Saturday, January 7, 2017
A couple of months ago, Snapchat’s parent announced that the company would hold an IPO in 2017 – the largest and most high-profile IPO since Alibaba in 2014. Given the sluggish IPO market, as well as Snapchat’s general name recognition and tech cachet, the announcement was a big deal.
But it’s possible there’s going to be a monkey in the wrench. On January 4, a former Snapchat employee (fired after 3 weeks) filed a lawsuit alleging two of Snapchat’s metrics – and which ones are redacted from the complaint – were fraudulently manipulated in order to inflate Snapchat’s valuations to private investors and in anticipation of the IPO. (The redactions are due to concerns that the allegations are covered by the plaintiff’s confidentiality agreement). The unredacted portions of the complaint allege that the company never built an appropriate team to analyze its metrics, and that the employee was illegally fired in retaliation for blowing the whistle.
Snapchat has given a statement to the media denying the allegations as the fictional creations of a “disgruntled former employee.”
Though the redactions are extensive, the complaint does offer at least a hint of what’s at stake. In Paragraph 24, the complaint lists certain “key performance metrics” for all social media applications. These are Daily Active Users, Monthly Active Users, User Retention Rate, Active User Growth Rate, Registration Completion Rate, Installations, Frequency, Session Length, and Average Revenue Per User. It’s impossible to know whether the two allegedly fraudulent Snapchat metrics are in this group, but these are probably the best hint we have. And these are significant numbers for Snapchat; it has claimed daily and monthly users in excess of Twitter, and – though not on the list in the complaint – has claimed daily video views in excess of Facebook (and that was before Facebook admitted it view counts were wrong).
So this will be an interesting story to watch going forward; until it’s resolved, it could spook potential IPO investors, and may even prompt investigation by Snapchat’s pre-IPO investors.
One point of interest: Apparently, the plaintiff signed an arbitration agreement with Snapchat, and has designed his claims to get around it (and, I assume, make sure his complaint was picked up by the media to pressure the company). According to the complaint, the arbitration agreement permits both parties to seek preliminary injunctions in court – and so, the plaintiff is seeking an injunction to force Snapchat to stop spreading allegedly false stories claiming that he was fired for incompetence. The plaintiff has separately filed an arbitration claim seeking lost wages and damages.
Friday, January 6, 2017
Tulane Law School invites applications for its Forrester Fellowship and visiting assistant professor positions, both of which are designed for promising scholars who plan to apply for tenure-track law school positions. Both positions are full-time faculty in the law school and are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support, both formal and informal, including faculty mentors, a professional travel budget, and opportunities to present works-in-progress to other faculty at workshops and in various settings.
Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to two sections of 25 to 30 first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a J.D. from an ABA-accredited law school, outstanding academic credentials, and at least three years of law-related practice and/or clerkship experience. To apply, please submit your materials via Interfolio at https://apply.interfolio.com/40042. If you have any questions, please contact Erin Donelon at email@example.com.
Tulane’s visiting assistant professor (VAP), a two-year position, is supported by the Murphy Institute at Tulane University (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy and ethics that draws faculty from the university’s departments of economics, philosophy, history, and political science. The position entails teaching a law school course or seminar in three of the four semesters of the professorship (presumably the last three semesters). It is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation). In addition to participating in the intellectual life of the law school, the visiting assistant professor will be expected to participate in scholarly activities at the Murphy Institute. Candidates should apply through Interfolio, at https://apply.interfolio.com/40013, providing a CV identifying at least three references, post-graduate transcripts, electronic copies of any scholarship completed or in-progress, and a letter explaining your teaching interests and your research agenda. If you have any questions, please contact Adam Feibelman at firstname.lastname@example.org.
The law school aims to fill these positions by March 2017. Tulane University is an equal employment opportunity/affirmative action employer committed to excellence through diversity. All eligible candidates are invited to apply for position vacancies as appropriate.
I recently finished my first consistent year of running since high school. To celebrate, I bought and read Once a Runner. Yes, that is how nerds like me celebrate - buy and read a book. I was asleep by 10pm on New Year's Eve.
Once a Runner is a cult classic published in 1978 and authored by a former University of Florida runner (and fellow lawyer), John Parker Jr. The novel was originally self-published, sold at running stores and out of the back of the author's car. It eventually became a New York Times Bestseller. The story follows the fictional Quenton Cassidy as he moves from a successful (but still somewhat distracted) college runner to a laser-focused, woods-dwelling hermit who increases his training to beat the best runners in the world. He does, eventually, beat one of the very best milers (in a small track meet), and then goes on to win silver in the Olympic Games.
Among the passages that struck me was the following from Quenton's time at a cocktail party, after spending months (in relative solitude) training and logging 100+ mile weeks:
What was the secret, they wanted to know; in a thousand different ways they wanted to know The Secret. And not one of them was prepared, truly prepared, to believe that it had not so much to do with chemicals and zippy mental tricks as with that most unprofound and sometimes heartrending process of removing, molecule by molecule, the very tough rubber that comprised the bottoms of his training shoes, The Trial of Miles; Miles of Trials.
Along those same lines, I recently listened to the How I Built This podcast on Angie Hicks of Angie's List. Angie stated that she was an unlikely entrepreneur - introverted, risk-adverse, and not a "big idea" person. But she credited her success to one main thing, perseverance. I am still working on how to best teach my students to persevere, and in this instant access society, more and more students are looking for The Secret to allow them to master the material (or at least get an A) with as little effort as possible. While it can be good to look for more efficient ways to do things, I also think we need to teach our students that some things of great value are only acquired through old fashioned hard work.
Thursday, January 5, 2017
As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB's) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.
Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).
Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.
Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.
Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.
SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.
Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.
I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.
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.
Tuesday, January 3, 2017
Today is my annual check-up on the use of "limited liability corporation" in place of the correct “limited liability company.” I did a similar review last year about this time, and revisiting the same search led to remarkable consistency. This is disappointing in that I am hoping for improvement, but at least it is not getting notably worse.
Since January 1, 2016, Westlaw reports the following using the phrase "limited liability corporation":
- Cases: 363 (last year was 381)
- Trial Court Orders: 99 (last year was 93)
- Administrative Decisions & Guidance: 172 (last year was 169)
- Secondary Sources: 1116 (last year was 1071)
- Proposed & Enacted Legislation: 148 (last year was 169)
As was the case last year, I am most distressed by the legislative uses of the phrase, because codifying the use of "limited liability corporation" makes this situation far murkier than a court making the mistake in a particular application.
New York, for example, passed the following legislation:
Section 1. Subject to the provisions of this act, the commissioner of parks and recreation of the city of New York is hereby authorized to enter into an agreement with the Kids' Powerhouse Discovery Center Limited Liability Corporation for the maintenance and operation of a children's program known as the Bronx Children's Museum on the second floor of building J, as such building is presently constructed and situated, in Mill Pond Park in the borough of the Bronx. The terms of the agreement may allow the placement of signs identifying the museum.
NY LEGIS 168 (2016), 2016 Sess. Law News of N.Y. Ch. 168 (S. 5859-B) (McKINNEY'S).
This creates a bit of a problem, as Kids' Powerhouse Discovery Center Limited Liability Corporation does not exist. The official name of the entity is as Kids' Powerhouse Discovery Center LLC and it is, according to state records, an LLC (not a corporation). Does this mean the LLC will have to re-form as a corporation so that the commissioner of parks and recreation has authority to act? It would seem so. On the one hand, it could be deemed an oversight, but New York law, like other states, makes clear that an LLC and a corporation are distinct entities.
Several other states enacted legislation using “limited liability corporation” in contexts that clearly intended to mean LLCs. Hawaii, West Virginia (sigh), Minnesota, Alabama, California, and Rhode Island were also culprits.
There was one bit of federal legislation, too. The “Communities Helping Invest through Property and Improvements Needed for Veterans Act of 2016” or the “CHIP IN for Vets Act of 2016." PL 114-294, December 16, 2016, 130 Stat. 1504. This act authorizes the Secretary of Veterans Affairs to carry out a pilot program in which donations of certain property (real and facility construction) donated by the following entities:
(A) A State or local authority.
(B) An organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and is exempt from taxation under section 501(a) of such Code.
(C) A limited liability corporation.
(D) A private entity.
(E) A donor or donor group.
(F) Any other non-Federal Government entity.
I have to admit, it is not at all clear to me why one needs any version of (C) if one has (D) as an option. Nonetheless, to the extent it was not intended to be redundant of (D), part (C) would appear to be incorrect.
I addition, I'd be remiss not to note the increase to 1116 uses in secondary sources last year, though only 43 were in law reviews and journals. That part is, at least a little, encouraging.
Last year, I wished “everyone a happy and healthy New Year that is entirely free of LLCs being called ‘limited liability corporations.’” This year, I have learned to temper my expectations. I still wish everyone a happy and healthy New Year, but as to the use of “limited liability corporations” I am hoping to reduce the uses by half in all settings for 2017, and I hope at least three legislatures will fix errors in their existing statutes. That seems more reasonable, if not any more likely.
Monday, January 2, 2017
Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman. He invited comments. So, I sent him one! He has started posting comments in a mini-symposium. Mine is here. Andrew Verstein's is here. There may be more to come . . . . I will try to remember to come back and edit this post to add any new links. Prompt me, if you see one before I get to it . . . .
Postscript (January 5, 2017): James Park also has responded to Steve's call for comments. His responsive post is here.
Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here. And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively. Steve collects the posts here.
Tomorrow, I am headed to the Association of American Law Schools ("AALS") Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister). I want to highlight a program at the conference for you all that may be of interest. John Anderson and I have convened and are moderating a discussion group at the meeting entitled "Salman v. United States and the Future of Insider Trading Law." The program description, written after the case was granted certiorari by the SCOTUS and well before the Court's opinion was rendered, follows:
In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.
This discussion group will focus on Salman and its implications for the future of insider trading law.
Of course, we all know what happened next . . . .
The discussants include the following, each of whom have submitted a short paper or talking piece for this session:
John P. Anderson, Mississippi College School of Law
Miriam H. Baer, Brooklyn Law School
Eric C. Chaffee, University of Toledo College of Law
Jill E. Fisch, University of Pennsylvania Law School
George S. Georgiev, Emory University School of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
Gregory Gilchrist, University of Toledo College of Law
Michael D. Guttentag, Loyola Law School, Los Angeles
Joan M. Heminway, University of Tennessee College of Law
Donald C. Langevoort, Georgetown University Law Center
Donna M. Nagy, Indiana University Maurer School of Law
Ellen S. Podgor, Stetson University College of Law
Kenneth M. Rosen, The University of Alabama School of Law
David Rosenfeld, Northern Illinois University College of Law
Andrew Verstein, Wake Forest University School of Law
William K. Wang, University of California, Hastings College of the Law
The discussion session is scheduled for 8:30 am to 10:15 am on Friday, right before the Section on Securities Regulation program, in Union Square 25 on the 4th Floor of the Hilton San Francisco Union Square. The AALS has posted the following notice about discussion groups, a fairly new part of the AALS annual conference program (but something SEALS has been doing for a number of years now):
Discussion Groups provide an in-depth discussion of a topic by a small group of invited discussants selected in advance by the Annual Meeting Program Committee. In addition to the invited discussants, additional discussants were selected through a Call for Participation. There will be limited seating for audience members to observe the discussion groups on a first-come, first-served basis.
Next week, I will post some outtakes from the session. In the mean time, I hope to see many of you there. I do expect a robust and varied discussion, based on the papers John and I have received. Looking forward . . . .
Sunday, January 1, 2017
Saturday, December 31, 2016
Happy (Almost) New Year! As 2016 draws to a close, I offer three quick hits of interesting recent business law developments:
First: The endlessly-running case of Erica P. John Fund v. Halliburton has finally settled! Halliburton has been a particular obsession of mine lo these past 6 years or so, and I even attended the Fifth Circuit oral argument held in September. (My report of that argument is here, where I link to my prior blog posts on the subject). I'm sort of sad to see it go, even though I found many of the opinions frustrating. In any event, Alison Frankel has a nice retrospective of the case, including how David Boies ended up as lead attorney for the plaintiffs after the death of his daughter, the previous lead.
Second: I previously posted about Facebook's move to create a nonvoting class of stock, essentially as a mechanism to allow Mark Zuckerberg to have his cake and eat it too (i.e., divest his stock while still maintaining voting control). The move was duly approved by an independent special committee, but - as was recently revealed in a shareholder lawsuit - one of the committee members appears to have been a double agent. According to the plaintiffs, Marc Andreessen kept Zuckerberg informed of the committee's deliberations, even going so far as to text Zuckerberg realtime advice on his negotiations during a conference call with the committee. He apparently contacted Zuckerberg to tell him what the committee's main concerns were, and to warn him what the committee planned to do. He also apparently kept Zuckerberg informed of his progress in persuading the recalcitrant committee member - Erskine Bowles - to accept the proposal. You can read articles about it here and here, or just pull the recently unsealed August 30 brief from In re Facebook Inc Class C Reclassification Litigation, 12286-VCL, but either way, I smell business law exam scenarios. (Maybe I shouldn't have said that.) Notably, Andreessen's loyalty to Zuckerberg, despite his nominal independence, is exactly the kind of thing that apparently has Strine's - and the Delaware Supreme Court's - attention.
Third: Surprise! The Tenth Circuit just held that the SEC's ALJ's are "inferior officers" and therefore their current method of appointment is unconstitutional. The decision creates a circuit split with the DC Circuit in Raymond J. Lucia Companies v. SEC, 832 F.3d 277 (D.C. Cir. 2016), and pretty much assures Supreme Court review - possibly with a newly-appointed justice of Trump's choosing. And that makes me wonder whether we're about to witness some radical changes to the structure of the administrative state.
Here's to 2017 - there will be no shortage of change to keep us busy!
Friday, December 30, 2016
As avid readers of this blog already know, I am a fan of New Year's Resolutions. I usually set over twenty goals for each year, and they prove helpful in directing effort during the year.
Over the past few years, my employer (Belmont University) has been engaged in Vision 2020, which should amount to something like New Year's Resolutions for the University (to be accomplished by 2020). I recently served on the committee for the Athletics Department's contribution to Vision 2020, which was an enjoyable and interesting experience.
My time on the Vision 2020 committee and my years of doing my own resolutions have taught me a few things. Most importantly, I have learned that SMART goals tend to be the most useful and effective. (For those who don't know, SMART usually stands for Specific, Measurable, Attainable, Relevant, Time-Based, though there are variations).
The most difficult part, in my view, is finding appropriate measurements. Some items are easy to measure - movements in endowment, enrollment, incoming student GPA and standardize test scores, rankings, etc. There are plenty of items that are important, but much more difficult to measure. And measurements can be overdone, especially if the focus on the measurement overshadows the ultimate goal.
At the end of every semester I resolve to give less work to my students so that I don't have so much to grade. This upcoming semester I may actually keep that resolution, but I do plan to keep my blogging assignment. In each class, I provide an extra credit or required post or series of posts of between 200-500 words so that students can learn a fundamental legal skill—communicating clearly, correctly, and concisely.
If you are reading this post, then you are already a fan of legal blogs. Academics blog to get their ideas out quickly rather than waiting for the lengthy law review cycle to publicize their thoughts. Academics can also refine ideas they are incubating by blogging and receiving real time feedback from readers. Practicing lawyers blog (or should) for a slightly different reason. Blogging can enhance a lawyer’s reputation and visibility and ultimately lead to more business.
Yesterday, I met with an attorney who will speak to the students in my new course on Legal Issues for Startups, Entrepreneurs, and Small Businesses. I mentioned to him that I found his blog posts enlightening and that they filled a gap in my knowledge base. Although I practiced for almost twenty years before entering academia and had a wide range of responsibility as a deputy general counsel, I delegated a number of areas to my colleagues or outside counsel. That attorney is now part of a growing trend. In 2011, when I left practice, lawyers rarely blogged and few utilized social media. Now, many recognize that lawyers must read legal blogs to keep up on breaking developments relevant to their practice. However, most lawyers understandably complain that they do not have the time to get new clients, retain their existing clients, do the actual legal work, and also blog.
Leaving blogging to the wayside is a mistake, particularly for small or newer firms. A 2016 Pew Research Center Study revealed that only 20% of people get their news from newspapers yet almost 40% rely on social media, which often provides summaries of the news curated to the consumer’s interests. The potential client base’s changing appetite for instant information in a shorter format makes blogging almost a necessity for some lawyers. Indeed, consumers believe that hiring a new lawyer is so overwhelming that some clients are now crowdsourcing. But when they receive multiple “offers” to represent them, how do/should consumers choose? Perhaps they will pick the firm with a social media presence, including a blog that highlights the firm’s expertise.
I read several blogs a day. Admittedly, I have a much longer attention span than many of our students and the lay public. I also get paid to read. Nonetheless, I consider reading blogs an essential part of my work as an academic. In prepping for my new course, I have found posts on startups and entrepreneurship particularly helpful in providing legal information as well as insight into the mindset of entrepreneurs. If I were a busy founder running a new startup, I would likely try to learn as much as possible as quickly as possible online about certain topics prior to retaining a lawyer. Some lawyers, however, don’t really know how to speak to clients without talking down to them, much less write anything “short” and free of jargon. A lawyer/blogger who wrote in a way that I could understand, without all of the legalese, would be more likely to get my business.
Thus, even though I want to grade fewer papers, I also want my students to leave my class with the critical skill of communicating complex topics to the public in digestible chunks (and in line with state bar rules on social media). Over the years, I have advised students to volunteer to update or start a blog for their internship employers. Many have told me that they enjoyed these projects and that their employers have found value in this work. This blogging practice also puts students in the position to start to blog after graduation.
I’ll end this post with a plug for my blogging colleagues who will attend AALS next week in San Francisco. I encourage you to attend some of the socioeconomic panels highlighted here. Please introduce yourself if you attend the panel next Wednesday morning at 9:50 on whistleblowers with me, Professor Bill Black of UMKC; Professor June Carbone of Minnesota; and Professor Ben Edwards of Barry. If you have an interest in the intersection between ethics and business, please swing by next Friday at 1:30 and see me and co-panelists Christopher Dillon from Gibson Dunn; Mina Kim, GC of Sunrun; Professor Eric Orts of Wharton; Professor Joseph Yockey of Iowa; Professor Brian Quinn of Boston College; Dean Gordon Smith of BYU; Professor Lori Johnson of UNLV; and Professor Anne Choike of Michigan.
If you have legal blogs you want to recommend and/or will be speaking at AALS and want to call attention to your session, feel free to comment below. Happy New Year and happy blogging.
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 27, 2016
New Book from Martin & Kunz: When the Levees Break: Re-visioning Regulation of the Securities Markets
My friend and colleague, Jena Martin's coauthored book (which she wrote with another West Virginia University professor Karen Kunz) has just been released: When the Levees Break: Re-visioning Regulation of the Securities Markets. I have just started the book, and I look forward to working my way through it. I cannot say Prof. Martin and I always see eye to eye on things (though we often do), she always has a thoughtful and interesting take. It's been an interesting read so far, and I recommend taking a look. Following is a synopsis of the book:
The stock markets. Whether you invest or not, the workings of the stock market almost certainly touch your life. Either through your retirement fund, your mutual fund or just because you work for a place that invests (or is invested in)—the reach of the securities markets is expanding, like an ever growing tidal wave.
This book discusses what happens when that wave hits the shore. Specifically, this book argues that, given the mounting deluge from misplaced regulation, fast-paced technology, and dominant financial players, the current US regulatory structure is woefully inadequate to hold back the tide.
Using vivid imagery and plain language, Karen Kunz and Jena Martin take the problems involved in regulating the complex world of securities head on. Examining everything from the rise of technology and the role of hedge funds to our bloated agency system, Kunz and Martin argue that the current structure is doomed to fail and, when it does, the consequences will be disastrous.
Sending out a call to action, the authors also offer a bold vision for how to fix the mess we’ve made—not by tinkering around the edges—but instead by building a whole new structure, one that can withstand the next storm that is sure to come.
Monday, December 26, 2016
The end of the calendar year brings many things--among others: the holidays (and I hope you have enjoyed and are enjoying them), the release of the last Oscar-contender movies, and the publication of oh-so-many "top ten" lists.
Apropos of the last of those three, I admit to being a bit proud, in a perverse sort of way, about spotting a "top ten" and commenting on it here on the BLPB. Back in May and June, I blogged about consumer litigation against Starbucks (my daughter's employer) involving coffee--too much ice, too hot, etc. Apparently, those types of legal actions are among the "Top Ten Most Ridiculous Lawsuits of 2016." Specifically, two of those lawsuits against Starbucks (the one for too much ice and another alleging too much steamed milk) are #1 on the list. Another consumer suit takes the #2 spot--a legal action asserting that a lip balm manufacturer's packaging is misleading (specifically, making customers beehive there is more product in the tube than there actually is). I continue to maintain (while acknowledging that consumer class action litigation can be useful when employed in cases that present a true danger to the consuming public), as I noted in my May post, that there are better ways to handle customer complaints.
Back in the spring, Weil, Gotshal shared some observations on litigation trends. Many of the underlying matters on which the co-authors of the report comment remain unresolved, and many involve actual or potential business litigation (including consumer litigation involving supply-chain-related or False Claims Act allegations). Certainly, a new U.S. Supreme Court appointee may make a difference in business law cases accepted by the Court this year . . . .
What will 2017 bring in business litigation? Any predictions? Now is the time to stake your claim!
Sunday, December 25, 2016
Saturday, December 24, 2016
I previously posted in praise of Sandys v. Pincus for its excellence as a teaching tool – which meant that its reversal was inevitable, as occurred days after classes concluded. (Same with the Salman v. United States decision, though that changed little; naturally; we won’t even what get into what changes midstream when I’m teaching Securities Regulation). The reversal itself is quite interesting, though, as the latest entry in the Delaware Supreme Court’s developing jurisprudence on friendship/social ties as a basis for director disqualification. And, strikingly for Delaware, it generated a dissent.
In Sandys, the basic dispute involves a secondary offering by the social-media game company Zynga. The plaintiffs filed a derivative lawsuit alleging that the secondary offering was designed to allow major insiders – including the controlling shareholder, himself a member of the Zynga board – to cash out before a disappointing earnings announcement. As a result, the secondary offering materials were alleged to have omitted critical facts about the company, ultimately exposing Zynga to a securities fraud lawsuit.
The Chancery decision held that demand was not excused, resting in large part on the court’s conclusion that the directors who were not directly implicated in the scheme were sufficiently independent of those who were to be able to consider the plaintiffs’ demand. The court found that numerous business and social ties among the directors were not sufficient to call these directors’ impartiality into question.
When I taught the case, I told my students that Delaware is largely persuaded by two things: blood and money.
Well, I’m going to have to revise that lesson.
On appeal, the Delaware Supreme Court – per Chief Justice Strine – held that the fuzzy half-business/half-social ties alleged by the plaintiffs were, in fact, sufficient to suggest that the directors were conflicted. (After first excoriating the plaintiffs for failing to pursue a Section 220 request – I don’t know what kind of competitive pressures the plaintiffs may have been under in this particular case, but let’s just say Delaware’s gonna have to do some retooling if it wants that advice to stick. See also Lawrence Hamermesh & Jacob Fedechko, Forum Shopping in the Bargain Aisle: Wal-Mart and the Role of Adequacy of Representation in Shareholder Litigation.)
First, one director co-owned an airplane with her husband, and with the controlling shareholder. The court held that an airplane is such an unusual asset, requiring such “close cooperation in use,” that joint ownership suggests an “intimate personal friendship” sufficient to call the director’s impartiality into question.
Second, two other directors were partners at Kleiner Perkins, a firm with a 9.2% stake in Zynga. Kleiner Perkins had also invested in a company started by the controlling shareholder’s wife, and had invested in a third company that also counted one of the other Zynga secondary-offering sellers (himself also a Zynga director) as one of its investors.
These interrelationships did not make the directors beholden to the controlling stockholder and other sellers in the financial sense, but, the court concluded, were evidence of a “network” of “repeat players” who had created a “mutually beneficial ongoing business relationship.” This created “human motivations” that called the directors’ impartiality into question. Additionally, the court noted that Zynga had not classified these directors as independent for NASDAQ purposes, a determination that itself deserved deference, and had particular relevance in a case, like this one, involving potential wrongdoing by the controlling stockholder.
Justice Valihura dissented. She believed that without more details of the size and scope of the Kleiner Perkins investments, or the financial or personal significance of the co-owned airplane, these relationships could not be used to challenge the directors’ impartiality.
Sandys is thus the latest in a line of Strine decisions pushing Delaware law toward greater legal recognition of the fact that structural coziness may make directors reluctant to accuse each other of wrongdoing. This has always been a delicate area; it’s fair to say that any human being who has lived some time among other humans understands the kind of bias that these relationships may generate, but courts have always feared that formal recognition of them would open the floodgates to frivolous/damaging litigation, and force judges to engage in impossible determinations as to the exact point at which friendship becomes compromising. Strine, plainly, believes that the law has overcorrected – i.e., the complete failure to recognize these informal relationships creates an intolerable artificiality in how questions of conflict are examined, and he’s pushing the law in a new direction.
(If I had to guess, I'd also say that Strine recognizes that as Delaware becomes a mini-SEC for transactions on which shareholders vote - i.e., disclosure becomes the only requirement - Delaware's relevance may hinge on its ability to stake out territory for vigorous court oversight that can't be cured by disclosure.)
What’s particularly striking here is that – as Justice Valihura’s dissent makes clear – Sandys goes much further than its predecessor, Del. County Emples. Ret. Fund v. Sanchez. In Sanchez, the allegedly conflicted director had a 50-year friendship with the interested party as well as a strong financial dependency; the Sandys relationships are nowhere near that scale. So Delaware – presumably at Strine’s urging – seems to be in the process of some rather aggressive redrawing of the lines. Where those lines will end up remains to be seen.
I may still teach the Chancery decision in my business class, though – it’s just so useful, with charts, and you can make alternative hypothetical charts and ask how the case might have come out differently. But then I’ll have to either talk the students through the reversal, or assign them the relevant excerpts.
That's all! Wishing everyone a happy erev Chanukah and erev Christmas!
Friday, December 23, 2016
I recently updated my list of business law teaching positions. At this point, a number of the positions have probably been filled, but I put posted dates by the more recently posted positions. I still get asked, on a fairly regularly basis, about how one breaks into law teaching, and while I do have thoughts on that topic (basically, write, write, write), I think folks wanting to enter the legal academy should ask themselves a few questions first.
- Are you truly drawn to both teaching and research (or are you just tired of practicing)?
- Are you geographically flexible? (You have to be both really good and really lucky to pick your geographic location in legal academia)
- Do you have a few years to devote to pursuing a career in legal academia? (these days, it often takes a VAP or two, and/or a few years on the market to secure an academic job).
- If you are in BigLaw, are you truly comfortable with a sizable pay cut?
- Can you be patient with students, administrators, staff, etc.? (things typically move much more slowly in academia than in practice)
Once you have received one of more offers, I would ask the following questions.
- What is my BATNA (best alternative to a negotiated agreement? (If you only have one academic offer, and don't like your alternatives in practice, you should be very careful in negotiating and should try to avoid offending the offering school).
- Can I see myself living in this part of the country? (Accessibility to a major airport can be an important consideration as well, if you plan to travel for work or personal reasons)
- What is the teaching package? Does it include night, weekend, or online courses?
- What are the research expectations? When are reviews done? Roughly what percentage of faculty members achieve tenure?
- How is the financial stability of the school? What is the reputation of the school? Does the school have strong distinctive? How is the local competition? What is the discount rate trend? What is the LSAT/UGPA trend?
- How do you get along with the faculty members you met?
- Is the surrounding town/city an area where it is easy or difficult to find an appropriate job for your significant other?
- If you have young children or plan to have children, how are the schools in the area? Does the university have a tuition exchange and/or tuition payment program?
There are many more questions to ask, but again, it is important to start with your alternatives. If you have strong alternatives, you can be more picky, but you also don't want to start your academic career with an overly aggressive negotiation.
I still think teaching is the most rewarding job available, but there are definitely important questions to ask before pursing an academic career path and before committing to school.
Thursday, December 22, 2016
A year and a half ago I was attending a panel discussion on sports law issues at the Academy of Legal Studies in Business (ALSB) Conference in Philadelphia. A meaningful discussion arose about the logistics of moving toward the pay-for-play model in college sports. At one point somebody asked whether anyone has thought about the tax consequences of moving towards that model, to which my co-author Adam Epstein (who was one of the panelists) responded yes, and noted that our paper analyzing the state tax implications of paying student-athletes was our most downloaded article on SSRN.
Thus far the NCAA hasn’t evolved from the paradigm of amateurism, but every time the debate seems to quiet down about whether it should something new pops up that brings the idea of paying student-athletes back into the spotlight. This week it was the headline, Could Fournette, McCaffrey Skipping Bowls Lead to NCAA Paying Players? As long as there is a remote possibility of moving in that direction in the future, tax issues should be included in the overall discussion of the effects of pay-for-play on college sports.
This past November I presented a working paper at the Southeastern Academy of Legal Studies in Business (SEALSB) Conference on the topic, Analyzing the Applicability of IRC § 162 on the Pay-For-Play Model. § 162 of the Internal Revenue Code provides rules for deducting business expenses for federal income tax purposes. One of the three conditions that must be satisfied to properly deduct business expenses requires that such expenses be incurred while away from home.
Currently there is a split among circuits as to what the term tax home means under § 162, with the majority holding that home is the principal place of business while the minority allows that home means home in the ordinary sense. With respect to professional sports, numerous cases have been published that analyze where various pro athletes’ tax homes are located. However, because college athletics still maintains the principal of amateurism, neither the judicial system nor scholarly works have heartily examined all the various tax issues that could arise under pay-for-play, including the application of § 162 on paid student-athletes.
In this paper I explore a very intricate area of federal tax law that will undoubtedly require judicial guidance in the future should college athletics move towards a pay-for-play model, specifically focusing on what the potential effects of the application of the term tax home will be on paid student-athletes and college athletic programs.
Analyzing the historical application of § 162 from both the majority and minority of circuits, I ultimately propose that depending on which circuit they live in certain paid student-athletes would likely be able to deduct the costs of travel and moving expenses between their family residences and the schools they play for, as well as other specified out-of-pocket expenses not covered by their institutions. For those student-athletes who won’t be able to take advantage of the benefits of § 162 because of the circuit they reside in, there may be a reasonable opportunity to make the case that they are temporarily employed by their universities – a characterization which various courts, including the US Supreme Court, have narrowly analyzed in order to open the door for possible business expense deductions to be taken even if they reside in circuits that define home as the principal place of business.
Ultimately, the questions of (1) where would a paid student-athlete’s tax home be located, and (2) would paid student-athletes be considered living temporarily away from home when residing at their employer-institutions’ campuses will be important tax issues that the judicial system will need to consider should the pay-for-play model be effectuated in the future. I attempt to analyze both of these issues quite thoroughly in this paper.
With visions of tax now dancing in your heads, I graciously wrap up this month’s Guest Blogger posts just in time for the College Football Bowl Game series to really ramp up (minus, of course, Fournette and McCaffrey). As we all embark on new and yet unknown adventures in the coming year I once again wish to extend my sincere thanks to Haskell Murray and the Business Law Prof Blog editorial board for inviting me to share my research in the area of sports and tax as we close out 2016. Happy holidays to all!
Wednesday, December 21, 2016
In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014. Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.
A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware. The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices. The full brief is available here, but this summary might provide easier reading. Reuters reports:
Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.
DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.
Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.
Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?