Saturday, June 20, 2015

Greetings from New Orleans - and also Musings on the AIG Verdict

I’ve just moved down to New Orleans to join the faculty at Tulane Law School (my bio will be updated  ... um, eventually), where I’ll be teaching Business Enterprises and Securities Regulation to start.  As you can imagine, Louisiana is quite a change from both North Carolina and, before that, NYC.  One thing I noticed right off the bat is that most of the banks in Louisiana are local/regional institutions – not many national banks have branches here.  Which means that, as a former plaintiffs’ attorney, for the first time in my adult memory I have a bank account with a financial institution I haven’t sued.

(Sidenote: That was actually kind of an issue when I worked for the law firm then-known as Milberg Weiss.  I was told we had trouble getting firmwide health insurance because we’d sued all the carriers and they didn’t want to do business with us.)

Anyway, as I procrastinate from unpacking....

*actual representation of my apartment

....the big news that has my attention is the AIG verdict.  There have already been conflicting views on what it portends for future bailouts, but what fascinates me is how much of the opinion is devoted to the judge’s moral condemnation of the Fed’s actions, and his moral absolution of AIG, even though the relative good or evil of either player was really not relevant to his ultimate holding.

[More under the jump]

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June 20, 2015 in Ann Lipton | Permalink | Comments (0)

Friday, June 19, 2015

Summer Reading: Conscious Capitalism

Conscious

Recently, I finished reading Conscious Capitalism, written by Whole Foods Market co-CEO John Mackey and Babson College professor Raj Sisodia.

The book is much more “popular press” than academic, as should be clear from the splashy subtitle “liberating the heroic spirit of business.” There is a bit of academic influence in the appendix and notes, but it is mostly social business advocacy and story telling. In fact, the authors state that the primary purpose of the book “is to inspire the creation of more conscious businesses: businesses galvanized by higher purposes that serve and align the interests of all their major stakeholders.” (pg. 8). The book is interesting, passionate, and may accomplish its primary purpose.

The authors paint a compelling picture of Whole Foods Market and similar companies like Trader Joe's, The Container Store, Costco, and Southwest Airlines. These companies appear to take a long-term view and consider what is best for all their stakeholders. I would have appreciated, however, more attention to the struggles the companies must have faced in attempting to satisfy all of their stakeholders. After finishing the book, I was left wishing the authors would have spent more time discussing how to make decisions in situations where certain stakeholder interests irreconcilably conflict. 

I may have more to say about this book in future posts, but as someone who has been researching in the social business area for a few years, I continue to be amazed at the proliferation of terms. The authors describe four tenants of their term “conscious capitalism”: (1) Higher Purpose (beyond just generating profits); (2) Stakeholder Integration (“optimizing value creation for all of them”); (3) Conscious Leadership (leaders “motivated primarily by service to the firm’s higher purpose and creating and creating value for all stakeholders.”); (4) Conscious Culture and Management (culture and management centering around traits like “trust, accountability, transparency, integrity, loyalty, egalitarianism, fairness, personal growth, and love and care.)  (pg. 32-35)

The authors try to differentiate their term of “conscious capitalism” from similar terms, as discussed below. While some of the distinctions make sense, I wish that these various social business movements would agree on a common vocabulary and work together more consistently. Unfortunately and ironically, many associated with the social business movements seem especially territorial. Perhaps, the lack of focus on financial returns causes some to seek personal returns in the form of recognition and influence. Quotes in the bullet points below come from pages 38, 291-97 in the book.  

  • Corporate social responsibility. The authors note that CSR is often “grafted onto traditional business model, usually as a separate department or part of public relations," but for Conscious Capitalism “[s]ocial responsibility is at the core of the business.” The authors are not the first to note this difference between CSR and the more recent social business movements, and I think it is a fair distinction, at least in some cases.
  • Natural Capitalism. According to the authors, “Conscious Capitalism included the valuable insights that natural capitalism offers about the environment and transcends them with a more comprehensive view of the entire business and economic system.” The authors seem to suggest that their term is more holistic, not merely focused on the environment, and more focused on human ingenuity than simply preserving the environment.
  • Triple Bottom Line. The authors seem to think that Conscious Capitalism has a more inclusive view of stakeholders than TBL’s “people, profit, planet.” I don’t think the authors make their case for this distinction, failing to note stakeholders that don’t fall in one of TBL’s three buckets. The authors then note that their theory pays more attention to “purpose, leadership, management, and culture.” I also think this is stretching for distinctions; most of the TBL proponents I know recognize the importance of “purpose, leadership, management, and culture.” The authors admit that the TBL movement is "a fellow traveler," but I think TBL and Conscious Capitalism are roughly synonymous. 
  • Shared-Value Capitalism. SVC, championed by Michael Porter and Mark Kramer, focuses on creating economic value for shareholders and all of society. Conscious Capitalism, the authors claim, does not only focus on economic value like SVC, but expands to human values and includes “emotional and spiritual motivators” lacking with SVC. 
  • Creative Capitalism. Bill Gates popularized this term in 2008 at the World Economic Forum, claiming that certain companies can use variable pricing to make products affordable to those at the “base of the pyramid” and still make a profit. The authors claim Creative Capitalism seems like an “add on” similar to CSR, only applies certain companies, and over-focuses on the reputational benefits, rather than changing the core business purpose. 
  • B Corporations. The authors do not seem optimistic about “[certified] B corporations” which they unfortunately use interchangeably with “benefit corporations,” even though the two terms are distinct. The main reason the authors offer for their pessimism toward B corporations is that “B corporations appear to violate the important principle that owners [shareholders] should ultimately control the corporation.” Most legal readers will notice problems with that statement. First, shareholders don’t control corporations, boards of directors do (see, e.g., DGCL 141(a)). Second, to the extent the authors are talking about aspects of corporate governance like the shareholders’ ability to elect the directors and bring derivative suits, those powers remain for shareholders of both certified B corporations and benefit corporations. Giving the authors (neither of whom are legally trained) the benefit of the doubt – perhaps they are talking about the deprioritization of shareholders in the benefit corporation statutes (shareholders are simply one of many stakeholders that the board must consider in its decision making). The authors seem concerned that shareholders, the most vulnerable of the stakeholders (according to them), will be relatively unprotected. This is a fairly common concern, but the Conscious Capitalism model seems to deprioritize shareholders as well, and even in traditional corporate law, the business judgment rule provides significant protection to the board of directors. Delaware law does give shareholders more power in the M&A context, but benefit corporations and corporations committed to Conscious Capitalism that are incorporated in a constituency statute state seem like they would operate similarly, even in the M&A context. In short, the authors do not clearly express a strong grasp of the benefit corporation statutes, and throughout the book the authors actually seem to advocate operating corporations in line with the benefit corporation statutes (considering all stakeholders in decisions). 

While I am a bit critical in some of my comments above, I did appreciate learning more about Whole Foods Market and similar companies. The companies discussed are some of my favorite companies and are certainly making the world better for many of their stakeholders. The book also made a number of claims that spurred additional thinking, for which I am grateful, and which made reading the book worthwhile.   

June 19, 2015 in Books, Business Associations, Corporate Governance, Corporations, CSR, Haskell Murray, Social Enterprise | Permalink | Comments (3)

Thursday, June 18, 2015

The Cuba Conundrum Part II- Compliance Challenges for US Companies

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

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

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

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

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

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

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

Wednesday, June 17, 2015

Tinkering With Securities Regulation: When Is Leaving "Good Enough" Alone?

In response to one of my posts last week, co-blogger Josh Fershee raised concern about making minor changes to securities regulation--in that case, in the context of the tender offer rules.  Specifically, after raising some good questions about the teaser questions in a marketing flyer regarding a program I am moderating, he adds:

This reflects my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive. 

Admittedly, I am not that close to this, so perhaps I am missing something big, but I’m thinking maybe we should just get out of the way (or, probably better stated, keep the obstacles we have in place, because at least everyone knows the course).

Although I pushed back a bit, I generally agree with his premise (and I told him so).  I will leave the niceties regarding the tender offer rule at issue for another day--perhaps blogging on this after the moderated program takes place.  But in the mean time, I want to think a bit more out loud here about Josh's idea that, e.g., mandatory disclosure and substantive regulation should be minimal and fraud regulation should be paramount.  Not, of course, a new idea, but a consideration that all of us who are honest securities policy-makers and scholars must address.

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June 17, 2015 in Joan Heminway, Securities Regulation | Permalink | Comments (0)

SEC Commissioner Stein's Critique of Mutual Funds & Areas of Future SEC Rule Making

SEC Commissioner Kara M. Stein provided remarks at the Brookings Institute's 75th Anniversary of the Investment Company Act on Monday, June 15th.  Now if that isn't an exciting introduction to a post, I just don't know what is.  She addressed a topic that is of great interest to me and a focus of my research:  retail/retirement investors.  I tend to call them Citizen Shareholders in my writing, and it is sentiment shared by Commissioner Stein:

"By retail investor, I mean the everyday citizen or household that is investing – not institutional investors or pension funds.  Eighty-nine percent of mutual fund assets are attributable to retail investors." (emphasis added).

In her remarks she detailed several troubling aspects of the mutual fund industry--a primary investment source for retail investors-- liquidity, leverage and disclosure.  She also highlighted future SEC rule making initiatives related to these issues.   For example, the Commission recently proposed new rules to enhance data reported to the Commission by registered funds. The proposed rule is available  here (Download SEC proposed disclosure rules) and received comments can be tracked on the SEC's website here.

Noting that a major function of the 1940 Investment Act was transparency and accuracy through disclosures, she lamented the mission drift in the mutual fund industry which she described as:

 

"[T]he liquidity of registered funds is one area where it seems that regulation has drifted into “buyer beware.”  A retail investor looks at a mutual fund and expects that he or she will be able to get money out of a fund very quickly if needed.   A retail investor is generally not performing cash flow analyses on mutual funds to test their true liquidity."

SEC rules require redemption within 7 days and only 15% of mutual fund assets can be invested in illiquid funds. Bank loans and ETF funds, increasingly dramatically in popularity since 2009 (by over 400%) take over one month to settle and thus threaten the redemption rights and liquidity of funds in times of financial stress.

Additional "drift" comes from interpretation that the 15% threshold is at the time of purchase, not at the time of settlement so there is no true 15% threshold.

Promising high liquidity, which all mutual funds must do, on illiquid assets, that have not traditionally been a part of mutual funds, does not seem in keeping with the intent of the Investment Company Act.

Commissioner Stein identified a second problem: leverage.  Another cornerstone principle in mutual fund regulation has been the requirement for relatively low leverage, as mandated by Section 18 of the Investment Company Act.  Section 18 of the Investment Company Act requires low leverage with senior securities mandating a coverage ratio of 3:1 (300% asset coverage for senior securities).  Commissioner Stein described the SEC's enforcement on leverage restrictions as "ad hoc" beginning in 1970 through the 30 subsequent no-action letters issued by the Commission.  

Additionally Commissioner Stein addressed the rapid evolution and popularity of alternative mutual funds that attempt to mimic hedge fund returns based on mutual fund liquidity:  propositions that she finds troubling.

Assets under management in alternative mutual funds have exploded in recent years.  In 2008, there were approximately $46 billion in assets under management for these funds.  By the end of 2014, the number had surged to over $311 billion in assets under management. This is an increase of over 575%.

****

[T]oday, alternative mutual funds promising the upside of hedge fund investments with the liquidity of traditional mutual funds are all the rage.  I think that this trend should give everyone pause, and regulators and the public need to be asking questions about this development.  .....  Should we consider regulating these funds differently than plain vanilla, traditional mutual funds?

Commissioner Stein's remarks highlight several areas in the mutual fund industry that are being reevaluated by the SEC and should be interested developments to watch if you are an attorney representing mutual fund companies and investment advisers, an academic or simply an average "retail" investor.

-Anne Tucker

June 17, 2015 in Corporate Finance, Securities Regulation | Permalink | Comments (0)

Tuesday, June 16, 2015

Polls and the Dumbification of America: Energy Policy & Beyond

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

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

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

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

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

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

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

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

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

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

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

 

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

Monday, June 15, 2015

The Death of Loser-Pays in Delaware

It looks like fee-shifting bylaws are going to have a very short life, at least in Delaware.
About a year ago, the Delaware Supreme Court upheld a loser-pays bylaw that required the unsuccessful party in any intracorporate litigation to pay the costs and attorneys’ fees of the prevailing party. The case, ATP Tour, Inc. v. Deutscher Tennis Bund, involved a non-stock corporation, but nothing in the case indicates the result would not apply to ordinary corporations, and the relevant statutory rules make no distinction between non-stock and stock corporations.

However, the Delaware General Assembly has passed, and the Governor is almost certain to sign, a bill that rejects loser-pay provisions in either the bylaws or the certificate of incorporation.

The bill, SB 75, amends Del. § 102 to provide:

(f) The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

It adds the following language to Del. § 109(b):

The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

Section 115 defines “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

The full text of SB 75 is available here.

June 15, 2015 | Permalink | Comments (0)

Video of Fordham Law School Panel on "Fee Shifting in Shareholder Litigation"

On June 11, 2015, the Delaware House of Representatives joined the Delaware Senate in passing a bill that would prohibit fee-shifting bylaws by Delaware stock corporations. The bill awaits signature by Delaware Governor Jack Markell. Nonetheless, the panel provides a nice debate, between practicing attorneys, and is available here. The information from the Chancery Daily is below. 

Fordham Law School hosted a panel on Fee Shifting in Shareholder Litigation, featuring three members of the corporate law council of the Delaware State Bar Association, which submitted proposed amendments to the Delaware General Corporation Law that would preclude the adoption of fee-shifting provisions in corporate instruments, on Thursday, March 26, 2015.  A webcast video of the panel is now available online here.
 
Moderated by:

Professor Sean J. Griffith - Fordham Law School

Panelists:

Frederick Alexander - Morris Nichols Arsht & Tunnell
Chris Cernich - Institutional Shareholder Services
Kurt Heyman - Proctor Heyman Enerio
Mark Lebovitch - Bernstein Litowitz Berger & Grossman
Norman Monhait - Rosenthal Monhait & Goddess
Andrew Pincus - Mayer Brown

June 15, 2015 in Business Associations, Corporate Governance, Corporations, Delaware, Haskell Murray | Permalink | Comments (0)

Sunday, June 14, 2015

ICYMI: Tweets From the Week (June 14, 2015)

June 14, 2015 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, June 13, 2015

The Pope and the Politics of Climate Change

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

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

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

 

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

Friday, June 12, 2015

Program of Possible Interest; I am Moderating

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Mosaic Dialogue Series
13D Filing Requirements: Time is of the Essence


There has been significant controversy surrounding the required disclosures by investors acquiring a 5% stake in public companies. Under current law, investors must disclose ownership of 5% or more within 10 days. Many issuers are in favor of shortening this disclosure window, with some favoring reporting as soon as one business day after the 5% threshold is crossed. They argue that the 10 day reporting lag deprives the market of material information and can facilitate market manipulation. Shareholders argue that shortening the disclosure window effectively allows issuers to set a ceiling on the number of shares an activist may acquire. Furthermore, at some companies, a poison pill can be triggered if the 5% threshold is crossed, preventing additional accumulation of shares by an activist investor.


Should the current 13D filing requirements be amended? Does the 10 day lag result in activists obscuring their actions? Would shortening the window assist issuers in preventing accumulation of shares by investors seeking change? Join us as we answer these questions and others on this important and timely topic.


Speakers:


Andrew M. Freedman, Partner, Olshan Frome Wolosky, LLP
Kai Haakon E. Liekefett, Partner, Vinson & Elkins


Moderator:

Joan MacLeod Heminway, W.P. Toms Distinguished Professor of Law, The University of Tennessee


Tuesday, June 23rd, 3:30pm EDT
To register, click here.

 

488 Madison Avenue, 23rd Floor, New York, NY 10022 | 212.961.7506 | www.proxymosaic.com
Corporate Governance is a Key Driver of Shareholder Returns

June 12, 2015 | Permalink | Comments (3)

Oregon Benefit Companies - Online List

Oregon has done those interested in social enterprise a great service by posting a list of their benefit companies online. Oregon also has a nice page about becoming an Oregon benefit company.

By my count, the version updated 6/3/15, lists the following number of entities (for a total of 500 benefit companies):

  • 1 professional benefit corporation 
  • 74 benefit corporations 
  • 425 benefit LLCs

Oregon is one of a very few states that provides for the formation of benefit LLCs, in addition to benefit corporations. As you can see, the benefit LLCs are a good bit more popular than the benefit corporations, likely because most social enterprises are small, closely-held entities that should probably be LLCs instead of corporations.  

LLC law is generally flexible enough to allow a social purpose and Oregon's corporation law expressly allows corporations to be formed for a social purpose, so the main draw seems to be branding/signaling based rather than law based.

These are still relatively small numbers in the grand scheme, but it was a fairly short time ago that there were fewer than 500 total benefit companies nationwide.    

June 12, 2015 in Business Associations, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Thursday, June 11, 2015

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

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

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

Some Cuba basics:

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

There are now three possible methods of international investment:

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

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

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

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

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

 

 

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

Wednesday, June 10, 2015

Random Thoughts on the Beneficiaries of Corporate Board Decision Making

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

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

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

Call for Papers - AALS Section on Securities Regulation

Courtesy of AALS Section on Securities Regulation Chair Christine Hurt:

Call for Papers

AALS Section on Securities Regulation - 2016 AALS Annual Meeting

January 6-10, 2016 New York, NY

The AALS Section on Securities Regulation invites papers for its program on “The Future of Securities Regulation: Innovation, Regulation and Enforcement.”

TOPIC DESCRIPTION: This panel discussion will explore the current trends and future implications in the securities regulation field including transactional and financial innovation, the regulation of investment funds, the intersection of the First Amendment and securities law, the debate over fee-shifting bylaws, the ever-expanding transactional exemptions including under Regulation D, and judicial interpretations of insider trading laws. The Executive Committee welcomes papers (theoretical, doctrinal, policy-oriented, empirical) on both the transactional and litigation sides of securities law and practice.

ELIGIBILITY: Full-time faculty members of AALS member law schools are eligible to submit papers. Pursuant to AALS rules, faculty at fee-paid law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit. Please note that all faculty members presenting at the program are responsible for paying their own annual meeting registration fee and travel expenses. NOTE FURTHER, AALS has announced reduced registration fees for junior faculty for the 2016 conference.

PAPER SUBMISSION PROCEDURE: Up to four papers may be selected from this call for papers. There is no formal requirement as to the form or length of proposals. However, more complete drafts will be given priority over abstracts, and presenters are expected to have a draft for commentators two weeks prior to the beginning of the AALS conference.

Papers will be selected by the Section's Executive Committee in a double-blind review. Please submit only anonymous papers by redacting from the submission the author's name and any references to the identity of the author. The title of the email submission should read: "Submission - 2016 AALS Section on Securities Regulation."

Please email submissions to the Section Chair Christine Hurt at: hurtc@law.byu.edu on or before August 21, 2015.

June 10, 2015 in Call for Papers, Joan Heminway, Securities Regulation | Permalink | Comments (0)

APDGE Conference │ Toulouse, France │ December 3-4, 2015

Recently, I received notice of the following call for papers from the French association of Law Professors in Business Schools – the Association des Professeurs de Droit des Grandes Ecoles (“APDGE”).  The theme of the conference is "Governance and Compliance in Companies: Constraints or Opportunities." Additional information is available below and at the conference website:

-------------------

TBS PDD

 3rd Conference of the Association of Law Professors of Les Grandes Ecoles/Business Schools, organized by Toulouse Business School

 

CALL FOR PAPERS

"Governance and Compliance in Companies: Constraints or Opportunities?"

December 3-4, 2015 – Toulouse Business School

Toulouse, France

Conference Website: http://www.tbs-education.fr/en/apdge-conference/

 

The taking into account of new legal rules (whether in Company Law, Banking Law, Tax Law, Environmental Law, Employment Law, Consumer Law, Digital Law, or in other fields of Law), involves increased attention to Governance and Compliance by companies, as well as by research professors.   The position of Chief Compliance Officer has become widespread within major companies, as have charters, codes of good conduct and codes of good governance.  Consequently, it is appropriate to look at Governance and Compliance in companies and to investigate whether or not they form constraints or opportunities for companies.    To what extent does the appearance of new legal and regulatory provisions represent new constraints for companies? On the contrary, may opportunities be detected in these practices in order to deal with upheavals in the Law?  What skills are necessary for lawyers in this new environment?  What are the roles of soft law and of Corporate Social Responsibility (CSR) in this context?

These two research days propose to focus discussion on constraints and opportunities for companies in the development of the new rules and practices of Governance and Compliance.

This Call for Papers seeks to explore the following questions (as illustrations, not limitations):

  • The links between Governance and Compliance, on the one hand, and Corporate Social Responsibility (CSR), on the other hand;
  • Programs to be put in place for a better compliance;
  • The role of lawyers  in Governance and Compliance;
  • Opportunities for good Governance and proper Compliance  for companies;
  • The impact of foreign laws on Governance (for example, the Sarbanes-Oxley Act);
  • The legal risks in a breach of compliance;
  • Legal monitoring and anticipation of new legal and regulatory constraints;
  • Government procurement and a company's history of Compliance ;
  • The interface between internal control (internal auditing, reporting, etc.) and the Law;
  • The legal challenges of whistleblowing;
  • The strategic role of Compliance;
  • The interface between company lawyers, external advisors and operational staff in Governance and Compliance;
  • The theory of groups of parent companies or subsidiaries and Compliance;
  • Control of the chain of sub-contractors and subsidiaries and Compliance;
    • Analysis of the effectiveness of soft law in Compliance;
    • Investors and Governance;
    • The comparative study of Governance. 

A publication of the best papers is foreseen.

Key Dates

Proposals: June 30, 2015

Full Text: September 1, 2015

Author Notification by the Scientific Committee: October 12, 2015

[More information after the break]

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June 10, 2015 in Business Associations, Business School, Call for Papers, Conferences, Haskell Murray | Permalink | Comments (0)

Eroding Effects of Fees on Investment: Personal & Institutional

My recent scholarship (e.g., Outside Investor & Retirement Revolution) has focused on retirement and institutional investors. On the retirement investor side, I frequently address the impact that fees have on retirement investment returns, in part, as a critique of the opacity and lack of choice in the defined contribution plans (i.e., 401K and 457 plans). A focus on fee reduction (as well as simple diversification) has driven growth in the index and electronically-traded (ETF) funds, which charge lower fees because they are passively managed.  These simple lessons in finance are not just relevant to the individual investor.  Earlier this week, CalPERS announced that it would cut fund management fees by reducing (nearly in half) the number of active fund managers overseeing the investment of its over $300 billion in assets.  The New York Times reported that:

Eliminating some external managers will help Calpers shore up its investments by reducing fees. Last year, it paid $1.6 billion in management fees, $400 million of which was a one-time payment for its real estate managers, a Calpers spokesman said.

With larger pools of assets shifted to the remaining asset managers, CalPERS should have more leverage to demand lower fees and cost savings of the chosen few.  CalPERS, as a leader in the pension world, may pave the way to increased pressure on Wall Street fees by other pension funds.

Additional coverage on the shift is available at the Wall Street Journal and at NPR.   

-Anne Tucker

June 10, 2015 in Anne Tucker, Corporate Finance | Permalink | Comments (0)

Tuesday, June 9, 2015

Exam Monitoring in the Digital Age

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. 

June 9, 2015 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (2)

Monday, June 8, 2015

A Proposal for a New "Lead Investor" Securities Act Exemption

I was reading an article on securities crowdfunding in China and came across this description of Chinese practice:

Generally, in China, equity-based crowdfunding capital-seekers rely on the strength of experienced, leading investors to advise “follow-up” investors in locating investment projects. Leading investors are usually professionals with rich experience in private offerings and label themselves as holding innovative techniques in investment strategies and possessing sound insights. On the contrary, follow-up investors usually do not have even basic financial skills, but they do ordinarily control certain financial resources for investment. When a leading investor selects a target investment project through an equity-based crowdfunding platform, the leading investor usually invests personal funds into the project. Crowdfunding capital- seekers then take advantage of the leading investor’s funds to market the project to follow-up investors.

(This is from a recent article by Tianlong Hu and Dong Yang, The People’s Funding of China: Legal Developments of Equity Crowdfunding-Progress, Proposals, and Prospects, 83 U. CIN. L. REV. 445 (2014).)

This is not unique to China. Private offerings to accredited investors in the United States often follow a similar path. Smaller investors are more likely to commit once a well-known, sophisticated investor has made a commitment. But the article made me wonder if we could use that structure to create a new securities offering exemption—one that responds to some of the policy concerns people have about the existing exemptions.

Most unregistered primary offerings of securities in the United States are pursuant to Rule 506 of Regulation D, the regulatory safe harbor for the private offering exemption in the Securities Act. Offerings pursuant to Rule 506, either by law [Rule 506(c)] or for practical reasons [Rule 506(b)], are limited to “accredited investors,” a defined term.

Many people have argued that the definition of accredited investor in Regulation D is too broad. Some of the investors covered by the definition are sophisticated institutional investors who clearly can fend for themselves. But the definition also includes many unsophisticated individuals who meet relatively low net worth and income requirements. Many of these investors, it is argued, cannot adequately evaluate the merits and risks of Rule 506 private offerings.

On the other hand, some people have complained that limiting these offerings to accredited investors privileges wealthy people at the expense of “ordinary” investors. Rich people have the opportunity to participate in these sometimes-lucrative offerings, but the rest of us cannot. That was one of the arguments for the not-yet-implemented section 4(a)(6) crowdfunding exemption added by the JOBS Act.

One way to resolve the tension between these two arguments, and deal with both concerns, would be to allow unsophisticated investors to invest in an offering only after a sophisticated investor has made a commitment. Ordinary investors might not be able to protect themselves, but they could free ride on the sophisticated investor’s evaluation of the offering.

We could create a new category of super-accredited investors, consisting only of institutions or individuals who clearly have the sophistication to protect themselves. Once one of those investors purchases a significant stake in an offering, other investors could purchase on the same terms.

For example, if Startup Corporation wanted to raise $50 million in an unregistered offering, it could first sell $10 million of the securities to a large venture capital firm. After that, it would be free to sell the remaining $40 million on the same terms to any investor, accredited or non-accredited, wealthy or not.

The lead investor’s evaluation of the offering wouldn’t completely protect the other investors. In particular, the lead investor’s tolerance for risk might be much higher than most ordinary investors’. But lead investor's evaluation would help protect against fraud and overreaching by the issuer.

The exemption would have to include some additional requirements to make sure that the other investors can reasonably rely on the lead investor’s decision to invest:

1. No conflicts of interest. The lead investor could not have a relationship to the issuer. Otherwise, the lead investor’s decision to invest might be due to that relationship, not because it believes the investment is a good one.

2. Minimum Investment. There should be a minimum investment requirement for the lead investor, to give the lead investor sufficient incentive to review the deal. To take an extreme example, a lead investor’s decision to invest $1 in a $50 million offering tells us little about the quality of the deal.

3. Same Terms. The lead investor must be investing on the same terms as the subsequent investors. The lead investor’s decision that an investment is worthwhile offers no protection at all to subsequent investors if those subsequent investors are getting a materially different deal.

4. Exit. If the lead investor’s decision to invest provides a signal to the other investors, so does the lead investor’s decision to exit the investment. At a minimum, the lead investor should have to disclose to the other investors when it sells. And, if the issuer is repurchasing the lead investor’s securities, we might want to impose a requirement that the issuer also offer to repurchase the securities of the other investors who purchased in the exempted offering.

This is just a sketch of what such an exemption would look like, about as far as one can go in a blog post. The proposed exemption would not be perfect. It wouldn’t guarantee that investors were getting a good deal, or even that the offering was not fraudulent. But even registration can’t do that. And I think the proposal is a nice compromise between investor protection and capital formation concerns.

June 8, 2015 in C. Steven Bradford, Corporate Finance, Financial Markets, Securities Regulation | Permalink | Comments (4)

Sunday, June 7, 2015

ICYMI: Tweets From the Week (June 7, 2015)

June 7, 2015 in Stefan J. Padfield | Permalink | Comments (0)