Tuesday, April 15, 2014
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting--Agency, Patnerships, LLCs & Unincorporated Assoc. Section
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014. The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair (email@example.com)
They really don't.
To be clear, this is not a post bashing corporations (or government). It's not really extolling the virtues of corporations, either. Instead, it's just to make the point that, notwithstanding Citizens United or Hobby Lobby and other cases of their ilk, the idea that corporations are people is still a legal fiction. A useful and important one, but a fiction nonetheless.
On April 11, Corey Booker posted the following on Facebook:
In awful years past, corporations polluted the Passaic river to the point that it ended the days where people could eat from it, swim in it, and use it as a thriving recreation source. Today we announced a massive initiative to clean the Passaic river and bring it back to life again. The tremendous clean up effort will create hundreds of jobs and slowly over time restore one of New Jersey's great rivers to its past strength and glory.
The river needs the clean-up, and I applaud the effort. Still, the reality is corporations did not pollute the Passaic River, at least not literally. People working for the corporation did. It is agency law that allows a corporation to act in the first place, because the fictional corporate person needs a natural person to act. (For a simple explanation, see here.) The corporation is liable for the harm caused by its agents. (And, in certain cases, the individuals would also be liable directly if their actions were, for example, illegal.)
Government doesn't really do anything, either. The clean-up proposal that Booker was referencing is a $1.7 billion Superfund river remediation project that was proposed by the EPA. Of course, government works through agents, too, and there are real people behind the proposal. Real people, through concerted action between corporations and government will actually do the clean up, too.
This is a point I have made before, but I think it's an important one. We need to remember that people are at the root of all corporate and government actions. This is important in two directions. First, for those criticizing a corporate or government action, it is critical for them to remember that there are people carrying out the action. A corporation or a government may act in an inappropriate manner, but it is also likely that the person carrying out the action is doing so with the intent to do well in the capacity in which they were fired.
Second, for people working for corporations or governments it is equally critical that they recognize that the their employer doesn't carry out actions without their help. That is, people who work for corporations or governments must recognize that they are carrying out the will of the entity they represent (and they should hold themselves responsible for doing do). Perhaps it is their boss who gave them the order (also a natural person), or even the board of directors (a group of natural people), but the charge is in fact, if not legally, being given by natural people.
Why does this matter? When we vilify or exalt the action of entities (like corporations or governments) we disconnect ourselves from the realities of the world, or at least our responsibilities within it. We become more susceptible to Groupthink in either direction. We are able to shirk our responsibilities -- as employees, as agents, as lawyers, as voters, as shareholders, as people -- to make decisions the are conscious of the world around us. In our daily lives and in our representative capacities, we all must make difficult decisions from time to time.
Sometimes, tough decisions require a cost-benefit analysis that means someone else will be worse off because of our decision. It's hard, but it's what people do. Often, it's what we must do. In doing so, though, it is essential that we hold ourselves and other people accountable as people for what we've done. Regardless of the rhetoric we often hear, the amalgamations of people who make up both governments and corporations have done some amazing and impressive things. Both have also done some horrendous and outrageous things. The people in charge, and the people who follow, are accountable in both circumstances.
In this instance, I am making a conceptual argument, not a legal one. There are legal regimes, sometimes effective, sometimes not, for holding both entities and their agents accountable for their actions (and rewarding them, where appropriate). How we think about corporations and governments and each other, though, has a broader impact. Without us -- all of us -- there are no corporations and there is no government. If we remember that, our responses to challenges are more likely to be more targeted, more effective, and more reasonable. Just because we don't always agree, doesn't mean we aren't all in this together. Whether we like it or not, we are, and it's time we acted like it.
Monday, April 14, 2014
Delaware, like most states, has a provision in its corporate statutes allowing corporations to limit directors’ liability for breaches of fiduciary duty. Delaware section 102(b)(7) allows corporations to include in their charter “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages" for certain breaches of fiduciary duty.
A recent Delaware case plows a huge hole through the protection provided by a section 102(b)(7) charter provision. In the Rural Metro case [In Re Rural Metro Corp. Stockholders Litigation, 2014 WL 971718 (Del. Ch. Mar. 7, 2014)], the Delaware Court of Chancery held that a 102(b)(7) provision does not protect against claims that non-directors aided and abetted a duty-of-care violation by directors, even when the directors themselves are protected.
The Chancery Court’s reasoning is sound. Section 102(b)(7), and the associated charter provision, don’t say there’s no breach of fiduciary duty, just that directors aren’t personally liable for damages. The underlying conduct by the directors is still a breach of fiduciary duty, and injunctive relief is still available, just no money damages.Since there’s still a breach of duty, and the statute says nothing about the liability of aiders and abettors, the court concluded that aiders and abettors can still be liable if: (1) the directors breached their fiduciary duties; (2) the third party knew the directors were breaching their fiduciary duties; and (3) the third party participated in the breach.
The court ultimately held that RBC Capital Markets, LLC was liable for aiding and abetting. I can't do justice to the facts in the space available here; I highly recommend a reading of this important opinion.
The real question is whether the Delaware legislature will let this holding stand. The Chancery Court’s statutory reasoning is sound, but that doesn’t mean the result is necessarily good policy. Investment bankers, brokers, accounting firms, and other third party providers, perhaps even lawyers in some cases, are exposed to the risk of liability under this holding. Even if they ultimately win on the merits, as I suspect many will, the litigation itself will be costly. That cost will, of course, be passed on to the corporations using the services of those third parties.
There’s a possible gain associated with that cost, of course: the possible increased deterrence of breaches of fiduciary duty by corporate directors. But the Delaware legislature, in adopting section 102(b)(7), has already decided that other considerations outweigh the deterrent effect of imposing liability on the directors themselves.
Two Legislative Options
Plugging the Rural Metro hole is easy. A simple amendment to 102(b)(7) would do the trick. But how the Delaware legislature chooses to amend the statute (if it does) is important.
One way would be to authorize corporations to include provisions in their charters protecting not only directors, but also people who aid and abet violations by the directors. If that's all the Delaware legislature did, the protection from liability would not be automatic. Companies with 102(b)(7) exculpation provisions would have to amend their charters to protect aiders and abettors.
A simpler, neater solution would make the protection of aiders and abettors automatic. The legislature could just add a sentence at the end of 102(b)(7) providing that aiders and abettors are not liable when the directors themselves are protected from liability. Something like the following would work: “Unless otherwise specified in the certificate of incorporation, no person shall be liable for money damages for aiding and abetting an action protected by such a provision.” If the legislature did this, no further corporate action would be needed to make this protection effective. Only companies that did not want aiders and abettors protected would have to amend their charters.
Stay tuned to see what, if anything, the Delaware legislature does.
Sunday, April 13, 2014
My Akron colleague Bernadette Bollas Genetin recently posted “The Supreme Court's New Approach to Personal Jurisdiction” on SSRN, and I believe it may be of interest to readers of this blog. Here is the abstract:
This article provides an analysis of the Court’s two recent personal jurisdiction opinions, Daimler AG v. Bauman, 134 S. Ct. 746 (2014), and Walden v. Fiore, 134 S. Ct. 1115 (2014), and concludes that these cases suggest a new doctrinal approach to personal jurisdiction.
In Daimler AG v. Bauman, the Supreme Court narrowed the scope of general jurisdiction, making it available primarily in a corporation’s states of incorporation and principal place of business and rejecting, in most instances, the prior approach of permitting general jurisdiction based on a defendant’s “continuous and systematic” forum contacts. In Walden v. Fiore, the Court used an interest balancing approach to resolve the specific jurisdiction question at issue, turning away from its longstanding purposeful availment approach.
Together, these cases can be interpreted to reinvigorate the reasonableness analysis of International Shoe, in which the Court focused on the “relation among the defendant, the forum, and the litigation.” The Supreme Court has, famously, reversed course several times on its analysis of personal jurisdiction. The article concludes that the Court should, in the full range of specific jurisdiction cases, return to an analysis that considers all relevant interests, including the interests of the defendant, the plaintiff, and the state.
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)
Continuing with the theme, I want to highlight a new hybrid resource, JURIFY, which is a mostly-free, online transactional law resource.
“Jurify provides instant access to high-credibility, high-relevance legal content, including forms and precedent in Microsoft Word® format written by the world’s best lawyers, white papers and webinars from top-tier law firms, articles in prestigious law journals, reliable blog posts and current versions of statutory, regulatory and case law, all organized by legal issue.”
Here are the stats: Jurify, launched in 2012, covers 5 broad transactional areas: General Corporate, Governance, Mergers & Acquisitions, Securities and Startup Companies. The 11,000+ sources that the website currently contains have been verified by transactional attorneys and generated from free on-line platforms or submitted by private attorneys who are voluntarily sharing their work. Documents are organized according to 586 tags. Three transactional attorneys started this website (husband/wife duo and their former law-firm colleague); none take compensation from editors, publishers or law firms.
Jurify is a unique transactional law resource for the following reasons:
- FREE (mostly). Website contents including primary law, secondary sources and template agreements and forms. All content is searchable; most is free; some templates/forms, available in Microsoft word version, require either a fee or a paid membership. In the future, Jurify founders hope to generate revenue by providing performance metrics and career services components.
- Emphasis on Primary Sources—collecting the most current and complete versions of governing statutes, and here is the important part—putting relevant sources together. Want to find out registration obligations? A search on Jurify will pull from several different sources to give you a comprehensive look at the governing law.
- Organization. The website resources are organized in a consumer-friendly, vertically integrated platform (like the searching functions on YouTube). If you search for one term of art, (the example used was break-up fees), the search results pull all related terms of art (i.e., termination fees, reverse break-up fees, etc.). The data base has been encoded with 1600 corporate law synonyms in the platform to facilitate more robust natural language searches.
- Multiple search modes (i.e., accessible for the novice). Non-experts can search for information using tags and drop down boxes to sort information by source type (news articles, videos, journals, statutes and regs, etc.). The site also includes a glossary of terms, and those terms serve as searchable categories that have documents associated with them.
- Narrowing the field. You don’t need every document- you just need the right document. Researchers can narrow search results through subcategories, which include definitions on all of the subcategories to assist the non-expert (i.e., students, generalist attorneys like some in-house teams). Within general categories, researchers can also conduct granular searches within a topic and can narrow by specific fields (i.e., M&A).
- Sorting the results. Search results are displayed in order of relevance. Relevance, in Jurify, is determined by the tags assigned by Jurify attorneys reviewing and labeling each document in the database. While a document may have 15 tags, 2 or 3 tags will be the primary tag, and the document will be flagged as “noteworthy” for that particular topic. The idea is that you review the most relevant documents first not just any document that contains any reference to your search fields.
- Networking Component. Some of the documents are voluntarily provided by practicing attorneys and their names remain associated with the document(s). If an attorney wants to establish herself as an expert in an area, she may do so in part, by contributing high-quality documents on that topic. Top contributors are highlighted on the website, using in part, a Credibility Score. In the future, a ranking/review feature will be added so that users can provide feedback on the quality/relevance of a document as well.
Erik Lopez, co-founder of Jurify, contacted the BLPB editors earlier this spring. As a result, I test drove the site with Erik a few weeks ago, which formed the basis of my comments above. Thanks Erik! (Note: Neither BLPB nor I, individually, received any compensation as a result of this post. I am passing it along because I genuinely am intrigued by the platform, business model, and potential for the website to be a valuable transactional resource.)
If anyone currently uses Jurify, or test drives the site after reading this post, please share your experience in the comments.
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.”
Thursday, April 3, 2014
As regular readers of this blog may know, I sit on the Department of Labor's Whistleblower Protection Advisory Committee. The Occupational Health and Safety Administration, a division of the Department of Labor, may not be the first agency that many people think of when it comes to protecting whistleblowers, but in fact the agency enforces almost two dozen laws, including Sarbanes-Oxley and the Consumer Financial Protection Bureau's law on whistleblowers. The Consumer Financial Protection Act was promulgated on July 21, 2010 to protect employees against retaliation by entities that offer or provide consumer financial products.
Today OSHA released its interim regulations for protecting CFPB whistleblowers. The regulation defines a “covered person” as “any person that engages in offering or providing a consumer financial product or service.” A “covered employee” is “any individual performing tasks related to the offering or provision of a consumer financial product or service.” A “consumer financial product or service” includes, but is not limited to, a product or service offered to consumers for personal, family, or household purposes, such as residential mortgage lending and servicing, private student lending and servicing, payday lending, prepaid debit cards, consumer credit reporting, credit cards and related activities. The Consumer Financial Protection Act protects “covered employees” of “covered persons” from retaliation who report violations of the law to their employer, the CFPB, or any other federal, state, or local government authority or law enforcement agency. Employees are also protected from retaliation for testifying about violations, filing reports or refusing to violate the law.
Retaliation is broadly defined as firing or laying off, reducing pay or hours, reassigning, demoting, denying overtime or promotion, disciplining, denying benefits, failing to hire or rehire, blacklisting, intimidating, and making threats. An employee or representative who believes that s/he has suffered retaliation must bring a claim within 180 days after the alleged retaliatory action. If OSHA finds that the complaint has merit, the agency will issue an order requiring the employer to put the employee back to work, pay lost wages, restore benefits, and provide other relief. Either party can request a full hearing before an ALJ of the Department of Labor. A final decision from an ALJ may be appealed to the Department’s Administrative Review Board and an employee may also file a complaint in federal court if the Department of Labor does not issue a final decision within certain time limits.
Although the statute is part of Dodd-Frank, the CFPB whistleblowers don’t get the same monetary benefits as Dodd-Frank whistleblowers who go to the SEC. The SEC Dodd-Frank whistleblower rule allows the recovery of between 10-30% of any monetary award of more then $1million of any SEC enforcement action to those individuals who provide original information to the agency. The SEC announced that in 2013 it awarded $14,831,965.64 during its fiscal year to 4 whistleblowers based on 3,238 tips. The vast majority—more than $14 million went to a single individual. The top three allegations involved corporate disclosures and financials (17.2%), offering fraud (17.1%) and manipulation (16.2%).
Should there be such a disparity between those whistleblowers who protect consumers and those who protect investors? Maybe not, but studies consistently show that whistleblowers don’t report to government agencies for the money so perhaps the absence of a large financial reward won’t be a deterrence. Time will tell as to whether any of these whistleblower laws will prevent the next financial crisis. But at least those who work in the financial sector will have some protection.
Tuesday, April 1, 2014
As I discussed briefly last week, I think reverse veil piercing in the Hobby Lobby case is a bad idea, in part because it uses a doctrine designed to prevent fraud to impute characteristics to the entity. One of the reasons this concerns me is that there are other recent decisions that imply courts may be missing the point about the separate and distinctive nature of entities, even as the individual rights of entities appear to be expanding.
In a recent West Virginia case, for example, a lower court allowed a wildly improper use of the statutory provision, “Unknown claims against dissolved corporation” to be the basis what became a $25 million jury award for punitive damages for emotional impact to a former entity’s shareholders. In the Order Addressing AIG Posttrial Motions (pdf) of May 1, 2012 (“Order”) Ryan Environmental, Inc. v. Hess Oil Co., Inc., Civil Action No. 10-C-20, the court adopted a plaintiff’s argument that, under W. Va. Code § 31D-14-1407(d), “the interests of the shareholders are joined with the interests of the corporation after a corporation’s dissolution.” See Order at 7. The court later explained its view that, because the plaintiff’s former entity was dissolved, damages and hardships attributable to the shareholders were a sufficient basis for the defendants’ liability directly to the shareholders and that such damages and hardships did not need to attributed to the former entity. That is, the defendants’ liability ran to the entity’s shareholders post-dissolution even though the harms claimed were never attributable to the entity. Click below to read more.
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.
Wednesday, March 26, 2014
A little more than six weeks ago The Lego Movie hit theaters. Without getting into too much detail for those of you who have not yet seen the movie or who will never get around to seeing the movie, in essence it’s about an ordinary guy who’s mistakenly identified as an extraordinary “MasterBuilder”. He is recruited to fight against a Lego villain (President Business-we can call him P.B.) who is intent on gluing everything together. The anti-PB crusaders like having the freedom to dismantle, break, and re-make their Lego creations and shudder at the thought of having everything permanently fixed in place. PB, on the other hand, is intent on perma-gluing the Lego bricks together because he likes the certainty and control of knowing where everything is, and he is wary of innovation or change. Hence, his admonition- “EVERYTHING MUST STAY IN PLACE.”
Now as I watched this battle unfold between President Business’ pro-gluing supporters on one hand, and the pro-change supporters on the other, I could not help but see some similarities between the Lego people’s contested views on the purpose of Legos and our society’s contested views on the purpose of corporations. In The Lego Movie it is a contest between staying in place and the freedom to innovate and create, while in the corporate purpose debate it is a contest between profit maximization/shareholder primacy and ANYTHING ELSE THAT DARES TO SAY ANYTHING OTHER THAN SHAREHOLDER PRIMACY (e.g., creating shared value; stakeholder theory; team production).
While shareholder primacy has both normative and pragmatic appeal, one cannot help but wonder whether this traditional conceptualization of corporations is open to being re-made, or must it be immovable and “stay in place”. In other words, if we accept that our world today is markedly different from the one that existed when shareholder primacy came into vogue, are we selling ourselves short by clinging to a mantra that may no longer be ideal or that may need to be revamped?
Consider a new report by McKinsey [Dr. Maximilian Martin of Impact Economy], titled “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation”. In essence, the report finds that pursuing a profit-as-usual model with “CSR” as a tangential activity is “fast coming to an end.” According to the report, this is because “[a] new paradigm is emerging in its place that is responding to structural changes in the operating environments of business.” The McKinsey [Impact Economy] report points to four “megatrends” that are nudging corporations towards a more transformative and holistic view of their role and purpose – what McKinsey [Impact Economy] terms “sustainable value creation.” These four trends are: (i) significant opportunities at the Base of the Pyramid (BoP); (ii) a $540 billion market for “Lifestyles of Health and Sustainability Consumption”; (iii) the growth in markets “resulting from green growth and the circular economy”; and (iv) the “modernization of the welfare state.” The conclusion reached by the report is that “companies are well advised to grasp the changing tectonics of value creation and tackle markets accordingly if they want to remain competitive in the long run.”
This new McKinsey [Impact Economy] report is of course not alone in making the case for a more expansive view of corporate purpose (for example, the Aspen Business & Society Program’s report on long-term value creation, or Michael Porter’s work on creating shared value). But what does it take to move the needle? In the Lego Movie, it took President Business and the head of the pro-change supporters realizing that their views were really not that far apart. Maybe that too is the winning answer for the corporate purpose debate – those corporations who are successful in responding to the aforementioned mega trends and other societal needs stand to be the ones who provide the most value creation for society and their shareholders.
UPDATE 4/15/14: The original version of this post improperly identified McKinsey as the source of the “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation” report. The post has been corrected to reflect the fact that the report was written by Dr. Maximilian Martin of Impact Economy.
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
Friday, March 21, 2014
On spring break, I found a hardcover copy of Professor David Nasaw’s biography of Andrew Carnegie in a Boone, NC thrift shop for $1. (Good books and good deals are two of my favorite things). A New York Times book review is available here.
I only made it about 200 pages into the fascinating 801 page biography before returning to work. I am currently on page 293, but already have some thoughts to share.
Before digging into this book, “failure” was one of the last words I would have associated with Andrew Carnegie. Carnegie is well known as one of the “captains of industry” (in the steel business) and as an extremely generous philanthropist. Even the word “struggle” is not a word I would have associated with Andrew Carnegie; from a distance, everything seemed to come easily for him.
But, like most of us, Carnegie experienced failure, and his life was marked by numerous struggles.
[More after the break]
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.
Tuesday, March 18, 2014
Ed Whelan at National Review Online (h/t: Prof. Bainbridge) asks, in light of a recent Fourth Circuit opinion, “Will those who (wrongly) think that for-profit corporations are incapable of exercising religion for purposes of RFRA object as vigorously to the concept that for-profit corporations can have a racial identity for purposes of Title VI? If not, why not?”
I have been following the Hobby Lobby case with interest, though I am just delving into its depths now. After starting through the various amicus briefs, my initial reaction is that the law has not evolved to where it needs to be with respect to protecting those engaging in the widespread use of entities. I, as is often the case, my intitial reaction is that the answer to Mr. Whelan’s question is somewhere in the middle: I think for-profit corporations are capable of exercising religion under RFRA, but in this case I don’t see the necessary substantial burden, at least when balanced with an individual’s right to make such decisions, to carry the day. (Reasonable minds can disagree on this, but that’s my take).
Taking a broader look, though, view entities should be able to take on the race, gender, or religion of its primary shareholders (or members) in proper circumstances to protect against discrimination. The Fourth Circuit opinion states: “We hold that a corporation can acquire a racial identity and establish standing to seek a remedy for alleged race discrimination under Title VI.” Seven other circuit courts “have concluded that corporations have standing to assert race discrimination claims.” This seems proper, because a minority-owned company might be denied a contract or be treated differently in the execution of a contract because of the race of the primary shareholders. It would be improper to deny protections for the shareholders/members just because they chose to avail themselves of entity protections to conduct their business.
The same should be true in cases of religion and gender. Suppose, for example, an all-female construction company were denied a bid because the city seeking the project thinks construction is “man’s work to be done by men.” Similarly, protections should be available if a Catholic-owned company were to lose a bid because the county seeking the bid was run by people who didn’t “trust Catholics to finish anything on time.” (Disclosure: I was raised Catholic, and while I most certainly don’t speak for any other Catholics, my comfort level leads me to use Catholics in such examples.)
Thus, an entity should be able to take on the race, gender, or religion of the shareholders/members to fight cases where the same discrimination against an individual would stand. Obviously, then, having a member of a certain race, gender, or religion as a shareholder, member, director, or employee would not be sufficient to make the claim. The entity would also have to demonstrate: (1) that the alleged discrimination was predicated on race, gender, or religion, and (2) the entity (and not just certain individuals) was identified with the group against whom the discrimination was targeted.
In the Hobby Lobby case, then, under this rubric I think the claim would fail because the entity would not be able to demonstrate they have satisfied the first test. Regardless of what one thinks of the healthcare law, the law was not designed to discriminate against certain religions (or race or gender). The law also does not mandate any individual course of action, but merely requires that access be provided to certain healthcare options. (That is, it mandates access, not use.)
This is not the current state of the law, of course. Still, it seems to me that the proper way forward is to recognize that entities can often take on identities of those running them, but that protections should only be available where the entity’s identity was targeted for harm because of that identity, and not an arguable result of another non-identity-based decision.
Monday, March 17, 2014
Professor Jennifer Pacella (CUNY-Baruch) recently posted an article entitled Bounties for Bad Behavior: Rewarding Culpable Whistleblowers under the Dodd-Frank Act and Internal Revenue Code. The abstract is posted below:
In 2012, Bradley Birkenfeld received a $104 million reward or “bounty” from the Internal Revenue Service (“IRS”) for blowing the whistle on his employer, UBS, which facilitated a major offshore tax fraud scheme by assisting thousands of U.S. taxpayers to hide their assets in Switzerland. Birkenfeld does not fit the mold of the public’s common perception of a whistleblower. He was himself complicit in this crime and even served time in prison for his involvement. Despite his conviction, Birkenfeld was still eligible for a sizable whistleblower bounty under the IRS Whistleblower Program, which allows rewards for whistleblowers who are convicted conspirators, excluding only those convicted of “planning and initiating” the underlying action. In contrast, the whistleblower program of the Securities and Exchange Commission (“SEC”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was modeled after the IRS program, precludes rewards for any whistleblower convicted of a criminal violation that is “related to” a securities enforcement proceeding. Therefore, because of his conviction, Birkenfeld would not have been granted a bounty under Dodd-Frank had he blown the whistle on a violation of the federal securities laws, rather than tax evasion. This Article will explore an area that has been void of much scholarly attention — the rationale behind providing bounties to whistleblowers who have unclean hands and the differences between federal whisteblower programs in this regard. After analyzing the history and structure of the IRS and SEC programs and the public policy concerns associated with rewarding culpable whistleblowers, this Article will conclude with various observations justifying and supporting the SEC model. This Article will critique the IRS’s practice of including the criminally convicted among those who are eligible for bounty awards by suggesting that the existence of alternative whistleblower incentive structures, such as leniency and immunity, are more appropriate for a potential whistleblower facing a criminal conviction. In addition, the IRS model diverges from the legal structure upon which it is based, the False Claims Act, which does not allow convicted whistleblowers to receive a bounty. In response to potential counterarguments that tax fraud reporting may not be analogous to securities fraud reporting, this Article will also explore the SEC’s recent trend of acting increasingly as a “punisher” akin to a criminal, rather than a civil, enforcement entity like the IRS. In conclusion, this Article will suggest that the SEC’s approach represents a reasonable middle ground that reconciles the conflict between allowing wrongdoers to benefit from their own misconduct and incentivizing culpable insiders to come forward, as such persons often possess the most crucial information in bringing violations of the law to light.
Sunday, March 16, 2014
The "Conference on Multi-Jurisdictional Deal Litigation" will be held April 25, 2014. Here is a brief introduction:
M&A litigation is increasingly filed in both the target’s state of incorporation and its headquarters state. It is the most important current development in corporate litigation. The leading plaintiffs’ and defendants’ deal litigators from Delaware and from Texas will discuss every aspect of this issue at our day-long conference. Chief Justice Strine of the Delaware Supreme Court and Justice Brown of the Texas Supreme Court will be panelists.