Thursday, July 30, 2015

Funding Tips from Angel Investors and Venture Capitalists

Last week I attended a panel discussion with angel investors and venture capitalists hosted by Refresh Miami. Almost two hundred entrepreneurs and tech professionals attended the summer startup series to learn the inside scoop on fundraising from panelists Ed Boland, Principal Scout Ventures; Stony Baptiste, Co-Founder & Principal, Urban.Us, Venture Fund; Brad Liff, Founder & CEO, Fitting Room Social, Private Equity Expert; and (the smartest person under 30 I have ever met) Herwig Konings, Co-Founder & CEO of Accredify, Crowd Funding Expert. Because I was typing so fast on my iPhone, I didn’t have time to attribute my notes to the speakers. Therefore, in no particular order, here are the nuggets I managed to glean from the panel.

1) In the seed stage, it’s more than an idea but less than a business. If it’s before true market validation you are in the seed round. At the early stage, there has been some form of validation, but the business is not yet sustainable. Everything else beyond that is the growth stage.

2) The friend and family round is typically the first $50-75,000. Angels come in the early stage and typically invest up to $500,000.

3) The seed rounds often overlap with angels and businesses can raise from $500,000 to $1,000,000. If you have a validated part of a business model but are not self funding then you are at Series A investment stage.  You still need outside capital despite validation. The Series A round often nets between $3-5 million and then there are subsequent rounds for growth until the liquidity event which is either the IPO or acquisition.

4) Venture capitalists are investing their LPs' money and often the LP will co-invest with the VC. Their ultimate goal is for the company to get acquired or go public.

5) At the early stages some VCs will show a deal to other investors if it looks good. Later stage VCs will become more competitive and will keep the information and good deals to themselves.

6) It’s important to find a lead investor or lead angel to champion your idea.

7) Not all funding is helpful. Some panelists discussed the concepts of “fallen angels” or “devils,” which were once helpful but now are not providing value but still take up time and energy that could be better spent focusing on building the business. “False angels” are those who could never have been helpful in the first place.

8) You don’t want to be the first or the last check the angel is writing. You want to get references on the angel investor and see where they have invested and what their plan is for you.

9) There is smart money and dumb money. Smart money gives money and additional resources or value. Dumb money just gives money and nothing else. It’s passive and doesn’t jump into the business (note the panelists disagreed as to whether this was a good or bad thing). Another panelist noted the distinction between helpful and harmful money. Harmful people think they are helpful and give advice when they don’t have a lot to add but take up a lot of time. Sometimes helpful money just gives a check and then gets out of the way. It’s the people in between that can cause the problems.

10) VCs and angels invest in teams as well as ideas. They look for the right fit and a mix of veteran entrepreneurs, a team/product fit, a mix of technical and nontechnical people, professionals whose reputations and resumes can be verified. They want to know whether the people they are investing in have been in a competitive environment and have learned from success or failure.

11) Crowdfunding can be complicated because investors don’t meet the entrepreneurs. They see everything on the web so the reputation and the need for a good team is even more important.

12) Convertible notes are the “gold standard” according to one speaker and it’s the workhorse for funding. There was some discussion of safe notes, but most panelists didn't have a lot of experience with them and that was echoed this week by attorney David Salmon, who advises small businesses and holds his own monthly meetups. One panelist said that the sole purpose of safe notes was to avoid landmines that can blow up the company. Another panelist indicated that from an investor standpoint it’s like a blackhole because it’s so new and people don’t know what happens if something goes wrong.

13) The panelists indicated that businesses need to watch out for: the maturity date for their debt (how long is the runway); when can the investors call the note and possibly bankrupt the company; how will quirky covenants affect the next round of financing and where later investors will fall in line; and covenants that are easy to violate.

14) There was very little discussion of Regulation A+ but it did raise some interest and the possibility to raise even more funds from non-accredited investors. Only 3% of the eight million who can invest through crowdfunding actually do, so Reg A+ may help with that.

16) All of the panelists agreed that entities may start out as LLCs but they will have to convert to a C Corp to get any VC funding.

There was a lot more discussion but this post is already too long. Because I've never been an angel nor sought such funding, I don’t plan to provide any analysis on what I’ve typed above. My goal in attending this and the other monthly events like this was to learn from the questions that entrepreneurs ask and how the investors answer. Admittedly, most of my students won’t be dealing with these kind of issues, but I still introduce them to these concepts so they are at least familiar with the parlance if not all of the nuances.

July 30, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Financial Markets, International Business, Law School, Legislation, LLCs, Securities Regulation, Teaching | Permalink | Comments (0)

Thursday, July 16, 2015

Has President Obama helped or hurt American business? Ten questions

Love him or hate him, you can’t deny that President Obama has had an impact on this country. Tomorrow, I will be a panelist on the local public affairs show for the PBS affiliate to talk about the President’s accomplishments and/or failings. The producer asked the panelists to consider this article as a jumping off point. One of the panelists worked for the Obama campaign and another worked for Jeb Bush. Both are practicing lawyers. The other panelist is an educator and sustainability expert. And then there’s me.

I’ve been struggling all week with how to articulate my views because there’s a lot to discuss about this “lame duck” president. Full disclosure—I went to law school with Barack Obama. I was class of ’92 and he was class of ’91 but we weren’t close friends. I was too busy doing sit-ins outside of the dean’s house as a radical protester railing against the lack of women and minority faculty members. Barack Obama did his part for the movement to support departing Professor Derrick Bell by speaking (at minute 6:31) at one of the protests. I remember thinking then and during other times when Barack spoke publicly that he would run for higher office. At the time a black man being elected to the president of the Harvard Law Review actually made national news. I, like many students of all races, really respected that accomplishment particularly in light of the significant racial tensions on campus during our tenure.

During my stint in corporate America, I was responsible for our company’s political action committee. I still get more literature from Republican candidates than from any other due to my attendance at so many fundraisers. I met with members of Congress and the SEC on more than one occasion to discuss how a given piece of legislation could affect my company and our thousands of business customers. My background gives me what I hope will be a more balanced set of talking points than some of the other panelists. In addition to my thoughts about civil rights, gay marriage, gun control, immigration reform, Guantanamo, etc., I will be thinking of the following business-related points for tomorrow’s show: 

1) Was the trade deal good or bad for American workers, businesses and/or those in the affected countries? A number of people have had concerns about human rights and IP issues that weren’t widely discussed in the popular press.

2) Dodd-Frank turns five next week. What did it accomplish? Did it go too far in some ways and not far enough in others? Lawmakers announced today that they are working on some fixes. Meanwhile, much of the bill hasn’t even been implemented yet. Will we face another financial crisis before the ink is dried on the final piece of implementing legislation? Should more people have gone to jail as a result of the last two financial crises?

3) Did the President waste his political capital by starting off with health care reform instead of focusing on jobs and infrastructure?

4) Did the President’s early rhetoric against the business community make it more difficult for him to get things done?

5) How will the changes in minimum wage for federal contractors and the proposed changes to the white collar exemptions under the FLSA affect job growth? Will relief in income inequality mean more consumers for the housing, auto and consumer goods markets? Or has too little been done?

6) Has the President done enough or too much as it relates to climate change? The business groups and environmentalists have very differing views on scope and constitutionality.

7) What will the lifting of sanctions on Cuba and Iran mean for business? Both countries were sworn mortal enemies and may now become trading partners unless Congress stands in the way.

8) Do we have the right people looking after the financial system? Is there too much  regulatory capture? Has the President tried to change it or has he perpetuated the status quo?

9) What kind of Supreme Court nominee will he pick if he has the chance? The Roberts court has been helpful to him thus far. If he gets a pick it could affect business cases for a generation.

10) Although many complain that he has overused his executive order authority, is there more that he should do? 

I don’t know if I will have answers to these questions by tomorrow but I certainly have a lot to think about before I go on air. If you have any thoughts before 8:30 am, please post below or feel free to email me privately at mnarine@stu.edu.

July 16, 2015 in Constitutional Law, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Business, Marcia Narine, Securities Regulation, Television, White Collar Crime | Permalink | Comments (0)

Wednesday, July 15, 2015

Shareholder Proposals and Legal Scholarship

I read with interest the recently released opinion of the U.S. Court of Appeals for the Third Circuit in Trinity Wall Street v. Walmart Stores, Inc.  The Wall Street Journal covered the publication of the opinion earlier in the month, and co-blogger Ann Lipton wrote a comprehensive post sharing her analysis on the substance of the decision over the weekend.  (I commented, and Ann responded.)  Of course, like Ann, as a securities lawyer, I was interested in the court's long-form statement of its holding and reasoning in the case.  But I admit that what pleased me most about the opinion was its use of legal scholarship written by my securities regulation scholar colleagues.

Tom Hazen's Treatise on the Law of Securities Regulation is cited frequently for general principles.  This is, as many of you likely already know, an amazing securities regulation resource.  I also will note that many of my students find Tom's hornbook helpful when they are having trouble grappling with securities regulation concepts covered in the assigned readings in my class.

Donna Nagy's excellent article on no-action letters (Judicial Reliance on Regulatory Interpretation in S.E.C. No-Action Letters: Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921 (1998)) also is cited by the court.  This piece is not praised enough, imho, for the work it does in the administrative process area of securities law.  I see the citations in the opinion as an element of needed praise.

And finally, Alan Palmiter's scholarship also is cited numerous times in the opinion.  Specifically, the court quotes from and otherwise cites to The Shareholder Proposal Rule: A Failed Experiment in Merit Regulation, 45 Ala. L. Rev. 879 (1994).  Again, this work represents an important, under-appreciated scholarly resource in securities law.

At least one other law review article is cited once in the opinion.

[Note: Alison Frankel also points out that Vice Chancellor Laster cites formatively to a paper co-authored by Jill Fisch, Sean Griffith, and Steve Davidoff Solomon in a recent opinion.  More evidence that our work matters, at least to the judiciary.]

As Ann's post notes, the Trinity opinion also is worth reading for its substance.  In addition to the matters Ann mentions, the opinion includes, for example, a lengthy, yet helpful, history of the ordinary business exclusion under Rule 14a-8.  And the analysis is instructive, even if unavailing (unclear in its moorings and effect in individual cases).

Finally, it's worth noting that the opinion is drafted with a healthy, yet (imv) professional, dose of humor.  The opinion begins, for example, as follows:

“[T]he secret of successful retailing is to give your customers what they want.” Sam Walton, SAM WALTON: MADE IN AMERICA 173 (1993). This case involves one shareholder’s attempt to affect how Wal-Mart goes about doing that.

And the conclusion of the opinion includes the following passage that made me smile:

Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions. For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but “transcendence,” we empathize.

(This is part of the "scolding" Ann references in her post.)

Read the concurring opinion of Judge Shwartz, too.  It is thoughtful (even if not entirely helpful, as Ann notes) in making some nice additional points worth considering.

July 15, 2015 in Corporate Governance, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (1)

Tuesday, July 14, 2015

CVS, Business Judgment, & Noisy Withdrawal from the Chamber of Commerce

A while back, I wrote about CVS's choice to eliminate tobacco products from its stores.  I noted that it seemed clear to me that CVS could make that choice, even thought it would mean lower short-term profits, because it was a decision that is clearly protected (or should be) by the business judgment rule. 

Today, according to an LA Times piece, 

[CVS] stood up for its principles.

The pharmacy giant announced it was quitting the U.S. Chamber of Commerce after reports that the influential business organization was lobbying against anti-smoking laws around the world.

CVS bolted because of the Chamber's views on tobacco sales.  In 2009, Apple and Nike made waves with the Chamber of its policy position on climate change. I find this interesting, and I have no reason to doubt that all of these companies are following their corporate values, though I also think they see public relations value in the noisy withdrawal.  

That some big companies have stepped away from the Chamber is less surprising to me than the fact that the Chamber has maintained such strength with small business owners, while advocating for many big business positions that don't help, and may hurt, small businesses.  I can't help but wonder if the Chamber's success it not so much in promoting policies that benefit of member businesses, and instead that it promotes policies that are consistent with the ideologies of many who work for or own businesses.

If the latter is the case, as I suspect it is, that's a good business model for the Chamber, but not necessarily for the entities it represents.  Of course, if business owners, officers, and directors remain aligned with the Chamber, despite a lack of clear benefit to the entity, well, that too is protected by the business judgment rule. 

July 14, 2015 in Business Associations, Corporate Personality, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (1)

CALL FOR PAPERS: A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family (October 16-17, 2015 in Atlanta, GA)

UPDATE: The deadline for submissions has been extended to July 21.

[The following is a copy of the official workshop announcement.  I have moved the "Guiding Questions" to the top to highlight the business law aspects.  Registration and submission details can be found after the break.]

A Vulnerability and the Human Condition Initiative Workshop at Emory Law

Guiding Questions:

This workshop will use vulnerability theory to explore the implications of the changing structure of employment and business organizations in the new information age. In considering these changes, we ask:

• What kind of legal subject is the business organization?
• Are there relevant distinctions among business and corporate forms in regard to understanding both vulnerability and resilience?
• What, if any, should be the role of international and transnational organizations in a neoliberal era? What is their role in building both human and institutional resilience?
• Is corporate philanthropy an adequate response to the retraction of state regulation? What forms of resilience should be regulated and which should be left to the 'free market'?
• How might a conception of the vulnerable subject help our analysis of the changing nature of the firm? What relationships does it bring into relief?
• How have discussions about market vulnerability shifted over time?
• What forms of resilience are available for institutions to respond to new economic realities?
• How are business organizations vulnerable? How does this differ from the family?
• How does the changing structure of employment and business organization affect possibilities for transformation and reform of the family?
• What role should the responsive state take in directing shifting flows of capital and care?
• How does the changing relationship between employment and the family, and particularly the disappearance of the "sole breadwinner," affect our understanding of the family and its role in caretaking and dependency?
• How does the Supreme Court's willingness to assign rights to corporate persons (Citizen's United, Hobby Lobby), affect workers, customers and communities? The relationship between public and private arenas?
• Will Airbnb and Uber be the new model for the employment relationships of the future?

Continue reading

July 14, 2015 in Business Associations, Call for Papers, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law and Economics, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 11, 2015

Mylan and Mandatory Disclosure

I noted with favor the other day (to myself, privately) the helpful and interesting commentary on The Glom of our trusted colleague and co-blogger, Usha Rodrigues, regarding the recent press reports on Mylan N.V.'s related-party disclosures.  As the story goes, a firm managed and owned in part by the Vice Chair of Mylan's board of directors sold some land to an entity owned by one of the Vice Chair's business associates for $1, and that entity turned around the same day and sold the property to Mylan for its new headquarters for $2.9 million.  Usha's post focuses on both the mandatory disclosure rules for related-party transactions and the mandatory disclosure rules on codes of ethics.  Two great areas for exploration.

A reporter from the Pittsburgh Tribune-Review called me Thursday to talk about the Mylan matter and some related disclosure issues.  He and I spoke at some length yesterday.  That press contact resulted in this story, published online late last night.  The reporter was, as the story indicates, interested in prior related-party disclosures made by Mylan involving transactions with family members of directors.  This led to a more wide-ranging discussion about the status of family members for various different securities regulation purposes.  It is from this discussion that my quote in the article is drawn.  But our conversation covered many other interesting, related issues.

Continue reading

July 11, 2015 in Corporate Governance, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Wednesday, July 8, 2015

Modern Independent Contractor vs. Agent Problem: UBER DRIVERS

For those of you who teach agency (and the related concept of independent contractors) the following recent case example will make for a fun and culturally relevant example for many of your students.  

In March, 2015, the California Labor Commissioner’s Office issued an opinion finding that a  driver for the ride-hailing service mobile app company, Uber, should be classified as an employee, not an independent contractor.  The opinion details the control Uber exercised over the driver including setting the payment rates and terms, quality controls, service platforms, user communications, liability insurance requirements, and background checks all the while maintaining that drivers are independent contractors.  Citing to S. G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341, 350-51, 769 P.2d 399 (1989), the Commission analyzed the following elements:

(a) whether the one performing services is engaged in a distinct occupation or business;

(b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

(c) the skill required in the particular occupation;

(d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(e) the length of time for which the services are to be performed;

(f) the method of payment, whether by the time or by the job;

(g) whether or not the work is a part of the regular business of the principal; and

(h) whether or not the parties believe they are creating the relationship of employer-employee.  

The Commission explained its finding that Plaintiff was an employee (not an independent contractor) (Commission Opinion, Berwick v. Uber, at 8)  with the following:

By obtaining the clients in need of the service and providing the workers to conduct it, Defendants retained all necessary control over the operation as a whole.  The party seeking to avoid liability has the burden of proving that persons whose services he has retained are independent contractors rather than employees.  In other words, there is a presumption of employment…..The modern tendency is to find employment when the work being done is an integral part of the regular business of the employers, and when the worker, relative to the employer, does not furnish an independent business or professional service.

Id. at 8.

The Commission found that “Plaintiff’s work was integral to Defendants’ business…Without drivers such as Plaintiff, Defendants’ business would not exist.” Id.


Impact Discussion:

Many technology companies, like Uber, contend that their virtual marketplaces facilitate individuals acting as contractors, using their own possession to provide services for a personal profit. The argument is that this empowers workers giving them flexibility and freedom to set their own hours and success. A counter argument raised by labor activists and others is that this type of freelance work strips workers from certainty of wages and job status as well as other benefits of traditional employment such as health care, retirement and sick leave benefits. Opponents argue that what is being touted as good for individuals is just a means to minimize costs and increase corporate, not individual, profits. 

[Note, I have included this, along with a host of other case updates and teaching materials, in my new Business Organizations electronic casebook, available through ChartaCourse starting fall 2015.]

Edited on 7/10/15 to add:  colleague, friend and fellow blogger Haskell Murray suggested this article (How Crowd Workers Became the Ghosts in the Digital Machine) from The Nation on crowd-workers and the thought-provoking discussion on whether minimum wage laws should apply to these workers.  Joan Hemminway, same credentials above, noted that the Wall Street Journal Blog is also commenting on the Uber case.

 

-Anne Tucker

July 8, 2015 in Anne Tucker, Business Associations, Corporations, Current Affairs, Unincorporated Entities | Permalink | Comments (3)

Thursday, July 2, 2015

Tips for Those Who Know Almost Nothing About Business (aka some of my incoming students)

It's barely July and I have received a surprising number of emails from my incoming business association students about how they can learn more about business before class starts. To provide some context, I have about 70 students registered and most will go on to work for small firms and/or government. BA is required at my school. Very few of my graduates will work for BigLaw, although I have some interning at the SEC. I always do a survey monkey before the semester starts, which gives me an idea of how many students are "terrified" of the idea of business or numbers and how many have any actual experience in the field so my tips are geared to my specific student base. I also focus my class on the kinds of issues that I believe they may face after graduation dealing with small businesses and entrepreneurs and not solely on the bar tested subjects. After I admonished the students to ignore my email and to relax at the beach during the summer, I sent the following tips:

If you know absolutely NOTHING about business or you want to learn a little more, try some of the following tips to get more comfortable with the language of business:

1) Watch CNBC, Bloomberg Business, or Fox Business. Some shows are better than others. Once we get into publicly traded companies, we will start watching clips from CNBC at the beginning of every class in the "BA in the News" section. You will start to see how the vocabulary we are learning is used in real life.

2) Read/skim the Wall Street Journal, NY Times Business Section or Daily Business Review. You can also read the business section of the Miami Herald but the others are better. If you plan to stay local, the DBR is key, especially the law and real estate sections.

3) Subscribe to the Investopedia word of the day- it's free. You can also download the free app.

4) Watch Shark Tank or The Profit (both are a little unrealistic but helpful for when we talk about profit & loss, cash flow statement etc). The show American Greed won't teach you a lot about what we will deal with in BA but if you're going to work for the SEC, DOJ or be a defense lawyer dealing with securities fraud you will see these kinds of cases.

5) Listen to the first or second season of The Start Up podcast available on ITunes.

6) Watch Silicon Valley on HBO- it provides a view of the world of  re venture capitalists and funding rounds for start ups.

7) Read anything by Michael Lewis related to business.

8) Watch anything on 60 Minutes or PBS' Frontline related to the financial crisis. We will not have a lot of time to cover the crisis but you need to know what led up to Sarbanes-Oxley and Dodd-Frank.

9 Watch the Oscar-winning documentary "Inside Job," which  is available on Netflix.

10) Listen to Planet Money on NPR on the weekends.

11) Listen to Marketplace on NPR (it's on weekday evenings around 6 pm).

12) Read Inc, Entrepreneur, or Fast Company magazines. 

13) Follow certain companies that you care about (or hate) or government agencies on Twitter. Key agencies include the IRS, SEC, DOJ, FCC, FTC etc. If you have certain passions such as social enterprise try #socent; for corporate social responsibility try #csr, for human rights and business try #bizhumanrights. For entrepreneurs try #startups. 

14) Join LinkedIn and find groups related to companies or business areas that interest you and monitor the discussions so you can keep current. Do the same with blogs. 

As I have blogged before, I also send them selected YouTube videos and suggest CALI lessons throughout the year. Any other tips that I should suggest? I look forward to hearing from you in the comments section or at mnarine@stu.edu.

July 2, 2015 in Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Film, Financial Markets, Law School, Marcia Narine, Technology | Permalink | Comments (3)

Wednesday, July 1, 2015

Section 13(d) Reporting: A Securities Regulation Hot Mess?

As I earlier noted, on June 23rd, I moderated a teleconference on proposals to shorten the Section 13(d) reporting period, currently fixed by statute and regulation at 10 days.  If you don't mind registering with Proxy Mosaic, you can listen to the program.  The link is here.

The discussion was lively--as you might well imagine, given that one of the participants represents activist shareholders and the other represents public companies.  A number of interesting things emerged in the discussion, many (most) of which also have been raised in other public forums on Schedule 13D, including those referenced and summarized here, here, and here, among other places.

  • Exactly how does the Section 1d(d) reporting requirement protect investors or maintain market integrity or encourage capital formation?  Or is it just a hat-tipping system to warn issuers about potential hostile changes of control, chilling the potential for the market for corporate control to run its natural course?  Of course, the answer to many questions about Section 13(d) depends on our understanding of the policy interests being served.  It's hard to tinker with the reporting  system if we cannot agree on the objectives it seeks to achieve . . . .  (Read the remaining bullets with this in mind.)
  • We're not in the 1960s, 1970s, or 1980s any more.  If market accumulations are deemed to present dangers to investors today (and that case needs to be made), why are they not just an accepted risk of public market participation?  Shouldn't every investor know that market accumulations are a risk of owning publicly traded securities?  And how does the reporting requirement really protect them from harm?  Is this just over-regulation that treats investors as nitwits?
  • Not all activist investors are the same.   Some act or desire to act as a Section 13(d) group; others don't.   Some seek effective or actual control of an issuer; some don't.
  • Provisions within the Section 13(d) filing requirements interact.  So, can we really talk about decreasing disclosure time periods without also talking about triggering thresholds and mandatory disclosure requirements?
  • Why is 5% beneficial ownership the triggering threshold for reporting?  What's the magic in that number--and if it were to be changed, should it be lower or higher?
  • Schedule 13D is a disclosure form fraught with complexity.   Many important judgment calls may have to be made in completing the required disclosures accurately and completely, depending on the circumstances.  Is all this complexity needed?  In particular, can the Item 4 disclosure requirement be simplified?  And is the group concept necessary?
  • What is the value, if any, in looking at the issue from a comparative global regulatory viewpoint?  Toward the end of the call, international comparisons were increasingly being made and used as evidence that a change in U.S. regulation is needed or desirable.  But are other markets and systems of regulation enough like ours for these comparisons to work?  E.g., although other countries require Schedule 13D-like filings fewer days after attainment of a triggering threshold of ownership, does that mean we also should reduce the time period for mandatory disclosure here in the U.S.?

Lots of questions; I am beginning to think through answers.  Regardless there's much food for thought here.  Any reactions?  What do you think, and why?

July 1, 2015 in Corporate Finance, Current Affairs, Joan Heminway, Legislation, Securities Regulation | Permalink | Comments (0)

Thursday, June 25, 2015

The Cuba Corporate Governance Conundrum

It’s always nice to blog and research about a hot topic. Last week I wrote about compliance challenges for those who would like to rush down to do business in Cuba- the topic of this summer’s research. Yesterday, Corporate Counsel Magazine wrote about the FCPA issues; one of my concerns. Earlier this week, I attended a meeting with the Greater Miami Chamber of Commerce and the United States International Trade Commission. Apparently, on December 17th, the very same day that President Obama made his surprise announcement that he wanted to re-open relations with Cuba, Senator Ron Wyden coincidentally sent a request to the USITC asking for an investigation and report on trade with Cuba and an analysis of restrictions. Accordingly, the nonpartisan USITC has been traveling around the country speaking to lawyers and business professionals conducting fact-finding meetings, in order to prepare a report that will be issued to the public in September 2015. Tomorrow the Miami Finance Forum is holding an event titled the New Cuba Revolution.

This will be my third and final post on business and Cuba and in this post I will discuss the focus of my second potential law review article topic. My working thesis is as follows: As relations between the United States and Cuba thaw, American businesses have begun exploring opportunities on the island. Cuba, however, remains a communist nation with a human rights record criticized by exiles, NGOs, and even members of the United States Congress. The EU has taken a "common position" on Cuba stating that the objective of the European Union in its relations with Cuba is to encourage a process of transition to a pluralist democracy, require a respect for human rights and fundamental freedoms, as well as sustainable recovery and improvement in the living standards of the Cuban people." Individual EU member states are free to conduct business with Cuba and many European companies have joined Canadian firms in investing through joint ventures and other state-sanctioned vehicles. This Article will examine whether the US should follow the EU's model in trying to spur reform or whether allowing American firms to do business in Cuba without human rights concessions will in fact perpetuate the status quo.

As I discussed in last week’s blog post, one reason that the U.S. is unlikely to lift the embargo is the nearly 7 billion in claims for confiscated US property. Another reason is Cuba’s human rights record. For example, the island is notorious for violations of rights to freedom of press, association, assembly, and imprisonment of political protesters. The Cuban government continues to control all media limiting the access to information on the Internet due to content-based restrictions and technical limitations. Independent journalists are systematically subjected to harassment, intimidation, and detention for reporting information that was not sanctioned by the state apparatus. My colleague Jason Poblete writes often and critically about the Obama administration’s rapprochement with Cuba. (I highly recommend him for legal advice about Cuba by the way).

Depending on whom you talk to the embargo will be lifted next year, in five year or in ten years. Personally, I don't know that the EU Common Position has been particularly effective in pressuring the Castro brothers to make human rights reforms. I don’t think the U.S. government will be any more successful either. The embargo is Exhibit A.

Most of my academic research thus far has been on what drives corporations to act in the absence of legal obligations vis a vis human rights. With that in mind, I plan to examine a few options related to Cuba. First, I am researching the effect of bilateral investment treaties. A bilateral investment treaty is an "agreement between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country.” These typically grant significant rights to foreign investors, provide safeguards to investments against foreign governments, and allow foreign investors to have investment disputes adjudicated outside of the country, which will be critical for those investing in Cuba. The problem is that these BITS rarely have human rights conditions. Accordingly, some scholars have recommended that they require adherence to the Universal Declaration of Human Rights, the United Nations International Covenant on Civil and Political Rights, the ILO Declaration on Fundamental Principles and Rights at Work, the United Nations Convention Against Corruption, the and the Rio Declaration on Environment and Development. I would also recommend reference to the UN Guiding Principles on Business and Human Rights and the OECD Guidance.

Another option is to condition any renewal of a development bank such as the US’s Ex-Im Bank on requiring human rights impact assessments. The Ex-Im bank is the official export credit agency of the US. It’s used when private sector lenders are unable or unwilling to provide financing to companies entering politically or commercially risky countries. Its charter is set to expire on June 30th although its supporters claim that it financed billions in exports, which supported 200 thousand jobs last year. Opponents claim that it financed exports in countries with abysmal human rights records and/or that it supports corporate welfare. I propose that Ex-Im and other lenders follow the lead of many European financers that require human rights disclosures. I (naively?) believe labor may be the only human right remotely and partially in the control of US companies operating in Cuba in the future.

I have some other ideas but those will have to wait for the upcoming article. In the meantime, if you have some thoughts or critiques of these early ideas, please comment below or send me an email at mnarine@stu.edu. I’m off to Guatemala on Saturday for a week with a group of academics studying business and human rights (another research topic for this summer). We will be exploring climate change, the extractive industries, maquiladoras, corporate social responsibility, and the effects on the rights of indigenous peoples. You can be sure I will be writing about that in a future post.

 

June 25, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Ethics, International Business, Law Reviews, Legislation, Marcia Narine, Research, Travel | Permalink | Comments (0)

Thursday, June 18, 2015

The Cuba Conundrum Part II- Compliance Challenges for US Companies

Last week I posted the first of three posts regarding doing business in Cuba. In my initial post I discussed some concerns that observers have regarding Cuba’s readiness for investors, the lack of infrastructure, and the rule of law issues, particularly as it relates to Cuba’s respect for contracts and debts. Indeed today, Congress heard testimony on the future of property rights in Cuba and the claims for US parties who have had billions in property confiscated by the Castro government- a sticking point for lifting the embargo. (In 1959, Americans and US businesses owned or controlled an estimated 75-80% of Cuban land and resources). Clearly there is quite a bit to be done before US businesses can rush back in, even if the embargo were lifted tomorrow. This evening, PBS speculated about what life would be like post-embargo for both countries. Today I will briefly discuss the Cuban legal system and then focus the potential compliance and ethical challenges for companies considering doing business on the island.

Cuba, like many countries, does not have a jury system. Cuba’s court system has a number of levels but they have both professional judges with legal training, and non-professional judges who are lay people nominated by trade unions and others. Cubans have compulsory service to the country, including military service for males. Many law graduates serve part of their compulsory service as judges (or prosecutors) and then step down when they are able. The lay judges serve for five years and receive a full month off from their employer to serve at full pay. Although there is a commercial court, only businesses may litigate there and are then they are at the mercy of the lay judges, who have equal power to the professional jurists. This lay judge system exists even at the appellate level. Most lawyers and law firms are controlled by the Cuban government, unless they work for a non agcricultural cooperative. More important, although I have received differing opinions from counsel, it is possible that hiring and paying a local lawyer there could violate US law related to doing business in Cuba. Notwithstanding these obstacles, many companies are trying to get an OFAC license to do business in Cuba right away or are planning for the eventual life of the embargo. In my view, getting there is the easy part. The hard part will be complying with US law, not because Cuba is in a nascent state of legal and economic development, but because of the sheer complexity of doing business with a foreign government.

The first challenge that immediately comes to mind is compliance with the Foreign Corrupt Practices Act, which makes it illegal for a person or company to make “corrupt payments” or provide “anything of value” to a foreign official in order to obtain or retain business. Since almost everything is a state-owned enterprise or a joint venture with a state owned enterprise, US firms take a real risk entering into contracts or trying to get permits. There is no de minimis exception and facilitation payments- otherwise known as grease payments to speed things along- while customary in many countries- are illegal too. Legal fees and fines for FCPA violations are prohibitively expensive, and those companies doing business in Cuba will surely be targets.

Another concern for publicly-traded US companies is compliance with the Sarbanes-Oxley and Dodd-Frank whistleblower rules. Unless the law changes, most US companies will have to follow the model of Canadian and EU companies and enter into joint ventures or some contractual relationship with the Cuban government or a Cuban company (which may be controlled by the government). Most US employees are afraid to report on their own private employers in the US. How comfortable will a Cuban employee be using a hotline or some other mechanism to report wrongdoing when his employer is in some measure controlled by or affiliated with the Cuban government? As I will discuss next week, the biggest criticism of Cuba is its human rights record related to those who dissent. I have personally dealt with the challenge establishing and working with hotlines in China and in other countries where speaking out and reporting wrongdoing is not the cultural norm. I can imagine that in Cuba this could be a herculean task.

The last concern I will raise in this post relates to compliance with a company’s own code of conduct. If a company has a supplier code of conduct that mirrors its own, and those codes discuss freedom of association and workers’ rights that may be out of step with the Cuban law or culture, should the US firm conform to local rules? Even if that is legal, is it ethical? Google's code is famous for its “don’t be evil”credo and it has received criticism in the past from NGOs who question how it can do business in China. But Google was in Cuba last week testing the waters. Perhaps if Google is able to broaden access to the internet and the outside world, this will be a huge step for Cubans. (Of note, Cubans do not see the same TV as the tourists in their hotels and there are no TV commercials or billboards for advertisements).

There are a number of other compliance and ethics challenges but I will save that for my law review article. Next week’s post will deal with the role of foreign direct investment in spurring human rights reform or perpetuating the status quo in Cuba.

June 18, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Ethics, International Business, Legislation, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Tuesday, June 16, 2015

Polls and the Dumbification of America: Energy Policy & Beyond

Public opinion polls often make news, but they don't necessarily improve discourse or policy decisions.  This is true in business and politics, at least where the polls are created primarily for news purposes. Not all polls are bad, of course, and groups like Pew and some others can offer useful starting points for policy discussions. Still we should be skeptical of public opinion polls. 

A new poll released today provides a good example of how unhelpful polls can be. Robert Morris University (RMU) today issued a press release (about a new poll) that says Pennsylvanians "expressed both overwhelming support and strong environmental misgivings, about" hydraulic fracturing (fracking). This framing of the poll does not seem to reveal any inherent inconsistencies. It would be entirely reasonable for people to recognize the potential value fracking for oil and gas can have, while at the same time being worried about the environmental risks that come with fracking (or any other industrial process).  

In fact, I have argued that this is the proper way to consider risks and benefits to help ensure oil and gas operations are as environmentally sound as possible to ensure sustainable development. Unfortunately, the poll indicates some internal inconsistencies among those polled that suggest people don't really understand either: (1) the questions or (2) how the world works.   Here are some of the results of the poll: 

  • Support fracking: 57.1% (PA) & 56% (U.S.)
  • Think fracking will help the U.S. economy: 74.2% (PA) & 73% (U.S.)
  • Say fracking will move U.S. toward Energy Independence: 69.9% (PA)

These numbers suggest reasonable-to-strong support for the drilling process. Okay so far, but here's the kicker: 60.1%  strongly or somewhat agree with this: “The environmental impact of gas drilling outweighs any resulting reduced energy costs or energy independence.

How can one agree with this statement at all and still support fracking, as it at appears at least 17% of those polled did?1 If you think that the environmental impacts outweigh "any" of those benefits, why would you support any drilling process? I'm confused. (Editor's note: a reader suggested that perhaps some people think that jobs or royalties might make the environmental impacts worth it, but not lower energy costs or energy independence.  Maybe, though I find that hard to believe, and if true, it doesn't make me feel any better about what the poll suggests.) 

Again, it makes sense to me that someone might support the drilling process, and still express reservations or concerns about it. It just doesn't make sense to me that, in the same poll, presumably within a few moments of answering the question about supporting fracking, that someone would turn around and say, essentially, "I support fracking, but some key potential benefits don't outweigh the risks."  This is seems like a John Kerry moment for those being polled: "I was for it, before I was against it." 

As I have noted before, there are studies that suggest polls like this make us dumb. As a Joe Carter article explained about a 2011 public opinion poll relating to President Obama's performance: 

On the vast majority of the items tested (8 of 11) the public expresses disapproval of Obama’s job performance and yet the overall result implies that they approve of the job he is doing. How does that make any sense? It doesn’t. By the alchemical process of applied statistics, the pollsters have turned our disapproval into approval. Unfortunately, such distortions are a common failing of opinion polls.

I'm not sure if the fracking poll makes us dumber, or just shows we tend to be dumb. Probably both, and it's not very encouraging. As Mr. Carter explains, public opinion polls "are nothing more than public perceptions produced by pollsters, mere aggregations of our ignorance. And we all become dumber by treating them seriously." The results of the RMU poll suggest he's right.  

1 From the release, the most sensible explanation of the data presented is as follows: if 60.1% of people agreed to some degree with the statement, then 39.9% did not agree. Those 39.9% of people are presumably pro-fracking relative to the 60.1%. At the same time, 57.1% of those polled stated that they support fracking, and 57.1% minus 39.9% is 17.2%, suggesting that 17.2% of of those polled said they support fracking but don't think the risks outweigh the benefits.  Admittedly, the poll answers would not likely break down this cleanly, but in that case the data makes even less sense.  

 

June 16, 2015 in Current Affairs, Joshua P. Fershee, Law and Economics, Legislation | Permalink | Comments (1)

Saturday, June 13, 2015

The Pope and the Politics of Climate Change

Apparently, there is a split of opinion on what some people believe God wants the world to do about the climate. On one side, Senator Jim Inhofe does not believe the man is responsible for climate change. He has publicly stated that, “[T]he Genesis 8:22 that I use in there is that ‘as long as the earth remains there will be seed time and harvest, cold and heat, winter and summer, day and night.’ My point is, God’s still up there. The arrogance of people to think that we, human beings, would be able to change what He is doing in the climate is to me outrageous.” When I mentioned this quote to a European audience at a conference on climate change and business in 2013, there was an audible gasp. He also wrote a 2012 book, The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future. His position did not change after the 2013 Intergovernmental Commission on Climate Change Report definitively declared that climate change was largely man made. This would all be irrelevant if Senator Inhofe wasn’t the Chair of the Senate committee that oversees the environment. Inhofe was the keynote speaker last week at the Heartland Institute’s annual conference on climate change (watch the video clip in the article in which the Catholic Church and the Pope get special mention).

On the other side of the debate, Pope Francis will enter the fray with a new Encyclical on climate change next week, and it's expected to have some influence on upcoming UN talks on the subject. Many US politicians argue that the Pope should "mind his own business" and stick to issues that affect the poor and the faithful around the world. Climate change is actually directly related to the ability of poor people to gain access to water, grow crops, and avoid natural disasters, and thus I would argue that this is the Pope’s “business.” It’s also Senator Inhofe’s business as he's allegedly received over $1.7 million from the oil and gas industry over his career.

Although oil and gas companies have contributed to Senator Inhofe, a number of them have already tried to be proactive in their CSR reports and other marketing efforts. The tide may be turning against climate change deniers. Norway’s $900 billion sovereign wealth fund just divested from 122 fossil fuel companies ($945 million), and that fund was largely financed by Norway’s oil wealth. In any event, I look forward to reading the Pope’s comments and seeing how foreign governments and US businesses respond to it.

 

June 13, 2015 in Corporate Personality, Corporations, CSR, Current Affairs, Marcia Narine, Religion, Science | Permalink | Comments (0)

Thursday, June 11, 2015

The Cuba Conundrum- How Will US Companies Fare Doing Business in a Communist Country?- Part I

Cuba has been in the news a lot lately. I’ve just returned from ten days in Havana so I could see it first hand both as a person who writes on business and human rights and as an attorney who consults occasionally on corporate issues. The first part of the trip was with the International Law Section of the Florida Bar. The second was with a group of art lovers. I plan to write two or three blog posts about the prospects of doing business in Cuba if and when the embargo is lifted. Because I do some consulting work, I want to make clear that these views are my own as an academic and should not be attributed to anyone else.

In this post I will just briefly list some basic facts about Cuba and foreign investment. Next week I will talk a bit more about investment, introduce the Cuban legal system, and talk about some of the business and compliance challenges. That's the subject of my research this summer. The following week I will address human rights in Cuba and how various governments and businesses are addressing those issues, the subject of another article I am working on. 

Some Cuba basics:

  • The island has 11 million people
  • The average monthly wage is $25-45 per month
  • The government is just starting to develop a comprehensive tax code
  • The government is now allowing the sale of private property but the concept of mortgages is undeveloped
  • 86% of people work for the government in some form but the government is now allowing “self employment” and cooperatives (small private businesses such as agricultural farms, salons, and restaurants)
  • 5% of population has access to internet or a cell phone
  • The government is seeking foreign investment- except in health, education, or military sectors
  • Cuba is not an OECD member state. It does sit on the UN Human Rights Council
  • The GDP is 62.7 billion
  • The literacy rate is 99.8% and the country scores high on the human development index
  • The country is in the middle of the pack in terms of the Corruption Perception Index, which measures bribery
  • There are now over 60 bilateral investment treaties in place but they are not all in force
  • Most lawyers and law firms work for the Cuban government

There are now three possible methods of international investment:

1)  International Economic Association Contract (AEI). 49% of the companies in the 2015 registry are AEIs. This is a contract that does not create a new company and there is no sharing of profits. Certain changes of parties require government approval;

2) Full Foreign Capital Company. This is almost never approved but the foreign company has total control of the enterprise; and

3)  Joint venture with the Cuban government. These are 45% of the companies in the 2015 registry. Often the hotels and other EU businesses are JVs with the government.

In the preamble to Cuba’s 2014 Laws on Foreign Investment (LFI), the Cuban National Assembly makes clear that the underlying basis for the law is: “Cuba's need to provide greater incentives to attract foreign capital, new technologies, and know-how to increase domestic production and better position Cuba to export to international markets.”  The new law halves the profits tax from 30 to 15% and exempts investors from paying it for eight years. But the new law also appears to withhold many of the tax benefits from companies that are 100% foreign-owned.

Although Cuba changed its law last year, many people believe that Cuba is not ready for investment. Clearly rule of law concerns and the lack of infrastructure are real barriers. I’ll give more of my opinion on compliance and investment challenges and opportunities next week.

 

 

June 11, 2015 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Legislation, Marcia Narine, Travel | Permalink | Comments (1)

Wednesday, June 10, 2015

Random Thoughts on the Beneficiaries of Corporate Board Decision Making

Last week, I attended the National Business Law Scholars Conference at Seton Hall University School of Law in Newark, NJ.  It was a great conference, featuring (among others) BLPB co-blogger Josh Fershee (who presented a paper on the business judgment rule and moderated a panel on business entity design) and BLPB guest blogger Todd Haugh (who presented a paper on Sarbanes-Oxley and over criminalization).  I presented a paper on curation in crowdfunding intermediation and moderated a panel on insider trading.  It was a full two days of business law immersion.

The keynote lunch speaker the second day of the conference was Kent Greenfield.  He compellingly argued for the promotion of corporate personhood, following up on comments he has made elsewhere (including here and here) in recent years.  In his remarks, he causally mentioned B corporations and social enterprise more generally.  I want to pick up on that thread to make a limited point here that follows up somewhat on my post on shareholder primacy and wealth maximization from last week.

Continue reading

June 10, 2015 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joan Heminway, Litigation, Social Enterprise | Permalink | Comments (6)

Friday, June 5, 2015

Evidence that Corporate Law Matters (!) (?)

This week, while preparing for and attending the National Business Law Scholars Conference, I have had to deal with a Tennessee corporate law "brushfire" of sorts generated by a Nashville Business Journal (NBJarticle published earlier this week.  The article, written by a Nashville lawyer, took a somewhat alarmist--and substantively inaccurate--view of a recent addition to the Tennessee Business Corporation Act drafted by the Business Entity Study Committee (BESC) of the Tennessee Bar Association, of which I am a member (and about which I have written here in the past, including here, here, and here).  Specifically, the author asserted that Tennessee's adoption of the text of Model Business Corporation Act Section 14.09 creates new liability for Tennessee corporate directors--especially directors of insolvent Tennessee corporations.  Somewhat predictably, calls and emails from directors, executives, and the Tennessee Secretary of State's office (which, itself, received many calls) ensued.

By design, and (we believe) by effect, the statutory section at issue clarifies the duties of directors of dissolved Tennessee corporations and establishes a safe harbor from liability.  Accordingly, the drafting team from the BESC (me included) believed we had to jump in and correct the mischaracterizations in the article, which the author apparently was unwilling to retract or self-correct.  The NBJ, greatly to its credit, understood our concerns and published a rebuttal from the BESC chair, which the BESC collaborated in drafting and co-signed.  In addition, the Chattanooga Times Free Press published an article that outlines the debate (in which the BESC chair and I am quoted).

So, folks do pay attention to corporate law--and they think it matters! Unfortunately, sometimes, they get it wrong. This leads to a number of lessons . . . .  Apropos of that thought, it's important that a lawyer measure twice and cut once, especially when writing a critical exposé intended and destined to receive attention from an important audience--one personally affected by the contents of the exposé.  Moreover, the need for experienced corporate legal counsel--lawyers steeped in the structure and function of corporate law--continues to be important in the drafting of, and public education regarding, complex corporate legal rules.

June 5, 2015 in Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Legislation | Permalink | Comments (0)

Friday, May 29, 2015

The Economics of the TV Show Nashville

Earlier this month, The Tennessean reported that the state of Tennessee approved $8 million of incentives for the fourth season of ABC's show Nashville. The city of Nashville also plans to chip in about $500,000.  According to the article, the "show spends about $20 million each season on local labor."

Economic incentives seem to be increasingly common, but this arrangement is interesting for a few reasons. First, this is an arrangement that not only brings jobs to town, but also brings publicity and tourists. Second, the lion share of the incentives appear to be coming from the state, but the lion share of the benefits seem to be directed at the city of Nashville - causing some in other parts of the state to complain

Some businesses, like the Bluebird Cafe, are featured regularly on the show, and I wonder whether they pay for that privilege. I don't think they do, but have not been able to find out for sure. 

My wife and I watch the show, if only because we like seeing our city on TV. Nashville is a wonderful place, has been called an "it city" and the "south's red hot town." Even the New York Times did a glowing article on the city Nashville during the tenure of ABC's show. The job market and real estate are both booming in Nashville.

I don't know how much of this success, if any, is due to the show about Nashville, but things do seem to be going well here...except for the increasing traffic. Product placement has been on the rise in media for some time now; perhaps we will see more city, state, and business placement over time.  

May 29, 2015 in Current Affairs, Haskell Murray, Jobs, Television | Permalink | Comments (2)

Wednesday, May 27, 2015

The Future of Respectability for Lawyers (Part 4)

In my first post of this series, I asked whether business leaders had unknowingly provided the legal industry with a long-term solution to declining interest in the legal profession and potential waning influence.  I suggested that business leaders may be the driving force that ends up saving the legal profession.  In my second and third posts, I discussed the current state of in-house attorneys and law firms.  Today is my birthday, so it is a great present to be able to share my view on the future of the legal profession, and how shifts may occur. 

Eventually, corporations can (and most probably will, in my view) evolve their thinking about “legal strategies” (as Professors Bird and Orozco suggest) to the point that lawyers are essential resources in developing sophisticated corporate planning. In order for this evolution to take place throughout the business world to any great degree, it will take time, experience, and success with the legal strategy concepts.  In other words, lawyers must become valuable not only for their legal skills, but also because they have inherent business talent resulting from advanced training. 

 

If this conversion is to occur, companies will initially be forced to buy senior legal talent they will need to begin this transformation.  This means attorneys with specific experience, usually from private firms or perhaps governmental entities, should begin moving towards corporate employment.  Companies will likely change their legal strategies from a rigid general counsel structure to include “Chief Legal Strategists,” as Bird and Orozco have posited, in order to accommodate this movement.  If accepted by business leaders, this should increase in-house counsels’ opportunities for engagement with the business units.  If so, corporate budgets likely will be increased to entice very talented firm lawyers to transition more regularly to companies. 

 

Because of their skill and expertise, and with the increasing trust of corporate leaders, these very same senior lawyers can then begin the legacy process of hiring established mid-career lawyers and use their growing corporate influence to replicate the success of their own tenure. If corporations begin to fill their ranks with qualified and active counsel, business leaders will be more able to recognize real legal talent, both in hiring and promotion.* Eventually, this environment may allow newly minted graduates to be directly hired into the company. Because these new hires should  have mentorship and support from more senior lawyers, their chances for individual acceptance and success in the corporate setting should increase.  As this occurs, corporations may be able to build legal departments that rival firms in social and economic attractiveness, as well as career opportunity.**

 

Assuming companies increase their endorsement of legal strategy, with the attendant hiring of more attorneys in-house, difficulties in communication between corporations and their outside law firms should diminish substantially.  With in-house attorneys having the confidence of their senior leadership and the knowledge of their businesses, they can foster enhanced dialogue with external counsel that might not have been possible in the past.  This can alleviate corporate trust concerns about law firm billing and perceived value (since in-house lawyers can act as an interpretive engine), allowing firms closer ties with their clients through greater understanding.  This in turn may actually increase work for the private law firms that survive the initial diminishment of legal work and lead to more private practice opportunities for new graduates, along with some firm positions that open due to lawyers moving to corporations.

 

As the legal landscape changes, the legal profession will, with the help of business leaders, become a broader, more inclusive, and more “respectable” profession—one that becomes pervasive and accepted throughout the business world, and not as insulated in private firms.  This familiarity will not breed contempt, but respect and appreciation, and it should benefit all. When this will happen, I cannot tell you.  But sooner, rather than later, it is bound to happen.

 

So, what can law schools and current lawyers do to help in this transition?  Well, I have some thoughts on that as well.  More here anon, same “Bat-Channel”...

 

--Marcos Antonio Mendoza

 

 

 

*Whether the business leaders will be able to hone and execute on this increased ability to recognize and incorporate this legal talent, no one can say for sure.  It will be a necessary factor in the success of this transformation of the legal environment, and one that should occur.  If not, the corporations will simply go through endless cycles of in-house counsel that will likely be underutilized.   

 

**I recognize that many companies have already built large legal divisions, and some companies have extremely talented lawyers.  But, for most businesses, in-house departments have yet to rival the talent, the opportunities for skill building, the ability to train, and the financial rewards, that most private law firms have.

May 27, 2015 in Corporations, Current Affairs | Permalink | Comments (0)

Friday, May 22, 2015

The outsourcing of human rights enforcement to corporations- EU-style

I haven’t met Hollywood producer Edward Zwick, who brought the movie and the concept of Blood Diamonds to the world’s attention, but I have had the honor of meeting with medical rock star, and Nobel Prize nominee Dr. Denis Mukwege. Both Zwick and Mukwege had joined numerous NGOs in advocating for a mandatory conflict minerals law in the EU. I met the doctor when I visited Democratic Republic of Congo in 2011 on a fact finding trip for a nonprofit that focuses on maternal and infant health and mortality. Since Mukwege works with mass rape victims, my colleague and I were delighted to have dinner with him to discuss the nonprofit. I also wanted to get his reaction to the Dodd-Frank conflict minerals regulation, which was not yet in effect. I don’t remember him having as strong an opinion on the law as he does now, but I do remember that he adamantly wanted the US to do something to stop the bloodshed that he saw first hand every day.

The success of the Dodd-Frank law is debatable in terms of stemming the mass rape, use of child slaves, and violence against innocent civilians. Indeed, earlier this month, over 100 villagers were raped by armed militia. A 2014 Human Rights Watch report confirms that both rebels and the Congolese military continue to use rape as a weapon of war to deal with ethnic tensions. I know this issue well having co-authored a study on the use of sexual and gender-based violence in DRC with a medical anthropologist. With all due respect to Dr. Mukwege (who clearly know the situation better than I), that research on the causes of rape, but more important, my decade of experience in the supply chain industry have lead me to believe that the US Dodd-Frank law was misguided. The law aims to stem the violence by having US issuers perform due diligence on their supply chains. I have spoken to a number of companies that have told me that  it would have been easier for the US to just ban the use of minerals from Congo because the compliance challenges are too high. Thus it was no surprise that last year’s SEC filings were generally vague and uninformative. It remains to be seen whether the filings due in a few weeks will be any better.

To me Dodd-Frank is a convenient way for the US government to outsource human rights enforcement to multinational corporations. Due diligence and clean supply chains are good, necessary, and in my view nonnegotiable, but they are not nearly enough to deal with the horrors in Congo. Nonetheless, in a surprise move, the EU Parliament voted this week to go even farther than the US law. According to the Parliament’s press release:

Parliament voted by 400 votes to 285, with 7 abstentions, to overturn the Commission's proposal as well as the one adopted by the international trade committee and requested mandatory compliance for "all Union importers" sourcing in conflict areas. In addition, "downstream" companies, that is, the 880, 000 potentially affected EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products, will be obliged to provide information on the steps they take to identify and address risks in their supply chains for the minerals and metals concerned… The regulation applies to all conflict-affected high risk areas in the world, of which the Democratic Republic of Congo and the Great Lakes area are the most obvious example. The draft law defines 'conflict-affected and high-risk areas' as those in a state of armed conflict, with widespread violence, the collapse of civil infrastructure, fragile post-conflict areas and areas of weak or non-existent governance and security, characterised by "widespread and systematic violations of human rights".

(emphasis mine). I hope this proposed law works for the sake of the Congolese and all of those who live in conflict zones around the world. The EU member states have to sign off on it, so who knows what the final law will look like. Some criticize the law because the list of “conflict-affected areas” is constantly changing. Although that’s true, I don’t think that criticism should affect passage of the law. The bigger flaw in my view is that there are a number of natural resources from conflict-affected zones- palm oil comes to mind- that this regulation does not address. This law, like Dodd-Frank does both too much and not enough. In an upcoming book chapter, I propose that governments use procurement and other incentives and penalties related to executive compensation and clawbacks to drive human rights due diligence and third-party audits (sorry, I'm prohibited from posting a link to it but it's forthcoming from Cambridge University Press).

In the meantime, I will wait for the DC Circuit to rule on constitutional aspects of the Dodd-Frank bill. I will also be revising my most recent law review article on the defects of the disclosure regime to address the EU development. I will post the article next week from Havana, Cuba, where I will spend 10 days learning about the Cuban legal system and culture. Given my scholarship and the recent warming of relations between the US and Cuba, I may sneak a little research in as well, and in two weeks I will post my impressions on the challenges and opportunities that US companies will face in the Cuban market once the embargo is lifted. Adios!

May 22, 2015 in Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Legislation, Marcia Narine, Securities Regulation, Travel | Permalink | Comments (0)

The Future of Respectability for Lawyers (Part 3)

In my first post of this series, I asked whether business leaders had unknowingly provided the legal industry with a long-term solution to declining interest in the legal profession and potential waning influence.  I suggested that business leaders may be the driving force that ends up saving the legal profession, and its "respectability".  In my second post, I discussed the current state of in-house attorneys.  In this post, I would like to look at the current state of private firms as it relates to the in-house attorney discussion.  My view is that the competitive marketplace reactions of a growing number of firms are partially contributing to the dimming of their own future prospects.  Firms will need to evolve rather quickly; how they can, I’ll discuss in a future post.  However, because of the firms’ relatively weaker position compared to corporations, many firms are in very precarious circumstances.

In this interim period between past firm dominance and the future corporate acceptance of Professors Bird and Orozco’s “corporate legal strategy” (in which attorneys are fully accepted and integrated as part of business teams in corporations, resulting in greater legal opportunities), firms are struggling.   From my discussions with attorneys, I have learned that many private firms are beginning to intentionally screen out attorneys that even appear to be on a path to in-house corporate life in the future.  They feel less inclined to provide expensive training for someone that has (in their perception) little intention of making a career of private practice, especially their private practice.  This diminishes the number of opportunities for new lawyers.  Firms have a harder time training the new lawyers they have, because much of the basic business work is now taken up by in-house counsel.  Corporations, for their part, have exacerbated the lack of work for new associates by using their increased influence and wealth to insist that only the most senior firm attorneys handle their corporate work—perhaps shortsightedly robbing firms of talent continuity that has historically benefitted the corporations in the end.  Expensive summer clerkships and recruiting drives have all but disappeared. 

Additionally, firms have become focused on hiring attorneys with portable business for the “quick hit” of income and are less concerned about hiring new law graduates.  This cannibalization of mature legal talent has always occurred, but it now seems to be a much greater part of firm business plans. It has resulted in some lawyers commoditizing themselves, rather than some of their clients doing so, perhaps further weakening the profession's "respectability".  Of course, because the legal industry is currently well staffed, this “horse-trading” approach will work for the present.  However, it will eventually be unsustainable—as lawyers retire, there will be fewer talented lawyers to replace them or have the capacity to buy out retiring partners’ percentages.  Of those, even fewer still will invite the rigors of private practice if the rewards diminish.

I, for one, am not a complete believer in the “end of Big Law”, or any size "Law", for that matter.  (The late Professor Larry Ribstein discussed the subject here--disappointingly, he only briefly touched on the in-house counsel effect, and instead, focused on the firms themselves.)  However, I do believe in the necessary evolution of “All Law”—where the legal industry (firm, in-house, and academia) evolves to a point of natural and mutual support which benefits society as a whole (creating greater “respectability” for all lawyers)—and businesses will initially play a dominant role.  How will businesses do so?  More soon in a post coming your way!

--Marcos Antonio Mendoza

 

May 22, 2015 in Compensation, Corporations, Current Affairs, Jobs | Permalink | Comments (9)