm the people it is intended to help.
So what do I think of apps like GoodGuide, BuyCott and 2ndVote (for more conservative causes)? I own some of them. But I also send letters to companies, vote regularly, call people in Congress and write on issues that inspire me. How many of the apps’ users go farther than the click or the scan? Some researchers have used the word “slacktivists” to describe those who participate in political discussions through social media, online petitions and apps. The act of pressing the button makes the user feel good but has no larger societal impact.
What about the vast majority of consumers? The single mother shopping for her children in a big-box retailer or in the fast food restaurant that has been targeted for its labor practices may not have the time, luxury or inclination to buy more “ethically sourced” products. Moreover, studies show that consumers often overreport on their ethical purchasing and that price, convenience and costs typically win out. The apps’ developers may have more modest intentions than what I ascribe to them. If they can raise consumer awareness- admittedly for the self-selected people who buy the app in the first place- then that’s a good thing. If the petitions or media attention lead to well-crafted legislation, that’s even better.
Sunday, March 23, 2014
I'm trying out a new weekly blog post theme, "The Weekly BLT," wherein I highlight a few interesting business law tweets that I've come across in the past week that have not yet made it to the BLPB.
"The problem ... is that ... Kiobel ... ignore[s] the robust corporate identity [recognized in Citizens United]" http://t.co/RI0BefWUUr— Stefan Padfield (@ProfPadfield) March 18, 2014
"Only ... 10 percent of S&P 500 companies reported the number of environmental fines paid." http://t.co/rthzXPwy2w— Stefan Padfield (@ProfPadfield) March 17, 2014
John Cunningham: "one of the best discussions I’ve ever seen about the application of veil-piercing doctrine to LLCs" http://t.co/xJae7nGqQm— Stefan Padfield (@ProfPadfield) March 17, 2014
"traditional theory about shareholder voting..does not reflect recent fundamental changes as to who shareholders are" http://t.co/e9LsR4YUtp— Stefan Padfield (@ProfPadfield) March 17, 2014
Thursday, March 20, 2014
It’s proxy season and the Conference Board has released a series of reports on investor engagement and corporate governance. In “The Conference Board Governance Center White Paper: What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Corporations?” the authors provide a 76-page overview of the evolution of US corporate governance, describing key trends and issues.
The report begins by discussing the history of the allocation of roles and responsibilities for governance of public companies. If I thought my law students would read it, I would assign this section to them. The second part of the paper addresses the legal, social and market trends that have influenced the historical allocation of rights. Specifically, it reviews:
a) the increasing influence of institutional investors resulting from the concentration of ownership in institutional investment, changes in voting rules and practices and more assertive shareholder activism;
b) shifting conceptions about the purpose of the corporation and the duty to maximize corporate value, with a strong emphasis on shareholder wealth maximization;
c) decreased public trust of business leaders following the corporate scandals of 2001-2002 and 2007-2008;
d) federal regulation intended to enhance the influence of shareholders and increase board and management accountability;
e) continuing related to executive compensation and incentives; and
f) the growth of proxy advisory firms in the shareholder voting process.
Some interesting statistics:
a) in 2013, 25% of all shareholder proposals were sponsored by two individuals and their family members and family trusts;
b) from 2006-2013, 33% of shareholder proposals submitted to Fortune 250 companies were sponsored by investors affiliated with labor; 26% by corporate gadflies; 25% by religious, social impact and public policy organizations; and 15% by other individual investors;
c) 241 activist campaigns were launched in 2012 up from 187 in 2009;
d) 69% of proxy contests against the management of Russell 3000 companies during the 2013 proxy season were launched by activist hedge funds; and
e) one third of the activist hedge fund contests sought full control of the board.
The third part of the report briefly summarizes but does not provide any conclusions about the work of Professors Bainbridge, Stout, Anabtawi, Bebchuk, Laverty, and others. It considers the following questions (but does not answer them):
a) Do federal mandates undermine the benefits of a historically state-driven corporate law?
b) Are further changes to board processes and composition desirable?
c) Should shareholders assume a more active role in corporate governance?
d) Do proxy advisory firms replace, rather than augment, the shareholder voice, and should the proxy advisory industry be subject to greater regulation and oversight?
e) Can changes to voting mechanisms improve the effectiveness of corporate governance?
f) Is short-termism a cause of concern, and is so, what are its causes and remedies?
g) What new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification?
In next week’s post I will discuss the “Guidelines for Engagement” and the “Recommendations of the Task Force on Corporate/Investor Engagement.” In the meantime, I highly recommend downloading these complimentary reports.
Wednesday, March 19, 2014
A hearing in the Delaware Court of Chancery highlights the question raised in my earlier post of institutional shareholder activism and provides a timely example of one brand of shareholder activism: issue activism.
Yesterday, Vice Chancellor J. Travis Laster denied Hershey's motion to dismiss a books-and-records suit brought by shareholder Louisiana Municipal Police Employees' Retirement System. The suit seeks inspection of corporate books to investigate claims that the chocolate company knowingly used suppliers violating international child labor laws. A full description of the hearing is available here.
UPDATE, Kent Greenfield who has been involved in the case, provided me with a copy of the Hershey hearing & ruling ( Download Hershey Ruling) as well as some context for the case. Yesterday's hearing did two things. First, it clarified the standard of review for motions to dismiss section 220 books and records demands. Citing to Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. Supr. 2006), the proper standard is whether a shareholder has provided "some evidence to suggest a 'credible basis' from which a court can infer that mismanagement, waste or wrongdoing may have occurred." Second, the books and record request was brought on the novel theory that corporate violations of law (domestic and international) are ultra vires and within the scope of shareholder enforcement. The ultra vires corporate enforcement theory is discussed in more detail in this 2005 article by Professors Greenfield and Sulkowski.
I am interested in the behavior of institutional investors, including defined benefit plans and large mutual funds, primarily because they trade in people's retirement savings. Institutional investors and hedge funds are some of the only remaining investors under the big umbrella heading of "shareholders" that have the resources and incentive to act the way that corporate law theorizes shareholders should act. They become the lab rats and the test case of governance experiments and debates.
Notably, the passivity of institutional investors has been described, empirically documented by number of initiated shareholder proposals and with voting records on such proposals, and debated at considerable length. Alan Palmiter, Jill Fisch, Roberta Romano, as well as a recent article by Gilson & Gordon and many others have all grappled with the evidence for and against and provided theories that augment or diminish the view of passivity by institutional investors.
The New York Times DealB%k published an article yesterday, New Alliances in Battle for Corporate Control, describing the coordination between institutional investors (both pension funds and mutual funds) and hedge fund activists. Drawing from industry sources, the article describes informal coordination of activists courting institutional investors' votes before shareholder meetings, which is just what we would expect and consistent with how we probably teach proxy contests and shareholder proposals to our students. The article also adds new dimensions describing how institutional investors may solicit hedge fund investment in poorly performing companies providing them with investment ideas, targets and strategies.
"Periodically, we are approached by large institutions who are disappointed with the performance of companies they are invested in to see if we would be interested in playing an active role in effectuating change," said William A. Ackman, founder of the $13 billion hedge fund Pershing Square Capital, who is best known for his positions on J. C. Penney and Herbalife. Institutional investors even have an informal term for this: R.F.A., or request for activist.
Evidence of this successful strategy is found in the success rate of hedge fund proxy proposals of which over 20% succeed last year, up from 9% in 2011.
Wednesday, March 12, 2014
Sunday, March 9, 2014
I have posted the first rough draft of my latest project, “Corporate Social Responsibility & Concession Theory,” on SSRN. Here is the abstract:
This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate.
Friday, March 7, 2014
Are the directors of Hobby Lobby and Conestoga Wood breaching their fiduciary duties by challenging the contraceptive mandate, seemingly without serious regard to the financial consequences?
Mark Underberg says “perhaps”.
Stephen Bainbridge says “no”.
Professor Bainbridge focuses on the facts that both Hobby Lobby and Conestoga Woods are family-owned, closely-held corporations, and that Conestoga Woods is incorporated under Pennsylvania law, which has a nonshareholder constituency statute. I am not going to jump into their disagreement directly, but, instead, will use a story I saw about Apple to extend the conversation.
Unlike Hobby Lobby and Conestoga Woods, Apple is a publicly-traded, California corporation. California does not have a constituency statute. Recently, Apple CEO and director, Tim Cook, discussed the company’s commitment to the environment, the blind, and making the world a better place. Cook supposedly told investors:
If you want me to do things only for ROI reasons, you should get out of this stock.
More forcefully, Cook said:
When we work on making our devices accessible by the blind, I don’t consider the bloody ROI.
In Cook’s first statement, he seems to be saying that ROI is one of the reasons (just not the only reason) Apple makes decisions. This appears to be a perfectly acceptable statement for a director in the day-to-day decision-making process to make. Could, however, Apple’s board of directors properly completely disregard ROI, as Cook’s second statement suggests?
While Apple is a California corporation, many states take their cues from Delaware on issues of corporate law. Two-former Delaware Chancellors, one of whom is the new Chief Justice of the Delaware Supreme Court, have reiterated the importance of considering shareholder value, at least for directors of Delaware corporations.
In eBay v. Newmark, former-Chancellor William Chandler stated that:
Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
In a similar vein, Chief Justice Leo Strine has written that:
[A]s a matter of corporate law, the object of the corporation is to produce profits for the stockholders…. the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.
(I note that a number of academics think the former-Chancellors' focus on shareholders is misplaced).
How much leeway does corporate law provide directors in focusing on non-shareholder interests? One might convincingly argue that even directors of public, Delaware-corporations are likely to avoid liability if they can make an argument that the decision could (possibly) lead to long-term value for the shareholders. Making such an argument would be relatively easy for Apple – likeminded customers, shareholders, and employees may become more committed to Apple following Apple's society-focused decisions. These likeminded shareholders may buy more shares and sue less frequently. Customers may buy more Apple products and goodwill may increase. Employee turnover may be reduced. All of this may increase profitability in the long-term. While a court is unlikely to challenge such an argument from Apple’s directors, is the argument an honest one? Are Apple's directors really making those decisions with a focus on profitability?
Could Apple’s directors argue, without fear of liability, that they made the society-focused decisions simply because it was the right thing to do, and openly admit that they knew that shareholders were going to suffer in both the short and long-term? I am not sure they could, and I believe that it is that uncertainty in traditional corporate law that benefit corporation statutes attempt to address. (Granted, I admit that the current benefit corporation statutes are far from perfect.)
Update: Professor Bainbridge posted a reply. Thanks to him for the detailed response, and I agree with much of what he writes. To clarify, my point was not about the likelihood of a breach, but rather the possibility of a breach. Also, while I appreciate the protection of the business judgment rule and the Shlensky v. Wrigley case, I think my hypthetical is different than Shelensky. In my hypothetical, the directors openly admit that nonshareholders were the focus of the decision and that shareholders would be hurt in the short and long run. While the court in Shlensky generously provided reasons for why not adding stadium lights might help the Cubs in the long run, I don't remember any direct statements by the defendants about shareholders being purposefully ignored.
Granted, my hypothetical might be a bit far-fetched. Any director with good attorneys may be able to just keep silent or mention the possible long-term benefits of their decisions. That said, in both Dodge v. Ford and eBay v. Newmark, the defendants seemed to insist on telling the court that they were not focused on the shareholders. Some egos may have been involved. I know some professors (such as Professor Gordon Smith) think the rules in those two cases are regulated to closely-held corporations, and while I am not convinced that the general rules are so limited, I do note that the chance of a majority of a public company board openly admiting that shareholder interests were ignored is extremely close to zero.
In the end, I agree with Professor Bainbridge that a breach is highly unlikely, but that Cook "would have been wise to be more temperate in his remarks." Where Professor Bainbridge and I may part company is that I maintain that there is a possibility of a breach if the directors (of a corporation incorporated in a state without a constituency statute) openly admit completely disregarding shareholder interests.
Thursday, March 6, 2014
This week in Lawson v. FMR, LLC the Supreme Court extended the reach of Sarbanes-Oxley to potentially millions more employers when it ruled that SOX's whistleblower protection applies to employees of private employers that contract with publicly-traded companies. In 2002, Congress enacted SOX with whistleblower protection provisions containing civil and criminal penalties. The law clearly protects whistleblowers who work for publicly-held companies, and courts have generally ruled against employees who work for privately-held firms. But the Department of Labor’s Administrative Review Board has ruled that contractors at public companies enjoy whistleblower protection as well. The Supreme Court agreed with that assessment, with Justice Ginsburg writing for the majority. The dissent, written by Justice Sotomayor, noted the "stunning reach" based on the majority's interpretation and opined that the extension was not what Congress intended. The plaintiffs in Lawson did not work for Fidelity, but were contracted to provide advice to Fidelity Mutual Fund customers. Plaintiffs voiced concerns to management regarding problems with cost-accounting methodologies and the alleged improper retention of millions of dollars in fees. Because Fidelity has no employees of its own, it was not a party to the suit.
This development will likely be among the many that the Whistleblower Protection Advisory Committee will discuss at our meeting next week. I sit on a 12-person committee comprised of management, labor and the public for a two-year term, and we are reviewing two dozen laws that OSHA enforces to protect employees. SOX is just one of the financial laws covered by OSHA for whistleblower purposes. Although the comment/question period for the committee meeting is officially closed, those who want to submit comments or questions can still do so through http://www.regulations.gov. The meeting is open to the public on March 11th from 9 a.m. - 5 p.m. in Room N-3437 A-C, U.S. Department of Labor, 200 Constitution Ave., NW, Washington, DC 20210
Some law professors may remember when Justices Roberts and Kennedy opined on the value legal scholarship. Justice Roberts indicated in an interview that law professors spend too much time writing long law review articles about “obscure” topics. Justice Kennedy discussed the value he derives from reading blog posts by professors who write about certs granted and opinions issued. I have no doubt that most law students don’t look at law review articles unless they absolutely have to and I know that when I was a practicing lawyer both as outside counsel and as in house counsel, I almost never relied upon them. If I was dealing with a cutting-edge issue, I looked to bar journals, blog posts and case law unless I had to review legislative history.
As a new academic, I enjoy reading law review articles regularly and I read blog posts all the time. I know that outside counsel read blogs too, in part because now they’re also blogging and because sometimes counsel will email me to ask about a blog post. I encourage my students to follow bloggers and to learn the skill because one day they may need to blog for their own firms or for their employers.
Blogging provides a number of benefits for me. First, I can get ideas out in minutes rather than months via the student-edited law review process. This allows me to get feedback on works/ideas in progress. Second, it forces me to read other people’s scholarship or musings on topics that are outside of my research areas. Third, reading blogs often provides me with current and sophisticated material for my business associations and civil procedure courses. At times I assign posts from bloggers that are debating a hot topic (Hobby Lobby for example). When we discuss the Basic v. Levinson case I can look to the many blog posts discussing the Halliburton case to provide current perspective.
But as I quickly learned, not everyone in the academy is a fan of blogging. Most schools do not count it as scholarship, although some consider it service. Anyone who considers blogging should understand her school’s culture. For me the benefits outweigh the detriment. Like Justice Kennedy, I’m a fan of professors who blog. In no particular order, here are the mostly non-law firm blogs I check somewhat regularly (apologies in advance if I left some out):
http://www.theconglomerate.org/ (thanks again for giving me first opportunity to blog a few months into my academic career!)
http://law.wvu.edu/the_business_of_human_rights (currently on a short hiatus)
I would welcome any suggestions of must-reads.
March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Marcia L. Narine, Merger & Acquisitions, Securities Regulation, Social Enterprise, Teaching, Unincorporated Entities, Weblogs | Permalink | Comments (2)
Monday, March 3, 2014
What happens if short sellers of stock are unable to cover because no one has any shares to sell? That’s one of the many interesting issues in the new book, Harriman vs. Hill: Wall Street’s Great Railroad War, by Larry Haeg (University of Minnesota Press 2013). Haeg details the fight between Edward Henry Harriman, supported by Jacob Schiff of the Kuhn, Loeb firm, and James J. Hill, supported by J.P. Morgan (no biographical detail needed), for control of the Northern Pacific railroad. Harriman controlled the Union Pacific railroad and Hill controlled the Great Northern and Northern Pacific railroads. When Hill and Harriman both became interested in the Burlington Northern system and Burlington Northern refused to deal with Harriman, Harriman raised the stakes a level by pursuing control of Hill’s own Northern Pacific.
I’m embarrassed to admit that I wasn’t aware of either the Northern Pacific affair or the stock market panic it caused. I had heard of the Northern Securities antitrust case that grew out of the affair; I undoubtedly encountered it in my antitrust class in law school. (Everything the late, great antitrust scholar Phil Areeda said in that class is still burned into my brain.)
I’m happy I stumbled across this book, and I think you would enjoy it as well. Harriman vs. Hill has everything needed to interest a Business Law Prof reader: short selling; insider trading; securities fraud; a stock market panic; a hostile takeover; a historical antitrust case; and, of course, J. P. Morgan. This was a hostile takeover before hostile takeovers were cool (and before tender offers even existed, so the fight was pursued solely through market and off-market purchases).
The book does have a couple of shortcomings. One is a polemic at the end of the book against the antitrust prosecution. The antitrust case was clearly a political play by Theodore Roosevelt, and Haeg may be right that the railroads’ actions were economically defensible, but his discussion is a little too one-sided for my taste. Haeg also has a tendency to put thoughts into the characters’ minds (Hill might have been thinking . . .), but he only uses the device to add factual background, so it isn’t terribly offensive. Finally, Haeg occasionally gets the legal terminology wrong. For example, he refers to the railroad holding company “that the U.S. Supreme Court narrowly declared unconstitutional,” when what he means is that the court upheld the law outlawing the holding company. He only makes legal misstatements like that a couple of times, but those errors are very grating on a lawyer reading the book.
Still, in spite of those minor flaws, this is a very good book and I highly recommend it.
Wednesday, February 26, 2014
As previously noted on this blog, 44 law professors filed an amicus brief in Sebelius v. Hobby Lobby Stores, Inc., outlining several corporate law issues in the arts-and-craft store chain’s request for a religious exemption from complying with contraceptive requirements in the Affordable Care Act. That brief prompted several responses and sparked a corporate law debate, which is being recapped and weighed in on at Business Law Prof Blog (see earlier thoughtful posts: here, here, and here by Stefan Padfield and Haskell Murray).
So what is at stake in this case? Religious exemptions for corporations. The role of benefit corporations and other hybrid, triple bottom line entities. The classic entity theory vs. aggregate theory debate of how do we treat the legal fiction of individuals acting through businesses and businesses acting, in part, on behalf of people. The role and future of Corporate Social Responsibility generally. Corporate personhood. Corporate constitutional rights. And existential questions like can corporations pray? You know, easy stuff.
CSR. Our laws set the floor; they establish the minimum that social actors must do and that other members in our society can expect to receive. Corporate social responsibility asks companies to do more than their minimum legal obligations and to do so for a host of reasons, some of which may be religious. The owners of Hobby Lobby can elect a corporate board that will authorize the company to donate to religious charities, to reimburse employees for religious expenses, to provide paid leave for a mission trip, or to not operate on Sundays. (Who here hasn’t craved a chicken biscuit on a road trip only to realize that Chick-Fil-A is closed on Sunday? Just us in the south?). Under what I will call the standard state corporate law regime, corporations can take actions like increasing their use of renewable energy sources, implementing diversity programs for women and minorities, refusing to support tobacco products and other actions that are in line with CSR. Whether for religious or environmental or other conscience-driven reasons, a corporation may take these actions and the directors of the corporation (under whose governance the acts took place) are protected by the business judgment rule in the event that any shareholder challenges the program or expenditure as a form of waste or conflict of interest.
Benefit Corporations & Hybrid Entities. For companies incorporated in states with benefit corporate statutes or laws that recognize hybrid entities interested in seeking (but not always maximizing) profits and other goals, there is even greater protection. These entities contain provisions in their charters identifying their “other” purpose, the shareholders are on notice of the dual pursuit and the corporate actions are protected by statutes recognizing this charter-based exception to profit maximization. In the event a shareholder sues for waste or conflicts of interest, not only is the business judgment rule available to protect the corporate actors, but the validity of the corporate action is strengthened by the special legislation. [This in no way captures the full scope of benefit corporation and hybrid entity legislation, but this post is about religious exemptions for corporations, so please excuse the over simplification here.]
Hobby Lobby. The owners of Hobby Lobby are not asking to do more, rather they are asking to do less. Hobby Lobby want to provide less than the standards established in the Affordable Care Act, and less than their competitors will be required to provide. Who would complain if Hobby Lobby failed to comply with the ACA? The employees without access to contraceptive medicine, and the federal government. This isn’t about the business judgment rule and whether owners, acting through boards of directors, can run companies in line with their view of religious or social or environmental consciousness. This case asks can the religious beliefs of owners of a corporation entitle that corporation to do less under the law and as compared to their competitors. On these grounds, deciding against a religious based exemption for Hobby Lobby does no harm to CSR or benefit corporations.
The Hypothetical. If the privately held religious belief of owners can change legal obligations for corporate actors, this could pose a threat to the stability, reliability and uniformity of the floor that the law sets. Poking a hole in the floor for religious exemptions based upon the owners’ religious beliefs may seem like a small concession in the Hobby Lobby case. If religion is a means to opt-out of regulations and requirements, and if doing so could lower costs, shortcut compliance obligations and otherwise provide a competitive edge there will be robust incentives for businesses to claim such an exception in a likely wide array of issues.
The Horrible. The sacred ground of religion has long been an unhappy refuge for arguments in support of racial, gender, religious and sexual-orientation discrimination. Every major social movement that I can think of has met resistance shrouded in religious beliefs. The right for women to vote (and the continuing progress towards equality), desegregating schools, the Civil Rights Acts, and our most modern example: gay rights. Consider the law that the Arizona Legislature passed last week that would exempt businesses refusing to serve same-sex couples from civil liability on the grounds of a religious exemption. Substantially similar legislation is pending in Georgia.
Religion, if we have it, should call us to do more and to be better. As individuals, we may disagree about what “more” and “better” means. I have no doubt that the owners of Hobby Lobby believe that their stance on birth control is consistent with their view of “more” and “better”. As individuals, they can express that value in many ways. As owners of a corporation they can express those values by electing directors that will govern the company and possibly pursue corporate donations to abstinence charities, promote natural family planning among employees via posters in the break room, and other avenues. The individual values of the owners should not be used to excuse the corporation from compliance with the legal standard. Individual religious views should not lower the minimum standards for corporate actions in this context, or others.
Tuesday, February 25, 2014
Yesterday, Carl Icahn sent a letter to eBay shareholders, which starts like this:
Dear Fellow eBay Stockholders,
We have recently accumulated a significant position in eBay’s common stock because we believe there is great long-term value in the business. However, after diligently researching this company we have discovered multiple lapses in corporate governance. These include certain material conflicts of interest, which we believe could put the future of our company in peril. We have found ourselves in many troubling situations over the years, but the complete disregard for accountability at eBay is the most blatant we have ever seen. Indeed, for the first time in our long history, we have encountered a situation where we believe we should not even have to run a proxy fight to change the board composition. Rather, we believe that in any sane business environment these directors would simply resign immediately from the eBay Board, either out of pure decency or sheer embarrassment at the public exposure of the extent of their self-serving activities.
Wow. You could almost drop the mic there. Icahn does not, though. He goes on to outline a series of transactions from board members and the CEO that raise reasonable questions about the independence of certain board members. (click below for more)
Sunday, February 23, 2014
My co-blogger Haskell Murray recently posted “Religion, Corporate Social Responsibility, and Hobby Lobby” and asked me to respond, which I am happy to do. I will admit that I am still developing my thoughts on the issues raised by Haskell’s post, so what follows is a bit jumbled but still gives a sense of why I currently oppose for-profit corporations being permitted to evade regulation by pleading religious freedom (if you have not read Haskell’s post, please do so before proceeding):
1. Corporate power threatens democracy. Corporations and other limited liability entities have been controversial since their creation because, among other things, the combination of limited liability, immortality, asset partitioning, etc., makes them incredible wealth and power accumulation devices. Of course, on the one hand, this is precisely why we have them – so that investors are willing to contribute capital they would never contribute if they risked being personally liable as partners, and thus unique economic growth is spurred, a rising tide then lifts all ships, and so on. On the other hand, because of their unique ability to consolidate power, corporations are aptly considered by many to be one of Madison’s feared factions that threaten to undermine the very democracy that supports their creation and growth:
Besides the danger of a direct mixture of religion and civil government, there is an evil which ought to be guarded against in the indefinite accumulation of property from the capacity of holding it in perpetuity by ecclesiastical corporations. The establishment of the chaplainship in Congress is a palpable violation of equal rights as well as of Constitutional principles. The danger of silent accumulations and encroachments by ecclesiastical bodies has not sufficiently engaged attention in the U.S.
[More after the break.]
February 23, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Financial Markets, Food and Drink, Haskell Murray, Religion, Social Enterprise, Stefan J. Padfield | Permalink | Comments (3)