Thursday, September 18, 2014

Alibaba and the forty (not really) risk factors

Teaching the definition of a "security" to business associations students who: 1) want to be litigators; 2) are afraid of math, finance, and accounting; 3) don't know anything about business; 4) only take the class because it's required; and 5) aren't allowed to distract themselves with electronics in class is no small feat.

Thankfully, as we were discussing the definition and exemptions, we also touched on IPOs. Many of the students knew nothing about IPOs but were already Alibaba customers and going through some of the registration statement made them understand the many reasons companies want to avoid going public. Of course, now that we went through some of the risk factors, my students who seemed gung ho about the IPO after watching some videos about the hype were a little less excited about it (good thing because they probably couldn't buy anyway).  

Now if I can only figure out how to jazz up the corporate finance chapter next week.

 

September 18, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (2)

Sunday, September 14, 2014

Hobby Lobby Redux: 7 Corporate Law/Theory Quotes

This coming Tuesday, I am scheduled to provide a brief overview of the corporate law/theory aspects of Hobby Lobby as part of the University of Akron’s Supreme Court Roundup.  What follows are the seven key quotes from the opinion that I plan to focus on (time permitting) in order to highlight what I see as the key relevant issues raised by the opinion. Comments are appreciated.

Issue 1: Did corporate theory play a role in Hobby Lobby?

While I believe the majority made a pitch for applying a pragmatic, anti-theoretical approach (“When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of … people.” Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2768 (2014)), the following quote strikes me as conveying an underlying aggregate view of corporations:

In holding that Conestoga, as a “secular, for-profit corporation,” lacks RFRA protection, the Third Circuit wrote as follows: “General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors.” 724 F.3d, at 385 (emphasis added). All of this is true—but quite beside the point. Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.

134 S. Ct. at 2768.

 

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September 14, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (2)

Thursday, September 11, 2014

Is it time to repeal the Dodd-Frank conflict minerals rule? Maybe, but not so fast

As I predicted in 2011 here and here, in 2012 here, in 2013 in amicus brief, and countless times on this blog, the SEC Dodd-Frank conflicts minerals law has had significant unintended consequences on the Congolese people and has been difficult to comply with. Apparently the Commerce Department, which has a role to play in determining which mines are controlled by rebels so that US issuers can stay away from them, can't actually figure it out either. In the past few days, the Washington Post, the Guardian, and other experts including seventy individuals and NGOS (some Congolese) who signed a memo, have called this misguided law into question.  In my view, without the "name and shame" aspect of the law, it is basically an extremely expensive, onerous due diligence requirement that only a few large companies can or have the incentive to do well or thoroughly. More important, and I as I expected, it has had little impact on the violence on the ground and has hurt the people it purported to help.

I had hoped to be wrong. The foundation that I work with helps medical practitioners, midwives, and traditional birth attendants in eastern Congo and many of their patients and neighbors are members of the artisanal mining community. I won’t go as far as Steve Bainbridge has in calling for the law’s repeal because I think that companies should do better due diligence of their supply chains, especially in conflict zones. This law, however, is not the right one for Congo and the SEC is not the right agency to address this human rights crisis. Frankly, I don’t know that the EU's voluntary certification is the right answer either. I hope that Canada, which is looking at a similar rule, pays close heed and doesn’t perpetuate the same mistake that the US Congress made and that the SEC exacerbated. In the meantime, I will stay tuned to see how and if the courts, Congress, and the SEC revisit the rule.

 

September 11, 2014 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Monday, September 8, 2014

More on Political Leaders and Private Industry Leaders

Last week, I posted my observations (musings?) relating to a colloquy that I had with Tennessee Governor Bill Haslam at an event sponsored by the C. Warren Neel Corporate Governance Center on The University of Tennessee's Knoxville campus.  At almost the same time, and not at all related to my attendance at that event, I picked up a reprint of a recent article, CEOs and Presidents, authored by Tom Lin at Temple.  Tom and I often work in overlapping fields.  In particular, both of us have shown interest, from different perspectives, in substantially similar issues relating to corporate executives. 

I commend Tom's article to you.  It provides a lucid and engaging comparison of CEOs and Presidents (as the title suggests).  (His analysis is, of course,  significantly more rich and nuanced than the reflections I shared in my earlier post.)  But Tom's piece doesn't stop there.  It goes on to critique the desirability of the "President as CEO" model based on the harms posed to both corporations and democracies and also highlights some important lessons we can learn from his study.

I do want to challenge Tom on one provocative statement that he makes in the article, however.  After critically commenting on the dangers of (among other things) government reliance on private industry and values in the accomplishment of its objectives, he observes that "[g]overnment and corporations are not actual or conceptual substitutes for one another, but are complements of one another."  He lists examples and avows that both government and private industry are optimized when they collaborate.  

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September 8, 2014 in Business Associations, Corporate Governance, Corporations, Joan Heminway | Permalink | Comments (0)

Thursday, September 4, 2014

What do shareholders value? ISS asks but the US Chamber questions the questions.

Behemoth proxy advisory firm Institutional Shareholder Services has released its 2015 Policy Survey.  I have listed some of the questions below:

Which of the following statements best reflects your organization's view about the relationship between goal­setting and award values?

 Is there a threshold at which you consider that the magnitude of a CEO’scompensation should warrant concern even if the company’s absolute and relative performance have been positive, for example, outperforming the peer group?

With respect to evaluating the say­ on ­pay advisory vote, how does your organization view disclosed positive changes to the pay program that will be implemented in the succeeding year(s) when a company demonstrates pay­ for ­performance misalignment or other concerns based on the year in review?

If you chose either the first or second answer in the question above, should shareholders expect disclosure of specific details of such future positive changes (e.g., metrics, performance goals, award values, effective dates) in order for the changes to be considered as a potential mitigator for pay ­for ­performance or other concerns for the year in review?

Where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders' rights, what approach should be used when evaluating board accountability?

Should directors be held accountable if shareholder ­unfriendly provisions were adopted prior to the company’s IPO?

In general, how does your organization consider gender diversity when evaluating boards?

As a general matter, what weight (relative out of 100%) would you view as appropriate for each of the categories indicated below (notwithstanding that some factors, such as repricing without shareholder approval, may be 100% unacceptable)?

How significant are the following factors when evaluating the board's role in risk oversight in your voting decision on directors (very significant, somewhat significant, not significant)?

In making informed voting decisions on the ratification of the outside auditor and the reelection of members of audit committees, how important (very important/somewhat important/not important) would the following disclosures be to you?

In your view, when is it appropriate for a company to utilize quantitative E&S (environmental and social) performance goals?

As someone who studies and consults on corporate governance issues, I look forward to seeing the results of this survey. However, the US Chamber of Commerce’s Center for Capital Market Competitiveness, which has argued that ISS and other proxy advisory firms have conflicts of interest and lack transparency, has issued a response to ISS because:

The CCMC is concerned that the development of the Survey lacks a foundation based on empirical facts and creates a one-size-fits-all system that failure to take into account the different unique needs of companies and their investors. We believe that these flaws with the Survey can adversely affect advisory recommendations negatively impacting the decision making process for the clients of proxy advisory firms. The CCMC is also troubled that certain issues presented in the Survey, such as Pay for Performance, will be the subject of Securities and Exchange Commission (“SEC”) rulemakings in the near future. While we have provided commentary to those portions of the Survey, we believe that their inclusion in the survey is premature pending the completion of those rulemakings….It is both surprising and very troublesome that the Survey does not contain a single reference to the paramount concern of investors and portfolio managers—public company efforts to maintain and enhance shareholder value—and seeks to elicit only abstract philosophies and opinions, completely eschewing any pretense of an interest in obtaining hard facts and empirically-significant data. This confirmation—that ISS’ policies and recommendations are based solely on a miniscule sampling of philosophical preferences, rather than empirical data—is itself a matter that requires, but does not yet receive, appropriate disclosure and disclaimers on ISS research reports.

The CCMC’s letter details concerns with each of ISS’ questions.  Both the complete survey and the CCMC response are worth a read. 

September 4, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Wednesday, September 3, 2014

The March of the Benefit Corporation: Next Up, West Virginia (PART II)

(Note:  This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  The previous installment can be found here (NLPB) and here (BLPB).)

What It Is:   So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is.  The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP.  The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.”  B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.

As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.”  Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity. 

To read the rest of the post, please click below. 

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September 3, 2014 in Business Associations, Corporate Governance, Corporations, Entrepreneurship, Joshua P. Fershee, LLCs, Social Enterprise | Permalink | Comments (1)

Tuesday, September 2, 2014

Corporate Inversion: Tax Spotlight for the Non-Tax Lawyer

Last week, news of the proposed Burger King & Tim Horton's merger fueled the already raging fire on corporate inversions as the Miami-based burger chain announced plans, through the merger, to possibly relocate to Canada.  As I have written about on this blog, here and here and in the Huffington Post, inversions may offer US companies tax savings.

Stephen E. Shay, a professor of practice at Harvard Law School, provides a short article (12 pages) describing the tax issues in corporate inversions and possible regulatory fixes.  This article is very helpful in taking the debate from the headlines into a more complex legal analysis illuminating the tax consequences and offering a better understanding of the legal remedies available.  Worth the read.

-Anne Tucker

September 2, 2014 in Anne Tucker, Corporations, Current Affairs, Merger & Acquisitions | Permalink | Comments (0)

Blessed Are the Meek Public Pension Funds

At the New York Times Dealbook, Andrew Ross Sorkin notes that public pension funds have been lately silent on the issue of corporate inversions. (See co-blogger Anne Tucker on inversions here and here.) Sorkin writes, "Public pension funds may be so meek on the issue of inversions because they are conflicted."

Maybe I am reading too much into his choice of words, but "meek" implies more to me than "moderate" or "mild" and instead conveys a value judgment that fund managers have an obligation to speak out. I am not pretty sure that's not true.

I definitely don't like companies heading offshore for mild gains, and I don't think I would support such a choice, but as a director, I'd sure analyze the option before deciding. Fund managers, too, have obligations to look out for their stakeholders, and unless I had a clear charge on this front or thought the inverting company was clearly wrong, I'd probably stay quiet, too.

Although the meek may inherit the earth, at least at this point, I might substitute "meek" with "cautious" or even "prudent."  But that's just me.

September 2, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee, Merger & Acquisitions | Permalink | Comments (0)

Monday, September 1, 2014

More on Cunningham's Berkshire Beyond Buffett

Larry Cunningham has a further post on his forthcoming book, Berkshire Beyond Buffett: The Enduring Value of Values, over at Concurring Opinions.  The post includes an excerpt from Chapter 8 of the book, Autonomy, and links to the full text of the chapter, available on SSRN for free (!) download.  Larry's and my earlier posts on the book here on the BLPB can be found herehere, here, and here.

Here's a slice of the excerpt included in the Concurring Opinions post:

. . . Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence. 

Cool stuff . . . .

September 1, 2014 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Weblogs | Permalink | Comments (0)

Government & Business: Is a Governor More Powerful Than a Corporate CEO?

On Friday, Bill Haslam, the Governor of the State of Tennessee, spoke at a session sponsored by the C. Warren Neel Corporate Governance Center on The University of Tennessee's Knoxville campus.  He is our former city mayor and a hometown favorite for many.  I always enjoy his talks.

His talk on Friday focused on how Tennessee is attracting businesses and jobs and how education--including higher education--plays a role.  But before he honed in on that topic, he asked an intriguing, albeit basic, question that operates on theoretical, political, and practical planes.  That question: How is government similar to and different from private enterprise?  He wanted audience participation.  I waited to see how everyone would react.  He got lots of good answers that cut across economics, management, finance, and governance.

Provocatively (at least for me), he characterized his gubernatorial role as akin to the role of a chief executive officer in a corporation.  He has served as a corporate manager (president of his family's firm and the CEO of a division of another firm), and his vision of the state gubernatorial role is clearly framed by that experience.  He actually called the legislature his "board of directors" in his role as governor. 

Well, after that analogy, I just had to contribute to the discussion with a comment.  I endorsed the governor's view of his position, but I also noted that the executive, as the head of a separate branch of a government of three branches, has power independent of the power afforded to the legislature.  That is when things got interesting, at least for me.

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September 1, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Joan Heminway | Permalink | Comments (2)

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.

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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)