Tuesday, June 30, 2015
Last week, S.E.C Commissioner Daniel M. Gallagher, gave a speech, Activism, Short-Termism, and the SEC: Remarks at the 21st Annual Stanford Directors’ College. I agree with many of Commissioner Gallagher's views on short-termism, and (I will semi-shamelessly note) he cited one of my earlier posts about the role of activists on board decision making. In his remarks, he said, with regard to short-termsim (i.e., companies operating for short term rather than long-term gains):
The current picture is bleak . . .
Clearly, there’s a way for all the parties . . . to co-exist peacefully. The SEC sets a level playing field; companies manage themselves for the long-term with the vigorous oversight of the board; and activists put pressure on those companies that fall short of that ideal. Unfortunately, we are not in that happy place. Rather, there seems to be a predominance of short-term thinking at the expense of long-term investing. Some activists are swooping in, making a lot of noise, and demanding one of a number of ways to drive a short-term pop in value: spinning off a profitable division, beginning a share buy-back program, or slashing capital expenditures or research and development expenses. Having inflated current returns by eliminating corporate investments for the future, these activists can exit their investment and move on.
. . . .
 See, e.g., Joshua Fershee, Shareholder Activists Can Add Value and Still Be Wrong (Apr. 28, 2015) (positing that activists can signal to boards when the company’s strategy may be inefficient; it is then the board’s responsibility to “use the tools before it to make decisions in the best interests of the entity” — that shareholder activists can improve long-term value even if following their recommendations blindly would not).
I absolutely agree with the Commissioner that too many companies are using a short-term philosophy to guide their decision making and that directors are allowing non-controlling institutional investors too much influence in the boardroom. But, as a believer in director primacy, I see that as a director failure, not an S.E.C. failure or an institutional investor/activist failure. Directors need to make the decisions for the entity based on their view of what is best for the entity, not on someone else's view.
Commissioner Gallagher is spot on when he notes his concern "that some institutional investors are paying insufficient attention to their fiduciary obligations to their clients when they determine whether to support a particular activist’s activity."
That concern, though, has nothing to do with how the board of a company responds to its activist institutional investors that urge short-termist actions. The institutional investor activist in that case should be held accountable to its clients, and perhaps it should not be urging such behavior, but that is not relevant to how a board of a company in which an institutional investors owns stock responds to such pressure.
It could be that some boards really believe that short-termism is how best to run a company. The level of complaining about activists suggests otherwise, but then it is up to boards to reject the activist's requests. If boards are being unduly influenced by non-controlling outside forces, then shareholders need to take a break from their rational apathy, and do something. If controlling shareholders are pushing short termism to the detriment of non-controlling shareholders, boards should not follow the controlling shareholder's request or (again) non-controlling shareholders need to push back to ensure the board and the controlling shareholders are honoring their fiduciary obligations.
If it's just that directors like short termism as a strategy, though, and it's not a decision made for any other reason than directors think it's the right one, I believe those directors are wrong. But that's not my call. I'm not on the board.
Tuesday, June 23, 2015
So, I'm on vacation, which is not something I do very often, at least unrelated to work. It's been great, and we're lucky to be able to do this (and to vacation as all). It's ungodly hot, but hey, that's the beach. I guess. Like I said, we don't do it like this very often.
Anyway, I recently read a piece that talked about freedom in way that really resonated for me. It is applicable personally, and it is applicable professionally. Law schools, collectively, could stand to pay attention, as well. We have choices, we just have to recognize it. I'm no philosopher, but here's the gist of the post that resonated with me, from Rapitude.com:
Sartre believed that we have much more freedom than we tend to acknowledge. We habitually deny it to protect ourselves from the horror of accepting full responsibility for our lives. In every instant, we are free to behave however we like, but we often act as though circumstances have reduced our options down to one or two ways to move forward.
This is bad faith: when we convince ourselves that we’re less free than we really are, so that we don’t have to feel responsible for what we ultimately make of ourselves. It really seems like you must get up at 7:00 every Monday, because constraints such as your job, your family’s schedule, and your body’s needs leave no other possibility. But it’s not true — you can set your alarm for any time, and are free to explore what’s different about life when you do. You don’t have to do things the way you’ve always done them, and that is true in every moment you’re alive. Yet we feel like we’re on a pretty rigid track most of the time.
We often think of freedom as something that can only make life easier, but it can actually be overwhelming and even terrifying. Think about it: we can take, at any moment, any one of infinite roads into the future, and nothing less than the rest of our lives hinges on each choice. So it can be a huge relief to tell ourselves that we actually have fewer options available to us, or even no choice at all.
In other words, even though we want the best life possible, if life is going to be disappointing, we’d at least like that to be someone else’s fault.
As law faculty, we don't always know what to do to make major improvements, but it's on us to work to make that happen. I think we do a lot of things right, but there's a lot (a lot!) we can do better. And that's our job -- to figure out how to be better. What to do is not an easy answer, but suggesting that we can't make changes is junk. Again, the idea that we can't change, .... "is bad faith: when we convince ourselves that we’re less free than we really are, so that we don’t have to feel responsible for what we ultimately make of ourselves."
Tuesday, June 16, 2015
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."
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.
Tuesday, June 9, 2015
Exam time has come and gone and grades are filed. I have never had any trouble, as far as a I know, with cheating in my exams. My expectation is that most problems arise from plagiarism in writing assignments. There may be people trying to cheat on my exams, I suppose, but I am not sure it would prove helpful. I change my exams and take steps to try to make the exam as fair possible, so that cheaters, should there be any, can't get much of an advantage.
I was interested to see the report that China took proctoring to new heights this week, according to a news report in The Guardian, China deploys drones to stamp out cheating in college entrance exams:
Authorities in China are employing surveillance drones in an effort to stamp out cheating in college entrance exams.
But this year officials have unleashed a six-propeller drone, flown over two testing centres in Luoyang in Henan province on Sunday – the first day of the exam – to scan for signals being sent to devices which may have been smuggled in. No such signals were detected, local reports said.
I suppose it makes sense to add enforcement mechanisms, especially with the stake so high for the exams. Drones sure make my walking of the aisles seems a little outdated.
Apparently some employers are taking steps to combat cheating, too. Potknox, a cloud-based online assessment tool, is used by some employers to screen applicants. According to the Potknox Blog, here, there are ways to combat cheaters. Among other things, the program can take random pictures of the test-taker (which can catch them on the phone) and random screenshots (checking Wikipedia).
Law schools that use exam software can lock out the internet, which can help limit such things, though I wonder just how much smartphones have changed the game. I have never caught anyone looking at a phone during an exam, but these days, one could get a basic definition of the business judgment rule or the Howey Test pretty quickly, I suppose. I'd be shocked if anyone could cheat their way to a high grade on my exams, but one who is struggling might find it useful to get by.
I'll have to give some thought about other ways to catch cheating. I have almost no interest in catching cheaters, because that's awful for everyone. However, I have zero interest in sending people out into the legal profession who would do such a thing, so I'll keep looking.
Tuesday, June 2, 2015
NPR recently posted a story titled, Nonacademic Skills Are Key To Success. But What Should We Call Them? The story, by Anya Kamenetz, is about labeling non-cognitive skills (or skill areas) that are important -- I would argue essential -- to success. The listed areas are as follows: (1) character, (2) non-cognitive traits and habits, (3) social and emotional skills, (4) growth mindset, (5) 21st Century skills, (6) soft skills, and (7) grit.
Ms. Kamenetz explains:
More and more people in education agree on the importance of learning stuff other than academics.
But no one agrees on what to call that "stuff".
There are least seven major overlapping terms in play. New ones are being coined all the time. This bagginess bugs me, as a member of the education media. It bugs researchers and policymakers too.
"Basically we're trying to explain student success educationally or in the labor market with skills not directly measured by standardized tests," says Martin West, at the Harvard Graduate School of Education. "The problem is, you go to meetings and everyone spends the first two hours complaining and arguing about semantics."
Whatever you call it, it matters.
Beyond the semantics, it would be easy to debate the relative importance of these areas, and I am not sure I'd organize (or label) my own list in this way, but the concept behind the story is critically important to legal education. As we in law schools strive to prepare practice-ready lawyers (at least, that's a primary focus of those with whom I have taught), I have often noticed that the skills students lack are often not information based. Many times, it's that students have a hard time with deadlines, responsiveness, accountability, and thoroughness.
Though it's less true today that it may have been ten, twenty, and thirty years ago, it's easy to get caught up in the idea that students might not have been taught how to draft a complaint, or file a motion, or create an LLC. These are all things a lawyer should be able to do, of course, but I am finding that just showing students how to file a motion or form an LLC does not mean they are ready to actually do it. That is, I am confident that some students I have taught how to form an LLC (and did well in my class) would not be ready to do that on their own. And I know some students who weren't in my class and have never seen an LLC statute who would be ready to figure it out. Why? Life skills.
Anyone who worked in a BigLaw job saw people who were clearly not cut out to do the job, even though the folks there come with a very serious pedigree. I sure saw people who couldn't (or wouldn't) do the work. I worked with some truly brilliant and wonderful people, and I worked with some folks who had no idea (or at least no interest) in doing the work required. For that matter, I also worked with some brilliant and wonderful partners, and just a couple smart partners who did good work but seemed committed to making people cry. (That's for a different post).
How, in addition to cognitive skills, do we teach deadlines, responsiveness, accountability, and thoroughness? I think it's through clinics and externship, as part of it, but it's also through committed efforts in courses throughout the curriculum. We often teach first-year students about hard deadlines in their writing course, and we do it to some degree with rigid exam schedules, but that lacks the constant nature of deadlines (and moving parts) we see in practice. We can do it in other classes, with additional assignments, and I think it's worth trying.
For my seminar courses, I have added small assignments and I don't remind people. They do it, or they don't. When students ask for an extension or change in their assignment date, I allow it if it fits my schedule and the class schedule. I'll decline or add a penalty if it causes others a problem. (They know this up front.) It allows me to have conversations throughout the course about the importance of deadlines, and to talk more realistically about how things work in the real world. I know I'm not solving everything, but I do think talking about these things candidly forces students to engage with these life skills in a way that might not otherwise.
It's easy to think a lot of the life skills are things you have or you don't, but that's not true. They just come to some people more easily. Others can be taught, if they want to be. For those who want to learn, I think it's our job to teach them. And for those who don't want or care to learn these skills, if we offer the education, it's one less thing they can blame when they're shown the door or otherwise don't get what they want.
[Author's note: My colleague Steve Bradford's post "Practice-Ready" Law Graduates? is a worthwhile companion to this post.]
Wednesday, May 27, 2015
Last month, Ovul Sezer, Francesca Gino, and Michael I. Norton of Harvard Business School posted Humblebragging: A Distinct – And Ineffective – Self-Presentation Strategy to SSRN (available here).
Here is the full article abstract:Humblebragging – bragging masked by a complaint – is a distinct and, given the rise of social media, increasingly ubiquitous form of self-promotion. We show that although people often choose to humblebrag when motivated to make a good impression, it is an ineffective self-promotional strategy. Five studies offer both correlational and causal evidence that humblebragging has both global costs – reducing liking and perceived sincerity – and specific costs: it is even ineffective in signaling the specific trait that that a person wants to promote. Moreover, humblebragging is less effective than simply complaining, because complainers are at least seen as sincere. Despite people’s belief that combining bragging and complaining confers the benefits of both self-promotion strategies, humblebragging fails to pay off.
Although the authors accurately explain that humblebragging is "bragging masked by a complaint," I am partial to the Urban Dictionary definition:
Subtly letting others now about how fantastic your life is while undercutting it with a bit of self-effacing humor or "woe is me" gloss.Uggggh just ate about fifteen piece of chocolate gotta learn to control myself when flying first class or they'll cancel my modelling [sic] contract LOL :p #humblebrag
I think most of us know someone who is a user of the humblebrag. I used to think it was just a fairly common technique among lawyers and academics, though I am now more of the mind that it is a "people" thing, with lawyers and academics perhaps leading the way. I'm rather glad to see an article that shows that humblebragging is empirically ineffective in its goals. In my experience, I have also found that it's also not especially effective in getting people to like the humblebragger, either.
Now, if only blatant, unrepressed, old-school bragging weren't so effective in some circles. we could make some real progress.
Tuesday, May 19, 2015
Vice Chancellor Laster recently issued an opinion in In re Carlisle Etcetera, LLC (available here), that has the potential to encourage (or at least fail to punish) sloppy practices and unnecessarily expands equitable standing for judicial dissolution. In doing so, the case increases litigation risk for LLCs.
The case involves an LLC made up of two member parties that formed Carlisle Etcetera, LLC. (Carlisle): WU Parent and Tom James Co. (James). The LLC agreement called for a manager-managed board, that would serve as sole manager. WU Parent appointed two board designees, as did James. Board decisions required "unanimous approval." At some point, for tax reasons, WU Parent assigned its membership interest to WU Sub. Thereafter, Carlisle identified WU Sub as a 50% member interest in tax filings and the LLC's accountants referred to WU Sub as "an equal member" of the LLC. The parties discussed an updated LLC agreement that would have made clear that an initial member of the LLC could transfer ownership to a wholly owned affiliate that would retain membership status, though that agreement was never finalized.
[Please click below to read more.]
Tuesday, May 12, 2015
I had planned to write a post about Delaware LLCs and who has standing to request judicial dissolution, but that post is going to wait. I'm knee deep in Sports Law exam grading, and so sports is on my mind. The big thing going on right now is, of course, Tom Brady's four-game suspension for his apparent participation in having footballs deflated to a psi that was not in compliance with league rules.
The science on the benefits of deflating footballs is not clear, as noted here. That, of course, is irrelevant to whether the rules were broken. Some have argued that the air pressure rules are stupid, especially given that the league not long ago change the rules to allow each team to prepare their own footballs for use on offense. Andy Benoit of SI.com explains,
With football being so much about strategy, the more comfortable the ball is for a quarterback and his receivers, the more entertaining the game becomes.
The NFL already agrees with this. Why do you think officials and ball boys go to such lengths to try to keep a football dry during a rainy game? Or, bringing it back to the inflate/deflate issue (or inflate/deflate controversy, since America has decided to be dramatic, if not hysterical, about this), why did the NFL permit quarterbacks to prepare their own balls before games in the first place?
The problem is, the league didn’t go far enough here. It should abolish all parameters regarding the ball’s air. Tom Brady didn’t cheat. Tom Brady’s job is to throw the football. Unfortunately, he had to go too far out of his way to do his job well.
I wouldn't think it would take a lawyer to explain that this reasoning is flawed, but perhaps it does. Even where a rule is stupid, counterproductive, or even obstructionist, it is still a rule. Failing to follow it leads to sanctions. If a speed limit is too low, it can limit my ability to get to a meeting on time or make it so the FedEx driver can't deliver as many packages in a day. But if either one of us gets clocked by a police officer's radar going 15 mph over the speed limit, we're going to get a ticket. And it's no defense to say, "But it's making it harder for me to do my job well!"
Brady, through his agent, has vowed to appeal, as is his right. Some people seem very concerned with Brady's image, and other have even suggested that the suspension could keep Brady from a future in politics. Maybe, but given that we live in a country that has re-elected many people who have tarnished their own images while in office, I'm not going to be too concerned about this.
The NFL, of course, has its own image issues, much of which is self-imposed. The sanctions against Brady seem reasonable but severe, if acting in a vacuum. But we don't, and it's hard to to look at other relative punishments for guidance. The NFL has been aggressive with suspensions in other areas, such as Sean Payton's year-long suspension for BountyGate. Saints fans were certainly not happy with the outcome of the NFL's punishment.
On the other hand, as the Washington Post reported, A lot of people noticed that Tom Brady got twice as long a suspension as Ray Rice’s initial punishment. The NFL could argue, of course, that Brady broke the league's rules, while Rice was subject to punishment from thecriminal justice system, too. And they might, if they wanted to remain as tone deaf on domestic violence as they have been in the past.
Why the NFL has this inflation rule, though, is a fair question. As Andy Benoit noted in the article linked above, why not just let each team provide footballs with whatever inflation they want? If it is easier to catch a deflated ball, then it's also easier to intercept. The league knows that offense sells tickets, so why not provide an advantage to all teams, if there is one to be had? Seems like a win-win option, and it reduces the number of things NFL officials have to worry about enforcing. Less regulation of regulations that are hard to enforce and have dubious value to the integrity of game helps everyone involved, and it reduces people trying to game the system through largely irrelevant technical rule enforcement. (I'm looking at you, pine tar.)
Still, a rule is a rule, and if you get caught knowingly breaking a rule, there will (and should be) sanctions. And let's be honest: The New England Patriots, with Bill Belichick and Tom Brady know what they are doing better than most. They are arguably the most successful coach and quarterback combination in NFL history, and they are very, very good at what they do. They only do things they think will help them win, and if they do something risky, there's a good chance they're correct that there's an advantage to be had.
Respect them for their skills, and hold them accountable for actions. And let's keep it all in perspective. It's still just football, and this time, no one got physically hurt.
Tuesday, May 5, 2015
Over the last few years, book stores and publishers have been evolving in how they offer books. Some textbooks are available electronically, and others are available for rent. Although I always try to be thoughtful about how students learn throughout the year, I find that I am especially sensitive to such thoughts when it's time to grade exams and papers. I obviously can't speak for all my fellow law professors, but I know a lot of us agree that we really like our students, and we want (and expect) them to succeed.
The cost of books matters. This article reports that students often spend $1200 a year on books and supplies, and further revealed:
Of the students surveyed, 65% said they decided against buying a textbook because of the high cost, and 94% of those students said they were concerned that their decision would hurt their grade in that course. Nearly half of the students surveyed said the cost of textbooks affected which courses they took.
This was not a law-specific survey, and I think (and hope) most law students do buy (or rent) their books. I absolutely support trying to make books more affordable, but it cannot come at the expense of content. I have taught some of my courses with all free materials, but that does not work for me in all cases.
This year, my thoughts on the learning process have turned, in part, to textbook rentals. Some (and perhaps many) students have moved on to book rentals instead of purchases. I am sympathetic to how much books cost, and I can understand why students would look for savings where they can. I am, how, concerned that rented books could have a negative impact on learning because of limits (or perceived limits) on how a renter can treat the books.
Barnes & Noble, for example, has the following book rental policy:
Rules of Renting
Textbook rentals allow us to reuse and recycle books. We hope that you return your rental textbook to us in a condition for someone else to reuse later. If the textbook is returned with excessive highlighting or writing, missing pages, and/or damaged spines or covers, you will be charged for the replacement of the book.
This seems reasonable enough, but I worry that the concern about limiting highlighting and writing in the book could serve to limit student engagement with the content. There is other language that suggests that it's not just "excessive highlighting or writing" that could be a concern. Also from the B&N website:
Treat with Care
Over the course of your studies be aware that other students will be renting the textbook after you, so please limit highlighting and writing in the book.
This is not merely advising against "excessive" notation -- it is also requesting "limit[ed]" highlighting and writing in the book. I am someone who likes to write in the margins, for example, and connect thoughts or ideas with circles and lines in the text. I am also not averse to highlighting important passages. (As a side note, I get the point on truly excessive highlighting. I bought one book that had so much highlighting it was easier to pick out what was not highlighted. Kind of annoying and amusing at the same time. I was able to work with it, but I was more careful with future purchases.)
As a first-year student, I wrote every term I didn't know (or suspected was a term of art) in the margins to look up in Black's Law Dictionary. I sometimes even wrote the definition in the margin. This kind of connection with the material, I think, was an important part of my learning process. I realize not everyone learns this way, but for those of us who do, I fear that the textbook rental will limit that experience.
Obviously, one who knows they learn better by writing in books can just choose to buy, instead of rent. Unfortunately, at least some of us wouldn't know that's they way we learn until after we get started. I can't say that I would have known, anyway. My (lax) undergraduate study habits were not in any way similar to my law school habits, and I was more than five years removed from school when I went back to law school.
I don't have a great answer right now, and I have not been able to readily find any studies to support my concerns on book rentals (or allay my fears). For students, I would say to think about how you learn and consider whether a book rental runs the risk of negatively impacting your education. For educators, I think we need to keep thinking about how students interact with the learning material, and we need to be aware of, and adjust to, the outside forces that may change the student learning process. Comments on all of this are most certainly welcome.
Tuesday, April 28, 2015
Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014. This year, though, despite some activist victories, boards are standing their grounds with more success.
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.
As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism:
Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.
I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances. I don't, however, think buybacks or dividends are inherently incorrect, either. Whether the idea comes from an activist shareholder or the board doesn't really matter to me. The board just needs to assess the idea and decide how to proceed.
[Please click below to read more.]
Tuesday, April 21, 2015
In North Dakota, the state has seen drastically falling revenues due to low oil prices. Lower revenues makes it more challenging for the communities in that state that are still trying to provide the necessary infrastructure and services that remain a challenge due to the enormous growth over the last several years. The response from some in the North Dakota legislature? Cut taxes.
Oil companies always seek lower taxes because they are rational actors. Lower taxes means higher revenues. This was true with sky high oil prices and is even more true with lower prices. From a company perspective, the position makes sense. From a legislative perspective, the position should be more nuanced.
(Please click below to read more.)
Tuesday, April 14, 2015
Energy is big business, and there is evidence that renewables are starting to play along with the more traditional big-time players. The Economist recently published the article, Renewable Energy: Not a Toy, which reports that renewable energy installations are continuing to increase even as subsidies fall because prices are continuing to drop. The energy sector is likely to continue to diversify, in part because diversification is good for resilience and for financial management. The Economist article notes:
Nearly half of last year’s investment was in developing countries, notably China, whose energy concerns have more to do with the near term than with future global warming. It worries about energy security, and it wants to clean up its cities’ air, made filthy partly by coal-burning power plants.
Sometimes lost in the discussion about cleaner energy is that climate concerns are not the only reasons to consider other resources. Cleaner air, more stable prices, and locally sourced energy can all be good reasons to consider renewable energy sources along side more traditional resources. Prices, are the big one, of course, but when it's close, other considerations can more easily be part of the analysis. It appears we're approaching that point, which means more opportunity, along with more upheaval. That's why some of us like the energy business so much. If nothing else, it's usually interesting,
Tuesday, April 7, 2015
So, Duke is the 2015 NCAA Men's Basketball champion. As a Michigan State basketball fan, this was at least mildly gratifying because the Spartans final losses the past two seasons have been to the eventual champion. (MSU's final two losses this season: Wisconsin and Duke.) Hardly the same as winning the whole thing, but after a loss, one takes what one can get.
This semester I am teaching Sports Law for the first time, and it has been an interesting and rewarding experience. As our recent guest, Marc Edelman, recently noted, there is a lot going on right now in college sports (there probably always is), with questions about paying NCAA players and players' rights to unionize, among other things, leading the way.
I am a big fan of college sports, and I generally prefer college sports to professional sports. I don't, however, have any illusion that big-time college sports are, in any real sense, pure or amateur. (For that matter, I don't know what "pure" means, but I hear complaints that colleges sports are "no longer pure," so it appears there is some benchmark somewhere.) College sports are a modified form of professional sports or, as the term I used to hear from time to time in other contexts, semi-pro sports.
What College Sports Are
College sports, in the simplest sense, are highly talented young people competing on behalf of educational institutions in exchange for the opportunity to pursue a mostly funded college education, if they so choose and can make it fit in with their athletic obligations. The athletes are compensated for their efforts with opportunities that are varied and wide ranging, depending on the athlete and the institution for which they compete.
Obviously, the experience for the high-profile college athlete -- generally football and men's and women's basketball -- is different from that of the less-watched sports, such as gymnastics, track, and golf. But in all instances, the athletes represent their institution on and off the field, and they all have significant obligations that come along with their participation on their team. (Not all athletes have full or even partial scholarships, which can vary the obligations, though often all athletes have similar requirements.)
(To read more, please click below)
Tuesday, March 31, 2015
In a later footnote, he noted that he was not sure what I meant by my statement: "I believe that public companies should be able to plan like private companies . . . ." I thought I'd try to explain.
My intent there was to address my perception that there is a prevailing view that private companies and public companies must be run differently. Although there are different disclosure laws and other regulations for such entities that can impact operations, I'm speaking here about the relationship between shareholders and directors when I'm referencing how public and private companies plan.
Public companies generally have far more shareholders than private companies, so the goals and expectations of those shareholders will likely be more diverse than in a private entity. Therefore, a public entity may need to keep multiple constituencies happy in a way many private companies do not. However, that is still about shareholder wishes, and not the public or private nature of the entity itself. A private company with twenty shareholders could crate similar tensions for a board of directors.
As an example, consider Investopedia's description of Advantages of Privatization in an article called "Why Public Companies Go Private" (emphasis added):
Private-equity firms have varying exit time lines for their investments depending on what they have conveyed to their investors, but holding periods are typically between four and eight years. This horizon frees up management's prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth. Management typically lays out its business plan to the prospective shareholders and agrees on a go-forward plan.
This is often a practical reality, but I disagree (or at least believe it should not be the case) that a company must be private to "free up management's prioritization on meeting quarterly earnings expectations and allows them to focus on activities that can create and build long-term shareholder wealth."
This, I think, connects with Prof. Bainbridge's point in his footnote annotation 4, where he says, "I think too many hedge funds are pressing too many boards to pursue short-term gains at the expense of sustainable long-run shareholder wealth maximization and, accordingly, that boards need more insulation from shareholder pressure." I agree completely with his point there, and that's the kind of issue facing public companies that I was intending to address in my assertion.
Ultimately, director primacy means ensuring a large measure of director autonomy (or insulation). This works in both directions, whether it relates to short- versus long-term planning or providing workplace benefits (or not). Ensuring a robust business judgment rule as an abstention doctrine preserves director primacy, and in the long run, will benefit corporate governance and shareholder choice.
Wednesday, March 25, 2015
The Economist has a helpful brief outline -- here -- of why oil prices are so low. I continue to think that oil prices will stabilize in the $55-$65 range, but now that it's apparent that most Bakken oil is profitable around $42, I would not be surprised to see prices bounce around in that range periodically for a while, too.
A few things to keep in perspective when you hear about how the energy sector is suffering:
(1) It's not very often through the years that anyone would be upset by low energy prices. That usually is a sign of good things to come in terms of markets because low energy prices can reduce costs of manufacturing, they tend to increase demand (in energy and beyond), and it tends to mean more money in consumers' pockets. Those are usually very good things.
(2) Despite layoffs are some energy sector companies, and a dramatic slow down of drilling, if you looked back to 2005 0r 2006 (an even more recently) people would have been thrilled to see the sector with this many jobs. Even another 20-30% slow down represents a strong and viable industry.
(3) Legal work for the sector is likely to carry on at a strong pace. A slow down will mean a slower pace in many sectors, and mineral leasing and other title work will likely slow significantly, but slow downs can lead to increases in M&A, restructuring, and litigation.
There are concerns, but it's always helpful to keep things in perspective. It's fair to raise questions and highlight the rapid changes, but it's not all gloom and doom.
Thursday, March 19, 2015
Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
Prof. Bainbridge is with Delaware Chief Justice Strine in that profit maximization is the only role (or at least only filter) for board members. As he asserts, “The relationship between the shareholder wealth maximization norm and the business judgment rule, . . . explains why the business judgment rule is consistent with the director's "legal obligation to maximise profits for their shareholders."
CJ Strine has noted that the eBay decision, which I have written about a lot, says that if “you remain incorporated in Delaware, your stockholders will be able to hold you accountable for putting their interests first.” I think this is right, but I remain convinced that absent self-dealing or a “pet project,” directors get to decide that what is in the shareholders best interests.
I have been criticized in some sectors for being too pro-business for my views on corporate governance, veil piercing law, and energy policy. In contrast, I have also been said to be a “leftist commentator,” in some contexts, and I have been cited by none other than Chief Justice Strine as supporting a “liberal” view of corporate norms for my views on the freedom of director choice.
When it comes to the Business Judgment Rule, I think it might be just that I believe in a more hands-off view of director primacy more than many of both my “liberal” and “conservative” colleagues. Frankly, I don’t get too exercised by many of the corporate decisions that seem to agitate one side or the other. I thought I’d try to reconcile my views on this in a short statement. I decided to use the model from This I Believe, based on the 1950s Edward R. Murrow radio show. (Using the Crash Davis model I started with was a lot less family friendly.) Here’s what I came up with [Author's note, I have since fixed a typo that was noted by Prof. Bainbridge]:
I believe in the theory of Director Primacy. I believe in the Business Judgment Rule as an abstention doctrine, and I believe that Corporate Social Responsibility is choice, not a mandate. I believe in long-term planning over short-term profits, but I believe that directors get to choose either one to be the focus of their companies. I believe that directors can choose to pursue profit through corporate philanthropy and good works in the community or through mergers and acquisitions with a plan to slash worker benefits and sell-off a business in pieces. I believe that a corporation can make religious-based decisions—such as closing on Sundays—and that a corporation can make worker-based decisions—such as providing top-quality health care and parental leave—but I believe both such bases for decisions must be rooted in the directors’ judgment such decisions will maximize the value of the business for shareholders for the decision to get the benefit of business judgment rule protection. I believe that directors, and not shareholders or judges, should make decisions about how a company should pursue profit and stability. I believe that public companies should be able to plan like private companies, and I believe the decision to expand or change a business model is the decision of the directors and only the directors. I believe that respect for directors’ business judgment allows for coexistence of companies of multiple views—from CVS Caremark and craigslist to Wal-Mart and Hobby Lobby—without necessarily violating any shareholder wealth maximization norms. Finally, I believe that the exercise of business judgment should not be run through a liberal or conservative filter because liberal and conservative business leaders have both been responsible for massive long-term wealth creation. This, I believe.
Tuesday, March 17, 2015
On the floor later Friday evening, the House put an amendment in a bill designed to shore up car dealers’ legal standings in dealings with auto manufacturers that effectively blocks innovative electric car manufacturer Tesla from doing business in the state.
The floor debate is best left forgotten: Several delegates played the crony capitalism card, talking about how their local car dealers are generous in sponsoring Little League teams and community events (not to mention campaign contributions), while other sneered about the company being owned by California billionaire Elon Musk (some called him “Monk,” but fortunately no one referred to him as “Elton”), and claiming the company relies on federal subsidies.
Never mind that it was stated that fewer than a dozen West Virginians own Teslas, or that a boom in demand for electric-powered cars might just be a good thing for a state that provides coal for electric power plants.
If you're about a free (or at least more free) markets, why stop a competitor from competing? Sorry, but the federal subsidy argument for the auto industry went out the window when the government bailed out GM and Chrysler.
Beyond that, for the life of me, I can't understand why coal friendly constituencies seem so often to be hostile to electric vehicles. (In fairness, Kentucky just added a Tesla charging station.) If it uses electricity, you should be all for it. Why is running a car on electricity any different than leaving the lights on all night? If you're for consumption, who cares who does it?
There is some debate about whether electric cars are better for the environment than gasoline powered cars. This remains an open question. But there's little doubt that increased demand for electricity is generally good for the coal industry.
More important, though, if consumers want to buy a Tesla, why not let them? What's the value in blocking consumers from buying the vehicles they want? Oh yeah, rent seeking and cronyism. By the way, the West Virginia legislature knows we can buy cars in other states, right?
Tuesday, March 10, 2015
Today in my Energy Law Seminar, I sprung an exercise on my class. I gave each member of the class a confidentiality and non-disclosure agreement (NDA). Half the class works for a venture fund and the other half works for a technology inventor who was seeking investment. (I give them some more details about the proposed deal the NDA would help facilitate. (The exercise is based on an issue I worked on some years ago.)
I instruct them to read the NDA, then they can meet with others assigned the same side. They can come up with their negotiating points, then I turn them loose with the other side.
I always enjoy watching students work like this. They are forced to react, and it lets them be a little creative. I also like this exercise, because it has multiple layers. They get to ask me me what they need to know for the business points, and I later get to talk to them about the options they may not have considered.
I have done this a few times, and the students always negotiate what they see as the key issues. Their issue spotting is usually good, but they often miss a big option (a couple students do often have an idea what's up). Here's the twist: the NDA I give them is absurdly one-sided and in fact reserves the secret information for the venture fund (who is only providing money), and not the inventor (who has the technology and information they want kept secret).
They can, of course, negotiate with this document and try to get a workable NDA based on the deal points, but the better answer for the investor representatives is to decline the entire document. The NDA is so one sided, there is no fixing it. The better answer is to ask for a more balanced version or to offer to draft one for the potential counterparty to consider.
Sometimes, of course, you have no room for negotiations, such as when you rent a car. You can mark up the contract, but with Avis, it's take it or leave it. The same can be true for certain clients who need funding or a supply contract, but often, there is room to talk. The real life version of the negotiation provides a perfect example: I told the venture fund the NDA was too one-sided and that it couldn't work for us. I suggested that we could try a draft or that we'd be happy to look at a different option. The venture fund's reply: "Oh sure, we have one that is far more balanced that doesn't have the provisions that seem to concern you most. You'll have an email in a few minutes."
When we talk about deal points and key issues, sometimes it's easy to forget to teach students some other big keys to business law. The takeaways:
(1) If at all possible, only use draft documents that reflect a sense of mutuality (e.g., reciprocal indemnification clauses). "Fixing" one-sided documents is fraught with risk.
(2) Don't be afraid to ask. Often, though I don't care for it, people like to start with offers to "see what I can get." (I see this as counterproductive, at least where a long-term relationship could be built.)
(3) Negotiate in proportion to the issue before you. The NDA is often so you can negotiate the deal. If you make that initial part too antagonistic, you may never even get to negotiating the actual deal, which can mean everyone loses.
Tuesday, March 3, 2015
The Fordham Journal of Corporate and Financial Law recently published a March 6, 2014, lecture from Former Delaware Supreme Court Chief Justice Myron T. Steele, Continuity and Change in Delaware Corporate Law Jurisprudence (available on Westlaw, but fee may apply). As an aside, I'll note that it appears to have taken a full calendar year for this to get published (at least on Westlaw), which seems crazy to me. If there's any question why legal blogs can fill such a critical role in providing timely commentary on legal issues, this is a big part of the answer.
In the lecture, Chief Justice Steele discusses three main areas: (1) multi-forum jurisdiction, (2) shareholder activism, and (3) the Nevada, Delaware, and North Dakota Debate (a "competition for charters").
As to multi-forum jurisdiction, he makes the unsurprising point that Delaware courts are of the view that first impressions of the Delaware General Corporation Law or other "internal affairs doctrine" issues should be handled in Delaware courts. Of note, he explains that the Delaware constitution (art. IV, § 11(8)) now allows federal courts, the top court from any state, the SEC, and bankruptcy courts to certify questions directly to the Delaware Supreme Court. This option is one that lawyers litigating such cases in other forums won't want to miss.
With regard to shareholder activism, Chief Justice Steele states,
In my preferred system for the world, and I think in the minds of all Delaware judges, engaged if not antagonistic stockholders add positive value as a check on director authority and are a catalyst for corrective accountability, so long as their efforts focus on improved performance and not the advancement of political or personal agendas--a major caveat in my view. Delaware courts, it seems to me, will increasingly recognize the benefits that engaged investors bring to the table.
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g., ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.
The corporate form in which [an Delaware corporation] operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. . . . Having chosen a for-profit corporate form, . . . directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
Thus, in Delaware a for-profit corporation cannot promote or practice the religious views of even a majority of directors or shareholders where such actions do not promote the value of the corporation for shareholders.
Finally, as to the Nevada, Delaware, North Dakota debate, Chief Justice Steele questions the value of Nevada allowing "charters to exculpate directors for breaches of duty of loyalty," because he thinks such a massive change in widely held views of fiduciary duty law could invite federal "meddling." I think he's exactly right on this. He notes with skepticism the North Dakota Publicly Traded Corporations Act because there are only two companies that have adopted the law, but the law's failure in the competition for charter does not raise the same concerns of a race to the bottom (my words) that Nevada's law provides.
I think Chief Justice Steele's article provides interesting and useful insight into the workings of the Delaware court system, and I recommend the sort read. I just wish I had seen it about nine months ago.
Tuesday, February 24, 2015
President Obama just vetoed the bill approving construction of the Keystone XL pipeline. The President has said the veto is not about the value of the pipeline, but that it represents the President's view the pipeline should not go around the State Department evaluation process.
The veto comes at a time when oil transportation is a increasingly an area of concern, especially in light of recent rail accidents in Quebec and West Virginia. I was recently part of a news story discussing the rail safety concerns in my part of country -- here -- and pipeline transportation tends to be much safer for human safety, though it raises other environmental concerns.
It's not clear whether Keystone XL would be built any time soon, in light of low oil prices, but the veto will certainly keep people talking. More on this soon.