Thursday, January 19, 2017
Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.
The abstract is below:
Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.
First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.
Wednesday, January 18, 2017
"The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets."
Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency. While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy. As the spring proxy season approaches-- it's like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures--these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors' corporate governance leaders are "working quietly behind the scenes to advocate for greater shareholder rights" fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.
I now how a new ambition in life: get invited to the Women in Governance lunch.
FN1: See Choi et al, Voting Through Agents: How Mutual Funds Vote on Director Elections (2011)
FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).
Friday, January 13, 2017
On Friday, I will present as part of the American Society of International Law’s two-day conference entitled Controlling Corruption: Possibilities, Practical Suggestions & Best Practices. The ASIL Conference is co-sponsored by the University of Miami School of Business Administration, the Business Ethics Program of the University of Miami School of Business Administration, UM Ethics Programs & the Arsht Initiatives, the Zicklin Center for Business Ethics Research, Wharton, University of Pennsylvania, Bentley University, and University of Richmond School of Law.
I am particularly excited for this conference because it brings law, business, and ethics professors together with practitioners from around the world. My panel includes:
Marcia Narine Weldon, St. Thomas University School of Law, “The Conflicted Gatekeeper: The Changing Role of In-House Counsel and Compliance Officers in the Age of Whistle Blowing and Anticorruption Compliance”
Todd Haugh, Kelley School of Business, Indiana University, “The Ethics of Intercorporate Behavioral Ethics”
Shirleen Chin, Institute for Environmental Security, Netherlands, “Reducing the Size of the Loopholes Caused by the Veil of Incorporation May lead to Better Transparency”
Edwin Broecker, Quarles &Brady LLP, Indiana,& Fernanda Beraldi Cummins, Inc, Indiana, “No Good Deed Goes Unpunished: Possible Unintended Consequences of Enforcing Supply Chain Transparency”
Stuart Deming, Deming PLLC, Michigan, “Internal Controls and Compliance Programs”
John W. Fanning, Kroll Compliance, “Lessons from ‘Sully’: Parallels of Flight 1549 and the Path to Compliance and Organizational Excellence”
I will discuss some of the same themes that I blogged about here last July related to how the Department of Justice Yates Memo (requiring companies to turn over culpable individuals in order to get cooperation credit) and to a lesser extent the SEC Dodd-Frank Whistleblower program may alter the delicate balance of trust in the attorney-client relationship. Additionally, I will address how President-elect Trump’s nomination of Jay Clayton may change the SEC’s FCPA enforcement priorities from pursuing companies to pursuing individuals, and how that will change corporate investigations. If you’re in Miami on Friday the 13th and Saturday the 14th, please consider attending the conference.
January 13, 2017 in Behavioral Economics, Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, International Business, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)
Wednesday, January 11, 2017
The late December announcement of Carl Icahn as a special advisor overseeing regulation piqued my professional interest and raises interesting tension points for both sides of the aisle, as well as for corporate governance folks.
Icahn's deregulatory agenda has the SEC in his sights. Deregulation, especially of business, is a relatively safe space in conservative ideology. Several groups such as the Chamber of Commerce and the Business Roundtable may be pro-deregulation in most areas, but, and this is an important caveat-- be at odds with Icahn when it comes to certain corporate governance regulations. Consider the universal proxy access rules, which the SEC proposed in October, 2016. The proposed rules would require companies to provide one proxy card with both parties' nominees--here we don't mean donkeys and elephants but incumbent management and challengers' nominees. Including both nominees on a single proxy card would allow shareholders to "vote" a split ticket---picking and choosing between the two slates. The split ticket was previously an option only available to shareholders attending the in-person meeting, which means a very limited pool of shareholders. "Universal" proxy access-- a move applauded by Icahn--is opposed by House Republicans, who passed an appropriations bill – H.R. 5485 –that would eliminate SEC funding for implementing the universal proxy system. On January 9th, both the Business Roundtable and the Chamber of Commerce submitted comment letters in opposition to the rules. The Chamber of Commerce cautions that the proposed rules "[f]avor activist investors over rank-and-file shareholders and other corporate constituencies." The Business Roundtable echos the same concerns calling the move a "disenfranchisement" of regular shareholders due to likely confusion. This is a variation of the influence of big-business narrative. Here, we have pitted big business against big business. The question is who is the bigger Goliath--the companies or the investors?
President-elect Trump's cabinet and administrative choices have generated an Olympic-level sport of hand wringing, moral shock and catastrophizing. I personally feel gorged on the feast of terribles, but realize that many may not share my view. Icahn's informal role in cabinet selections (such as Scott Pruitt for EPA which favors Icahn's investments in oil and gas companies) and formal role in a deregulatory agenda foreshadows no end in sight to this royal feast. On this particular pick, both sides of the aisle may be invited to the feast. My only question is, who's hungry?
Monday, January 9, 2017
The members of Friday's AALS discussion group about which I wrote last week came to an inescapable--if unsurprising--overall conclusion: the U.S. Supreme Court's opinion in the Salman case does little to address major unresolved questions under U.S. insider trading law. That having been said, we had a wide-ranging and sometimes exciting discussion about the Court's opinion in Salman and what might or should come next. I found the discussion very stimulating; a great way to start a new semester--especially one in which I am teaching Securities Regulation and Advanced Business Associations, both of which deal with insider trading law. I will offer brief outtakes from the proceedings here for your consideration and (as desired) comment.
John Anderson and I framed three questions around which we structured the formal part of the discussion session (which commenced after brief introductory comments from each participant).
- What, if anything, does the Court's Salman opinion say by its silence?
- What, if anything, is left of the Second Circuit opinion in the Newman case after Salman?
- Is law reform needed after Salman, and if so, should we continue to permit it to occur through further, incremental judicial developments or should reform be undertaken through legislation or regulatory rule-making or guidance?
The questions drew both divergent and overlapping responses. It would take too long to try to capture it all, but a recording of the discussion will be available, if all went well with the technology, etc., on the AALS website in the coming months.
I want to pass on here, however, two key reading recommendations that Don Langevoort made to all of us that offer a basis for responding to all three questions--and more. First, Don recommended that we all read the Solicitor General's Brief for the United States in the Salman case. From this, he suggested (among other things), we can review issues not addressed in Salman and get an idea of how the U.S. government--at least at present--is processing those issues as across the Department of Justice and the Securities and Exchange Commission. Second, he recommended reading the First Circuit opinions in the Parisian and McPhail cases--two criminal prosecutions alleging insider trading violations (tipping and trading) by members of a golf group. These opinions also address important issues not taken up by Salman--including how the "knew or should have known" language from the Court's Dirks opinion relates to both the mens rea requirement in criminal insider trading actions (which require proof of a "willful" violation under Section 32(a) of the Securities Act of 1933, as amended) and misappropriation actions--and may offer windows on future judicial decision making.
No doubt, insider trading law in the United States remains a bit of an open book in many respects after Salman. Given that, I may report on more from this AALS discussion session in future posts. But I will leave the matter here, for now, having posed a few questions for your consideration and passed on some good advice from a trusted colleague who has followed U.S. insider trading law for many years . . . .
Thursday, January 5, 2017
As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB's) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.
Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).
Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.
Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.
Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.
SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.
Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.
I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.
Monday, January 2, 2017
Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman. He invited comments. So, I sent him one! He has started posting comments in a mini-symposium. Mine is here. Andrew Verstein's is here. There may be more to come . . . . I will try to remember to come back and edit this post to add any new links. Prompt me, if you see one before I get to it . . . .
Postscript (January 5, 2017): James Park also has responded to Steve's call for comments. His responsive post is here.
Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here. And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively. Steve collects the posts here.
Tomorrow, I am headed to the Association of American Law Schools ("AALS") Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister). I want to highlight a program at the conference for you all that may be of interest. John Anderson and I have convened and are moderating a discussion group at the meeting entitled "Salman v. United States and the Future of Insider Trading Law." The program description, written after the case was granted certiorari by the SCOTUS and well before the Court's opinion was rendered, follows:
In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.
This discussion group will focus on Salman and its implications for the future of insider trading law.
Of course, we all know what happened next . . . .
The discussants include the following, each of whom have submitted a short paper or talking piece for this session:
John P. Anderson, Mississippi College School of Law
Miriam H. Baer, Brooklyn Law School
Eric C. Chaffee, University of Toledo College of Law
Jill E. Fisch, University of Pennsylvania Law School
George S. Georgiev, Emory University School of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
Gregory Gilchrist, University of Toledo College of Law
Michael D. Guttentag, Loyola Law School, Los Angeles
Joan M. Heminway, University of Tennessee College of Law
Donald C. Langevoort, Georgetown University Law Center
Donna M. Nagy, Indiana University Maurer School of Law
Ellen S. Podgor, Stetson University College of Law
Kenneth M. Rosen, The University of Alabama School of Law
David Rosenfeld, Northern Illinois University College of Law
Andrew Verstein, Wake Forest University School of Law
William K. Wang, University of California, Hastings College of the Law
The discussion session is scheduled for 8:30 am to 10:15 am on Friday, right before the Section on Securities Regulation program, in Union Square 25 on the 4th Floor of the Hilton San Francisco Union Square. The AALS has posted the following notice about discussion groups, a fairly new part of the AALS annual conference program (but something SEALS has been doing for a number of years now):
Discussion Groups provide an in-depth discussion of a topic by a small group of invited discussants selected in advance by the Annual Meeting Program Committee. In addition to the invited discussants, additional discussants were selected through a Call for Participation. There will be limited seating for audience members to observe the discussion groups on a first-come, first-served basis.
Next week, I will post some outtakes from the session. In the mean time, I hope to see many of you there. I do expect a robust and varied discussion, based on the papers John and I have received. Looking forward . . . .
Monday, December 19, 2016
In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect's tweets regarding public companies. She ends her post with the following:
So, it's all a bit unsettled. Let's just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.
Today, I take on a somewhat related topic. I briefly explore the President-Elect's conflicting interests through the lens of a corporate law advisor. For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect's role as the POTUS, public investor and leader of the United States, and his role as "The Donald," private investor and leader of the Trump corporate empire.
The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic. In a number of common situations, fiduciaries have interests in both sides of a transaction. For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation. What matters under corporate law is whether the fiduciary's participation in the transaction on both sides results in a deal made in a fully informed manner, in good faith, and in the bests interests of the corporation. Conflicting interests raise a concern that the fiduciary is or may be acting for the benefit of himself, rather than for and in the best interest of the corporation.
Corporate law generally provides several possible ways to overcome concerns that a fiduciary has breached her duty because of a conflicting interest in a particular action or transaction:
- through good faith, fully informed approval of the action or transaction (e.g., after disclosure of information about the nature and extent of the conflicts) by either the corporation's shareholders or members of the board of directors who are not interested in the transaction; and
- through approval of a transaction that is entirely fair--fair as to process and price.
See, e.g., Delaware General Corporation Law Section 144. Yet, if I believe what I read, no similar processes exist to combat concerns about actions or transactions in which the POTUS has or may have conflicting interests. In particular, to the extent one does not already exist, should a disinterested body of monitors be identified or constituted to receive information about actual and potential conflicting interests of the POTUS and approve the action or transaction involving the conflicting interests? Perhaps the Office of Government Ethics ("OGE") already has something like this in place . . . . If it does, then both the public media and I are underinformed about it. While there seems to be OGE guidance on the President-Elect's nominees for executive branch posts (see, e.g., here and here) and on overall executive branch standards of conduct (see here), I have not found or read about anything applicable to the President-Elect or POTUS.
In making these observations, I recognize that our federal government is different in important ways from the corporation. I also understand that the leadership of a country/nation is different from the leadership of a corporation. Having said that, however, conflicting interests can have similar deleterious effects in both settings. The analogy I raise here and this overall line of inquiry may be worth some more thought . . . .
Thursday, December 8, 2016
A friend of mine is considering teaching his constitutional law seminar based almost entirely on current and future decisions by the President-elect. I would love to take that class. I thought of that when I saw this article about Mr. Trump’s creative use of Delaware LLCs for real estate and aircraft. Here in South Florida, we have a number of very wealthy residents, and my Business Associations students could value from learning about this real-life entity selection/jurisdictional exercise. Alas, I probably can’t squeeze a whole course out of his business interests. However, I am sure that using some examples from the headlines related to Trump and many of his appointees for key regulatory agencies will help bring some of the material to life.
Thursday, November 10, 2016
I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.
I am serving as a panelist and a moderator at the ABA's annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect's public statements that he plans to dismantle much of President Obama's legacy, including a number of his executive orders.
President-elect Trump's plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling "every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.
Plaintiffs' lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That's probably true. However, I have the following broader business-law related questions:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
9. What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.
November 10, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Law, Legislation, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (2)
Wednesday, November 9, 2016
Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Strine further notes that "advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion."
I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that "directors must make stockholder welfare their sole end." But I also agree that "disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity." My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what"stockholder welfare" means and what ends to use in pursuit of that end. That is, I think it's wrong to say "directors generally are not under a legal obligation to maximise profits for their shareholders," but I do think directors usually get to decide what it means to "maximise profits."
I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements. Thus, if a plaintiff can show self dealing (like maybe via giving to a "pet charity" described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes). But otherwise, it's the board's call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing). Thus, companies like Tom's Shoes and Ben and Jerry's should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.
eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing -- the actions taken by Jim and Craig were impermissible not because they were working toward "purely philanthropic ends," but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).
Anyway, I am still a believer in the BJR as abstention doctrine. Show me some fraud, illegality, or self-dealing or I'm leaving the board's decision alone.
Tuesday, November 8, 2016
Each year, I rethink how I teach fiduciary duties in the corporate law context in my Business Associations course. My learning objectives for the students are both limited and involved. On the one hand, there's little room in my three-credit-hour course for a nuanced understanding of all of the contexts in which corporate fiduciary duty claims typically occur. In particular, I have determined to leave out the public company mergers and acquisitions context almost completely. On the other hand, I find myself juggling uncertain classifications of duty components, explanations of seemingly mismatched standards of conduct and liability, and judicial review standards in and outside the Delaware corporate law context. It's a handful. It's teaching complexity.
Of course, fiduciary duty is not the only complex matter that one must teach in Business Associations. But it is, for me, one of the topics I am least confident that I "get right" in my interactions with students in and outside the classroom. Accordingly, as I again head toward the end of the semester, I find myself wondering whether I could have done--or could do--more with the students in my Business Associations course this semester. This leads me to ask my fellow business law professors (that's you!) whether any of you have materials, teaching techniques, exercises (in-class or out-of-class), etc. that you find to be particularly effective in educating law students the basics and nuances of corporate fiduciary duties.
So, have at it! Share your corporate fiduciary duty teaching successes in the comments, if you would. I am all ears. I know that what you report will benefit me and others (including our students), and I hope that your comments will generate a continuing conversation . . . .
Sunday, October 23, 2016
The Association of American Law Schools (AALS) Annual Meeting will be held Tuesday, January 3 – Saturday, January 7, 2017, in San Francisco. Readers of this blog who may be interested in programs associated with the AALS Section on Socio-Economics & the Society of Socio-Economics should click on the following link for the complete relevant schedule:
Specifically, I'd like to highlight the following programs:
On Wednesday, Jan. 4:
9:50 - 10:50 AM Concurrent Sessions:
- The Future of Corporate Governance:
How Do We Get From Here to Where We Need to Go?
andre cummings (Indiana Tech) Steven Ramirez (Loyola - Chicago)
Lynne Dallas (San Diego) - Co-Moderator Janis Sarra (British Columbia)
Kent Greenfield (Boston College) Faith Stevelman (New York)
Daniel Greenwood (Hofstra) Kellye Testy (Dean, Washington)
Kristin Johnson (Seton Hall) Cheryl Wade (St. John’s ) Co-Moderator
Lyman Johnson (Washington and Lee)
- Socio-Economics and Whistle-Blowers
William Black (Missouri - KC) Benjamin Edwards (Barry)
June Carbone (Minnesota) - Moderator Marcia Narine (St. Thomas)
1:45 - 2:45 PM Concurrent Sessions:
1. What is a Corporation?
Robert Ashford (Syracuse) Moderator Stefan Padfield (Akron)
Tamara Belinfanti (New York) Sabeel Rahman (Brooklyn)
Daniel Greenwood (Hofstra)
On Thursday, Jan. 5:
3:30 - 5:15 pm:
Section Programs for New Law Teachers
Principles of Socio-Economics
in Teaching, Scholarship, and Service
Robert Ashford (Syracuse) Lynne Dallas (San Diego)
William Black (Missouri - Kansas City) Michael Malloy (McGeorge)
June Carbone (Minnesota) Stefan Padfield (Akron)
On Saturday, Jan. 7:
10:30 am - 12:15 pm:
Economics, Poverty, and Inclusive Capitalism
Robert Ashford (Syracuse) Stefan Padfield (Akron)
Paul Davidson (Founding Editor Delos Putz (San Francisco)
Journal of Post-Keynesian Economics) Edward Rubin (Vanderbilt)
Richard Hattwick (Founding Editor,
Journal of Socio-Economics)
October 23, 2016 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Financial Markets, Law and Economics, Law School, Marcia Narine Weldon, Research/Scholarhip, Stefan J. Padfield, Teaching | Permalink | Comments (0)
Wednesday, October 19, 2016
Today's post continues the discussion started by Anne’s informative post regarding the law of controlling stockholders. Anne astutely notes that the MFW “enhanced ratification” framework was rendered in connection with a going private merger. Although I recognize the intuitive appeal, I wish to call into question the impact of MFW’s holding on other manners of controlling shareholder transactions.
Going private transactions differ from going concern transactions in that their successful completion wipes out the minority float. This distinction accelerates stockholders' divergent incentives and raises the possibility for minority stockholder abuse. An unscrupulous controller might structure the transaction in a manner that captures all unlocked value for later private consumption. Going private transactions allow controlling stockholders to shed the restrictions of the public market, thereby evading future retribution by minority stockholders. Policy considerations accordingly call for superior protection of minority stockholders participating in a going private transaction.
Since MFW establishes a procedure for achieving less intrusive judicial review for going private transactions, it stands to reason that this procedure should apply to all transactions involving a controlling stockholder. Indeed, without addressing the distinction between going private and going concern transactions in this context, a fairly recent Chancery Court decision has explicitly opined that the MFW framework applies to all controlling stockholder transactions (In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016)).
In a forthcoming article at the Delaware Journal of Corporate Law, I argue that the borders of "MFW-Land" are not as clear-cut as they appear. The Delaware Supreme Court decision does not create a universally-applicable safe harbor procedure for all manner of controlling stockholder transactions. Two main arguments form the basis of this contention.
The dual tenets of doctrinal clarity and cohesion underpin the first argument. A careful reading of the MFW decision fails to detect any mention of competing precedent or a general proclamation regarding its applicability to other types of controlling stockholder transactions. MFW is clearly situated on a path of doctrinal evolution of judicial inspection of going private transactions with controlling stockholders. Canons of judicial interpretation counsel against an indirect reversal or modification of established precedent.
Additionally, the theoretical justifications for the MFW decision hold significantly less weight in the going concern context. MFW's doctrinal shift is grounded on the twin pillars representing the competency of independent directors and non-affiliated stockholders. Whatever the validity of these mechanisms in the freeze out context, the legal and financial scholarship does not validate an extension to going concern transactions. Serious flaws hamper the ability of independent directors and non-affiliated stockholders to pass meaningful judgment on going concern transactions. In the final tally, MFW does not produce an all-encompassing framework for all controlling stockholder transactions.
Monday, October 17, 2016
Assume a state trial court issues an opinion in a particular case and the case is not appealed. Should a legal scholar using the opinion to support or refute a key point (in the text of a written work) characterize the weight or status of the opinion (e.g., noting that it is a trial court opinion and that is has not been appealed)? Justify your answer.
If the trial court at issue is the Delaware Chancery Court and the opinion addresses matters under the Delaware General Corporation Law, does that alter your answer? Why? Why not?
I am having fun considering these issues today in connection with my work on a symposium paper. I have not yet decided how to handle the specific matter that raises the questions. Accordingly, it seemed like a good idea at this juncture to share my questions and seek collaboration in answering them . . . .
Thursday, October 13, 2016
Today I used Wells Fargo as a teaching tool in Business Associations. Using this video from the end of September, I discussed the role of the independent directors, the New York Stock Exchange Listing Standards, the importance of the controversy over separate chair and CEO, 8Ks, and other governance principles. This video discussing ex-CEO Stumpf’s “retirement” allowed me to discuss the importance of succession planning, reputational issues, clawbacks and accountability, and potential SEC and DOJ investigations. This video lends itself nicely to a discussion of executive compensation. Finally, this video provides a preview for our discussion next week on whistleblowers, compliance, and the board’s Caremark duties.
Regular readers of this blog know that in my prior life I served as a deputy general counsel and compliance officer for a Fortune 500 Company. Next week when I am out from under all of the midterms I am grading, I will post a more substantive post on the Wells Fargo debacle. I have a lot to say and I imagine that there will be more fodder to come in the next few weeks. In the meantime, check out this related post by co-blogger Anne Tucker.
Wednesday, October 12, 2016
I am preparing to teach the doctrine on controlling shareholders in my corporations class tomorrow, and found the recent Delaware opinions on non-controlling shareholder cleansing votes and the BJR to be helpful illustrations of the law in this area.
In summer 2016, the Delaware Court of Chancery dismissed two post-closing actions alleging a breach of fiduciary duty where there was no controlling shareholder in the public companies, where the stockholder cleaning vote was fully informed, and applied the 2015 Corwin business judgment rule standard. The cases are City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, (Del. Ch. Aug. 24, 2016) (Bouchard, C.) and Larkin v. Shah, C.A. No. 10918-VCS, (Del. Ch. Aug. 25, 2016) (Slights, V.C.), both of which relied upon Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015). (Fellow BLPB blogger Ann Lipton has written about Corwin here).
The Larkin case clarified that Corwin applies to duty of loyalty claims and will be subject to the deferential business judgment rule in post-closing actions challenging non-controller transactions where informed stockholders have approved the transaction. The Larkin opinion states that:
(1) when disinterested, fully informed, uncoerced stockholders approve a transaction absent a looming conflicted controller, the irrebuttable business judgment rule applies; (2) there was no looming conflicted controller in this case; and (3) the challenged merger was properly approved by disinterested, uncoerced Auspex stockholders. Under the circumstances, the business judgment rule, irrebuttable in this context, applies. ....The standard of review that guides the court’s determination of whether those duties have been violated defaults to a deferential standard, the business judgment rule, which directs the court to presume the board of directors “acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.” In circumstances where the business judgment rule applies, Delaware courts will not overturn a board’s decision unless that decision 'cannot be attributed to any rational business purpose.' This broadly permissive standard reflects Delaware’s traditional reluctance to second-guess the business judgment of disinterested fiduciaries absent some independent cause for doubt. Larkin at 21-22 (internal citations omitted).
Two-sided controller transactions (a freeze out merger where a controlling shareholder stands on both sides of the transaction) is covered by the 2014 Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014) case, which I summarized in an earlier BLPB post here.
To refresh our readers, the controlling shareholder test is a stockholder who owns a majority of stock. Additionally, a stockholder may qualify as a controller if:
Under Delaware law, a stockholder owning less than half of a company’s outstanding shares may nonetheless be deemed a controller where 'the stockholder can exercise actual control over the corporation’s board.'This “actual control” test requires the court to undertake an analysis of whether, despite owning a minority of shares, the alleged controller wields “such formidable voting and managerial power that, as a practical matter, [it is] no differently situated than if [it] had majority voting control.'A controlling stockholder can exist as a sole actor or a control block of “shareholders, each of whom individually cannot exert control over the corporation . . . [but who] are connected in some legally significant way—e.g., by contract, common ownership agreement, or other arrangement—to work together toward a shared goal.' Larkin at 33-34 (internal citations omitted).
Excellent commentary on theLarkin and Comstock cases and their practical implications can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation, available here.
Wednesday, October 5, 2016
The Wells Fargo headlines--fresh from a congressional testimony, a spiraling stock price, and a CEO with $41M less dollars to his name-- raise the question of whether this is a case study of corporate governance effectiveness or inefficiency. That the wrong doing (opening an estimated 2M unauthorized customer accounts to manipulate sales figures) was eventually unearthed, employees fired and bonus pay revoked may give some folks confidence in the oversight and accountability structures set up by corporate governance. Michael Hiltzit at the LA Times writes a scathing review of the CEO and the Board of Directors failed oversight on this issue.
The implicit defense raised by Stumpf’s defenders is that the consumer ripoff at the center of the scandal was, in context, trivial — look at how much Wells Fargo has grown under this management. But that’s a reductionist argument. One reason that the scandal looks trivial is that no major executive has been disciplined; so how big could it be? This only underscores the downside of letting executives off scot-free — it makes major failings look minor. The answer is to start threatening the bosses with losing their jobs, or going to jail, and they’ll start to take things seriously.
Whats your vote? Is the call for resignation an empty symbolism or a necessary consequence of governance?
Monday, September 26, 2016
Fresh from the presidential debate,** I find myself writing about board room diversity.*** Over the 2016 summer, SEC Chairwoman Mary Jo White signaled intent to revisit diversity in U.S. boardrooms. In 2009 the SEC adopted a diversity disclosure rule requiring companies to disclose how their nominating committees considered diversity and whether the company had a diversity policy. The full rule can be viewed here. The SEC did not define (nor did it mandate a singular definition of ) diversity, and companies have been left to define diversity individually, often without regard to gender, ethnic, racial or religious identities. The result, criticized by Chairwoman White, has been vague disclosures without apparent impact.
SEC diversity rule making (past and future) was the backdrop for a recent corporate governance seminar class where I asked students: Why should they care about board room diversity? And if the 2009 disclosure rule changes, how should it change? How do other countries approach the issue of boardroom diversity? Can it be a mandated or legislated endeavor? To guide our discussion we read Aaron A Dhir's brilliant and thorough: Challenging Boardroom Homogeneity: Corporate Law, Governance and Diversity and consulted Catalyst.org to understand the panoply of diversity choices from other jurisdictions.
Dhir's Challenging Boardroom Homogeneity was a helpful and powerful book, equipping students with facts and language to think about and discuss diversity. Dhir engaged in a qualitative, interview-based methodology to investigate, and ultimately compare the Norwegian quota system with the U.S. diversity disclosure experience. While noting the costs and the translation problems from Norway to the world writ-large, Dhir interpreted his results as follows:
"female directors, present in substantial numbers, may enhance the level of cognitive diversity and constructive conflict in the boardroom. They are more apt to critically analyze, test and challenge received wisdom. In doing so, they appear to have harnessed for their boards the value of dissent, a key driver of effective governance."
In focusing on the U.S. experience, however, Dhir found that U.S. firms defined diversity in terms of experience not identity, and that this initiative fell short of the goal of encouraging or promoting boardroom diversity. Dhir recommended that the SEC define diversity as containing socio-demographic components and encourage companies to incorporate such considerations in governance by imposing a comply or explain regime in the U.S. While some have lamented that the SEC's primary challenge is how to define what diversity means, Dhir, through his research and analysis has a pretty good staring point. Should someone send Chairwoman White a copy of this book?
More than even the careful methodology, the refreshing comparative perspective and thoughtful recommendations tied to data and observable trends, the book provides a common language to explain the phenomenon of why diversity, as an initiative, is even necessary in the first place. Chapter two engages with a nuanced set of issues, irrefutable fact and explanations of bias--implicit and explicit. Here I think, more so than even other parts of the book, students connected with the materials linking language to real experiences and observations in their own lives. The attack on the pool problem critique (there aren't enough qualified women and it variant: we hired the most qualified candidate from our pool) alone warrants my effusive praise for its persuasive presentation and ability to generate thoughtful student debate.
**The debate wasn't the impetus, rather writing this post is just an exercise in settling my nerves before trying to sleep.