Wednesday, August 27, 2014

More on "Closely Held" in the Hobby Lobby Regulatory Context

Thanks for your informative post, Anne.  I started drafting this post as a comment to yours, and then I realized it was its own post.   [sigh]

It seems to me that the U.S. Department of HHS and any commentators must grapple with what has been a difficult, fact-based question in determining how to define “closely held” to effectuate the Supreme Court’s intent in as expressed in the Hobby Lobby opinion.  That question?  What "control" means in this context.

The Court said in the Hobby Lobby opinion:  “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.”  More specifically, the Court notes that the Hahns (owners of shares in Conestoga) “control its board of directors and hold all of its voting shares” and notes that Hobby Lobby and Mardel “remain closely held, and David, Barbara, and their children retain exclusive control of both companies.”  [Emphasis has been added by me in each quote.]

The definition of “control” primarily has been a question of fact in business law, making the task of defining it here somewhat difficult.  Some questions and considerations to grapple with are set forth below the fold.  I am sure that others can come up with more.  I am posting these as a way of getting the collective juices flowing.

Continue reading

August 27, 2014 in Business Associations, Anne Tucker, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Tuesday, August 26, 2014

HHS Proposes Definition of Closely Held Entity in Rules for Hobby Lobby Exemption:

As I have pointed out in earlier posts on this blog, the June decision in Hobby Lobby failed to define closely-held business for purposes of the religious exemption.  On August 22nd, the U.S. Department of Health and Human Services (HHS) issued proposed rules, open for comments for 60 days, that include a definition of closely-held under one of two approaches borrowed from state law definitions like with S corporations and from IRS regulations.

In common understanding, a closely held corporation – a term often used interchangeably with a “close” or “closed” corporation – is a corporation the stock of which is owned by a small number of persons and for which no active trading market exists. ....Under the first proposed approach, a qualifying closely held for-profit entity would be an entity where none of the ownership interests in the entity is publicly traded and where the entity has fewer than a specified number of shareholders or owners....

Under a second, alternative approach, a qualifying closely held entity would be a forprofit entity in which the ownership interests are not publicly traded, and in which a specified fraction of the ownership interest is concentrated in a limited and specified number of owners.

HHS invites comments on the proposed definitions, the preferred approach, and the threshold cut offs for ownership concentration or numbers of owners.

Importantly, and answering a question raised in several posts in the on line symposium at The Conglomerate, the proposed rules would require a valid corporate action, taken in accordance with state law, to assert that the owners' religious views form the basis of the entity's objection.   HHS also invites comments "on whether to require documentation of the decision-making process and disclosure of the decision."

-Anne Tucker

 

August 26, 2014 in Anne Tucker, Corporate Governance, Corporations, Current Affairs | Permalink | Comments (0)

The March of the Benefit Corporation: Next Up, West Virginia (Cross Post)

West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here.   As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit.  (Current and pending state legislation for benefit corporations can be found here.)

As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking.  Hopefully, this series will address something you didn’t know from the other side of the discussion!

Part I: The Benefit Corporation: What It’s Not:  Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world.  A benefit corporation is different than a B Corporation (or B Corp).  B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.” 

It wants to be the Good Housekeeping seal of approval for social enterprise organizations.  In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.  

In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,

I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]

A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.)  The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company.  As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS.  The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law).   By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election).   The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way).  The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later. 

Finally, let’s be clear – a benefit corporation is not a nonprofit corporation.  A benefit corporation is organized at least, in some part, to profit to its owners.  The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation.  Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.

In the next installments:

Part II – The Benefit Corporation: What It Is.

Part III – So Why Bother?  Isn’t the Business Judgment Rule Alive and Well?

Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?

Part V - Random Thoughts and Conclusions

EWW & JPF

August 26, 2014 in Business Associations, Corporations, Entrepreneurship, Joshua P. Fershee, LLCs, Social Enterprise | Permalink | Comments (2) | TrackBack (0)

Friday, August 22, 2014

Corporate Constitutional Themes Pt.2

I love a good debate and appreciate the opportunity (provided by Professor Bainbridge’s thoughtful post yesterday) to engage a bit more deeply on the thesis of Wednesday’s post suggesting an approach for how to incorporate Citizens United and Hobby Lobby into the survey BA/Corporations course. 

By way of recap and ruthless summary, Stephen Bainbridge wants nothing to do with these issues (or other constitutional law questions) in his course because of the:

  1. Existing emphasis of public law over private law and resulting imbalance in law school curriculum;
  2. False impression that constitutional law is the holy grail of law teaching and practice;
  3. These cases present a hornet’s nest of controversial and divisive topics; and
  4. Coverage constraints.  The menu options of what we can (should) teach is already more ambitious than time allows.

And to no surprise to anyone, anywhere:  Stephen Bainbridge is right on the money with all of these points.

As a survey course and one that almost every student in my law school (Georgia State) takes, I feel a responsibility to provide context for the subject matter that we teach and to do my best to “hook” students who didn’t come to my class with an interest in corporate law. 

First, hear me now when I say that corporate law matters.  It matters to the business owners who form and operate a firm.  It matters to the individuals and other businesses who interact with the firm as a supplier or customer or creditor or employee.  These first two points are significantly incorporated into the traditional BA syllabus.  Corporate law also matters to general members of society because corporations wield tremendous power in elections, in lobbying (regulatory capture anyone?), in shaping retirement savings, in religious and reproductive rights debates and setting other cultural norms around issues like corruption, sustainability, living wage, etc.   Multi-national corporations with ubiquitous brand recognition aren’t the only powerful actors.  The Hobby Lobby ruling tells us that those creatures governed largely by private law—the closely held corporation—also play a major role.  To teach corporate law in a vacuum that ignores this broader context is to teach nuclear physics without discussing the atom bomb and its consequences (if I can use hyperbole).  Should the broader context be the focus of the class? Absolutely not.  Can it be woven into context setting discussions or used as a way to elicit student participation?  In my class at least.

Second, not every student in BA enrolled out of pure self-interest; not everyone has a business background.  I consider my course to be a great equalizer in law school:  we take the health sciences majors, the B-schoolers, the political science and the anthropology kids and at the end of the semester everyone can explain basic financial concepts, the different menu options of firms, proxy fights, and even poison pills. We do this best when we can engage all of the students, which sometimes means helping students see why it might matter to them and how the subject connects with the things that they care about.  For some that will be the clever ways you can use private agreements to shape outcomes and hedge against risk, for others it will be seeing why corporate law matters even if you don’t care about corporations (see paragraph above).

My last point is that being an effective classroom teacher generally requires a sense of self-awareness about your comfort zone, your strengths, and your weaknesses (among other things). I have lots of colleagues, at GSU and other institutions (many of them BLPB editors), whom I admire, but if I tried to teach class the way that they did, I would fall short of the mark.  We teach to our own strengths and infuse classes with a sense of our own personality and passion.  I don’t think I have convinced anyone not previously inclined to incorporate these materials; and I wonder if Stephen has caused any course corrections with his thoughts.  We may have just reinforced the positions that you already held.  Either way, happy teaching to all readers who have started or are preparing to start the new semester and the new school year.

-Anne Tucker

August 22, 2014 in Business Associations, Anne Tucker, Constitutional Law, Corporations, Law School, Teaching | Permalink | Comments (3)

Thursday, August 21, 2014

Is the Dodd-Frank Whistleblower Law Working?

Two news articles about the Dodd-Frank whistleblower law caught my eye this week. The first was an Op-Ed in the New York Times, in which Joe Nocera profiled a Mass Mutual whistleblower, who received a $400,000 reward—the upper level of the 10-30% of financial recoveries to which Dodd-Frank whistleblowers are entitled.

Regular readers of this blog may know that I met with the SEC, regulators and testified before Congress before the law went into effect about what I thought might be unintended effects on compliance programs. I have blogged about my thoughts on the law here and here

The Mass Mutual whistleblower, Bill Lloyd, complained internally and repeatedly to no avail. Like most whistleblowers, he went external because he felt that no one at his company took his reports seriously. He didn’t go to the SEC for the money. As I testified, people like him who try to do the right thing and try resolve issues within the company (if possible) deserve a reward if their claims have merit.

The second story had a different ending. The Wall Street Journal reported on the Second Circuit opinion supporting Siemens’ claim that Dodd-Frank’s anti-retaliation protection did not extend to its foreign whistleblowing employees. In that case, everything-- the alleged wrongful conduct, the internal reporting, and the termination--happened abroad. The employee did disclose to the SEC, but only after he was terminated, and therefore his retaliation claim relates to his internal reports. The court's reasoning  about the lack of extraterritorial jurisdiction was sound, but this ruling may be a victory for multinationals that may unintentionally undermine the efforts to bring certain claims to internal compliance officers. 

I proudly serve as a “management representative” on the Department of Labor’s Whistleblower Protection Advisory Committee with union members, outside counsel, corporate representatives, and academics. Although Dodd-Frank is not in our purview, two dozen other laws, including Sarbanes-Oxley are, and we regularly hear from other agencies including the SEC. I will be thinking of these two news articles at our next meeting in September.

I will also explore these issues and others as the moderator of the ABA 8th Annual Section of Labor and Employment Law Conference, which will be held in Los Angeles, November 5-8, 2014. Panelists include Sean McKessey, Chief of the SEC’s Office of the Whistleblower, Mike Delikat of Orrick, Herrington & Sutcliffe LLP, and Jordan A. Thomas of Labaton Sucharow LLP.

The program is as follows: 

 Program Title: Whistleblower Rewards:  Trends and Emerging Issues in Qui Tam Actions and IRS, SEC & CFTC Whistleblower Rewards Claims

Description:     This session will explore the types of claims that qualify for rewards under the False Claims Act and the rewards programs administered by the Securities & Exchange Commission, Commodity Futures Trading Commission, and Internal Revenue Service, the quantity and quality of evidence needed by the DOJ, IRS, SEC, and CFTC to investigate a case successfully, and current trends in the investigation and prosecution of whistleblower disclosures. The panel also will address, from the viewpoint of in-house counsel, the interplay between these reward claims and corporate compliance and reporting obligations.

If you can think of questions or issues I should raise at either the DOL meeting in DC next month or with our panelists in November, please email me at mnarine@stu.edu or leave your comments below.

August 21, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Tuesday, August 19, 2014

Summer's Over: More On Teaching Business Organizations

At West Virginia University College of Law, we started classes yesterday, and I taught my first classes of the year: Energy Law in the morning and Business Organizations in the afternoon.  As I  do with a new year coming, I updated and revised my Business Organizations course for the fall.  Last year, I moved over to using Unicorporated Business Entities, of which I am a co-author.  I have my own corporations materials that I use to supplement the book so that I cover the full scope of agency, partnerships, LLCs, and corporations.  So far, it's worked  pretty well.  I spent several  years with  Klein, Ramseyer and Bainbridge's Business Associations, Cases and Materials on Agency, Partnerships, and Corporations (KRB), which is a great casebook, in its own right.

I did not make the change merely (or even mostly) because I am a co-author. I made the change because I like the structure we use in our book. I had been trying to work with KRB in my structure, but this book is designed to teach in with the organization I prefer, which is more topical than entity by entity.  I'll note that a little while ago, my co-blogger Steve Bradford asked, "Are We Teaching Business Associations Backwards?" Steve Bainbridge said, "No." He explained, 

I've tried that approach twice. Once, when I was very young, using photocopied materials I cut and pasted from casebook drafts the authors kindly allowed me to use. Once by jumping around Klein, Ramseyer, and Bainbridge. Both times it was a disaster. Students found it very confusing (and boy did my evaluations show it!). It actually took more time than the entity by entity approach, because I ended up having to do a lot of review (e.g., "you'll remember from 2 weeks ago when we discussed LLCs most recently that ...."). There actually isn't all that much topic overlap. Among corporations, for example, you've got the business judgment rule, derivative suits, "duty" of good faith, executive compensation, the special rules for close corporations, proxies, and so on, most of which either don't apply to LLCs etc.... or don't deserve duplicative treatment.

I have great respect for Prof. Bainbridge, and his writing has influenced me greatly, but (not surprisingly), I come out more closely aligned with my perception of Larry Ribstein on such issues, and with Jeff Lipshaw, who commented, 

I disagree about the lack of topic overlap, and suspect Larry Ribstein is raging about this in BA Heaven right now. . . .

This may reflect differences among student populations, but the traditional corporate law course, focusing primarily on public corporations, is less pertinent in many schools where students are unlikely to be doing that kind of work when they graduate. It's far more likely that they'll need to be able to explain to a client why the appropriate business form is a corporation or an LLC, and what the topical differences between them are.

I completely agree, and I would go another step to say that I find the duplication to be a valuable reinforcement mechanism that is worth (what I have seen as limited) extra time.  I am teaching a 4-credit course, though, which gives me time I never had in my prior institution's 3-credit version. 

One thing I am doing differently this year is my first assignment, which seeks to build on what I see as a need for students here. That is, I think many of them will need to be able to explain entity differences and help clients select the right option. 

I had my students fill out the form for a West Virginia Limited Liability Company (PDF here). I had a few goals.  First, I don't like to have students leave any of my classes without handling at least some of the forms or other documents they are likely to encounter in practice.  Second, I did it without any instruction this time (I have used similar forms later in the course) because I thought it would help me tee up an introduction to all this issues I want them thinking about with regard to entity choice.  (It did.) Finally, I like getting students to see the connection between the form and the statute. We can link though and see why the form requires certain issues, discuss waivable and nonwaivable provisions, and talk about things like entity purpose, freedom of contract, and the limits of limited liability.  

If nothing else, the change kept things fresh for me.  I welcome any comments and suggestions on any of this, and I wish everyone a great new academic year.  

August 19, 2014 in Business Associations, Agency, Corporations, Joshua P. Fershee, Law School, LLCs, Partnership, Teaching | Permalink | Comments (1) | TrackBack (0)

Thursday, August 14, 2014

How I Try to Make Business Associations Less Terrifying for the “Suits” Crowd

A brief ten-question survey is one of the most effective tools I have used in my three years as an academic. I first used one when teaching professional responsibility and then used it for my employment law, corporate governance seminar, and business associations courses. I’m using it for the first time with my civil procedure students. I count class participation in all of my classes for a portion of their grade, and responding to the survey link by the first day of class is their first “A” or first “F” of the semester.

I use survey monkey but other services would work as well. The survey serves a number of uses. First, I will get an idea of how many students actually read my emails before next Tuesday’s first day of class—interestingly as of Thursday morning, 62% of my incoming 1Ls have completed their survey, while 42% of the BA students have done theirs. Second, my BA students work in mini law firms for a number of drafting exercises and simulations. The students can pick their own firms, but I designate a “financial expert” to each firm based upon the survey responses. I remind them that they should never leave the classroom thinking they are “experts” in the real world-- they are just experts compared to the "terrified." I use this tactic to avoid having all of the MBAs and bitcoin owners (yes, I had some last year) sit together and unintentionally intimidate the other firms with their perceived advantage.

Third, I get an idea of how students have learned about business prior to BA and what news sources they use. Fourth, I tailor my remarks and hypotheticals (when appropriate) to reach the litigators or those who plan to specialize in nontransactional work. I want them to know how BA will relate to the practice areas they think they will enter. I tell them on the first day that I went to Columbia for college because it didn’t have a math requirement and I planned to do public interest work, went to law school because the LSAT was the only graduate school entrance exam that had no math on it (ok- my professor Jack Greenberg at Columbia also said I should go). I tell them that I became a litigator to avoid business and spent my first years as a non-corporate person having to learn about FASB and the definition of a "security" because I was a big-firm commercial litigator. I tell them that when I went in-house I had to take accounting for lawyers and although I don’t love the accounting, we will discuss some basics because they never know where they will end up. Many of them mat even represent entrepreneurs. My first day speech is meant to reach the 79% of my students (as of this morning) who say they want to be litigators.

Finally, I feel as though I’m not walking in on the first day completely ignorant of my students. I often use the names or storylines from popular shows or movies in class when I can. The show Suits, by the way, is the runaway favorite for my 1Ls and I know my BA students watch it as well. My BA survey questions are below. If you are interested in seeing my Civ Pro questions, email me at mnarine@stu.edu.

1. Please enter your first and last name. If your name is hard to pronounce, please provide a phonetic spelling as well (rhymes with ___ or NUH-RHINE for Narine). 

2. Have you had any experience working in a legal setting (firm, court, agency, clinic, other) BEFORE coming to law school or DURING law school? Please answer yes or no and then describe the experience if you answered "yes".

 a) Yes- please complete comment box

 b) No

Other (please specify) 

3. Which type of practice appeals to you more?

 a) Planning (e.g. transactional)

 b) Dispute resolution (e.g. litigation)

 c) I do not plan to practice law after graduation

Other (please specify) 

4. Have you or a close family member ever owned a business?

 Yes, and I have been completely involved in management and/or business discussions

 Yes, and I have been somewhat or occasionally involved in management and/or business discussions

 Yes, but I have had no involvement in management and/or business discussions

 No

5. Do you own any stocks, bonds, other types of securities (individually or through a mutual fund or trust) or bitcoin?

 Yes

 No

6. Choose up to THREE fields of law in which you would most prefer to practice

 a) bankruptcy

 b) civil rights/constitutional law

 c) corporate and securities law (including business planning)

 d) criminal law (prosecution)

 e) criminal law (defense)

 f) labor and employment law

 g) trusts and estates

 h) family law

 i) health law

 j) immigration

 k) intellectual property

 l) real estate/land use

 m) litigation (plaintiff side)

 n) litigation (defense side)

 o) sports and entertainment

 p) tax

 q) other, please describe

Other (please specify) 

7. Do you have an MBA, business, finance, accounting, or economics degree?

Yes

No

8. Do you read any business related newspapers, magazines or blogs? Do you watch any business-related television shows or listen to podcasts or radio shows? If so, please name them.

9. Other than to pass the class, what are your learning goals for this course? Are there particular topics that interest or frighten you?

10. Please describe your level of familiarity with business, finance and/or accounting.

 I am an expert and could teach this class

 I have some experience, but could use a refresher

 I have no experience, but am willing to learn

 I am completely terrified

My goals this year: help my students think like business people so that they can add value, help them pass the bar, and most important, help them realize that business isn't so terrifying. Now I just have to get my Civ Pro students to realize that the show Franklin and Bash is probably not the best way to learn about legal practice.

 

August 14, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Law School, Marcia Narine, Securities Regulation, Teaching, Television | Permalink | Comments (3)

Tuesday, August 12, 2014

Kinder Morgan: MLPs, C-Corps & Dividends, Oh My!

Kinder Morgan, a leading U.S. energy company, has proposed consolidating its Master Limited Partnerships (MLPs) under its parent company. If it happens, it would be the second largest energy merger in history (the Exxon and Mobil merger in 1998, estimated to be $110.1 billion in 2014 dollars, is still the top dog). 

Motley Fool details the deal this way:

Terms of the deal
The $71 billion deal is composed of $40 billion in Kinder Morgan Inc shares, $4 billion in cash, $27 billion in assumed debt. 

Existing shareholders of Kinder Morgan's MLPs will receive the following premiums for their units (based on friday's closing price):

  • Kinder Morgan Energy Partners: 12%
  • Kinder Morgan Management: 16.5%
  • El Paso Pipeline Partners: 15.4%
Existing unit holders of Kinder Morgan Energy Partners and El Paso Pipeline Partners are allowed to choose to receive payment in both cash and Kinder Morgan Inc shares or all cash. 
As I understand it, the exiting holders of the partnerships would have to pay taxes on the merger (this is partnership to a C-corp), but please, consult your tax professional.  
 
The goal here is said to be to increase dividend potential and use the C-corp structure to maximize opportunities that the MLP structure is now apparently less effective in generating.
 
I, for one, like that this company is seeking to generate income from real products, invest in new infrastructure, and pay dividends.  I'm no financial planner or investment consultant, but I like the idea of companies that offer dividend value rather than value to shareholders solely through increase share price. It seems to me it leads to better long term planning.  I am also intrgigued by the part of Richard Kinder story where he ended up not leading Enron.  As Forbes explained in 2012,
The most important man in the American Energy Boom wears brown slacks and a checkered shirt and sits in a modest corner office with unexceptional views of downtown Houston and some forgettable art on the wall. You would expect to at least see a big map showing pipelines stretching from coast to coast. Nope. “We don’t have sports tickets, we don’t have corporate jets,” growls Richard Kinder, 68, CEO of Kinder Morgan, America’s third-largest energy firm. “We don’t have stadiums named after us.”
I will be watching to see if this deal goes through, and I think the chance to have a big study in consolidating partnerships with a C-Corp could be a great teaching moment. Stay tuned! 
 
 

August 12, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Merger & Acquisitions, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)

Sunday, August 10, 2014

Essays on Competing Theories of Corporate Governance

The following paragraph is an excerpt from Micro-Symposium on Competing Theories of Corporate Governance, 62 UCLA L. Rev. Disc. 66, which can be found online (here) and is also available via Westlaw.

On Friday, April 11, and Saturday, April 12, 2014, the UCLA School of Law Lowell Milken Institute for Business Law and Policy sponsored a conference on competing theories of corporate governance…. This conference provided a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines. In addition to an oral presentation, each conference participant was invited to contribute a very brief essay of up to 750 words (inclusive of footnotes) on their topic to this micro-symposium being published by the UCLA Law Review’s online journal, Discourse. These essays provide a concise but powerful overview of the current state of corporate governance thinking….

The included essays:

  • Stephen M. Bainbridge, An Abridged Case For Director Primacy
  • George S. Georgiev, Shareholder vs. Investor Primacy in Federal Corporate Governance
  • David Millon, Team Production Theory: A Critical Appreciation
  • Usha Rodrigues, David and Director Primacy
  • Stefan J. Padfield , Citizens United, Concession Theory and Corporate Social Responsibility (CSR)
  • Christopher M. Bruner, Corporate Governance Theory and Review of Board Decisions
  • Robert T. Miller, The Board Veto and Efficient Takeovers
  • Lisa M. Fairfax, Toward a Theory of Shareholder Leverage
  • Iman Anabtawi, Shadow Directors
  • Michael D. Guttentag, Shareholder Primacy and the Misguided Call for Mandatory Political Spending Disclosure by Public Companies
  • James J. Park, Averages or Anecdotes? Assessing Recent Evidence on Hedge Fund Activism

Shameless self-promotion excerpt:

In extremely truncated form, my argument proceeds as follows. While both director primacy and shareholder primacy differ in terms of who should control corporate decisionmaking, both identify shareholder wealth maximization as the positive and normative goal of corporate governance. In addition, while team production theory tempts advocates of CSR, in the end it also falls short of supporting mandatory CSR. As for the theories of corporate personality, both aggregate theory and real entity theory view the corporate entity as standing in the shoes of natural persons to some meaningful degree (typically the shareholders in the case of aggregate theory and the board of directors in the case of real entity theory), thereby providing corporations a basis for resisting government regulation. Only concession theory, which views the corporation as fundamentally a creature of the state created to serve public ends, can support mandatory CSR as a normative matter. Thus, the advocates of mandatory CSR should use concession theory, with its emphasis on the public roots of corporations, to provide the compelling narrative necessary to move our corporate law beyond its exclusive focus on shareholder wealth maximization.

Stefan J. Padfield , Citizens United, Concession Theory and Corporate Social Responsibility (CSR), 62 UCLA L. Rev. Disc. 84, 86 (2014).

August 10, 2014 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, Stefan J. Padfield | Permalink | Comments (0)

Thursday, August 7, 2014

Does the US Chamber of Commerce Have the Cure for Investor “Information Overload?”

On June 5, 2014, SEC Commissioner Dan Gallagher commemorated the agency’s 80th anniversary by, among other things, repeating the criticisms of the various nonfinancial disclosures that companies are compelled to make by law or asked to make through shareholder proposals. In his view, “companies’ disclosure documents are being cluttered with non-material information that can drown out or obscure the information that is at the core of a reasonable investor’s investment decision.  The Commission is not spending nearly enough time making sure that our rules elicit focused, meaningful disclosures of material information.” I assume that he is referring to the various environmental, social and governance proposals (“ESG”) brought by socially responsible investors and others. I’m writing this blog post while taking a break from reviewing dozens of these proposals for an article that I am writing on how consumers and investors evaluate ESG disclosures and those required in other countries in the human rights context.

Citing Chair White’s quote about “information overload,” last week the US Chamber of Commerce’s Center for Capital Markets Competitiveness released a list of relatively non-controversial recommendations on how the SEC can modernize the current disclosure regime so that it can better serve the investing public. For a great discussion of what led to this latest round of disclosure reform see here. Some of the recommendations concern items that technology can handle. Others concern repetition and relate to factors that the SEC does not require but are there to avoid litigation. The report, entitled “Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation,” focuses on near-term improvements to Regulation S-K that the Chamber believes would likely garner widespread support. The report also discusses longer-term proposals, but does not discuss in any detail the kinds of issues that Chair Gallagher and others raise. You can also watch an entire webcast of the panel discussion releasing the report featuring, among others, two former SEC Commissioners, current SEC Director of the Division of Corporate Finance Keith Higgins, and issuers counsel, including my former colleague from Ryder, Flora Perez, here (start at minute 19:45).  

Full disclosure-- I was part of the working group that reviewed some of the recommendations and gave comments before the report’s release, and while I also oppose the conflict minerals disclosure because I don’t think it should be within the SEC’s purview and didn’t take into account some of the realities of the modern supply chain, I don’t have a complete aversion to corporate disclosure of ESG or other risk factors to investors and the public. The who, what, why, how, where and when are the key questions.

Below is a list of all of the recommendations for reform taken directly from the Chamber’s one-pager:  

Near Term Improvements:

 The requirement to disclose in a company’s Form 10-K the “general development” of a business, including the nature and results of any bankruptcy, acquisition, or other significant development in the lifecycle of a business (Item 101(a)(1) of Regulation S-K)

 The requirement to disclose financial information for different geographic areas in which a company operates (Item 101(d) of Regulation S-K)

 The requirement to disclose whether investors can obtain a hard copy of a company’s filings free of charge or view them in the SEC’s Public Reference Room (Items 101(e)(2) and (e)(4) of Regulation S-K)

 The requirement to describe principal plants, mines, and other materially important physical properties (Item 102 of Regulation S-K)

 The requirement that companies discuss material legal proceedings (Item 103 of Regulation S-K)

 The requirement to disclose which public market a company’s shares are traded on and the high and low share prices for the preceding two years (Items 201(a)(1)(i), (ii), (iii), and (iv) of Regulation S-K)

 The requirement to disclose the frequency and amount of dividends for a company’s stock during the preceding two years (Item 201(c) of Regulation S-K)

 The requirement to display a graph showing the company’s stock performance over a period of time (Item 201(e) of Regulation S-K)

 The requirement to disclose any changes in and disagreements with accountants (Item 304 of Regulation S-K)

 The requirement to disclose certain transactions with related parties (Item 404(a) of Regulation S-K)

 The requirement to disclose the ratio between earnings and fixed charges (Item 503(d) of Regulation S-K)

 The requirement to file certain exhibits (Item 601 of Regulation S-K)

 The requirement to disclose recent sales of unregistered securities and a description of the use of proceeds from registered sales (Item 701 of Regulation S-K)

Longer Term Improvements:

 Compensation Discussion & Analysis (CD&A)

 Management’s Discussion and Analysis (MD&A)

 Repetition

 Risk Disclosure

 A Revised Delivery System

Take a look at the list, read the report which describes the Chamber's rationale, and if you have time watch the webcast, which provides some real-world context. What’s missing from the list? What shouldn’t be on the list? Have you seen anything in your practice or teaching that could inform the debate? I look forward to seeing your feedback on this site or via email at mnarine@stu.edu

.

 

August 7, 2014 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (1)

Wednesday, August 6, 2014

Inversion Avoided: Walgreens/Boots Merger Announced Today, Staying in US

Last week on this blog, I wrote about the revived trend of corporate inversions where, through a merger transaction a US company re-domiciles outside of the US for business reasons, including the desire to avoid paying US corporate taxes.  Walgreens was rumored to be negotiating with Alliance Boots, a UK company in which the US drugstore chain already held 45%.  The merger announcement today, in a deal valued at $5.27 billion for the other 55% of Alliance Boots will keep the merged company's headquarters in Chicago.   Citing, in part to public reaction and the drug store's brand here in the US, "The company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S."

The full article in the DealBook is available here.

-Anne Tucker

August 6, 2014 in Anne Tucker, Corporations, Current Affairs, Financial Markets, Merger & Acquisitions | Permalink | Comments (0)

Thursday, July 31, 2014

Was Dov Charney too hot for the American Apparel Board to handle?

Warning- do not click on the first link if you do not want to see nudity.

Dov Charney founded retailer American Apparel in 1998 and it became an instant sensation with its 20-something year old consumer base. He mixed a "made in America- sweatshop free" CSR focus with a very sexy/sexual set of ads (hence the warning- - when I first created the link, the slideshow went from a topless “Eugenia in disco pants in menthe” (seriously) to a shot of adorable children’s clothing in about 10 seconds).  No wonder my 18-year old son, who leaves for art school in two weeks, appreciates the ad campaigns. Most of his friends do too- both the males and females. In fact, he indicated that although they all know about the “sweatshop free” ethos, because “it’s in your face when you walk in the stores,” that’s not what draws them to the clothes. As a person who blogs and writes about human rights and supply chains, I almost wish he had lied to me. But he’s no different than many consumers who over-report their interest in ethical sourcing, but then tend to buy based on quality, price and convenience. I am still researching this issue for my upcoming article on CSR, disclosure regimes and human rights but see here, here, here and here for some sources I have used in the past.  My son’s friends--the retailer’s target demographic-- appreciate that the clothes are “sweatshop free” but don’t make their buying decisions because of it. They buy because of the clothes and to a lesser extent, the ads.

The first time I ever really thought about the store was after a 2005 20/20 expose about Charney, who was accused of, among other things, sexually harassing and intimidating numerous employees.  At the time I was a management-side employment lawyer and corporate compliance officer and thought to myself “what a nightmare for whomever has to defend him.” It’s pretty hard to shock an employment lawyer, but the allegations, which continued until his ouster last month, were pretty egregious.  After over 10 years of lawsuits, the company terminated him for breaching his fiduciary duty, violating company policy, and misusing corporate assets.

Recently, American Apparel’s employment practices liability insurance rose from $350,000 to $1 million, I can only assume, because of his actions and not due to the other 10,000 company employees. The company has been sued repeatedly by the EEOC and not just for sexual allegations. Purportedly, the company, which has never traded above $7.00 a share and today is a steal at $.97, could not get financing from some sources as long as Charney was at the helm.

My son and his friends did not know about the termination or the harassment allegations over the years, but he says that the nature of the allegations could have caused some of his friends to stop and think about whether they wanted to patronize the stores. I have some 30-something friends who refuse to shop there. Could this be why the store chose to add a female director? As I explained to a reporter last week, the company shouldn’t need a female perspective to realize that the founder is, to put it mildly, a risk. And in fact, as studies cited by my co-blogger Josh Fershee noted earlier this week, being the “woman’s voice” may minimize her perceived effectiveness. Yes, it’s true that American Apparel took more decisive action than the NFL last week, as Joan Heminway observed, but what took them so long? Is it too little too late? Where was the general counsel when Charney allegedly refused to take his sexual harassment training, which is required by law in California every two years? Where were the other board members who allowed the settlement of case after case involving Charney? I have often found that some of the most vigilant supporters of women in the workplace, especially in harassment matters, are older males who have daughters and wives and who know what it’s like for them. When did the board worry about whether the CEO's well-publicized alleged attacks on employees contradicted the heavy corporate responsibility branding? Did the board meet its Caremark duties?

Ironically, the company’s 10-K filed two months before his termination indicated that, “In particular, we believe we have benefited substantially from the leadership and strategic guidance of Dov Charney. The loss of Dov Charney would be particularly harmful as he is considered intimately connected to our brand identity and is the principal driving force behind our core concepts, designs and growth strategy.”

So at what point between April and June did Charney’s actions go off the scale on the enterprise risk management heat map? COSO, the standard bearer for ERM, encourages boards to focus on: what the firm is willing to accept as it pursues shareholder value; a knowledge of management’s risk management processes that have identified and assessed the most significant enterprise-wide risks; a review of the risk portfolio compared to the risk appetite; and whether management is properly responding to the most significant risks and apprising the board of those risks. Could such an objective risk assessment have even occurred with Charney (the risk) in the room? How could the company have the right tone at the top when the founder/CEO failed to comply with Code of Ethics Rule #2 --“service to the Company never should be subordinated to personal gain and advantage”? The stock price has been falling for years and the company has been struggling. Did the high rates to insure Charney’s conduct finally become too hot to handle? On the other hand, would the directors have made the same decision if the shares were trading at $97 instead of .97? Some shareholders are raising concerns too about why any of the original board members remain given the appalling financial performance.

The board now has a “suitability committee,” which will review the results of an independent investigation into Charney’s actions. Even if the report clears Charney and he’s brought back, the new independent directors will have a lot of questions to answer. The question of whether there is a woman on the board seems to be almost irrelevant given the history. For the record, even though the literature is mixed on the financial benefits of gender and racial diversity, I am a strong proponent of the diversity of viewpoints, particularly those that the underrepresented can bring to the table.

But this board needs to re-establish trust among its investors and funders and then focus on what any retailer should- potential supply chain disruptions, the impact of any immigration reform, currency fluctuations, and keeping their customer base happy and out of competitors H & M and Forever 21. The last thing they need to worry about is how to pay off the victims of their founder’s latest escapades.

 

July 31, 2014 in Corporate Governance, Corporations, Current Affairs, Ethics, Joan Heminway, Joshua P. Fershee, Marcia Narine, Securities Regulation, Television | Permalink | Comments (0)

Wednesday, July 30, 2014

Recent U.S./Foreign Mergers Motivated by Tax Incentives

There is a new face on an old problem — American companies “moving” overseas in part to avoid U.S. taxes — that has increased in popularity in the last several years and recently gained political attention. Last week President Obama and Treasury Secretary Jacob J. Lew called for tax reform to encourage economic patriotism and to deter corporate defectors, calling the overseas moves legal, but immoral.

Two structural features of the U.S. tax code incentivize corporations to move abroad. The U.S. corporate tax rate, at 35 percent, is high compared to the average Organization for Economic Cooperation and Development (OECD) rate of 25 percent, and the average European Union rate of 21 percent. Many corporations effectively pay much less than 35 percent, after factoring in loopholes and deductions, policies that cost approximately $150 billion in untaxed revenue last year. But the reported tax rate is high compared to other jurisdictions and the complexity required to reduce that rate in practice also is a deterrent.

Second, other countries like the United Kingdom become attractive foreign tax locations because they operate under a territorial system that does not tax profits earned outside of the home country. Under the U.S. system, however, returning foreign-earned corporate profits home is a taxable event at high corporate tax rates. As a result, it is estimated that $2 trillion in foreign-earned profits of U.S. corporations sit in foreign bank accounts unavailable for use absent paying taxes.

There are two main ways to achieve an overseas move. A transaction called an inversion where a U.S. company reincorporates overseas becoming, say, a Bermuda corporation, which was popular in the 2000s. Inversions also can happen when a U.S. company forms an overseas affiliate and the original company becomes a subsidiary of the foreign affiliate. The 2004 American Jobs Creation Act prevented companies pursuing inversions from reaping tax benefits of the transactions if the original stockholders retained 80 percent or more of the new company or if there was not substantial business operation in the new location. Treasury regulations have defined “substantial business operations” as meaning 25 percent of corporate activity thus effectively stopping these so-called “naked” inversions as a means to transfer corporate profits overseas.

Another vehicle to move a U.S. company overseas is through a merger with a foreign company, and this is where the recent uptick has occurred. If a larger foreign company buys the U.S. one then both profits and control effectively move overseas in the newly combined company. If, however, a larger U.S. company buys a smaller overseas one, then control may stay effectively in the United States, with only the profits moved overseas. 

For example, in 2012 Cleveland-based Eaton purchased Cooper Industries PLC in an $11.8 billion merger. After the merger, the new company Eaton Corporation PLC, incorporated in Ireland and headquartered in Cleveland, projected savings of $160 million a year as a result of not being subject to U.S. corporate taxes. So far this year, there have been more than a dozen of similar tax-motivated foreign mergers announced including companies like Chiquita, Pfizer and even some interest behind the drug-store chain Walgreens moving to the United Kingdom. 

See the following discussion of foreign mergers in the DealBook earlier this month following the announcement of two multibillion dollar health care mergers:

“With a[n]…. offer worth $53 billion, AbbVie, a big Chicago-based pharmaceutical company, has succeeded in winning tentative approval to buy the Irish drug maker Shire . If completed, it would be the biggest deal of the year. Also on Monday, Mylan Laboratories, based in Canonsburg, Pa., said it would acquire the international generic drug business from Abbott Laboratories in an all-stock deal valued at $5.3 billion and reincorporate in the Netherlands.”

Solutions to curb corporate flight include lowering corporate taxes to a more competitive rate, decreasing the ownership thresholds for inversions from 80 percent to 50 percent, and excluding tax benefits for foreign-based mergers. Congressional Democrats have circulated several proposals, but Republicans have not expressed interest without comprehensive tax reform. Obama included proposals targeted at foreign mergers in his proposed 2015 budget, which includes decreasing the corporate tax rate, decreasing the ownership threshold for inversions and closing some corporate tax loopholes. While congressional action before the end of the year is unlikely, the strong rhetoric of economic patriotism and corporate defectors has the issue primed for the 2014 election debates.

For a great summary on the issue, see the following report issued earlier this summer by the congressional research service.

 -Anne Tucker 

 

July 30, 2014 in Anne Tucker, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (1)

Monday, July 28, 2014

American Apparel 1, NFL 0

As many readers (and all of my friends) know, I am a bit of a sports fan.  Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games.  I even served on The University of Tennessee's Athletics Board for a few years.  But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.

I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends).  I have friends in the industry and find aspects of it truly fascinating.  I even used to subscribe to Women's Wear Daily, the fashion industry trade rag.  I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.

This personal background is prelude to my interest in two current events stories that I see as parallels.  I am trying to sort them through on a number of levels. Maybe you can help.  Here are the top lines of each story.

  • Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
  • The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.

Continue reading

July 28, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Marcia Narine, Sports | Permalink | Comments (2)

Sunday, July 27, 2014

An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby

I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:

This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.

I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.

As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:

1. Are corporations capable of exercising religion?

As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.

2. Is the exercise of religion by corporations ultra vires?

Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.

3. Can corporations sacrifice shareholder wealth to further religious exercise?

So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.

Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”

So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.

July 27, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield | Permalink | Comments (1)

Thursday, July 24, 2014

Dodd-Frank Grows Up- Or Does It?

As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example).  Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.

SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings. 

Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:

As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.

Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.

1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?

2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?

3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?

4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?

5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong. 

Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.

July 24, 2014 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Wednesday, July 23, 2014

Antitrust as a Question of Power, Not Competition

Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has an interesting article on antitrust in the DealBook today:  Changing Old Antitrust Thinking for a New Gilded Age. Professor Solomon argues that a new wave of mergers in the tech and telecommunications industries mirror the consolidation wave of the Gilded Age a century ago which lead to our current antitrust laws.  These mergers leave competition in tact, albeit among a few huge companies, and therefore facially meet the competition requirements under antitrust law.  He argues that "[t]his calculus, however, excludes the political and other power that a concentrated industry can wield with government and regulators."  Citing to industry-based nonprofits and the ability to participate in political spending in a post-Citizens United world, professor Solomon concludes that antitrust may become a question of power, not just competition. 

"[R]ight now there is simply no real government ability to review the industry consolidation that is occurring today in which industries become dominated by a handful of major players. Yet it is becoming increasingly apparent that size and industry concentration affect American society even if competition still exists."

I think that this is an interesting lens through which to view, and teach, current market trends in mergers and acquisitions and related questions of antitrust law.

-Anne Tucker

July 23, 2014 in Business Associations, Anne Tucker, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (0)

Tuesday, July 22, 2014

Berkshire 2.0

Amazon BBB Book Cover
You may think of Warren Buffett as a savvy stock picker but his greater accomplishment is in configuring an exceptionally strong corporation that defies widespread conceptions of effective corproate governance.  

Since early in his career, Buffett adopted what he calls the double-barreled approach to capital allocation, meaning both stock picking and business buying. He gained prominence primarily as an investor in stocks, championing a contrarian investment philosophy.

Attracting three generations of devoted followers to a school of thought called “value investing,” he doubted the market’s efficiency and deftly exploited it. Buffett bought stocks of good companies at a fair price, assembling a concentrated portfolio of large stakes in a small number of firms. Today, nearly three-fourths of Berkshire’s stock portfolio consists of just seven stocks.     

But late in his career, beginning around 2000, Buffett shot more often through the other half of his double-barreled approach: buying 100 percent of companies run by trusted managers given great autonomy. True, Berkshire early on bought all the stock of companies such as Buffalo News and See’s Candies. But, through the 1990s, the first barrel dominated, with Berkshire consisting 80 percent of stocks and 20 percent owned companies. That mix gradually reversed and recently flipped, making subsidiary ownership the defining characteristic of today’s Berkshire.

Owning primarily subsidiaries rather than merely stocks gives Berkshire a different shape compared to its previous character as the holding company of a famed investor. After all, even for a buy-and-hold investor, stocks come and go. Berkshire has sold the stocks of many once-fine companies, including Freddie Mac, McDonald’s, and The Walt Disney Company.

In contrast, aside from a few Berkshire subsidiaries that it acquired from the Buffett Partnership in the 1970s, Berkshire has never sold a subsidiary and vows to retain them through thick and thin.  Despite their variety, moreover, Berkshire companies are remarkably similar when it comes to corporate culture, which is the central discovery I document and elaborate in my upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values.

When Berkshire consisted mostly of the stock portfolio of a famed stock picker, you could expect that, once that investor departed, the portfolio would naturally be unwound and the company dissolved. Now, however, with Berkshire made of companies not stocks, its life expectancy stretches out in multiple decades, not mere years. It certainly goes beyond the stock picker who founded it.  That's not an accident either, as the dominant cultural motif at Berkshire and its subsidiaries is a sense of permanence--the longest possible time horizon imaginable.   

Continue reading

July 22, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (2)

Friday, July 18, 2014

Ding! Hobby Lobby and Disclosure, Round Three . . . .

Cross-post alert!

At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today.  It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things.  Enjoy or not, as you so please . . . .

July 18, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Next Week: Larry Cunningham on Warren Buffett and Succession Planning!

The Business Law Prof Blog is delighted to have as a guest blogger next week our friend and colleague Lawrence A. Cunningham (known to me as Larry!), of George Washington University Law School, who has just finished writing a new book being released in October called Berkshire Beyond Buffett: The Enduring Value of Values.  He will offer a few posts about aspects of the book during the week. We will kick it off Monday with some questions and answers.   

Larry is the Henry St. George Tucker III Research Professor at GW.  He teaches accounting, contracts, and corporate governance and has written extensively in all those areas.  He previously taught at Boston College Law School, where he served a term as Academic Dean, and Cardozo Law School, where he directed the Samuel and Ronnie Heyman Center on Corporate Governance.

Among his most cited articles are these scholarly jewels:

A Prescription to Retire the Rhetoric of “Principles-Based Systems” in Corporate Law, Securities Regulation and Accounting (Vanderbilt Law Review, 2007)

The Sarbanes-Oxley Yawn Heavy Rhetoric, Light Reform (And it Might Just Work) (Connecticut Law Review, 2003)

From Random Walks to Chaotic Crashes: The Linear Genealogy of the Efficient Capital Market Hypothesis (GW Law Review, 1994)

All are great reads.  Among his most notable books other than Berkshire Beyond Buffett (which is sure to be a hit!) are the following:

The Essays of Warren Buffett: Lessons for Corporate America  (self-published and distributed by Carolina Academic Press, 3d ed. 2013)

Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press, 2012)

Berkshire Beyond Buffett is now in the production and pre-ordering phase, garnering early attention among readers in both the investing and corporate governance communities, including: The Motley Fool (which also posted a written interview and video interviews here, here, here, and here);  BeyondProxy; and USA Today.  We look forward to our Q&A with Larry next week followed by his posts!

July 18, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs | Permalink | Comments (0)