Thursday, October 16, 2014
I plan to write a more traditional blog post later if I have time, but I am in the midst of midterm grading hell. I was amused today in class when a student compared the drama of the Francis v. United Jersey Bank case with the bankruptcy, bank, and mortgage fraud convictions of husband and wife Joe and Teresa Guidice from the reality TV hit the Real Housewives of New Jersey.
I had provided some color commentary courtesy of Reinier Kraakman and Jay Kesten’s The Story of Francis v. United Jersey Bank: When a Good Story Makes Bad Law, and apparently Mrs. Pritchard’s defenses reminded the student of Teresa Guidice’s pleas of ignorance. Other than being stories about New Jersey fraudsters, there aren’t a lot of similarities between the cases. Based on my quick skim of the indictment I don’t think that Teresa served on the board of any of the companies at issue--Joe apparently had an LLC and was the sole member, and the vast majority of the counts against the couple relate to their individual criminal conduct. In addition, Teresa is also going to jail, and no one suffered that fate in United Jersey. But luckily, she may see a big payday from a purported book deal and reality TV show spinoff after she’s out, possibly disproving the adage that crime doesn’t pay.
Tuesday, October 14, 2014
To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics. I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law. This week's announcement of Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.
I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more. A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:
A theory prize! A rigor prize! I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics. He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too. He is a broader economist than many of his fans realize.
Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s. In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory. Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs. The idea of mechanism design runs throughout his papers in many different guises. Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts. That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession. He has shown a remarkable breadth and depth over the course of the last thirty or so years.
Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.")
The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:
- "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
- "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."
Here's the abstract (paper available on JSTOR):
The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).
It's worth a read, even if the math part is a little beyond some of us.
H/T: Geoffrey Manne
Thursday, October 9, 2014
The numbers are in on SEC Dodd-Frank conflict minerals filings. According to a Tulane study, the average company spent over half a million dollars to comply. A review by law firm Schulte Roth & Zabel shows how meaningless (in my view), some of those filings were. Meanwhile, Canada failed to pass another conflict minerals bill and NGOs are pressuring the EU to step up to the plate for more rigorous regulation. I continue to believe that there has to be a better way to resolve a deadly human rights crisis, and that disclosure and due diligence in the supply chain are important but are not the solutions.
Wednesday, October 8, 2014
Alibaba dominated the September business press coverage with its record-breaking IPO last month, and news of its stock price, trading at a 30% premium, continues to dominate coverage. I have been using the headline-hogging IPO in my corporations class to discuss raising capital, which I am sure many of you are doing as well. Here are a few creative uses for the class-friendly headlines:
- I used coverage of the IPO and its short-lived halo effect on other tech IPO's as a companion to the E-bay stock spinning case (taught under director fiduciary duties).
As we move into securities next week,
- Students will examine Alibaba's registration statement as we look at section 11 liability.
- Students will review portions of a 2012 10b(5) lawsuit against Yahoo alleging that Yahoo! made materially false and misleading statements regarding its holdings in Alibaba.
Please add to the list of uses in the comments section if you have any new ideas or suggestions.
Tuesday, October 7, 2014
Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that
Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.
Senator Raskin further notes that the Congress doesn't appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures. In response, the senator has a proposal:
Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.
Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.
Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue "an internal governance issue, which is a state-level issue." (Please click below to read more.)
Thursday, October 2, 2014
For the second time, I have assigned my BA students to write their own shareholder proposals so that they can better understand the mechanics and the substance behind Rule 14-a8. As samples, I provided a link to over 500 proposals for the 2014 proxy season. We also went through the Apple Proxy Statement as a way to review corporate governance, the roles of the committees, and some other concepts we had discussed. As I reviewed the proposals this morning, I noticed that the student proposals varied widely with most relating to human rights, genetically modified food, environmental protection, online privacy, and other social factors. A few related to cumulative voting, split of the chair and CEO, poison pills, political spending, pay ratio, equity plans, and other executive compensation factors.
After they take their midterm next week, I will show them how well these proposals tend to do in the real world. Environmental, social, and governance factors (political spending and lobbying are included) constituted almost 42% of proposals, up from 36% in 2013, according to Equilar. Of note, 45% of proposals calling for a declassified board passed, with an average of 89% support, while only two proposals for the separation of chair and CEO passed. Astonishingly, Proxy Monitor, which looked at the 250 largest publicly-traded American companies, reports that just three people and their family members filed one third of all proposals. Only 4% of shareholder proposals were supported by a majority of voting shareholders. Only one of the 136 proposals related to social policy concerns in the Proxy Monitor data set passed, and that was an animal welfare proposal that the company actually supported.
I plan to use two of the student proposals verbatim on the final exam to test their ability to assess whether a company would be successful in an SEC No-Action letter process. Many of the students thought the exercise was helpful, although one of the students who was most meticulous with the assignment is now even more adamant that she does not want to do transactional law. Too bad, because she would make a great corporate lawyer. I have 7 weeks to convince her to change her mind.
October 2, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Monday, September 29, 2014
In recent blog posts, two of my favorite bloggers, Keith Paul Bishop and Steve Bainbridge, have highlighted for our attention Delaware and California statutes providing (differently in each case) that an LLC and, at least in Delaware, its managers and members, are bound by the LLC's operating agreement even if they do not sign that agreement. Bishop notes in his post that the California "RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties." In his post Bainbridge cites to the Bishop post and another post by Francis Pileggi. Certainly, they all have a point. For students of contract law, the conclusion that a non-party is bound by a contract does not seem to be an obvious result . . . .
The flap in the blogosphere has its genesis in a recent Delaware Chancery Court decision, Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al. C.A. No. 8841-VCL. The limited liability company defendant in that case raised as its only defense that it was not a party to the limited liability company agreement and therefore was not bound. Unsurprisingly in light of applicable Delaware law, Chancellor Laster found the defense wanting as a matter of law.
This issue has more history than my brother bloggers point out, some of which is included in the brief Seaport Village opinion. I probably don't have all the details, but set forth below is some additional background information that may be useful in thinking about the binding nature of LLC operating agreements. Others may care to fill in any missing information by leaving comments to this post.
Thursday, September 25, 2014
Professor Dionysia Katelouzou of Kings College, London has written an interesting empirical article on hedge fund activisim. The abstract is below:
In recent years, activist hedge funds have spread from the United States to other countries in Europe and Asia, but not as a duplicate of the American practice. Rather, there is a considerable diversity in the incidence and the nature of activist hedge fund campaigns around the world. What remains unclear, however, is what dictates how commonplace and multifaceted hedge fund activism will be in a particular country.
The Article addresses this issue by pioneering a new approach to understanding the underpinnings and the role of hedge fund activism, in which an activist hedge fund first selects a target company that presents high-value opportunities for engagement (entry stage), accumulates a nontrivial stake (trading stage), then determines and employs its activist strategy (disciplining stage), and finally exits (exit stage). The Article then identifies legal parameters for each activist stage and empirically examines why the incidence, objectives and strategies of activist hedge fund campaigns differ across countries. The analysis is based on 432 activist hedge fund campaigns during the period of 2000-2010 across 25 countries.
The findings suggest that the extent to which legal parameters matter depends on the stage that hedge fund activism has reached. Mandatory disclosure and rights bestowed on shareholders by corporate law are found to dictate how commonplace hedge fund activism will be in a particular country (entry stage). Moreover, the examination of the activist ownership stakes reveals that ownership disclosure rules have important ramifications for the trading stage of an activist campaign. At the disciplining stage, however, there is little support that the activist objectives and the employed strategies are a reflection of the shareholder protection regime of the country in which the target company is located.
September 25, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Merger & Acquisitions, Securities Regulation | Permalink | Comments (0)
Wednesday, September 24, 2014
President Judge James T. Vaughn, Jr. of the Delaware Superior Court has been nominated to the Delaware Supreme Court by Governor Jack Markell. Judge Vaughn has served on the Delaware Superior Court for 15 years.
News.Delaware.Gov has more here.
Sunday, September 21, 2014
Frank Pasquale on “how masterful manipulation of the law has allowed tech and finance giants to grow incredibly fast”
Like many people I know, I am a huge fan of Frank Pasquale. Thus, I was very excited to read his Balkanization interview (available here) discussing his forthcoming book, “The Black Box Society.” The interview touches on a wide range of topics, so you should go read the whole thing, but here is an excerpt to tempt you in case you’re on the fence:
I think our academic culture is very good at analysis, but oft-adrift when it comes to synthesis. Specialization obscures the big picture. And law can succumb to this as easily [as] any other field. For example, in the case of internet companies, cyberlawyers too often confine themselves to saying: “Google and Facebook should win key copyright cases, and subsequent trademark cases, and antitrust cases, and get certain First Amendment immunities, and not be classified as a ‘consumer reporting agency’ under relevant privacy laws,” etc. They may well be correct in every particular case. But what happens when a critical mass of close cases combines with network effects to give a few firms incredible power over our information about (and even interpretation of) events?
Similarly, old banking laws may fit poorly with the new globalized financial landscape. Finance lawyers churn out position papers dismantling the logic of Dodd-Frank, Basel, Sarbanes-Oxley, etc. But if too-big-to-fail firms keep growing bigger, assured of state support, while everything else the government does is deemed contingent: what kind of social contract is that?
The lawyers of the Progressive Era and the New Deal dealt with similar challenges: massive firms that warped the fabric of economic, political, and even cultural life to their own advantage. They consulted the best of social science to recommend regulation—but they didn’t let some narrow field (like neoclassical economics) act as a straitjacket (as, say, antitrust lawyers of today are all too prone to do).
Thursday, September 18, 2014
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)
Monday, September 15, 2014
Crowdfunding site GoFundMe recently removed the funding page for a person looking to crowdfund her abortion. Past crowdfunding campaigns have funded fertility treatments, gender confirmation surgeries, organ transplants, and other medical procedures and treatments. Watsi is an entire crowdfnding platform dedicated to financing medical care for patients through donations. While I usually research and write about crowdfunding business entities and projects, the crowdfunding of medical procedures and treatments has gotten more and more traction with those needing or wanting financial assistance for expensive medical care. It seemed like a good time to say something about it . . . . But what to say?
Sunday, September 14, 2014
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.
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
Today started in Williston, ND, and we then went to Mountrail County. We vistied Tioga and Stanley, then headed south through New Town and Killdeer on the way back to Dickinson, where we stay tonight before flying out tomorrow morning (ridiculously early, I might add).
We started the day at Williston State College, where we learned about the TrainND program and other degree programs. TrainND works with companies to do OSHA and other safety training, and trained more than 16,000 people last, the vast majority of whom were employed. The College also offers degree programs for those seeking to be Lease Operators and PLC-trained operators. Interesting for academics, the college had 38% turnover last summer. The college has invested in campus housing for faculty, which can be part of the incentive package to bring people. Apartments run from $2600/mo for 1 and 2 BR options, with home rentals over $3K. Seventy percent of new faculty hires are moving into the new campus housing apartments (which looked nice from the outside). Just like the industry, the college is "catching up" with the whole thing.
We saw more densely packed well sites, such at this 9-pack (nine wells on one well pad). This is an advantage of hydraulic fracturing, in that one well pad can handle multiple wells, which leads to less land impact per well.
We also saw major traffic, including long lines of traffic coming over the
Four Bears Bridge at Lake Sakakawea. We didn't have a terrible time driving, and it was not the horror story that has been repeated at times, but it was striking to have open rolling hills with very few signs of people, other than wells, flares, and trucks.
We saw two natural gas faciltities, aswell, today, which is encourging, as it's important to have facilities to take the natural gas that's coming out of the ground along with the oil.
Also of interest was a waste water facility, which is critical to better oil production. I have written many times that the biggest concern about hydraulic fracturing in not the fracking or drilling process; it's surface concerns about spills of things like the waste water coming back up the well. (Drilling matters, too, but protecting ground water in that context is about good well casings, and the concerns are largely the same as conventional drilling.)
Such facilities are important, as they have helped vastly reduce the use of impoundment pits used for waste water in the early Bakken experience.
I heard for at least the third time today that the EPA is the biggest risk the industry faces. I continue to believe this is a red herring. That is, the biggest risk the industry faces is a major disaster from careless activities. It seems that many of the biggest concerns on that front are being handled well in North Dakota (better, in my sense, than in the Marcellus Shale). It's not to say everything is right, but there does seem to be a commitment to getting the process done well. Economic incentives are largely aligned with that goal, too.
The one thing that concerns me here, conceptually, is that people don't seem that concerned about water safety. I know most of the industry is working hard to keep things clean, but a bad chemical spill, oil spill, or waste water spill in the lake (picture above) could be disastrous. It's not that I have seen anything specific that makes me worry about the lake. I didn't. It's just that I'd prefer to hear, "We're worried about water contamination, but we're doing our best to prevent it." Instead, " I have have heard repeatedly, "Water issues aren't really a concern." I think that means that major issues haven't arisen, and not that people don't care, but that doesn't mean issue can't or won't arise.
Finally, as to the EPA, I don't think the EPA is poised to do much to slow hydraulic fracturing in oil country. And I don't think they should. That said, a major disaster would open the door to EPA or other federal action. Such a disaster would invite a shut down, and I know the industry doesn't want that. If the industry continues to improve, as it has since 2007, major disasters should be avoided. Here's hoping industry, regulators, and the people of the region continue to improve safety so that the benefits of heavy oil production increasingly outweigh the downsides. It can be done, and I sincerely hope it is.
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.
Wednesday, September 10, 2014
We covered a lot of ground today, driving up from Medora, ND, to Williston, ND, through Watford City. The traffic was not terrible for us, though the truck traffic and the road construction was slow going for a while. We're told we missed the worst of the traffic because our timing was good. It still felt like big city traffic in what is not a big city.
Watford City has been a prime example of a place where the oil boom has caused significant growing pains. A recent article in The Atlantic asked, What If Your Small Town Suddenly Got Huge?, and explained:
The Bakken oil boom has brought rapid growth to many towns and cities in western North Dakota, including Williston, north of the Missouri River, and Dickinson, alongside Interstate 94. But Watford City, where the population has jumped from just 1,400 people six years ago to more than 10,000 today, has experienced a particularly dramatic shift in character.
There is dirt being moved everywhere: for roads, for housing, and, of course, for oil. Driving this region you see very few homes, rolling hills, a few small buttes, and some abandoned farm homes. Oil wells blend in surprisingly well in many spots, as the sites are often small, and they look like small farms, without the farm house or barn. The colors of the sites blend in with the landscape, and are often easy to miss if they are far from the road, other than the flicker (and sometimes blaze) of flared natural gas that comes up with the oil and has no where else to go.
It continues to be striking to me that here in oil country, that gas is burned rather than saved, when back in West Virginia and the rest of the Marcellus Shale play (and in Texas's Barnett Shale), millions of dollars are spent per well to pull that exact commondity from the ground. Efforts to gather the gas here in North Dakota are underway, but it's not an easy undertaking. There is little immediate need here for natural gas, as there is abundant electricity already available because of lignite coal, and even some wind and hydro power in the state. The crew camp we visited on Tuesday is completely electric (no natural gas)-- even for heat, because the prices are so low.
Later in the day discussed traffic issues in the area with the state Department of Transportation, landowner issues with a landowner group, and air and water quality with a state health department official. I plan to write more on each of these issues in the next few weeks, so for now I'll just note that, as you'd expect, traffic is bad; landowners without mineral rights are sometimes not happy; and the health department has some challenges.
We also had the chance to speak with a geologist in the area, who explained the basics of the formation and how it works. It was interesting, but I'll leave that to the geology folks, as there are plenty of sources discussing that (PDF). The thing I wanted to note now was her explanation of the North Dakota's library of core samples. A recent Bismarck Tribune article explains:
In the early 1950s when the oil activity began, then-North Dakota State Geologist Wilson M. Laird, Ph.D., went to the legislature and lobbied to preserve the rocks of the producing zones and store them into a library. They bought Laird's concept, created a law based on the Model Act drafted by the Legal Committee of the Interstate Oil Compact Commission and the archives began.
This collection of rocks may be the most valuable rocks on the planet as they hold the secrets to the Bakken. Those secrets are being unlocked everyday as new technologies are created in response to the publicly-owned core samples of North Dakota.
Some states have adopted similar libraries, some have not. Looking across state lines at Montana where the Bakken crude also roams underfoot, less production is occurring. According to many in the industry, the historical shared data within the Wilson Laird library is one of the key reasons.
"In 2013, industry and academia examined 79,000 feet of core, an all-time record in the core library." Ed Burns, North Dakota State Geologist said. "More specifically, we had 28 companies and nine separate universities use the library."
In the past sharing data was not as common due to the large amounts of information, intellectually property rights and competition. North Dakota was the exception to that rule.
Apparently core samples are required about every 30 feet (horizontally or vertically) once the well gets below 8,000 feet vertically. (There are some exceptions when things get going quickly, but even then samples are needed about every 90 feet.) Because so much of North Dakota's information is publicly available, this information can help companies figure out what to look for in the drilling process, which can help maxmize production from wells.
This kind of forced data sharing is rather remarkable in that it's not something we usually see among competitors. That said, in an industry with a depleteable resource where virtually every state has a law outlawing "waste," it does makes some sense. See, e.g., the North Dakota Century Code:
43-02-03-06. Waste prohibited. All operators, contractors, drillers, carriers, gas distributors, service companies, pipe pulling and salvaging contractors, or other persons shall at all times conduct their operations in the drilling, equipping, operating, producing, plugging, and site reclamation of oil and gas wells in a manner that will prevent waste.
The industry would be well served to share such information and show a similar commitment to avoiding waste in all aspects of the process (not just oil and gas). We'd probably see less water use, better environmental protection, and faster clean up where things go wrong. There's some indication that at least the best of the industry are doing so, and I sincerely hope that continues. Stay tuned for Day 4.
Tuesday, September 9, 2014
This experience has been rather remarkable, and I'm only two days in to the trip. We covered a lot of miles today, and not all of it was related to the oil and gas business. I started the day with a run, at a misty 43 degrees, after a high of 85 yesterday. This is not relevant, other than to saw I was a bit cold this morning.
Target Logistics Dunn County Lodge
A few visits of interest today: First: Target Logistics Dunn County Lodge, which is a crew camp site. These are often know as "man camps." They prefer "workforce housing." I'll stick with crew camps.
It was was an impressive site for quickly built housing. The facility provides housing that does not take away from the local community, and deals with parking, water, and utility issues, as well as other resource issues. The site has about 600 beds, and costs about $8-$10 million to build. They plan about a 20-month payoff for the build, which they met. Impressive.
Prices are geared to be market competitive. The average is about $120 per night, which includes all food and utilities, though companies negotiate their own deals. The people who work in the area tend to be transient -- two weeks on two weeks off. People who do hydraulic fracturing tend to do two weeks on, on week off. Construction people do four weeks on, two weeks off. The people who service the facility (and are also not locals, because the market is tight) work six weeks on two weeks off, and they pay their own travel.
There are mostly men on the site, but women are there. They have their own rooms or share rooms with other women with a "jill and jill" bathroom share. People generally work within 45 miles or they find other facilities. The site is zero tolerance -- no alcohol, no firearms, no visitors. The have on-site workout facilities, laundry, and food service. It's clean, well organized, and safe. It's the Cadillac of temporary housing. And I'd try very hard not to ever, ever live there. While I admit, it's better than some of my college housing, it lacks the sense of free will I had then.
Bakken Oil Express
Next was a trip to Bakken Oil Express, an oil shipping facility. It was impressive in its organization and its operation. It was big, with oil tanks, a rail yard, and lots of trucks. Oil there moves by unit train, which is 104 cars. The site has several tanks, and they can store 640k gallons of oil. Tanks are generally 90k or 105k gallons. An average truck brings 225 barrels of oil. It takes 17 to 18 hours to load a train, and the site loads about 1.5 trains per day. That is about 685 gallons per car.
A diesel refinery is supposed to come on line on the site to serve the region, which is expected in December. The site has about 75 employees, with salaries at $27/hour and up.
The site is working to upgrade safety, including fire suppression, which it doesn't have now. They are building foaming pipes to help if they have a problem. Right now, the plan in case of fire is to ship out what's possible, and let it burn out.
Theodore Roosevelt National Park
This is a park you should see. I think I'd say that of all national parks, but I love this one. The park is facing several challenges. This includes protecting the "sound scape and sense of solitude," that made Teddy Roosevelt love the place so much. This is a challenge for a park that has major highways running through it and major mineral operations being sought in the nearby land parcels.
The park has done well working with companies, who have responded well to requests to keep noise and other issues away from the park when issues have been raised. Bakken flaring (or natural gas) has been an issue, too, and the park is working to preserve the night sky. The area has had (and continues to have ) amazing view of the stars and the night sky, and flaring can cause haze and horizon light that makes the sky less amazing. They are working on it.
There is no drilling in the park, but drilling near has impacts, too. So far, industry, the park, and the community have done well to minimize impacts.
Tomorrow, we visit more communities, which are widely known to have had even larger impacts than what I have seen so far. The oil boom has been good for the region in many ways, but it's been hard, too. We're about to get a sense of how hard.
Monday, September 8, 2014
Today marked the first day of several meeting with people from North Dakota to discuss the oil boom and how it has impacted the state. I lived in the state, and I loved it, so I think I am a little more connected than many to what's happened here. That said, I lived on the other side of the state from the oil boom, and I only spent five (largely great) years in North Dakota, so while I'm informed, I have hardly "lived the boom." I've just been watching and trying to pay attention.
A few things I was told tonight struck me as significant:
1. Housing costs are still a huge issue. Building a new house in Dickinson can run upwards of $250 per square foot. A one-bedroom apartment can easily run $1300.
2. In 1997, there were 698 hotel rooms in the city, largely for tourism jumping off for the North Dakota Badlands. By 2004, that number was 754. As of 2013, that number has increased to 1632. (The number is true of 2014, too.)
3. In 2005, the average daily rate for a hotel room was $53.96
By 2008: $68.95
2013: $112.37 (280 rooms were added in 2013).
This does not likely mean that things are slowing down, thought perhaps they are stabilizing. More permanent housing has also been going up at a significant rate, so the increased number of hotel rooms, combined with those leaving the temporary housing market, likely explains the (relatively) modest decrease in average daily rate.
4. Traffic and road maintenance remain a big concern. One person I met tonight said he'd had a paved road to his house for years, until the oil boom came, and it's now back to being a gravel road.
5. I learned the term "Bakken charge," which I'm told refers to the premium one pays for goods and services in this region. Examples given include $5 Little Caesar's Pizzas, which are $5.99 here (or 20% more) and flyers from big box stores with 20% ot 40% higher prices than the same flyers in other markets.
6. The idea of community action is less of a focus here than in other areas, like what we've seen in some spots in West Virginia. It's not that people don't care, but they don't necessarily participate in community actions. Once can opine on the reasons why, and I have my guesses, but as a lawyer, I'll stick to reporting what I've been told on this one: if you want support, you need to go to the people where they are. (That seems like sound advice anywhere.)
7. All those people asking for minimun wage at fast-food restaurants across the country "are really just asking to be paid like the they live in Dickinson, ND."
8. A major biggest employment challenge is finding people "who can pass a drug test. Some employers say when that when potential applicants are asked that question, 'half the people just turn and walk out.""
I learned a lot more than this after a good conversation with interesting people, but I'll leave it here for tonight.
I'm currently flying at about 30,000 feet on my way to Dickinson, North Dakota. Regular readers know I do much of my research in the energy sector and that the impacts of horizontal drilling and hydraulic fracturing have had on the local, regional, national, and global economies are an interest of mine. This trip marks my first return to North Dakota since I left the University of North Dakota School of Law in the summer of 2012, and it will be my most extended trip to the Bakken oil patch in the western part of the state.
I have the benefit of traveling with a group from West Virginia University, and we're gathering information for a variety of applications, all of which I hope will help us plan for a more sustainable economic and environmentally viable energy future. The trip is scheduled to include meetings with government officials (state and local), industry representatives, landowners, farmers, educators, and others. I'm looking forward to this rare opportunity to hear so many different perspectives from people living in the heart of the U.S. oil boom.
Over the last few years, I have written about the challenges and opportunities related to the shale oil and gas reserves made available through horizontal drilling and hydraulic fracturing, with a focus on the economic, environmental, and social impacts. I'm curious to see how my earlier assessments stack up with new information regarding the current situation. Throughout the week, I plan to write about things I learn, provide some updates about what's happening, and maybe share some thoughts about what's next from the business, legal, and regulatory perspectives. Follow me on Twitter, too, @jfershee for (hopefully) in-the-moment updates.
Stay tuned for more to come, and for those interested, here are some of my recent pieces on the subject:
- North Dakota Expertise: A Chance to Lead in Economically and Environmentally Sustainable Hydraulic Fracturing, 87 North Dakota Law Review 485 (2011) (invited) (symposium issue)
- The Oil and Gas Evolution: Learning from the Hydraulic Fracturing Experiences in North Dakota and West Virginia, 19 Texas Wesleyan Law Review 23 (2012) (invited) (symposium issue)
- Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania, 116 W. Va. L.Rev. 819 (2014) (invited)
Thursday, September 4, 2014
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.