Thursday, November 2, 2017
UK company law requires "directors to promote the...company for the benefit of its members, the shareholders" 74Wash.&LeeL.Rev.1001 #corpgov— Stefan Padfield (@ProfPadfield) November 1, 2017
Wednesday, November 1, 2017
Every year, the United Nations holds a symbolic but important vote on a resolution condemning the U.S. embargo against Cuba and every year the United States and Israel are the only two countries to vote against it. Last year, the United States abstained in accordance with the rapprochement that the Obama administration began in 2014. A few hours ago, the U.S. and Israel stood alone and voted once again against the UN resolution, while 192 other nations voted for it. Ambassador Haley explained that the vote demonstrated, “continued solidarity with the Cuban people and in the hope that they will one day be free to choose their own destiny.” Prior to the vote she announced to the General Assembly that "today, the crime is the Cuban government's continued repression of its people and failure to meet even the minimum requirements of a free and just society… The United States does not fear isolation in this chamber or anywhere else. Our principles are not up for a vote … We will stand for respect for human rights and fundamental freedoms that the member states of this body have pledged to protect, even if we have to stand alone." The United States is indeed isolated in its thinking. Furthermore, the vote and the embargo inflame tensions with allies in Latin America that the U.S. needs for the war on terror and drug smuggling.
I feel strongly about this issue having visited the island three times in the past two years to research business and human rights issues. I’ve sat on a panel with Cuban lawyers and judges in Havana to discuss the embargo. I’ve attended countless seminars and meetings with lawyers and businesses who want to trade with Cuba. At the American Bar Association International Law Section meeting last week there were at least 6 sessions on Cuba. The world wonders why the United States places so much attention on this tiny island nation.
A few minutes ago, I put my finishing touches on my third law review article on Cuba (I had to wait to add in the UN vote). I argue that if and when the U.S. lifts the embargo and considers a bilateral investment treaty, it should require human rights provisions as a condition precedent for investor-state dispute resolution. I will post more about the article when it’s finally published but here’s a sneak peek of an argument relevant to today’s UN vote and the United States’ purported concern about the lack of human rights in Cuba:
[P]rior to lifting the embargo, the United States needs to examine its own record on human rights and how it treats other violators, otherwise it will have no credibility with the Cuban government. The U.S. Congress demands human rights reform in Cuba but has not been consistent in its own business dealings with other authoritarian or socialist regimes. For example, although the U.S. Department of State has criticized Cuba’s human rights record, China, another communist country with a poor human rights record, is the United States’ third largest trading partner. The United States lifted its trade embargo with Communist Vietnam twenty years ago and major U.S. companies now operate there today even though the U.S. government has leveled some of the same human rights criticism against Vietnam as it has against Cuba. The communist government of Laos did not fare much better than Cuba in human rights states department reports, but the U.S. government actively promotes potential investment opportunities there. This inconsistency in approach to human rights violators diminishes the U.S. government’s integrity in negotiating with Cuba. Tellingly, in its 2017 World Report, Human Rights Watch, a respected NGO, warned of the dangers of the Trump Administration from a human rights perspective. This hardly puts the U.S. in a strong bargaining position with Cuba when discussing the conditions on lifting the embargo.
The Trump Administration still has not released its official changes to the trade rules that it announced in June. In the meantime, although it’s hardly easy to do business in Cuba or with the Cuban government, U.S. businesses now remain in limbo until the implementing rules come into force. To be clear, I do not condone the human rights violations that the Cuban government commits against its people. In my upcoming article, I propose mechanisms to prevent foreign investors from perpetuating violations themselves. However, these same businesses that cannot do business with Cuba have no problem doing business with Russia, China, or other regimes with oppressive human rights records. Perhaps the Trump administration has not read State Department and NGO reports on those countries, but I have. Today, the hypocrisy was once again on full display for the world community to see.
Tuesday, October 31, 2017
Ave Maria School of Law seeks applicants for a tenure-track position to begin in the 2018-2019 academic year. The school's greatest curricular needs are business law subjects such as Contracts, Business Organizations, and Uniform Commercial Code courses. Applicants must have a Juris Doctorate or equivalent degree and a strong academic record. Duties will include teaching, scholarship, and service to the law school.
Ave Maria offers students a distinctive legal education marked by the integration of the Catholic faith and the law. Students are trained to reflect critically on the law and to understand that all areas of legal practice serve the common good. The law school emphasizes the importance of faith and community among its faculty, staff, and students, and seeks applicants attracted by, and supportive of, its mission.
Ave Maria has an increasingly diverse student body and desires to provide students with faculty role models and mentors of shared background and experience. As such, we particularly encourage applications from women and members of underrepresented groups within the profession.
Ave Maria is located in Naples, Florida along the coast of the Gulf of Mexico. Naples has been recognized for its healthy lifestyle and excellent quality of life, and is known for its cultural activities and institutions as well as for its many and varied natural attractions.
Applicants should send a cover letter and resume to Professor Mollie Murphy, Chair, Faculty Appointments Committee, at firstname.lastname@example.org, and to Melissa Gamba, Chief Human Resources Officer at email@example.com.
When the indictment for Paul Manafort and Richard Gates was released yesterday, I decided to take a look, in part because I read that the charges included claims that the defendants "laundered money through scores of United States and foreign corporations, partnerships, and bank accounts." (Manafort Indictment ¶ 1.)
It did not take long for people to note an initial mistake in the indictment. The indictment states that Yulia Tymoshenko was the president of the Ukraine prior to Viktor Yanukovych. (Id. ¶ 22.) But, Dan Abrams' Law Newz notes, "Tymoshenko has never been the president of the Ukraine. She ran in the Ukrainian presidential election against Yanukoych in 2010 and came in second. Tymoshenko ran again in 2014 and came in second then, too." Abrams continues:
The Tymoshenko flub is a massive error of fact, but it doesn’t impinge much–if any–on the narrative contained in the indictment itself. The error doesn’t really bear upon the background facts related to Manafort’s and Gates’ alleged crimes. The error also doesn’t bear whatsoever upon the laws Manafort and Gates are accused of breaking. Rather, it’s an error which bears upon the credibility of the team now seeking to prosecute the men named in the indictment.
Perhaps. It is a high-profile mistake, but it doesn't go to the core of the charges, so I think this may overstate it a bit. Still, it is hardly ideal, and it's definitely an unforced error. And unfortunately, there is a second such error.
Paragraph 12 of the indictment provides a chart of entities that were "owned or controlled" by the defendants. The chart headings provide "Entity Name," "Date Created," and "Incorporation Location." But a number of the entities are not corporations. They are LLCs, and you do not "incorporate" an LLC. You form an LLC. (Also, just to be clear, LLCs are not "partnerships," either. They are LLCs.)
Similar to the Tymoshenko error, the type of entity does not appear to impact the underlying narrative or charges. For example, entity type does not appear to impact the "conspiracy to launder money" count. And other jurisdictions, such as Cyprus, do tend to merge the corporate concept with the company concepts in a way that might make the chart headings less wrong than it is for U.S. entities. Nonetheless, it would not have been that hard to go with "Entity Origin" or "Formation Location."
Okay, so all of this is rather nitpicky, and I get that. The underlying charges are serious, and I hope and expect that the charges and the surrounding facts (not these mistakes) will be the focus of the legal process as it runs its course. But, it is also proper, I think, to work toward getting the entire document right. Details matter, and at some point could mean the difference between winning and losing, even if that does not appear to be the case this time around.
Monday, October 30, 2017
The title of this post is hyperbole on some level. But with Halloween being tomorrow, I couldn't resist the temptation to use a festive greeting to introduce today's post. And there is a bit of a method to my titling madness . . . .
I admit that I do feel a bit tricked by the removal of the Leidos, Inc. v. Indiana Public Retirement System case (about which co-blogger Ann Lipton and I each have written--Ann most recently here and I most recently here) from the U.S. Supreme Court's calendar. It was original scheduled to be heard a week from today. Apparently, based on the related filings with the Court, the parties are documenting a settlement of the case. Kevin LaCroix offers a nice summary here. How cunning and skillful! Just when I thought resolution of important duty-to-disclose issues in Section 10(b)/Rule 10b-5 litigation was at hand . . . .
Indeed, I had hoped for a treat. What pleasure it would have given me to see this matter resolved consistent with my understanding of the law! The issue before the Court in Leidos is somewhat personal for me (in a professional sense) for a simple reason--a reason consistent with the amicus brief I co-authored on the case. I share that reason briefly here to further illuminate my interest in the case.
In my 15 years of practice before law teaching, I often advised public company issuers on mandatory disclosure documents--periodic filings and offering documents, most commonly. I also counseled investment banks serving as public offering underwriters, placement agents for private securities offerings, and financial advisors in transactions. Even in those days, I was a bit of a rule-head (self-labeled)--a technically engaged legal advisor who tried to stick to the law and regulations, determine their meaning, and implement them consistent with their meaning in practice. I drove colleagues to distraction and boredom, on occasion, with my explanations of the appropriate interpretation of various rules, including specifically mandatory disclosure rules. (This may be why I love the work of the Sustainability Accounting Standards Board, which is looking at mandatory disclosure rules in context.) I teach my students from that same nerdy vantage point.
In advising issuers and others on mandatory disclosure (and in training junior lawyers in the firm), I always noted that facial compliance with the specific line-item disclosure requirements for a Securities and Exchange Commission ("SEC") form is not enough. I advised that two additional legal constraints also govern the appropriate content of the public disclosures required to be made in those forms--constraints that required them to inquire about (among other things) missing information.
- First, I noted the existence of the general misstatements and omissions disclosure (gap-filler) rules under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended (as applicable in the circumstances)--Rule 408 under the 1933 Act and Rule 12b-20 under the 1934 Act. Each of these rules provides for the disclosure of "such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading" in addition to the information expressly required to be included in the relevant disclosure document under applicable line-item disclosure rules.
- Second, I noted that anti-fraud law--and, in particular, Section 10(b) of, and Rule 10b-5 under, the 1934 Act--provides an even more comprehensive basis for interrogating the contents of disclosure that facially complies with line-item mandatory disclosure rules. The overall message? No one wants a fraud suit, and if they get one, they should be able to get out of it fast! If a business and its principals were to be sued under Section 10(b) and Rule 10b-5, I wanted to ensure that the relevant disclosures were accurate and complete in all material respects.
Thus, the existence of the line-item and gap-filling disclosure rules--and the potential for fraud liability based on failed compliance with them--are, taken together, important motivators to the best possible disclosure. In my business lawyering, I believe I used these regulatory principles to my clients' advantage. I would hate to see lawyers lose the important leverage that potential fraud liability gives them in fostering accurate and complete disclosures, fully compliant with law. Hence, my position on the Leidos litigation--that mandatory disclosure rules do give rise to a duty to disclose that may form the basis for a securities fraud claim under Section 10(b) and Rule 10b-5. (The ultimate success of any such claim would be, of course, based on the satisfaction of the other elements of a Section 10(b)/Rule 10b-5 claim.)
So, no treat for me--at least not just yet. But perhaps this post will forestall any real trickery--the trickery involved with avoiding securities fraud liability for misleading omissions to state material information expressly required to be stated under line-item mandatory disclosure rules. For me, that is what is at stake in Leidos and in disclosure lawyering generally. Let's see what transpires from here.
Sunday, October 29, 2017
Saturday, October 28, 2017
It seems that in the wake of Donald Trump’s remarkable political ascent, a number of CEOs have developed their own political ambitions.
Facebook’s Mark Zuckerberg famously embarked on an anthropological tour of the United States, rubbing shoulders with the struggling common folk in Iowa, as well as in Wisconsin, Ohio, and South Carolina. Disney’s Bob Iger says a lot of people are saying that he should run. Starbucks’s Howard Schultz (okay, former CEO, still Executive Chair) visited the Houston victims of Hurricane Harvey, later explaining, “I wanted to see the aftereffects, but mostly I wanted to talk to people. And you learn a few things that are heartbreaking. You know, 40 percent of American households don’t have $400 of cash available to them….I think the country needs to become more compassionate, more empathetic. And we can’t speak about the promise of America and the American Dream and leave millions of people behind.”
Now, I suppose one could ask all kinds of questions about whether the Trump phenomenon should be interpreted to mean that America hungers for a closer relationship between corporations and politics, but my immediate reaction is, how do you square the fiduciary obligations associated with running a company with the demands of the political sphere?
I mean, leaving aside the obvious pull on a CEO’s attention and time, Schultz – apparently while harboring presidential ambitions – announced that Starbucks would hire 10,000 refugees (a decision that, arguably, negatively impacted his company’s stock price). Bob Iger has had to navigate such highly charged issues as his presence on Trump’s Advisory Council, and the political commentary of Jimmy Kimmel at ABC, and Jemele Hill at ESPN. Facebook, of course, has had to address issues of foreign interference with American elections, and has recently announced that it will voluntarily require disclosures akin to those required of television ads. And that doesn’t even get into any gratuitous political speeches.
I’m not taking a position over whether these executives did the right or the wrong thing in each instance, but I am concerned that when CEOs simultaneously run their companies and run for president, it’s difficult to discern whether their political moves are intended to benefit the corporation (including, as relevant, all stakeholders), or their own political careers. Under these conditions, how can shareholders be certain that their CEOs’ actions – on everything from labor conditions to executive pay to environmental footprints – are intended to advance the best interests of the company?
Friday, October 27, 2017
A former student brought this fundraising website to my attention: To the Stars Academy of Arts and Sciences ("TTS Academy). (Image above from a Creative Commons search).
This article describes TTS Academy as follows: "Former Blink-182 singer and guitarist Tom DeLonge is taking his fascination with/conspiracy theories about UFOs to their logical conclusion point: He's partnering with former government officials on a public benefit corporation studying 'exotic technologies' from Unidentified Aerial Phenomenon (UAP) that the consortium says can 'revolutionize the human experience.'"
Remember the Blink-182 song Aliens Exist?
I couldn't make this up. And I did spend some time trying to determine if it was a joke, but TTS Academy's 63-page offering circular suggests that it is no joke. And TTS Academy appears to have already raised over $500,000.
According to the organization's website, Tom DeLonge of Blink-182 fame is in fact the CEO and President. Supposedly, DeLonge has teamed with former Department of Defense official Luis Elizondo who confirmed to HuffPost that the TTS Academy is planning to "provide never before released footage from real US Government systems...not blurry, amateur photos, but real data and real videos." Rolling Stone reports that "DeLonge has long been interested in UFO and extraterrestrial research. After parting ways with Blink-182 in 2015, he delved deeper into the subject, releasing the book Sekret Machines: Gods earlier this year and he's also working on a movie that is related to those interests called Strange Times." TTS Academy is a Public Benefit Corporation, formed in Delaware.
The TTS Academy website states: "To The Stars Academy is a Public Benefit Corporation (PBC), which means our public benefit purpose is a core founding principle of our corporate charter alongside the traditional goal of maximizing profit for shareholders." Hmm... How does one pursue a public benefit purpose and seek to maximize profit for shareholders? A main point of benefit corporations is liberate companies from the perceived restrictions of shareholder wealth maximization.
The website continues: "Our public purpose: Education - Community - Sustainability - Transparency. PBCs have enjoyed a surge in popularity as the public becomes more interested in corporate responsibility, transparency, and more recently, the concept of impact investing.* It’s clear that an expanding portion of the general population is looking to make an impact on the world around them, not only through volunteering, or speaking out on social media, but through financial decision making.** We believe raising resources through Regulation A+ crowdfunding will allow us to expedite expansion of TTS Academy’s PBC initiatives, like promoting citizen science, enhancing traditional education with science, engineering and art-related programming, supporting veterans and their families, and promoting underrepresented people in film." Color me skeptical.
As Professor Christine Hurt noted way back in 2014/15, the crowdfunding and social enterprise circles may overlap significantly. Professor Hurt wrote, "for-profit social entrepreneurship may find equity crowdfunding both appealing and available. For-profit social entrepreneurs may be able to use the crowdfunding vehicle to brand themselves as pro-social, attracting individual and institutional cause investors who may operate outside of traditional capital markets and may look for intangible returns. Just as charitable crowdfunders rebut the conventional wisdom that donors expect tax-deductibility, prosocial equity crowdfunders may rebut the conventional wisdom that early equity investors expect high returns or an exit mechanism." Not sure if she, or any of us, predicted exactly this type of company.
Thursday, October 26, 2017
Wednesday, October 25, 2017
Today I sat through a panel at the ABA International Law Section Meeting entitled, I, Robot - The Increasing Use and Misuse of Technology by In-House Legal Departments. I have already posted here about Ross and other programs. I thought I would share other vendors that in-house counsel are using according to one of the panelists:
- Deal point - virtual deal room.
- Casetext - legal research.
- Disco AI; Relativity; Ringtail - apply machine learning to e-discovery.
- Ebrevia; Kira Systems; RAVN - contract organization and analysis.
- Julie Desk - AI "virtual assistant" for scheduling meetings.
- Law Geex - contract review software that catches clauses that are unusual, missing, or problematic.
- Legal Robot - start-up uses AI to translate legalese into plain English; flags anomalies; IDs potentially vague word choices.
- LexMachina - litigation analytics.
- NeotaLogic - client intake and early case assessment.
- Robot Review - compares patent claims with past applications to predict patent eligibility.
- Ross Intelligence - AI virtual attorney from IBM (Watson).
These and their future competitors lead to new challenges for lawyers, law professors, and bar associations. Will robots engage in the unauthorized practice of law? What are the ethical ramifications of using artificial intelligence in legal engagements? How much do you tell clients about how or what is doing their legal research? What about data security issues for this information? How do we deal with discovery disputes? Can robot lawyers mediate? Why should lawyers who bill by the hour want the efficiency of artificial intelligence and machine learning? Finally, how do we help students develop skills in “judgment” and how to advise and counsel clients in a world where more of the traditional legal tasks will be automated (and 23% of legal task already are)? These are frightening and exciting times, but I look forward to the challenge of preparing the next generation of lawyers.
Tuesday, October 24, 2017
A recent magistrate judge's recommendation on a motion to strike in Hawaii alerted me to a problem with the Hawaii Local Rules of Practice for the United States District Court for the District of Hawaii. The mistake is not the judge's; it is in the rules. The recommendation explains:
[An] LLC must be represented by an attorney. See Local Rule 83.11 (“[b]usiness entities, including but not limited to ... limited liability corporations ... cannot appear before this court pro se and must be represented by an attorney”) . . . .
THE BANK OF NEW YORK MELLON FKA THE BANK OF NEW YORK, AS TRUSTEE FOR THE CERTIFICATE HOLDERS OF THE CWMBS INC., CHL MORTGAGE PASS-THROUGH TRUST 2006-OA5, MORTGAGE PASS THROUGH CERTIFICATES, SERIES 2006-OA5, a Delaware corporation, Plaintiffs, v. LEN C. PERRY JR.; NATHAN JON LEWIS; 3925 KAMEHAMEHA RD PRINCEVILLE, HI 96722, LLC, Defendants., No. CV 17-00297 DKW-RLP, 2017 WL 4768271, at *1 (D. Haw. Oct. 2, 2017), report and recommendation adopted sub nom. THE BANK OF NEW YORK MELLON fka THE BANK OF NEW YORK, AS TRUSTEE FOR THE CERTIFICATE HOLDERS OF CWMBS INC.; CHL MORTGAGE PASS-THROUGH TRUST 2006-OA5, MORTGAGE PASS THROUGH CERTIFICATES, SERIES 2006-OA5, a Delaware corporation, Plaintiff(s), v. LEN C. PERRY, JR.; NATHAN JON LEWIS; 3925 KAMEHAMEHA RD PRINCEVILLE, HI 96722, LLC Defendant(s)., No. CV 17-00297 DKW-RLP, 2017 WL 4767667 (D. Haw. Oct. 20, 2017). (I know this could be cited more succinctly, but I thought this was pretty great so I went with the whole enchilada.)
The local rules, available here, state, as quoted,
LR83.11. Business Entities.
Business entities, including but not limited to corporations, partnerships, limited liability partnerships, limited liability corporations, and community associations, cannot appear before this court pro se and must be represented by an attorney. (emphasis added)
LLCs (limited liability companies) are still not corporations, and too often courts and local rules insist on saying they are. But help is available. I made my first trip this summer to Hawaii with my family, and it was amazing. So I put this offer out there: if anyone in Hawaii would like some help cleaning up local rules (and other business-entity related laws, rules, and regulations) count me in. This rule is wrong, but there is a whole lot right about Hawaii.
Monday, October 23, 2017
Notre Dame Law School invites applications to serve as the inaugural full-time Director of the Law School’s new California Innovation Clinic. The Clinic will provide transactional services and related advice to individuals or entities in the Bay Area seeking to start or expand their own ventures. The Clinic will operate out of the Notre Dame California center in Palo Alto, California.
The Clinic will provide students, under the supervision of the Clinic Director, opportunities to serve the transactional needs of early-stage startup ventures. The services offered by the Clinic will depend in significant part on the background and skills of the Clinic Director, but we anticipate that the Clinic will assist clients with some or all of the following: entity formation, founder agreements, non-disclosure agreements, ownership agreements, licensing and/or freedom to operate agreements, and privacy and data security policies. Specific client matters will be determined by the Clinic Director, although decisions about the overall direction of the Clinic’s work will be made in consultation with the Dean and other law school faculty members.
The Director will be a full-time staff attorney or non-tenure track faculty member, with responsibility for all aspects of the Innovation Clinic, including client development, client representation, law student supervision, and classroom instruction. The Innovation Clinic will be one of six clinics at the Law School.
Responsibilities of the Director will include:
- Developing a consistent and appropriate base of clients for the clinic;
- Designing and implementing the Clinic infrastructure including a curriculum, a case management system, and relationships with partner organizations;
- Providing transactional services to Clinic clients;
- Supervising up to 8-10 law students per semester, and approximately
1-2 law students each summer, in direct client representation;
- Providing law students with instruction in substantive and procedural law necessary to effectively represent Clinic clients;
- Providing law students with training in core lawyering skills necessary to carry out client representation, including interviewing and counseling, fact investigation, negotiation, drafting corporate agreements, and oral advocacy;
- Developing and teaching a companion course covering the range of legal issues that arise at different stages of a startup venture’s development;
- Collaborating with clinical and other faculty at the Law School;
- Collaborating with leaders of other entrepreneurship-related activities within the broader University, including the IDEA Center;
- Attending conferences and interacting with faculty at other institutions; and
- Assisting in the development of additional financial resources for the Clinic.
The ideal candidate will have the following qualifications:
- A Juris Doctor degree from an ABA-accredited law school and at least 8-10 years of practice experience relevant to the representation of startup ventures in transactional matters;
- Excellent supervisory and communication skills;
- A commitment to instructing and supervising law students;
- Ability to work in a self-directed and entrepreneurial environment;
- An academic record that demonstrates the capacity to be an active participant in the Law School’s academic community and in the national clinical-education community; and
- A license to practice law in the State of California.
Term and Compensation: The position is full-time with a salary commensurate with experience, plus benefits, which include medical, dental, and retirement. The initial contract will be for a two-year term beginning July 1, 2018, or as soon as possible.
Sunday, October 22, 2017
"Kantian ethics..prohibits [some]..high-risk lending..based on..impossibility of universalizing..practice" 15Geo.J.L.&Pub.Pol'y865 #corpgov— Stefan Padfield (@ProfPadfield) October 22, 2017
Saturday, October 21, 2017
Readers of the blog know that a few months ago, the University of Tennessee hosted a BLPB symposium, with essays to be published in a forthcoming volume of Transactions: The Tennessee Journal of Business Law. It was a terrific amount of fun, where we bloggers who usually just interact over the internet got a chance to see each other face to face (in some cases, for the first time!)
Anyhoo, I just posted my contribution to the symposium, Family Loyalty: Mutual Fund Voting and Fiduciary Obligation, to SSRN. Here is the abstract:
In recent years, institutional investors have increasingly come to dominate the market for publicly-traded stock. Mutual funds have become especially important, controlling trillions of dollars of corporate equity.
The SEC has made clear that it is the fiduciary responsibility of fund administrators to vote their shares in a manner that benefits investors in the fund. Sponsoring companies have responded by creating centralized research offices that determine the voting policies across all of the funds they administer. Though there may be some variation at the individual fund level, most fund families vote as a block.
The practice of centralized voting raises the question whether each fund is promoting the best interests of its investors. For example, one fund may hold stock in an acquisition target, while another holds stock in the acquirer; one fund may hold stock in a target, while another holds debt. These funds have different interests, but voting policies rarely differentiate among them.
This Essay argues that mutual fund boards should develop procedures to ensure that fund shares are voted with a view toward advancing the best interests of that particular fund. If such procedures cannot be implemented in a manner that justifies their costs, funds should refrain from voting their shares at all.
In addition to benefitting fund investors, this proposal may also have a salutary effect on portfolio firms. In recent years, commenters have expressed concern about the voting power exerted by mutual fund managers, who may pressure firms to avoid competition within an industry, or who may encourage short-term financial engineering over long-term growth. Decentralization may diminish asset managers’ power, thereby alleviating these effects.
Thanks so much to the University of Tennessee College of Law, and to all of the students - and especially to Joan - for the opportunity.
Friday, October 20, 2017
American University Washington College of Law is seeking applications, both entry-level and lateral, for tenure-track or tenured appointment to the faculty. The law school is looking at several areas, but fields of particular need are securities regulation, corporate finance, business associations, and the regulation of banks and financial institutions. The official announcement contains more details, but applications should not be sent through Interfolio; instead please send a cover letter and CV directly to Brian Coffill, Faculty Coordinator, at firstname.lastname@example.org.
Below the line is a call for papers that I just received.
The Atlantic Law Journal is a double-blind peer-reviewed law journal, and it is one of the regional publications of the Academy of Legal Studies in Business.
The Atlantic Law Journal is now open for submissions and is soliciting papers for its upcoming Volume 20 with an expected publication date in summer 2018. The Atlantic Law Journal is listed in Cabell's, fully searchable in Thomson-Reuters Westlaw, and listed by Washington & Lee. The journal is a double-blind peer-reviewed publication of the Mid-Atlantic Academy of Legal Studies in Business (MAALSB). Acceptance rates are at or less than 25%, and have been for all our recent history. We publish articles that explore the intersection of business and law, as well as pedagogical topics. Please see our website at http://www.atlanticlawjournal.org/submissions.html for the submission guidelines, the review timeline, and more information regarding how to submit. Submissions or questions can be sent to Managing Editor, Evan Peterson, at petersea [at] udmercy.edu.
The Harvard Law School Forum on Corporate Governance and Financial Regulation recently contained a notice about the Delaware Corporate Law Resource Center, which I thought might interest our readers as well. The post is reproduced below the line.
The oral histories of iconic Delaware cases are the most interesting, and useful, part of the website to me, though some of the cases do not appear to have materials yet. In addition to the cases, there is an oral history on 102(b)(7) to which my judge (VC Stephen Lamb) and others contributed. I hope the existing materials will be added to and expanded over time.
The University of Pennsylvania Law School Institute for Law and Economics (ILE) is pleased to announce the creation and public availability of a new website devoted to resources relating to the development of the Delaware General Corporation Law and related case law. This website (the Delaware Corporation Law Resource Center) has two principal components. The first is a compilation of resources relating to the Delaware General Corporation Law itself, including a link to the text of the statute, and links to the bills to amend the statute since its general revision in 1967. This portion of the website also includes links to annual commentaries on those amendments, the reports and minutes generated in the 1967 revision process, and memoranda disseminated by the Council of the Delaware State Bar Association Corporation Law Section describing some of the more significant and controversial amendments to the statute.
The second component of the website is a repository for materials constituting oral histories of iconic corporate law decisions of the Delaware courts since 1980, dealing with the director’s fiduciary duty of care, duties in takeovers, and freezeouts by controlling stockholders. This portion of the website is a work in progress, but for some of the cases it already contains the opinions in the case, briefs, selected transcripts of oral arguments, and selected key documents from the record. Most notably, the oral history compilation includes high quality videotaped interviews of lawyers and judges involved in the case, who describe the back story of the case with details not available through review of the courts’ opinions.
The oral history portion of the website also includes the first in a series of composite videos setting forth the background of each case. That premiere video describes the background of Smith v. Van Gorkom and presents, in narrative fashion, selected excerpts from the video interviews of the participants.
ILE hopes and expects that this website, which is freely available to the public, will prove to be a valuable resource for the teaching and development of Delaware corporate law. ILE welcomes suggestions for ways in which the website can be made even more useful to those interested in its subject.
The new website is available here.
Thursday, October 19, 2017
Faculty Development Opportunity -- Business Innovation in Chile: A Case Study of the Wine Export Sector
If you're a fan of wine (I am) and international business if of interest (it is), this Faculty Development might be for you. It overlaps with the AALS Annual Meeting, so it won't work for me this year, but it looks like a good program. Have a look:
Temple University’s Center for International Business Education and Research (CIBER) presents
Faculty Development in International Business: Santiago, Chile (January 5-11, 2018)
Business Innovation in Chile: A Case Study of the Wine Export Sector
Leave winter behind this January and join us for a summer experience in Chilean wine country. As an innovation-driven economy, the United States prides itself on developing and delivering innovative goods and services domestically and globally through high-tech exports, creative branding, and in-demand services. Among those exports is our growing wine sector, led by Napa Valley but recently expanding into other parts of California, Oregon, Virginia, and other lesser-known wine producing regions of the United States. Despite this expansion, the United States remains behind old world wine producers in Europe. Chile and Australia also outpace the United States in terms of wine exports and have been leading the way in innovative production and marketing techniques.
On this faculty/professional-oriented immersion experience, participants will visit a number of innovative businesses in the wine export sector and related industries in Chile to better understand how innovation in a highly-regulated sector can disrupt the traditional approaches taken by Old World producers in Europe and provide a comparative advantage for modern producers.
Some of the key learning outcomes on this immersion include:
- An understanding of how innovation is utilized to drive growth in emerging markets;
- A comparative perspective of an innovative sector active in the home and target market;
- A better sense of the supply chain for a commodity such as wine and how innovation can accelerate movement along that supply chain and;
- Tools that can be used to leverage enhancements in innovation for U.S. exporters.
The immersion experience is being led by Fox School of Business Assistant Professor, Dr. Kevin Fandl, a Latin America specialist with deep knowledge of the region. Dr. Fandl’s research emphasizes the relationship between law, policy, and business in global markets. He takes his extensive experience at senior levels of federal government policymaking to the marketplace by examining how laws and regulations drive or inhibit innovation and business opportunity. His knowledge of Chile, as well as the wine industry, add significant academic value to this immersion experience.
Program Fee: $2,700 per person (fee includes: hotel accommodations, corporate visits, cultural activities, some meals, visits to Chilean Vineyards, and in-country transportation)
Deposit: A $500 non-refundable deposit is due at initial time of registration. Final payment will be due on October 27, 2017. To register: https://noncredit.temple.edu/templeciberfdib
Space is limited. A guest package is also available.
For questions or additional information, please contact Lauren Letko at email@example.com
Tuesday, October 17, 2017
Guest Post: Zohar Goshen and Richard Squire’s “Principal Costs: A New Theory for Corporate Law and Governance”
The following is a guest post from Bernard S. Sharfman*:
The foundation of my understanding of corporate governance rests on a small but growing number of essays, articles, and books. These writings include Henry Manne’s Mergers and the Market for Corporate Control, Michael Dooley’s Two Models of Corporate Governance, Stephen Bainbridge’s Director Primacy: The Means and Ends of Corporate Governance and The Business Judgment Rule as Abstention Doctrine, Kenneth J. Arrow, The Limits of Organization, Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Law, Zohar Goshen & Gideon Parchomovsky’s The Essential Role of Securities Regulation, and Alon Brav, Wei Jiang, Frank Partnoy & Randall Thomas’ Hedge Fund Activism, Corporate Governance, and Firm Performance. Recently, I have added to this esteemed list Zohar Goshen and Richard Squire’s Principal Costs: A New Theory for Corporate Law and Governance.
Goshen and Squire put forth a new theory, the “principal-cost theory,” which posits that a firm’s optimal corporate governance arrangements result from a calculus that seeks to minimize total control costs, not just agency costs (“the economic losses resulting from managers’ natural incentive to advance their personal interests even when those interests conflict with the goal of maximizing their firm’s value”):
The theory states that each firm’s optimal governance structure minimizes total control costs, which are the sum of principal costs and agent costs. Principal costs occur when investors exercise control, and agent costs occur when managers exercise control. Both types of cost can be subdivided into competence costs, which arise from honest mistakes attributable to a lack of expertise, information, or talent, and conflict costs, which arise from the skewed incentives produced by the separation of ownership and control. When investors exercise control, they make mistakes due to a lack of expertise, information, or talent, thereby generating principal competence costs. To avoid such costs, they delegate control to managers whom they expect will run the firm more competently. But delegation separates ownership from control, leading to agent conflict costs, and also to principal conflict costs to the extent that principals retain the power to hold managers accountable. Finally, managers themselves can make honest mistakes, generating agent competence costs.
Moreover, it is important to understand that the theory is firm specific:
Principal costs and agent costs are substitutes for each other: Any reallocation of control rights between investors and managers decreases one type of cost but increases the other. The rate of substitution is firm specific, based on factors such as the firm’s business strategy, its industry, and the personal characteristics of its investors and managers. Therefore, each firm has a distinct division of control rights that minimizes total control costs. Because the cost-minimizing division varies by firm, the optimal governance structure does as well. The implication is that law’s proper role is to allow firms to select from a wide range of governance structures, rather than to mandate some structures and ban others.
The bottom line is that “A firm that seeks to maximize total returns will weigh principal costs against agent costs when deciding how to divide control between managers and investors.”
A minimization of total control costs approach to the identification of optimal governance arrangements allows for the fundamental value of authority in large organizations to be respected and acknowledged, something which is missing in many academic works that only focus on agency costs. According to Michael Dooley, “Where the residual claimants are not expected to run the firm and especially when they are many in number (thus increasing disparities in information and interests), their function becomes specialized to risk-bearing, thereby creating both the opportunity and necessity for managerial specialists.” According to Rose and Sharfman, “Especially where there are a large number of shareholders, it is much more efficient, in terms of maximizing shareholder value, for the Board and executive management—the corporate actors that possess overwhelming advantages in terms of information, including nonpublic information, and whose skills in the management of the company are honed by specialization in the management of this one company—to make corporate decisions rather than shareholders.”
The calculus of the principal-cost theory also allows for the potential for Bainbridge’s director primacy as a positive theory to be proven correct for any particular firm: “As a positive theory of corporate governance, the director primacy model strongly emphasizes the role of fiat - i.e., the centralized decisionmaking authority possessed by the board of directors.” In the context of Goshen and Squire’s calculus, Bainbridge is arguing that principal costs will greatly outweigh agency costs when total control costs are minimized.
Finally, Goshen and Squire’s theory allows for an understanding of why dual-class share structures continue to persist and why they have been successfully implemented at companies such as Alphabet (Google) and Facebook. Their theory is critical to the argument I make in my most recent paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs. In sum, Goshen and Squire’s theory allows for a more robust understanding of what is meant by optimal corporate governance arrangements, something that an exclusive focus on agency costs does not allow.
*This post comes to us from Bernard S. Sharfman, who is an associate fellow at the R Street Institute, a member of the Journal of Corporation Law’s editorial advisory board, a visiting professor at the University of Maryland School of Law (Spring 2018), and a former visiting assistant professor at Case Western Reserve University School of Law (Spring 2013 and 2014).