Saturday, November 16, 2013
Congratulations to Eric Chaffee, former BLPB contributing editor & friend of the blog, for taking over the Securities Law Prof Blog reins from Barbara Black. Barbara has left some big shoes for Eric to fill, having single-handedly built the Securities Law Prof Blog into one of the staple blogs for business law folks, but if anyone is up to the task it's Eric. Make sure you add the Securities Law Prof Blog to your personal blogroll.
Friday, November 15, 2013
I have posted an updated draft of my latest paper Rehabilitating Concession Theory, which is forthcoming in the Oklahoma Law Review, on SSRN. I have made only minor changes to the the prior draft, but I thought I’d post the abstract and link to the paper here in case any blog readers haven’t seen the paper before and might be interested in the content.
In Citizens United v. FEC, a 5-4 majority of the Supreme Court ruled that, “the Government cannot restrict political speech based on the speaker's corporate identity.” The decision remains controversial, with many arguing that the Court effectively overturned over 100 years of precedent. I have previously argued that this decision turned on competing conceptions of the corporation, with the majority adopting a contractarian view while the dissent advanced a state concession view. However, the majority was silent on the issue of corporate theory, and the dissent went so far as to expressly disavow any role for corporate theory at all. At least as far as the dissent is concerned, this avoidance of corporate theory may have been motivated at least in part by the fact that concession theory has been marginalized to the point where anyone advancing it as a serious theory risks mockery at the hands of some of the most esteemed experts in corporate law. For example, one highly-regarded commentator criticized the dissent by saying: “It has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously.” In this Essay I consider whether this marginalization of concession theory is justified. I conclude that the reports of concession theory’s demise have been greatly exaggerated, and that there remains a serious role for the theory in discussions concerning the place of corporations in society. This is important because without a vibrant concession theory we are primarily left with aggregate theory and real entity theory, two theories of the corporation that both defer to private ordering over government regulation.
Thursday, November 14, 2013
This week two articles caught my eye. The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.
Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the economy. He questioned why the government hadn’t used RICO to pursue more criminal cases. Former prosecutor and now private lawyer Allen Goelman pointed out rather bluntly that prosecutors aren’t cozy with Wall Street—they just won’t bring a case when the evidence won’t allow them to win. He also reminded us that greed and stupidity, which he claimed was the cause of the “overwhelming majority of the risky and irresponsible behavior by Wall Street,” are not crimes. Professor Lawrence Friedman wrote that the law “announces the community’s conceptions of right and wrong,” and if we now treat corporations like people under Citizens United then we should likewise make the executives who run them the objects of the community’s condemnation of wrongdoing.
Finally, Senator Elizabeth Warren concluded that if corporations know that they can break the law, pay a large settlement, and not admit any guilt or have any individual prosecuted, they won’t have any incentive to follow the law. She also argued for public disclosure of these settlements including whether there were tax deductions or releases of liability.
This brings me to the second interesting article. Former SEC enforcement chief and now Kirkland & Ellis partner Robert Khuzami recently said, “I didn’t think there was much doubt in most cases that a defendant engaged in wrongdoing when you had a 20-page complaint, you had them writing a big check, you may well have prosecuted an individual in the wrongdoing.” While not endorsing or rejecting current SEC Chair Mary Jo White’s position to require certain companies to admit wrongdoing in settlements, he raised a concern about whether this change in policy would place undue strain on the agency’s limited resources by forcing more cases to go to trial. He also raised a valid point about the legitimate fear that firms should have in that admitting guilt could expose them to lawsuits, criminal prosecution, and potential business losses. Chair White did not set out specific guidelines for the new protocol, but so far this year 22 companies have benefitted from the no admit/no deny policy and have paid $14 million in sanctions. But we don’t know how many executives from these companies lost their jobs. On the other hand, would these same companies have settled if they had to admit liability or would they have demanded their day in court?
Should the desire to preserve agency resources trump the need to protect the investing public—the stated purpose of the SEC? If neither the company nor the executive faces true accountability, what will be the incentive to change? In a post-Citizens United world, will Congressmen strengthen the laws or bolster the power and resources of the regulators to go after the corporations that help fund their campaigns? Have we, as Dostoyevsky asserted, become “used” to the current state of affairs where drug dealers and murderers go to jail, but there aren’t enough resources to pursue financial miscreants?
What will make companies and executives “do the right thing”? Dostoyevksy also wrote “intelligence alone is not nearly enough when it comes to acting wisely,” and he was right. Perhaps the fear of the punishment for clearly enumerated and understood crimes, and the fear of the admission of wrongdoing with the attendant collateral damage that causes will lead to a change in individual and corporate behavior. I agree with Professor Podgor that there is clearly room for prosecutorial abuse of power and that the myriad of laws can lead to a no-mans land for the unwary executive forced to increase margins and earnings per share (while possibly getting a healthy bonus). While I have argued in the past for an affirmative defense for certain kinds of corporate crimial liability, I also agree with Professor Black and Senator Warren. At some point, people and the corporations (made up of people) need more than “intelligence” to act “wisely.” They need the punishment to fit the crime.
Last week, I attended and presented at my first legal studies in business school conference, the Southeastern Academy of Legal Studies in Business ("SEALSB") annual conference. On this recent trip, I was able to meet a number of other professors who hold positions similar to mine at other business schools. Most of the professors were from the southeast, but we also had professors from California, Michigan, Minnesota, and New York.
One of the new pieces of information I learned was that, while I was correct in my previous post stating that there is no “meat market” equivalent for legal studies in business school positions, the Academy of Legal Studies in Business (“ALSB”) does send out job postings, on occasion, to its members. Also, more than one professor in attendance claimed to have obtained his/her current position by attending the ALSB annual meeting and networking.
In this post, I will discuss some of the differences I see between my current job as a professor teaching law in a business school and my previous job as a law professor in a law school. I draw on my own experiences and conversations I have had with many professors across the country, at both types of schools. That said, this is just anecdotal evidence, and I imagine experiences differ.
- Business school deans and colleagues usually require education on legal scholarship and law journals. Business schools are used to traditional peer reviewed journals (generally double blind) that are listed on Cabell’s. That said, most business schools I know of, are accepting (at least some) law reviews as acceptable placements from their tenure track legal studies professors
- Business schools also tend to encourage, or at least not penalize, co-authored work, whereas it seems many law schools apply a significant discount to co-authored articles.
- Legal studies professors in business schools may have to struggle to obtain WestLaw access and legal research support. Everyone I talked to at SEALSB had obtained access, though it seemed to require a bit more effort than at a law school.
- In law schools, very roughly speaking, the average teaching load seems to be 2/1 at research schools and 2/2 at the teaching schools. In business schools, the normal teaching load seems to be either 2/1 or 2/2 at the research schools (with 2/2 appearing to be the norm), and 3/3 (or in some limited cases 3/4 or 4/4) at business schools. Teaching loads seem to be a bit lighter at law schools, though this may be changing at some law schools given the financial challenges many are facing.
- Business school professors tend to give many more assessments than law school professors. In law schools the norm still seems to be one major assessment per semester, though plenty of professors do more. Most of the legal studies professors in business schools claimed to give at least three major assessments a semester, and sometimes as many as six or seven.
- The business school professors I spoke to tended to have smaller classes (20-50), at least smaller than the large section law classes (70-150). That said, some of the professors from large state universities reported undergraduate classes as large (or sometimes much larger) than the average large section law school class.
- Many legal studies professors I have met teach both undergraduate and graduate business law courses, though some only teach undergraduate. Obviously, law professors only teach graduate students. That said, the average MBA student likely has more work experience than the average law student.
- As far as I can tell, service requirements seem similar at law and business schools.
- Compensation of law professors and legal studies in business school professors seems relatively close, at least if the business school has an MBA program, in addition to its undergraduate program. The compensation seems a bit less uniform across business schools than across law schools, with a few business professors who would be outliers, on the low end, of current law school compensation.
These are all obviously generalizations, and I am sure there are many exceptions, but I thought the rough sketch of the differences might be useful for those who are trying to choose between teaching law at a business school or at a law school.
Wednesday, November 13, 2013
We live in a world where most working individuals have some retirement savings invested in the stock market. The stock market funds, in part, college educations, and serve as the primary wealth accumulator for post-baby boom generations. My parents—an elementary school teacher and a furniture salesman—lived in Midwestern frugality and invested their savings from the mid-80’s until 2006 when they pulled out of the market. They retired early, comfortably (so I believe), and largely because of consistent gains in the stock market over a 30 year period. The question is whether this story is repeatable as a viable outcome for working investors now.
The Wall Street Journal ran a story on Monday “Stocks Regain Appeal” documenting the number of dollars flowing into markets from retail investors as well as the anecdotal confidence of investors. The WSJ reports that:
“U.S. stock mutual funds have attracted more cash this year than they have in any year since 2004, according to fund-tracker Lipper. Investors have sent $76 billion into U.S. stock funds in 2013. From 2006 through 2012, they withdrew $451 billion.”
This seems indisputably good right? Maybe. The real question for me is why is more money flowing into the markets and confidence high? Is this behavior driven by information, emotion, or herd mentality? Robert Shiller, recent Nobel Prize winner and author of Irrational Exuberance, wrote in March in a column for the NYT that investors were confident, but who knows why. Shiller’s conclusions were based on data from the cyclically adjusted price-earnings ratio, CAPE, of 23 suggesting that the market was priced high, which is interesting when compared with his data that 74% of individual investors did not think that the market was overpriced. Shiller strengthened his cautionary stance on the market last month when the CAPE held at 23.7, and Shiller warned that stocks were the “most expensive relative to earnings in more than five years.”
This is business law blog, not a market blog, yet the role of the market interests me greatly. As corporate law scholars, we teach students and write about the legal limits, obligations and assumptions that establish the market and dictate how individuals and institutions interact with the market and corresponding corporate-level controls. In 2007 the market collapsed (self-corrected if we want to use the economists’ terms) and what was the result? Dodd-Frank and a series of legislation aimed at policing the market. If we are interested in the laws that govern the market, surely some attention must be paid to how and why the market works the way that it does.
Tuesday, November 12, 2013
Today is November 12, 2013, or 11/12/13. (It also happens to be my 43rd birthday. Yay me.)
In honor of the unique date, I decided to take a look at some business cases from the most recent prior 11/12/13. I found a couple of interesting passages. One case, Cotten v. Tyson, 89 A. 113, 116 (Md. Nov. 12, 1913), provides a good overview of some basic corporate principals:
 The principle is elementary that a stockholder, as such, is not an owner of any portion of the property of the corporation and, apart from his stock, has no interest in its assets which is capable of being assigned. [citing cases]
 Where one person is the owner of all the capital stock of a corporation, it has been held bound by his acts in reference to its property. [citing cases]
 But it is entirely clear upon reason and authority that a stockholder of a corporation, while retaining his stock ownership, cannot assign the interest represented by his stock in any particular class of the corporate assets. Such an attempted alienation would not only be incompatible with the retention of title to the stock in the assignor but its enforcement would be altogether impracticable. The stockholder himself could not require the corporation to segregate and distribute a specific portion of its property, and certainly he could not create and confer such a right by assignment.
 . . .Even if a stockholder could effectively assign an interest in the choses in action of his corporation, such a result could obviously not be accomplished by a mere assignment of his interest in the assets of its debtors.
Another, and in contrast, Smith v. Pullum, 63 So. 965 (Ala. Nov. 12, 1913), provides a sound example of terrible legal jargon:
The bill . . . alleges that it was agreed between the three parties, viz., G.W. Smith, William Pullum, and W.K. Pullum, that upon the purchase of the property for the above sum a corporation was to be formed, with a paid in capital of $4,500; that $1,650 of the said capital stock was to be the property of W.K. Pullum, $600 of said capital stock was to be the property of said Wm. Pullum, and $2,250 of said capital stock was to be the property of said G.W. Smith.
The case uses the term "said" seventy-five times. It's a four-page case.
Here's hoping we can dispense with said practice posthaste.
Monday, November 11, 2013
The SEC’s crowdfunding proposal offers small, startup businesses a new way to raise capital without triggering the expensive registration requirements of the Securities Act of 1933. But the capital needs of small businesses are often uncertain. They may need to raise money again shortly after an exempted offering. Or they may want to sell securities pursuant to another exemption at the same time they’re using the crowdfunding exemption. How do other offerings affect the crowdfunding exemption? The proposed crowdfunding rules are unexpectedly generous with respect to other offerings, but they still contain pitfalls.
Other Securities Do Not Count Against the $1 Million Crowdfunding Limit
The proposed rules make it clear that the crowdfunding exemption’s $1 million limit is unaffected by securities sold outside the crowdfunding exemption. As I explained in an earlier post, only securities sold pursuant to the section 4(a)(6) crowdfunding exemption count against the limit.
Crowdfunding and the Integration Doctrine
But the integration doctrine, the curse of every securities lawyer, poses problems beyond determining the offering amount.
Briefly, the integration doctrine defines what constitutes a single offering for purposes of the exemptions from registration. The Securities Act exemptions are transactional; to avoid registration, the issuer must fit its entire offering within a single exemption. It cannot separate what is actually a single offering into two or more parts and fit each part into different exemptions.
Unfortunately, the application of the integration doctrine is notoriously uncertain and unpredictable, making it difficult for issuers who do two offerings of securities at or about the same time to know whether or not those offerings qualify for an exemption. (For a critical review of the integration doctrine, see my article here.)
The SEC’s crowdfunding proposal begins with what appears to be absolute protection from integration. The proposal says (p. 18) that “an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied on for the particular offering.”
However, the SEC giveth and the SEC taketh away. First, this isn’t really a rule, just a pledge by the SEC. The anti-integration language does not appear anywhere in the rules themselves; it’s only in the release discussing the rules. Other integration safe harbors, such as Rule 251(c) of Regulation A and Rule 502(a) of Regulation D, appear in the rules. It’s not clear why the SEC was unwilling to write an integration provision into the crowdfunding rules, but an actual rule would provide much more comfort to issuers than the SEC’s bare promise.
And, unfortunately, the SEC doesn’t stop with the broad anti-integration pledge. It adds (pp. 18-19) that
An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, however, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of the offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.
These qualifications may prove particularly mischievous. Assume, for example, that an issuer is offering securities pursuant to section 4(a)(6) and, around the same time, offering securities pursuant to Rule 506(b), which prohibits general solicitation. The issuer would have to verify that none of the accredited investors in the Rule 506(b) offering saw the offering on the crowdfunding platform. Since crowdfunding platforms are open to the general public, that might be difficult.
As a result of the second sentence quoted above, there’s also a potential problem in the other direction. Assume that an issuer is simultaneously offering the same securities pursuant to both section 4(a)(6) and Rule 506(c). Rule 506(c) allows unlimited general solicitation, but the crowdfunding rules severely limit what an issuer and others may say about the offering outside the crowdfunding platform. The SEC seems to be saying that a public solicitation under Rule 506(c) would bar the issuer from using the crowdfunding exemption to sell the same securities. Since the same securities are involved in both offerings, the 506(c) solicitation would arguably “include an advertisement of the terms of the offering made in reliance on Section 4(a)(6).”
Double-Door Offerings Redux
Before the SEC released the crowdfunding rules, I questioned whether “double-door” offerings using the crowdfunding exemption and the new Rule 506(c) exemption were viable. I posited a single web site that sold the same securities (1) to accredited investors pursuant to Rule 506(c) and (2) to the general public pursuant to the crowdfunding exemption. I concluded that, because of the integration doctrine, such offerings were impossible. The SEC anti-integration promise may change that result, if the SEC really means what it says.
The anti-integration promise doesn’t exclude simultaneous offerings, even if those offerings involve the same securities. And I don’t see anything in the rules governing crowdfunding intermediaries that would prevent both 506(c) and crowdfunding offerings on a single web platform, with accredited investors funneled to a separate closing under Rule 506(c). Funding portals could not host such a double-door platform, because they’re limited to crowdfunded offerings, but brokers could.
However, both the issuer and the broker would have to be careful about off-platform communications. Ordinarily, an issuer in a Rule 506(c) offering may engage in any general solicitation or advertising it wishes, on or off the Internet. But the SEC crowdfunding release, as we saw, warns that “any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of the offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.” To avoid ruining the crowdfunding exemption, any off-platform communications would have to be limited to what the crowdfunding rules allow, and that isn’t much.
Sunday, November 10, 2013
Martin Gelter & Geneviève Helleringer posted “Constituency Directors and Corporate Fiduciary Duties” on SSRN a few weeks ago, and I’m finally getting around to passing on the abstract:
In this chapter, we identify a fundamental contradiction in the law of fiduciary duty of corporate directors across jurisdictions, namely the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. Directors are often formally or informally selected by specific shareholders (such as a venture capitalist or an important shareholder) or other stakeholders of the corporation (such as creditors or employees), or they are elected to represent specific types of shareholders (e.g. minority investors). In many jurisdictions, the law thus requires or facilitates the nomination of what has been called “constituency” directors. Legal rules tend nevertheless to treat directors as a homogeneous group that is expected to pursue a uniform goal. We explore this tension and suggest that it almost seems to rise to the level of hypocrisy: Why do some jurisdictions require employee representatives that are then seemingly not allowed to strongly advocate employee interests? Looking at US, UK, German and French law, our chapter explores this tension from the perspective of economic and behavioral theory.
Saturday, November 9, 2013
As Marc O. DeGirolami notes here: "In an extensive decision, a divided panel of the U.S. Court of Appeals for the Seventh Circuit has enjoined the enforcement of the HHS contraception mandate against several for-profit corporations as well as the individual owners of those corporations.” I have not had a chance to read the entire decision (which you can find here), but I did do a quick search for “corporation” and pass on the following excerpts I found interesting.
The plaintiffs are two Catholic families and their closely held corporations—one a construction company in Illinois and the other a manufacturing firm in Indiana. The businesses are secular and for profit, but they operate in conformity with the faith commitments of the families that own and manage them…. These cases—two among many currently pending in courts around the country—raise important questions about whether business owners and their closely held corporations may assert a religious objection to the contraception mandate and whether forcing them to provide this coverage substantially burdens their religious-exercise rights. We hold that the plaintiffs—the business owners and their companies—may challenge the mandate. We further hold that compelling them to cover these services substantially burdens their religious exercise rights…. Nothing in RFRA [the Religious Freedom Restoration Act] suggests that the Dictionary Act’s definition of “person” is a “poor fit” with the statutory scheme. To use the Supreme Court’s colloquialism, including corporations in the universe of “persons” with rights under RFRA is not like “forcing a square peg into a round hole.” [Rowland, 506 US 194, 200 (1993).] A corporation is just a special form of organizational association. No one doubts that organizational associations can engage in religious practice…. It’s common ground that nonprofit religious corporations exercise religion in the sense that their activities are religiously motivated. So unless there is something disabling about mixing profit-seeking and religious practice, it follows that a faith-based, for-profit corporation can claim free-exercise protection to the extent that an aspect of its conduct is religiously motivated.
The quote I focus on above is: “A corporation is just a special form of organizational association.” I have argued previously that when courts render decisions like the Seventh Circuit did here, they seem to be giving mere lip service to the word “special” in that sentence. For more on that, you can go here.
Friday, November 8, 2013
The Economist has an interesting piece on how “[a] mutation in the way companies are financed and managed will change the distribution of the wealth they create.” You can read the entire article here. A brief excerpt follows.
The new popularity of the [Master Limited Partnership] is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works…. Collectively, distorporations such as the MLPs have a valuation on American markets in excess of $1 trillion. They represent 9% of the number of listed companies and in 2012 they paid out 10% of the dividends; but they took in 28% of the equity raised…. [The] beneficiaries, though, are a select class. Quirks in various investment and tax laws block or limit investing in pass-through structures by ordinary mutual funds, including the benchmark broad index funds, and by many institutions. The result is confusion and the exclusion of a large swathe of Americans from owning the companies hungriest for the capital the markets can provide, and thus from getting the best returns on offer….
Another booming pass-through structure is that of the “business development company” (BDC). These firms raise public equity and debt much like a leveraged fund.… What they all share is an ability to do bank-like business—lending to companies which need money—without bank-like regulatory compliance costs….
Andrew Morriss, of the University of Alabama law school, sees the shift as an entrepreneurial response to a century’s worth of governmental distortions made through taxation and regulation. At the heart of those actions were the ideas set down in “The Modern Corporation and Private Property”, a landmark 1932 study by Adolf Berle and Gardiner Means. As Berle, a member of Franklin Roosevelt’s “brain trust”, would later write, the shift of “two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers and …almost necessarily involves a new form of economic organisation of society.” … Several minor retreats notwithstanding, the government’s role in the publicly listed company has expanded relentlessly ever since.
November 8, 2013 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Financial Markets, LLCs, Partnership, Securities Regulation, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (0)
Thursday, November 7, 2013
In 2011, I met with members of the SEC and Congressional staffers as part of a coalition of business people and lawyers raising concerns about the proposed Dodd-Frank whistleblower provision. Ten days after leaving my compliance officer position and prior to joining academia, I testified before a Congressional committee about the potential unintended consequences of the law. The so-called “bounty-hunter” law establishes that whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act are eligible for ten to thirty percent of the amount of the recovery in any action in which the SEC levies sanctions in excess of $1 million dollars. The legislation also contains an anti-retaliation clause that expands the reach of Sarbanes-Oxley. Congress enacted the legislation to respond to the Bernard Madoff scandal. The SEC recently awarded $14 million dollars to one whistleblower. To learn more about the program, click here.
I argued, among other things, that the legislation assumed that all companies operate at the lowest levels of ethical behavior and instead provided incentives to bypass existing compliance programs when there are effective incentive structures within the existing Federal Sentencing Guidelines for Organizations. Although they are no longer binding, judges use the Guidelines to sentence corporations that plead guilty or are so adjudicated after trial. Prosecutors use them as guideposts when making deals with companies that enter into nonprosecution and deferred prosecution agreements. I recommended: (1) that there be a presumption that whistleblowers report internally first unless there is no viable, credible internal option; (2) that the SEC inform the company that an anonymous report has been made unless there is legitimate reason not to do so and (3) that those with a fiduciary duty to report be excluded from the bounty provisions of the bill and be required to report upward internally before reporting externally.
Fortunately, the final legislation does make it more difficult for certain people to report externally without first trying to use the compliance program, if one exists. Nonetheless, the Wall Street Journal reported yesterday that a growing number of compliance personnel are blowing the whistle on their own companies, notwithstanding the fact that they must wait 120 days under the rules after reporting internally to go to the SEC. One of the attorneys interviewed in the WSJ article, Gregory Keating, is a shareholder Littler Mendelsohn, a firm that exclusively represents management in labor matters. His firm and others are seeing more claims brought by compliance officers.
This development leads to a number of questions. What about compliance officers who are also lawyers, as I was? NY state has answered the question by excluding lawyers from the awards, and I am sure that many other states are considering it or will now start after reading yesterday’s article. What does this mean for those forward thinking law schools that are training law students to consider careers in compliance? I believe that this is a viable career choice in an oversaturated legal market because the compliance field is exploding, while the world of BigLaw is contracting. Do we advise students considering the compliance field to forego their bar licenses after graduation because one day they could be a whistleblower and face a conflict of interest? I think that’s unwise. What about compliance personnel in foreign countries? Courts have already provided conflicting rulings about their eligibility for whistleblower status under the law.
Most significantly, in many companies compliance officers make at least an annual report to the board on the activities of the compliance program in part to ensure that the board fulfills its Caremark responsibilities. These reports generally do and should involve detailed, frank discussions about current and future risks. Will and should board members become less candid if they worry that their compliance officer may blow the whistle?
Could the Sentencing Commission have avoided the need for compliance officers to blow the whistle externally by recommending that compliance officers report directly to the board as the heads of internal audit typically do? This option was considered and rejected during the last round of revisions to the Sentencing Guidelines in 2010. Compliance officers who do not report to general counsels or others in the C-Suite but have direct access to board members might feel less of a need to report to external agencies. This is why, perhaps, in almost every corporate integrity agreement or deferred prosecution agreement, the government requires the chief compliance officer to report to the board or at least to someone outside of the legal department.
To be clear, I am not opposed to the legislation in principle. And for a compliance officer to report on his or her own organization, the situation internally was probably pretty dire. Gregory Keating and I sit on the Department of Labor’s Whistleblower Protection Advisory Committee, which will examine almost two dozen anti-retaliation laws in the airline, commercial motor carrier, consumer product, environmental, financial reform, food safety, health care reform, nuclear, pipeline, public transportation agency, railroad, maritime and securities fields. During our two-year term we will work with academics, lawyers, government officials, organized labor and members of the public to make the whistleblower laws more effective for both labor and management.
State bars, government agencies, boards, general counsels, plaintiffs’ lawyers and defense lawyers need to watch these developments of the compliance officer as whistleblower closely. I will be watching as well, both as a former compliance officer and for material for a future article.
Wednesday, November 6, 2013
Yesterday was election day! Elections hold a special place in my heart, and I remain interested in the interplay of corporations and campaigns, especially in a post-Citizens United world. The races, candidates, and results, however, received significantly less attention without a federal election (mid-term or general) to garner the spotlight. The 2014 election season, which officially begins today, has several unknowns. While Citizens United facilitated unlimited independent expenditures (distinguishable from direct campaign contributions) for individuals and corporations alike, corporations remain unable to donate directly to campaigns. Individual campaign contributions are currently capped at $2,500 per candidate/election and are subject to aggregate caps as well. McCutcheon v. FEC, which was argued before the US Supreme Court on October 8, 2013, challenges the individual campaign contribution cap. If McCutcheon removes individual caps, the foundation will be laid to challenge corporate campaign contribution bans as well. See this pre-mortem on McCutcheon by Columbia University law professor Richard Briffault. As for current corporate/campaign finance issues, the focus remains on corporate disclosures of campaign expenditures in the form of shareholder resolutions (118 have been successful) and company-initiated disclosure policies, possible SEC disclosure requirements for corporate political expenditures, and the threat of legislation augmenting corporate disclosure requirements for political expenditures (see, for example the latest bill introduced: the Corporate Politics Transparency Act (H.R. 2214)).
As an aside, brief treatment of the questions regarding the rights of corporations to participate in elections, and the role of corporations in our democracy elicit some of the best (and most heated) student discussions in my Corporations class. If you have the stomach for it, I highly recommend that you try it!
Tuesday, November 5, 2013
As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, "Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf), in which a study considered the impact CEO divorces have on the CEO's corporation. The report indicates that recent events "suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions."
The study found that a CEO's divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact "the productivity, concentration, and energy levels of the CEO" or even result in premature retirement. Third, the sudden change in wealth because of the divorce could lead to a change in the CEO's appetite for risk, making the CEO either more risk averse or more willing to take risks.
The report argues that this matters because:
1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value. Should shareholders and boards be concerned when a CEO and spouse separate?
2. Rigorous research demonstrates a relation between the size and mix of a CEO’s equity exposure and risk taking. Should the board “make whole” the CEO in order to get incentives back to where they originally intended? Would this decision be a “cost” to shareholders because it represents supplemental pay that could have been used to fund profitable investments, or a “benefit” because it realigns incentives and risk taking?
3. Companies do not always disclose when a CEO gets divorced. Reports only come out much later when shares are sold to satisfy the terms of the settlement. Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be? (citation omitted)
While I think this is somewhat interesting, I am not sure how much it helps shareholders or boards in their consideration of CEOs or their companies. Any major life problems or events -- divorce, death of a close family member, major losses in other investments, addiction, etc. -- could (in varying degrees) have a negative impact on control, performance, and risk tolerance.
In addition, the study cites two high-profile examples: Harold Hamm and Rupert Murdoch. Both such divorces are likely to touch on all the issues the study raises. Still, for both men, their recent divorces are not their first divorces. I'd be curious to know if there is any correlation between the performance of companies with CEOs who have been divorced at least once versus those who have not.
Clearly, a major life event can have a negative impact on the CEO and the company, at least in the short term. But I can't help but wonder how much value this adds as a general matter. That is, it may matter on a case-by-case basis, but I don't think I would want to see it become some kind of Sabmematric analysis of CEO potential. It seems to me risky for a company to look at the likelihood of divorce of a CEO as a determining factor in hiring. Or for a company to encourage a CEO to stay married (or single). And I doubt it's wise to go dumping stock in a company just because the CEO has a wandering eye (or their spouse does).
Perhaps there's more to this, but it seems to me this just confirms that a divorce is an awful experience for everyone. Still, for the companies and their shareholders, just as it is for the people directly involved, divorce may be the best available option.
Monday, November 4, 2013
Thanks to Paul Caron and the BLPB editors for allowing me to join the blog as a contributing editor.
I will post from time to time on my scholarly interests, which include legal issues involved in corporate governance, mergers & acquisitions, entrepreneurship, and social enterprise. Currently, as Stefan mentioned in his kind introduction, most of my time has been devoted to social enterprise law, especially benefit corporation law.
For my first few posts, however, I am going to write about landing a job teaching law in a business school and how working at a business school differs from working at a law school. This fall, I moved from a law professor position at Regent University School of Law to a business school position at Belmont University. The move has been a good one, and though my appointment is in the business school, I will also be teaching Business Associations in Belmont’s law school, starting next year.
With the entry and lateral markets so weak at law schools across the country, given the 45% drop in LSAT test takers since 2009, I imagine some readers are considering business school positions.
Finding a legal studies position in a business school can be a bit more work than finding a law professor position. There doesn’t seem to be anything similar to the Faculty Recruitment Conference (a/k/a "the meat market") for legal studies positions in business schools. If there is, I never uncovered it, and would welcome information in the comments.
David Zaring (Wharton) does us all a great service over at The Conglomerate by posting some of these business school legal studies positions. For example, this semester he has posted about openings at Wharton, UNLV, Kansas, Texas State, Richard Stockton, UConn, Penn State, Georgia, Texas A&M, Indiana, and Northeastern Illinois. Occasionally, these business school legal studies positions will require (or at least strongly prefer) a PHD, but for most a JD is sufficient.
Higher Ed Jobs and the Chronicle’s Vitae are two other places to look, though you will have to sort through quite a few adjunct position postings if you are looking for a tenure-track job. As an addition to David’s helpful list above, on November 1, 2013, George Mason University posted an Assistant/Associate Professor in Business Legal Studies opening.
Business schools tend to hire a bit later in the year than law schools, but you see postings year-round. That said, I think business schools are starting to realize that they need to hire earlier if they want to compete with law schools for the top legal talent.
I absolutely love being a professor; it is a loophole on life. For many, however, it is difficult to find a position in your geographic area of preference. If location is important to you, as it was (and is) to me, broadening your search to include business schools could increase your options.
I support crowdfunded securities offerings, but I have criticized the crowdfunding exemption in the JOBS Act. I won’t repeat those criticisms here, but, after wading through the 585-page SEC rules proposal, I am happy to report that some (but not all) of the proposed rules would significantly improve the exemption.
1. The proposed rules clear up the statutory ambiguities relating to investment limits and the amount of the offering
Title III of the JOBS Act includes a number of ambiguities relating to the investment limits and the amount of the offering. The proposed rules clear up those ambiguities. I have already discussed this aspect of the proposed rules and won’t repeat that discussion here.
2. Both issuers and intermediaries can rely on information provided by investors to determine if the investment limits are met.
The amount that an investor may invest in a crowdfunded offering depends on that investor’s net worth and annual income and also on how much that investor has already invested in section 4(a)(6) offerings in the last 12 months. I have argued that crowdfunding issuers and intermediaries should not be required to verify these numbers--that investors should be able to self-certify.
I am happy to report that the SEC’s proposal recognizes the substantial burden that verification would impose and allows both issuers and crowdfunding intermediaries to rely on the number furnished by investors.
Proposed Rule 303(b)(1) allows crowdfunding intermediaries to rely on an investor’s representations as to net worth, annual income, and previous investments unless the intermediary has reason to question the reliability of the investor’s representations. And Instruction 3 to proposed Rule 100(a)(2) allows the issuer to rely on the intermediary to ensure that investors don’t violate the limits, unless the issuer knows an investor is exceeding the limit.
3. The proposed rules include a “substantial compliance” rule that preserves the exemption in spite of immaterial violations.
The crowdfunding exemption’s requirements are detailed and extensive, and the availability of the exemption is conditioned on the issuer’s and intermediary’s compliance with all of those requirements. Most crowdfunding issuers will be relatively inexperienced small businesses and often won’t have sophisticated securities counsel, so violations are likely. The exemption could be lost due to a relatively minor technical violation of the exemption’s requirements.
The SEC solved this problem in Regulation D by adding a “substantial compliance” rule, Rule 508, that sometimes preserves the Regulation D exemptions even when issuers are not in full compliance.
The SEC has included a similar rule in the proposed crowdfunding rules. Proposed Rule 502 provides that a failure to comply with a requirement of the exemption will not result in loss of the exemption as to a particular investor if the issuer shows:
(1) The failure to comply was insignificant with respect to the offering as a whole;
(2) The issuer made a good faith and reasonable attempt to comply with all of the exemption’s requirements; and
(3) If it was the intermediary who failed to comply, the issuer was unaware of the noncompliance or the noncompliance was solely in offerings other than the issuer’s.
4. The proposed rules require the intermediary to provide communications channels for issuers and investors.
As I have discussed elsewhere, the statutory exemption
omits a crucial element of crowdfunding—an open, public communications channel allowing potential investors to communicate with the issuer and each other. Openness of this sort would allow crowdfunding sites to take advantage of “the wisdom of crowds,” the idea that “even if most of the people within a group are not especially well-informed or rational . . . [the group] can still reach a collectively wise decision.” Open communication channels can help protect investors from both fraud and poor investment decisions by allowing members of the public to share knowledge about particular entrepreneurs, businesses, or investment risks. Open communication channels also allow investors to monitor the enterprise better after the investment is made. [C. Steven Bradford, The New Federal Crowdfunding Exemption: Promise Unfulfilled, 40 SEC. REG. L. J. 195 (2012)]
(For more on why I think open communications channels are a good idea, see here, at pp. 134-136.)
Proposed Rule 303(c) requires crowdfunding platforms to provide “communication channels by which persons can communicate with one another and with representatives of the issuer about offerings made available on the intermediary’s platform.” Those communications channels must be accessible by the general public, although only investors who have opened an account with the crowdfunding platform may post.
Sunday, November 3, 2013
Omri Y. Marian has posted “Jurisdiction to Tax Corporations” on SSRN. Here is the abstract:
Corporate tax residence is fundamental to our federal income tax system. Whether a corporation is classified as “domestic” or “foreign” for U.S. federal income tax purposes determines the extent of tax jurisdiction the United States has over the corporation and its affiliates. Unfortunately, tax scholars seem to agree that the concept of corporate tax residence is “meaningless.” Underlying this perception are the ideas that corporations cannot have “real” residence because they are imaginary entities and because taxpayers can easily manipulate corporate tax residence tests. Commentators try to deal with the perceived meaninglessness by either trying to identify a normative basis to guide corporate tax residence determination, or by minimizing the relevance of corporate tax residence to the calculation of tax liabilities. This Article argues that both of these approaches are misguided. Instead, this Article suggests a functional approach, under which corporate tax residence models are designed to support the policy purposes of corporate taxation. This Article concludes that the U.S. should reform the way it defines “domestic” corporations for tax purposes by adopting a two-pronged tax residence test: the place where the corporation’s securities are listed for public trading, or the place of the corporation’s central management and control.
Saturday, November 2, 2013
Friday, November 1, 2013
Grant M. Hayden & Matthew T. Bodie have posted “Larry from the Left: An Appreciation” on SSRN. Here is the abstract:
This essay approaches the scholarship of the late Professor Larry Ribstein from a progressive vantage point. It argues that Ribstein's revolutionary work upended the "nexus of contracts" theory in corporate law and provided a potential alternative to the regulatory state for those who believe in worker empowerment and anti-cronyism. Progressive corporate law scholars should look to Ribstein's scholarship not as a hurdle to overcome, but as a resource to be tapped for insights about constructing a more egalitarian and dynamic economy.
Thursday, October 31, 2013
Although I blog on business issues, I spent most of my professional life as a litigator and this semester I teach civil procedure. A few weeks ago I asked my students to draft a forum selection clause and then discussed the Boilermakers v. Chevron forum selection bylaw case, which at the time was up on appeal to the Delaware Supreme Court. The bylaws at issue required Delaware to be the exclusive venue for matters related to derivative actions brought on behalf of the corporation; actions alleging a breach of fiduciary duties by directors or officers of the corporation; actions asserting claims pursuant to the Delaware General Corporation Law; and actions implicating the internal affairs of the corporation.
While I was not surprised that some institutional investors I had spoken to objected to Chevron’s actions, I was stunned by the vitriolic reactions I received from my students. I explained that Chevron and FedEx, who was also sued, were trying to avoid various types of multijurisdictional litigation, which could be expensive, and I even used it as a teachable moment to review what we had learned about the domiciles of corporations, but the students weren’t buying it.
Perhaps in anticipation of the likelihood of an affirmance from Delaware’s high court, the plaintiffs voluntarily dismissed their appeal, which may have been a smart tactical move. Now let’s see how many Delaware corporations move from the wait and see mode and join the 250 companies that already have these kinds of bylaws. Interestingly, prior to the dismissal, only 1% of those surveyed by Broc Romanek indicated that they would never institute a forum selection bylaw. Given how broad some of these bylaws are, it may stem the tide of some of the litigation that I blogged about here as plaintiffs’ lawyers are forced to face Delaware jurists. Yesterday, as we were discussing venue, I broke the news about the dismissal of the appeal to my students. Needless to say, many were disappointed. Perhaps they will feel differently after they have taken business associations next year.
I have argued that, because of excessive regulatory costs, the new crowdfunding exemption in section 4(a)(6) of the Securities Act is unlikely to be as successful as hoped. (Rule 506(c) is another story; I expect that to be wildly successful.)
We now know what the SEC anticipates. Hidden deep within the SEC’s recent crowdfunding rules proposal is the Commission’s own estimate of the likely impact of the new exemption. (It’s on pp. 427-428, in the Paperwork Reduction Act discussion, if you want to look at it yourself.)
How Many Crowdfunded Offerings?
The SEC estimates that there will be 2,300 crowdfunded offerings a year once the new section 4(a)(6) exemption goes into effect, raising an average of $100,000 per offering. That’s a total of $230 million raised each year.
How Many Crowfunding Platforms?
The SEC estimates, “based, in part on current indications of interest” (p. 380) that 110 intermediaries will offer crowdfunding platforms for section 4(a)(6) offerings. Sixty of those will be operated by registered securities brokers and the other fifty will be operated by registered funding portals. (Non-brokers may act as crowdfunding intermediaries only if they register as funding portals.)
The Fight to Survive
If the SEC’s figures are correct, and who really knows, that’s an average of approximately $2 million raised per crowdfunding platform. I would expect many of those 110 platforms to fail rather quickly. Given the regulatory and other costs involved, crowdfunding intermediaries won’t survive for very long on 10-15% of $2 million a year. The SEC doesn’t appear to think so, either. They note (p. 380) that “it is likely that there would be significant competition between existing crowdfunding venues and new entrants that could result in . . . changes in the number and type of intermediaries as the market develops and matures.”
Of course, as the proposal itself indicates, it’s impossible to predict exactly what will happen when the rules become effective. But it’s at least interesting to see the SEC’s own guesses.