Thursday, August 16, 2018
On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.
The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.
Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.
Portions of the bill summarized:
- As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
- The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
- The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
- The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the "best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment - drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
- Employees must elect 40%+ of the board of directors.
- 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.
My brief thoughts:
- This is a lot of press for benefit corporations.
- The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock's Fink Unite Around 'Accountable Capitalism'
- I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
- Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is "if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation." This bill attempts to remove that choice for large companies.
(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term "U.S. Corporations" throughout).
Tuesday, January 9, 2018
The new semester is upon us, and AALS (as it tends to) ran right into the new semester. Joan Heminway provided a nice overview of some of her activities, including her recognition as an outstanding mentor by the Section on Business Associations, and it was a pleasure to see her recognized for her tireless and consistent efforts to make all of us better. Congratulations, Joan, and thank you!
I, too, had a busy conference, with most of it condensed to Friday and Saturday. (As a side note, it was pretty great to run along the water in 55-65 degree weather. As much as I love New York and appreciate San Francisco and DC, I'd be quite content with AALS moving between San Diego and New Orleans.) I spoke on a panel with my co-bloggers, as Joan noted, about shareholder proposals, and I spoke on a panel about the green economy and sustainability, which was also fun. It's nice when I am able to spend some time with a focus on my two main areas of research.
As to our panel on shareholder proposals, I thought I'd share a few of my thoughts. First, as I have explained in the past, I am not anti-activist investor, even though I often think their proposals are wrong headed. I think shareholder (and hedge fund) activist can add value, even when they are wrong, as long as directors continue to exercise their judgment and lead the firm appropriately.
Second, although I tend to have a bias for staying the course and leaving many laws and regulations alone, I am open to some changes for shareholder proposals. The value of the current system (especially one that has been in place for some time) is that everyone knows the rules, which means there is some level of efficiency for all the players.
That said, the threshold for shareholder proposals has been in places since the 1950s. The Financial Choice Act looks to move the proxy threshold from $2,000 and one-year holdings to a 1%/three-year hurdle. That is a pretty big move. Updating the $2,000 threshold from 1960 would mean raising the threshold to around $16,000, so a move to what can be millions may be too much. But $16,000 (basically updating for inflation), would make some sense to me, too. Anyway, just a few simple thoughts to start the year. Hope your classes are starting well.
Wednesday, October 11, 2017
From our friend and BLPB colleague, Anne Tucker, following is nice workshop opportunity for your consideration:
We (Rob Weber & Anne Tucker) are submitting a funding proposal to host a works-in-progress workshop for 4-8 scholars at Georgia State University College of Law, in Atlanta, Georgia in spring 2018 [between April 16th and May 8th]. Workshop participants will submit a 10-15 page treatment and read all participant papers prior to attending the workshop. If our proposal is accepted, we will have funding to sponsor travel and provide meals for participants. Interested parties should email firstname.lastname@example.org on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (mailto:email@example.com) or Anne Tucker (firstname.lastname@example.org).
Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.
Our topic description is intentionally broad reflecting our different areas of focus, and hoping to draw a diverse group of participants. Possible topics include, but are not limited to:
- The idea of financial intermediation: regulation of market failures, the continued relevance of the idea of financial intermediation as a framework for thinking about the financial system, and the legitimating role that the intermediation theme-frame plays in the political economy of financial regulation.
- Examining institutional investors as a vehicle for individual investments, block shareholders in the economy, a source of efficiency or inefficiency, an evolving industry with the rise of index funds and ETFs, and targets of SEC liquidity regulations.
- The role and regulation of private equity and hedge funds in U.S. capital markets looking at regulatory efforts, shadow banking concerns, influences in M&A trends, and other sector trends.
This workshop targets works-in-progress and is intended to jump-start your thinking and writing for the 2018 summer. Our goal is to provide comments, direction, and connections early in the writing and research phase rather than polishing completed or nearly completed pieces. Bring your early ideas and your next phase projects. We ask for a 10-15 page treatment of your thesis (three weeks before the workshop) and initial ideas to facilitate feedback, collaboration, and direction from participating in the workshop. Interested parties should email email@example.com on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (firstname.lastname@example.org) or Anne Tucker (email@example.com).
Anne & Rob
October 11, 2017 in Anne Tucker, Call for Papers, Corporate Finance, Financial Markets, Joshua P. Fershee, Law School, M&A, Research/Scholarhip, Securities Regulation, Writing | Permalink | Comments (0)
Earlier this week, I had the pleasure of hearing a talk about universal proxies from Scott Hirst, Research Director of Harvard’s Program on Institutional Investors.
By way of background, last Fall under the Obama Administration, the SEC proposed a requirement for universal proxies noting:
Today’s proposal recognizes that few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person and that, in the modern marketplace, most voting is done by proxy. This proposal requires a modest change to address this reality. As proposed, each party in a contest still would bear the costs associated with filing its own proxy statement, and with conducting its own independent solicitation. The main difference would be in the form of the proxy card attached to the proxy statement. Subject to certain notice, filing, form, and content requirements, today’s proposal would require each side in a contest for the first time to provide a universal proxy card listing all the candidates up for election.
The Council of Institutional Investors favors their use explaining, “"Universal" proxy cards would let shareowners vote for the nominees they wish to represent them on corporate boards. This is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. Universal proxy cards would make for a fairer, less cumbersome voting process.”
The U.S. Chamber of Commerce has historically spoken out against them, arguing:
Mandating a universal ballot, also known as a universal proxy card, at all public companies would inevitably increase the frequency and ease of proxy fights. Such a development has no clear benefit to public companies, their shareholders, or other stakeholders. The SEC has historically sought to remain neutral with respect to interactions between public companies and their investors, and has always taken great care not to implement any rule that would favor one side over the other. We do not understand why the SEC would now pursue a policy that would increase the regularity of contested elections or cause greater turnover in the boardroom.
I can't speak for the Chamber, but I imagine one big concern would be whether universal proxies would provide proxy advisors such as ISS and Glass Lewis even more power than they already have with institutional investors. When I asked Hirst about this, he did not believe that the level of influence would rise significantly.
Hirst’s paper provides an empirical study that supports his contention that reform would help mitigate some of the distortions from the current system. It’s worth a read, although he acknowledges that in the current political climate, his proposal will not likely gain much traction. The abstract is below:
Contested director elections are a central feature of the corporate landscape, and underlie shareholder activism. Shareholders vote by unilateral proxies, which prevent them from “mixing and matching” among nominees from either side. The solution is universal proxies. The Securities and Exchange Commission has proposed a universal proxy rule, which has been the subject of heated debate and conflicting claims. This paper provides the first empirical analysis of universal proxies, allowing evaluation of these claims.
The paper’s analysis shows that unilateral proxies can lead to distorted proxy contest outcomes, which disenfranchise shareholders. By removing these distortions, universal proxies would improve corporate suffrage. Empirical analysis shows that distorted proxy contests are a significant problem: 11% of proxy contests at large U.S. corporations between 2001 and 2016 can be expected to have had distorted outcomes. Contrary to the claims of most commentators, removing distortions can most often be expected to favor management nominees, by a significant margin (two-thirds of distorted contests, versus one-third for dissident nominees). A universal proxy rule is therefore unlikely to lead to more proxy contests, or to greater success by special interest groups.
Given that the arguments made against a universal proxy rule are not valid, the SEC should implement proxy regulation. A rule permitting corporations to opt-out of universal proxies would be superior to the SEC’s proposed mandatory rule. If the SEC chooses not to implement a universal proxy regulation, investors could implement universal proxies through private ordering to adopt “nominee consent policies.
Wednesday, October 4, 2017
Yesterday, Professor Bainbridge posted "Is there a case for abolishing derivative litigation? He makes the case as follows:
A radical solution would be elimination of derivative litigation. For lawyers, the idea of a wrong without a legal remedy is so counter-intuitive that it scarcely can be contemplated. Yet, derivative litigation appears to have little if any beneficial accountability effects. On the other side of the equation, derivative litigation is a high cost constraint and infringement upon the board’s authority. If making corporate law consists mainly of balancing the competing claims of accountability and authority, the balance arguably tips against derivative litigation. Note, moreover, that eliminating derivative litigation does not eliminate director accountability. Directors would remain subject to various forms of market discipline, including the important markets for corporate control and employment, proxy contests, and shareholder litigation where the challenged misconduct gives rise to a direct cause of action.
If eliminating derivative litigation seems too extreme, why not allow firms to opt out of the derivative suit process by charter amendment? Virtually all states now allow corporations to adopt charter provisions limiting director and officer liability. If corporate law consists of a set of default rules the parties generally should be free to amend, as we claim, there seems little reason not to expand the liability limitation statutes to allow corporations to opt out of derivative litigation.
I think he makes a good point. And included in the market discipline and other measures that Bainbridge notes would remain in place to maintain director accountability, there would be the shareholder response to the market. That is, if shareholders value derivative litigation as an option ex ante, the entity can choose to include derivative litigation at the outset or to add it later if the directors determine the lack of a derivative suit option is impacting the entity's value.
Professor Bainbridge's post also reminded me of another option: arbitrating derivative suits. A friend of mine made just such a proposal several years ago while we were in law school:
There are a number of factors that make the arbitration of derivative suits desirable. First, the costs of an arbitration proceeding are usually lower than that of a judicial proceeding, due to the reduced discovery costs. By alleviating some of the concern that any D & O insurance coverage will be eaten-up by litigation costs, a corporation should have incentive to defend “frivolous” or “marginal” derivative claims more aggressively. Second, and directly related to litigation costs, attorneys' fees should be cut significantly via the use of arbitration, thus preserving a larger part of any pecuniary award that the corporation is awarded. Third, the reduced incentive of corporations to settle should discourage the initiation of “frivolous” or “marginal” derivative suits.
Andrew J. Sockol, A Natural Evolution: Compulsory Arbitration of Shareholder Derivative Suits in Publicly Traded Corporations, 77 Tul. L. Rev. 1095, 1114 (2003) (footnote omitted).
Given the usually modest benefit of derivative suits, early settlement of meritorious suits, and the ever-present risk of strike suits, these alternatives are well worth considering.
Thursday, August 10, 2017
From an e-mail I received this week:
The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for lateral candidates for a tenured faculty position to hold the Clayton K. Yeutter Chair at the College of Law. This chaired faculty position will be one of four faculty members to form the core of the newly-formed, interdisciplinary Clayton K. Yeutter Institute for International Trade and Finance. The Institute also will include the Duane Acklie Chair at the College of Business, the Michael Yanney Chair at the College of Agriculture and Natural Resources, and the Haggart/Works Professorship for International Trade at the College of Law. The Yeutter Chair, along with the other three professors, will be expected to support the work and objectives and ensure the success of the Yeutter Institute. The Yeutter Chair will teach courses at the College of Law, including International Finance. Other courses may include Corporate Finance and/or other classes related to business and finance. More on the Yeutter Institute can be found at http://news.unl.edu/free-tags/clayton-k-yeutter-institute-of-international-trade-and-finance/.
Minimum Required Qualifications: J.D Degree or Equivalent; Superior Academic Record; Outstanding Record of Scholarship in International Finance and/or other areas related to international business; and Receipt of Tenure at an Accredited Law School. General information about the Law College is available at http://law.unl.edu/. Please fill out the University application, which can be found at https://employment.unl.edu/postings/51633, and upload a CV, a cover letter, and a list of references. The University of Nebraska-Lincoln is committed to a pluralistic campus community through affirmative action, equal opportunity, work-life balance, and dual careers. See http://www.unl.edu/equity/notice-nondiscrimination. Review of applications will begin on September 15, 2017 and continue until the position is filled. If you have questions, please contact Associate Dean Eric Berger or Professor Matt Schaefer at firstname.lastname@example.org.
Sunday, August 6, 2017
My latest paper, The Inclusive Capitalism Shareholder Proposal, 17 U.C. Davis Bus. L.J. 147 (2017), is now available on Westlaw. Here is the abstract:
When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. This paper advances the relevant discussion by explaining how shareholder proposals may be used to increase understanding of Inclusive Capitalism, and thereby further the likelihood that Inclusive Capitalism will be implemented. In addition, even if the suggested proposals are rejected, the shareholder proposal process can be expected to facilitate a better understanding of the strengths and weaknesses of Inclusive Capitalism, as well as foster useful new lines of communication for addressing both poverty and economic inequality.
August 6, 2017 in Corporate Finance, Corporate Governance, CSR, Financial Markets, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)
Monday, July 17, 2017
Save the Date!
The Yale Law School Center for Private Law will host a Private Equity Conference on November 17, 2017. The conference will bring leading theorists from law, economics, finance, and sociology into dialogue with people with experience at the highest levels of private equity, including from law practice, financial firms, and institutional investors.
Oliver Hart, winner of the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, will give the keynote address.
Other speakers include:
Jon Ballis, Kirkland & Ellis
Rosemary Batt, Cornell University, ILR School
Neil Fligstein, UC Berkeley Sociology Department
Stephen Fraidin, Pershing Square Capital Management
Will Gaybrick, Stripe
Adam Goldstein, Princeton University Department of Sociology
Victoria Ivashina, Harvard Business School
Andrew Metrick, Yale School of Management
Meridee Moore, Watershed Asset Management
John Morley, Yale Law School
Alan Schwartz, Yale Law School
David Swensen, Chief Investment Officer, Yale University
Location: Yale Law School, 127 Wall St., New Haven, CT
Time: Approximately 9:45 a.m.-4:00 p.m.
Cost: There is no cost associated with this event, though pre-registration is required. Registration information will be available soon at this link.
The conference is sponsored by the Kirkland & Ellis Fund for the Study of Private Law.
Tuesday, June 6, 2017
More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrong, where I explained my view on shareholder proposals:
I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock. I don't see activist shareholder as an inherently bad thing. I do, however, think it's bad when boards succumb to the whims of activist shareholders just to make the problem go away. Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.
Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock. (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%. GM's board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here). GM argued in the board maintenance piece:
Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.
Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: "A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders." Not sure. Though the proposal was defeated, it's worth noting that the proposal would not have "forced" anything. The proposal was an "advisory shareholder proposal" requesting the separation of the functions. No mandate here, because such decisions must be made by the board, not the shareholders. The proposal stated:
Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.
GM argued against this proposal because the "policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure." Also not true. It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything. If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so, but the proposal would have kept in place the "Board’s discretion to evaluate and change its leadership structure."
These proposals appear to have been properly brought, properly considered, and properly rejected. As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists' proposals would not. That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions. That is, GM has conceded that its stock is undervalued and that change is needed. GM argues those changes are underway, and for now, most voting shareholder agree. But we'll see how this looks if the stock price has not noticeably improved next year. An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver. They can do it their own way, but they are on notice that there are alternatives. An shareholders now know that, too.
This knowledge underscores the value of shareholder proposals as a process. They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team. But I agree with the shareholders that if this board doesn't perform, it may well be time for a change.
June 6, 2017 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Management, Securities Regulation, Shareholders | Permalink | Comments (0)
Wednesday, April 19, 2017
Ratings behemoth Bill O'Reilly is out of a job at Fox News “after thorough and careful review of the [sexual harassment] allegations” against him by several women. Fox had settled with almost half a dozen women before these allegations came to light, causing advertisers to leave in droves once the media reported on it. According to one article, social media activists played a major role in the loss of dozens of sponsors. Despite the revelations, or perhaps in a show of support, O’Reilly’s ratings actually went up even as advertisers pulled out. Fox terminated O’Reilly-- who had just signed a new contract worth $20 million per year-- the day before its parent company’s board was scheduled to meet to discuss the matter. The employment lawyer in me also wonders if the company was trying to preempt any negligent retention liability, but I digress.
An angry public also took to social media to expose United Airlines' after its ill-fated decision to have a passenger forcibly removed from his seat to make room for crew members. However, despite the estimated 3.5 million impressions on Twitter of #BoycottUnited, the airline will not likely suffer financially in the long term because of its near monopoly on some key routes. United’s stock price nosedived by $800 million right after the disturbing video surfaced, but has rebounded somewhat with EPS beating estimates. Check out Haskell Murray's recent post here for more perspective on United.
Pepsi and supermodel Kendall Jenner also suffered more embarrassment than financial loss after people around the world erupted on social media over an ad that many believed trivialized the Black Lives Matter movement. Pepsi pulled the controversial ad within 24 hours. Some believe that Pepsi may suffer in sales, but I’m not so sure. Ironically, Pepsi’s stock price went up during the scandal and went down after the company apologized.
Pepsi and United both suffered public relations nightmares, but the skeptic in me believes that consumers will ultimately focus on what’s most important to them- convenience, quality, price, and in Pepsi’s case, taste. I recently attended my 25th law school reunion, and all of my colleagues who used a ride sharing app used Uber nowithstanding its well-publicized leadership scandals and the #deleteuber campaign. Indeed, many social media campaigns actually backfire. The #grabyourwallet boycott of Ivanka Trump’s brand raised public awareness but may have actually led to its recent record sales.
Reasonable people can disagree about whether social media campaigns and threats of consumer boycotts actually cause long-standing and permanent changes in corporate culture or policy. There is no doubt, however, that CEOs and PR departments will be working more closely than ever in the age of viral videos and 24-hour worldwide Twitter feeds.
Thursday, March 9, 2017
In 2016, the Securities and Exchange Commission (SEC) for the first time sought public comment on whether financial disclosure reform should address indicators of firms’ sustainability risks and practices. Securities disclosure reform now appears poised to take a deregulatory turn, and innovations at the intersection of sustainability and finance appear unlikely in the face of new policy priorities. Whether the SEC should take any steps to improve how sustainability-related information is disclosed to investors is also deeply contested.
This Article argues that the SEC nonetheless faces a sustainability imperative, first to address this issue in the near term as part of its ongoing review of the reporting framework for financial disclosure, and second, to promote disclosure of material sustainability information within financial reports in furtherance of its core statutory mandate. This conclusion rests on evidence that the current state of sustainability disclosure is inadequate for investment analysis and that these deficiencies are largely problems of comparability and quality, which cannot readily be addressed by private ordering, nor by deference to policymaking at the state level. This Article highlights the costs of agency inaction that have been largely ignored in the debate over the future of financial reporting and concludes by weighing potential avenues for disclosure reform and their alternatives.
Wednesday, February 22, 2017
Here is a rundown of recent business news headlines:
The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.
In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash.
Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger. While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury.
A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making. Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests.
Thursday, February 9, 2017
Shortly after the election in November, I blogged about Eleven Corporate Governance and Compliance Questions for the President-Elect. Those questions (in italics) and my updates are below:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minimum, may not be out of the question.
Last week, via Executive Order, President Trump made it clear (without naming the law) that portions of Dodd-Frank are on the chopping block and asked for a 120-day review. Prior to signing the order, the President explained, “We expect to be cutting a lot out of Dodd-Frank…I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.” An executive order cannot repeal Dodd-Frank, however. That would require a vote of 60 votes in the Senate. To repeal or modify portions, the Senate only requires a majority vote.
Some portions of Dodd-Frank are already gone including the transparency provision, §1504, which NGOs had touted because it forced US issuers in the extractive industries to disclose certain payments made to foreign governments. I think this was a mistake. By the time you read this post, the controversial conflict minerals rule, which requires companies to determine and disclose whether tin, tungsten, tantalum, or gold come from the Democratic Republic of Congo or surrounding countries, may also be history. The President may issue another executive order this week that may spell the demise of the rule, especially because others in Congress have already introduced bills to repeal it. I agree with the repeal, as I have written about here, because I don’t think that the SEC is the right agency to address the devastating human rights crisis in Congo.
As for the whistleblower provisions, it is too soon to tell. See #7 below.
Based on an earlier Executive Order meant to cut regulations in general and the President’s reliance on corporate raider/activist Carl Icahn as regulation czar, we can assume that the financial sector will experience fewer and not more regulations under Trump.
- What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency? 3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
President Trump has nominated Jay Clayton, a lawyer who has represented Goldman Sachs and Alibaba to replace former prosecutor Mary Jo White. Based on his background and past representations, we may see less enforcement of the FCPA and more focus on capital formation and disclosure reform. Observers are divided on the FCPA enforcement because 2016 had some record-breaking fines. As for the other SEC vacancies, I will continue to monitor this.
- How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
The Department of Labor enforces OSHA, and the current nominee for Secretary, Andy Pudzer, is a fast food CEO with some labor issues of his own. His pro-business stance and his opposition to increases in the minimum wage and the DOL white-collar exemption changes don’t necessarily predict how he would enforce SOX, but we can assume that it won’t be as much of a priority as rolling back regulations he has already publicly opposed.
- In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
- How will a more conservative Supreme Court deal with the business cases that will appear before it?
I will comment on this after the confirmation hearings of nominee Neil Gorsuch. Others have already predicted that he will be pro-business.
- Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
Senator Jeff Sessions was confirmed yesterday after a contentious hearing. During his hearing, he indicated that he supported whistleblower provisions related to the False Claims Act, and many believe that he will retain retain the Yates Memo. Ironically, prior to that confirmation, President Trump fired Acting Attorney General Sally Yates, for refusing to defend the President’s executive order on refugees and travel.
- What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
Despite, running on a populist theme, Trump has targeted a number of institutions meant to protect consumers. Based on reports, we will likely see some major restrictions on the Consumer Financial Protection Bureau and the rules related to disclosure and interest rates. Trump will likely replace the head, Richard Cordray, whom many criticize for his perceived unfettered power and the ability to set his own budget. The Financial Stability Oversight Council, established to address large, failing firms without the need for a bailout, is also at risk. The Volker Rule, which restricts banks from certain proprietary investments and limits ownership of covered funds, may also see revisions.
- What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
I will comment on this in a separate post.
- What happens to the Public Company Accounting Board, which has had an interim director for several months?
The PCAOB is not directly covered by the February 3rd Executive Order described in #1, and many believe that the Executive Order related to paring back regulations will not affect the agency either, although the agency is already conducting its own review of regulations. In December, the agency received a budget increase.
- Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
President Trump has tapped ex-Goldman Sachs veteran Steve Mnuchin, and some believe that he will be good for both Wall Street and Main Street. More to come on this in the future.
I will continue to update this list over the coming months. I will post separately today updating last week’s post on the effects of consumer boycotts and how public sentiment has affected Superbowl commercials, litigation, and the First Daughter all in the past few days.
February 9, 2017 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Human Rights, International Business, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)
Tuesday, January 31, 2017
Sound energy policy begins with the recognition that we have vast untapped domestic energy reserves right here in America. The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own. We will use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure. Less expensive energy will be a big boost to American agriculture, as well.
It is certainly true that we "have vast untapped domestic energy reserves right here in America." It has brought some wealth and prosperity to the nation, and low oil prices because the country "embrace[d] the shale oil and gas revolution to bring jobs and prosperity to millions of Americans." However, low oil and gas prices (which largely remain) have slowed that growth and expansion because shale oil and gas exploration and production was wildly successful.
The President says, "We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own." But it's not clear how that's helpful. That is, selling our (the American people's) assets when the market is at or near record lows doesn't seem like very good asset management.
The plan is to "use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure." I am very fond of all of these things, though I am skeptical that the federal government should take a leading role in all of them. I am open to the discussion. But, if we're selling our assets at pennies on the dollar of historic value, I am particularly skeptical of the benefits.
"Less expensive energy will be a big boost to American agriculture, as well." Low energy costs do help agriculture. That is certainly true. But notice that making energy even less expensive means we get less for our assets, and we're dumping more cheap energy into a market where private businesses in the oil and gas sector are already having a hard time.
Facilitating a boom from cheap energy means investing in new jobs to use the energy, not just getting more of the energy. Plants that use our cheaper fuels to make and build new products could help, but it's never easy. High energy prices can stifle an economy, but low ones rarely spur growth. About a year ago, an Economist article from January 2016 remains accurate, as it explained that sudden and major price increases can slow an economy rapidly, as we saw in Arab oil embargo of 1973. However, "when the price slumps because of a glut, as in 1986, it has done the world a power of good. The rule of thumb is that a 10% fall in oil prices boosts growth by 0.1-0.5 percentage points."
The article further explains:
Cheap oil also hurts demand in more important ways. When crude was over $100 a barrel it made sense to spend on exploration in out-of-the-way provinces, such as the Arctic, west Africa and deep below the saline rock off the coast of Brazil. As prices have tumbled, so has investment. Projects worth $380 billion have been put on hold. In America spending on fixed assets in the oil industry has fallen by half from its peak. The poison has spread: the purchasing managers’ index for December, of 48.2, registered an accelerating contraction across the whole of American manufacturing. In Brazil the harm to Petrobras, the national oil company, from the oil price has been exacerbated by a corruption scandal that has paralysed the highest echelons of government.
I am all for a new energy plan to help the economy grow, and I support continued energy exploration and production as long as it is done wisely, which I firmly believe can be done. But adding new competitors (by allowing more exploration on federal lands) simply won't help (and it really won't help increase coal jobs). More supply is not the answer in an already oversupplied market. And the current proposal is just giving away assets we will want down the road.
Monday, January 30, 2017
Although it may have gotten a bit lost in the shuffle of the POTUS's first ten days in office, the nomination of Representative Tom Price for the post of Secretary of Health and Human Services has received some negative attention in the press. In short, as reported by a variety of news outlets (e.g., here and here and here), some personal stock trading transactions have raised questions about whether Representative Price may have inappropriately used information or his position to profit personally from securities trading activities, in violation of applicable ethical or legal rules. This post offers some preliminary insights about the nature of the concerns, which are set forth in major part in this New York Times editorial from January 18, and joins others in calling for reform.
Concerns about legislators' securities trading activities are not new. As you may recall, a 2011 study (using data from 1985-2001) found that members of the U.S. House of Representatives do make abnormal returns on stock trades. A 60 Minutes exposé, "Insiders," then followed, which helped catalyze the adoption in 2012 of the Stop Trading on Congressional Knowledge ("STOCK") Act. A recently released paper catalogues this history and effects on those abnormal returns. The findings in this paper, which focuses on Senate trading transactions, are summarized below.
Before “Insiders” aired, the market-value weighted hedged portfolio earns an annualized abnormal return of 8.8%. This abnormal return comes entirely from the sell-side of the portfolio, which earns an annualized 16.77% abnormal return. Post-60 Minutes, we find no evidence of continued outperformance in our market-value weighted portfolios. On average, abnormal returns to the market-value weighted sell portfolio are 24% lower post-60 Minutes, relative to the pre-60 Minutes sample. Taken together, our evidence suggests that, Senators, on the whole, outperformed the market pre-60 Minutes, and this systematic outperformance did not survive the attention paid to Senators’ investments surrounding the broadcast of “Insiders” and subsequent passage of the Stop Trading On Congressional Knowledge (STOCK) Act.
Wednesday, January 18, 2017
"The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets."
Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency. While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy. As the spring proxy season approaches-- it's like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures--these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors' corporate governance leaders are "working quietly behind the scenes to advocate for greater shareholder rights" fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.
I now how a new ambition in life: get invited to the Women in Governance lunch.
FN1: See Choi et al, Voting Through Agents: How Mutual Funds Vote on Director Elections (2011)
FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).
Wednesday, January 11, 2017
The late December announcement of Carl Icahn as a special advisor overseeing regulation piqued my professional interest and raises interesting tension points for both sides of the aisle, as well as for corporate governance folks.
Icahn's deregulatory agenda has the SEC in his sights. Deregulation, especially of business, is a relatively safe space in conservative ideology. Several groups such as the Chamber of Commerce and the Business Roundtable may be pro-deregulation in most areas, but, and this is an important caveat-- be at odds with Icahn when it comes to certain corporate governance regulations. Consider the universal proxy access rules, which the SEC proposed in October, 2016. The proposed rules would require companies to provide one proxy card with both parties' nominees--here we don't mean donkeys and elephants but incumbent management and challengers' nominees. Including both nominees on a single proxy card would allow shareholders to "vote" a split ticket---picking and choosing between the two slates. The split ticket was previously an option only available to shareholders attending the in-person meeting, which means a very limited pool of shareholders. "Universal" proxy access-- a move applauded by Icahn--is opposed by House Republicans, who passed an appropriations bill – H.R. 5485 –that would eliminate SEC funding for implementing the universal proxy system. On January 9th, both the Business Roundtable and the Chamber of Commerce submitted comment letters in opposition to the rules. The Chamber of Commerce cautions that the proposed rules "[f]avor activist investors over rank-and-file shareholders and other corporate constituencies." The Business Roundtable echos the same concerns calling the move a "disenfranchisement" of regular shareholders due to likely confusion. This is a variation of the influence of big-business narrative. Here, we have pitted big business against big business. The question is who is the bigger Goliath--the companies or the investors?
President-elect Trump's cabinet and administrative choices have generated an Olympic-level sport of hand wringing, moral shock and catastrophizing. I personally feel gorged on the feast of terribles, but realize that many may not share my view. Icahn's informal role in cabinet selections (such as Scott Pruitt for EPA which favors Icahn's investments in oil and gas companies) and formal role in a deregulatory agenda foreshadows no end in sight to this royal feast. On this particular pick, both sides of the aisle may be invited to the feast. My only question is, who's hungry?
Wednesday, January 4, 2017
Ethics has been a recurrent news headline from questions of President-elect Trump's business holdings to the Republican House's "secret" vote on ethics oversight on Monday.
I want to share research from a seminar student's paper on financial regulation and the role of ethics. She made a compelling argument about the role of ethics to be a gap filler in the regulatory framework. Financial regulation, as many like Stephen Bainbridge have argued, is reactionary and reminds one of a game of whack-a-mole. Once the the regulation has been acted to target the specific bad act, that bad act has been jettisoned and new ones undertaken. Her research brought to my attention something that I find hopeful and uplifting in a mental space where I am hungry for such morsels.
In 2015, in response to a perceived moral failing that contributed to the financial crisis, the Netherlands required all bankers to take an ethics oath. The oath states: “I swear that I will endeavor to maintain and promote confidence in the financial sector, so help me God.” The full oath is available here. Moreover, “by taking and signing this oath, bank employees declare that they agree with the content of the statement, and promise that they will act honorable and will weigh interests properly . . . [by] ‘focusing on clients’ interests.’” The oath is supported by a code of conduct and disciplinary rules including fines, suspensions or blacklisting.
Georgia State University College of Law student Tosha Dunn described the role of the oath as follows:
An oath is thought of as a psychological contract: “the oath has always been the highest form of commitment, and as a social function it creates or strengthens trust between people.” However, psychological contracts are completely subjective; the meaning attached to the contract is wholly open to the interpretation of the individual involved. Social cues like rituals and public displays may impart meaning or responsibility... the very idea behind the oath is to restore confidence in the Dutch banking system: “we are renewing the way we do business, from the top of the bank to the bottom” and “a violation of the oath becomes more than simply a legally culpable act; it is, in addition, an ethical issue.”
And isn't that a lovely way to think of an oath and the ability of a social contract to elevate our behavior and promote our higher selves?
Citations from the student paper and further scholarly discussion are available with the following sources: Tom Loonen & Mark R. Rutgers, Swearing To Be A Good Banker: Perceptions of The Obligatory Banker’s Oath in the Netherlands, 15 J. Banking & Reg. 1, 3 (2016) & Denise M. Rousseau & Judi McLean Parks, The Contracts of Individuals and Organizations, 15 Research in Org. Behavior 1, 18-19 (1993).
Happy New Year BLPB readers-- here's to an ethical and enlightened 2017.
Thursday, December 29, 2016
Ten days ago, I posted on conflicts of interest and the POTUS. Today, friend-of-the-BLPB Ben Edwards has an Op Ed in The Washington Post on conflicts of a different kind--those created by brokerage compensation based on commissions for individual orders. The nub:
In the current conflict-rich environment, Wall Street gorges itself on the public’s retirement assets. While transaction fees are costs to the public, they’re often juicy paydays for financial advisers. A study by the White House Council of Economic Advisers found that Americans pay approximately $17 billion annually in excess fees because of such conflicts of interest. The high fees mean that the typical saver will run out of retirement money five years earlier than he or she would have with better, more disinterested advice.
The solution posed (and fleshed out in a forthcoming article in the Ohio State Law Journal, currently available in draft form on SSRN here):
[S]imply banning commission compensation in connection with personalized investment advice would put market forces to work for consumers. This structure would kill the incentive for financial advisers to pitch lousy products with embedded fees to their clients. While the proposal might sound radical, Australia and Britain have already banned commission compensation linked to investment advice without any significant ill effect. While some might pay a small amount more under such a system, the amount of bias in advice would go down, likely more than offsetting the additional cost with investment gains.
I have been following the evolution of Ben's thinking on this and recently heard him present the work at a faculty forum. I encourage folks interested in the many areas touched on (broker duties, broker compensation, conflicts of interest generally, etc.) to give it a read. This is provocative work, even of one disagrees with the extent of the problem or the way to solve any problem that does exist.
Tuesday, December 13, 2016
U.S. Securities and Exchange Commission Chair Mary Jo White has vowed to press on in her efforts to adopt new rules related to derivatives and mutual funds, among other issues, says a Reuters report. The Senate Banking Committee’s top two Republicans, Chairman Richard Shelby and Mike Crapo of Idaho, sent a letter asking her to stop the rule making process while the Trump administration reviews the SEC's agenda. She declined.
Chair White replied that the SEC must “exhibit a spirit of firm independence” in continuing its work “without fear or favor.” She further wrote, “I am not insensitive to the issues raised by your letter and have carefully considered what impact, if any, the election should have on the current work of the Commission.” (Reuters saw the letter, but I have not found a copy.)
I am on record as saying (e.g., here and here) I'd like to see the SEC and Congress take a break from new regulations and focus on enforcement, though I know some of the proposed rules are (at least in some form) required by Dodd-Frank. Still, even where I disagree with some of the proposals, I think it's right for independent agencies to continue on with their work. Each such agency can be respectful of the incoming administration, while continuing on with their workload. Just because the incoming Congress and president may disagree with some of the policies or rationales, the SEC has statutory obligations to put forth rules, and the business of the country doesn't stop between terms. Ultimately, I'd be quite content to see the SEC decide to put the a lot of these rules on hold (or make them more narrow) because the Commission thinks that's the best course of action, but not because the top Senate Banking Committee members asked.