Thursday, April 6, 2017

ICYMI: #corpgov SSRN Roundup (April 6, 2017)

April 6, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, April 5, 2017

We had a corporate law conference!

No, not that conference, although I suppose that one's nice too.  

In (very) loose association with that other conference, Tulane hosted a corporate academic conference, made possible by the generous donation of one of our alums, Gordon Gamm, and his wife Grace.

The academic conference, which took place on Saturday, April 1 immediately following the Tulane Corporate Law Institute, was great fun, and allowed me to reconnect with old friends and make some new ones.  It was structured on the theme of Navigating Federalism in Corporate and Securities Law, and featured presentations by 11 corporate and securities scholars (including me!).  

Discussion ranged from how to encourage retail shareholders to exercise their corporate voting rights to whether to redesign the internal affairs doctrine to controlling corporate political spending to issues of SEC regulatory capture and the intensity of its enforcement efforts to - of course - how, and even whether, we should distinguish corporate law from securities law.  Most of the papers were in draft form and are not yet publicly available, but a few are up, including Ed Rock's and Daniel Rubenfeld's Defusing the Antitrust Threat to Institutional Involvement in Corporate Governance, Robert Jackson's, Robert Bishop's, and Joshua's Mitts's Activist Directors and Information Leakage, J.W. Verret's Uber-Ized Corporate Law, and my own Reviving Reliance.  

It was genuinely a lively and productive day, capped with a (naturally - this is New Orleans) mouthwatering dinner at Emeril's Delmonico.

I am so grateful to everyone for making it such a special event.  And fingers crossed, we'll be able to host a similar conference next year, also timed to follow the Corporate Law Institute.  With any luck, it can become a regular annual event. 

The full program is here.  

April 5, 2017 in Ann Lipton | Permalink | Comments (0)

Tuesday, April 4, 2017

Equal Pay Day Applied to M & A

The Washington Post reports

Back in 2015, Salesforce CEO Marc Benioff admitted something many CEOs wouldn't: The company had found a pay gap between the men and women who worked for the cloud computing giant, and it was spending $3 million to fix it. Now after acquisitions and rampant growth at the company brought in 7,000 new employees in the past year, he's doing it again, announcing Tuesday that the company has spent another $3 million to adjust for a pay gap that affects 11 percent of its more than 25,000 employees.

In an interview with The Washington Post, Benioff said he believed the re-opened gap was largely because of the company's acquisitive streak -- it bought 14 companies in its last fiscal year, the largest in its history. When companies acquire others, Benioff said, "you buy their pay practices, and this pay practice -- of, basically, gender discrimination -- is quite dramatic through our industry and other industries," he said.

If one cares about equal pay, and I think people should (beyond just today), one needs to account for it in the purchase price of another entity.  This is a great reminder about the due diligence process. We need to think about all the things that matter to our clients (and ask them what those things are). The cost of implementing those things that matter, in addition to all the traditional things we worry about in an acquisition, should be accounted for if we want to maximize benefit for clients.   

April 4, 2017 in Compensation, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (0)

Monday, April 3, 2017

Recent Law Review Experiences - Fewer Nightmares

From time to time, we at the BLPB offer our views on publishing with law reviews.  The excellent, the good, the bad, the ugly--apparently, we have seen it all (or at least close to it).  See, e.g., Marcia's post from last year that includes links to many of these prior posts.  This post carries forward that tradition.  

Two-and-a-half years ago, I published a post entitled Nightmare in Law Review Land . . . . That post included the two standard instructions that I routinely give to law reviews when I submit stack-check drafts.

The first is to leave in the automatic footnote cross-referencing that I have used in the draft until we finalize the article.  The second is to notify me if the staff believes that new footnote citations or citation parentheticals need to be added (specifically noting that I will handle those additions myself).

For the most part, this has worked well for me.  Recently, however, I received the following response to the second instruction:

Thank you for your notes. As part of our editing process, we add any needed citations and parentheticals. We build in time to do this and tend to be fairly thorough. If there are questions regarding sources or an individual has trouble finding sources, our Lead Article Editor (who will serve as your main contact) will reach out to ask you for assistance. As a general rule, our journal does tend to add a large number of parentheticals. I only mention this because it has sometimes caught Authors off guard in the past and I thought it would be worth mentioning on the front end. You will have two opportunites to review the parentheticals and added citations over the next few months to ensure they are consistent with your work.

I should have pushed back.  I didn't.  The result?  I got back a draft with a bunch of new, bungled footnote citations and parentheticals.  It took me hours to run down the new sources cited and consider  them.  I responded with significant edits in the draft and the following comments in my cover message, in pertinent part (edited to omit a few typos):

[F]ootnote citations were frequently inserted in places (especially in the introduction and other areas in which I have provided a “roadmap”—a summary of where the text will go next) where I do not believe they are needed. I have left specific comments in each place, although I fear they may not be well enough developed. But ask questions where you have them.

Relatedly, the citations inserted for a number of these new footnotes supported principles other than those in the cited sentence. . . .  In each case, I tried to go find the material being referenced in the cited source and evaluate whether it supported the stated principle. Then, if I found a disconnect, I suggested in the margin an alternative footnote. . . .  [I]f you decide under your editorial guidelines that a citation is required, please use the alternative I provided. . . .

Also, parentheticals were added in places where they are not required, e.g., in general citations to cases . . . .  I took them out. If you require parenthetical in these places, please just ask and I will supply them. The parentheticals that were added were either so general that they were unhelpful or included inapposite information.

I am not sure my tone was right on the message.  But I admit that I was frustrated and disappointed--maybe more with myself than with the law review students who worked on editing the article--when I wrote the message.  My time in cross-checking all those faulty citations and parentheticals was entirely wasted.  I could easily have added some footnotes and parentheticals where I had missed including them in the draft I submitted, as necessary or desired.  It would have taken a lot less time (more like ten, instead of thirty, hours).

Have any of you had this same issue with law review editors?  I originally experienced this years ago, which led to my standard instruction.  But it seems the problem persists.  So, it must have something to do with the way law review editors are instructed--or instruct each other.  Perhaps that instruction requires more thought . . . .

At any rate, since I started issuing my two standard instructions, I have had fewer dissatisfying experiences.  I plan to continue with the practice of including them when I submit draft articles for review.  And I guess next time a law review insists in response on supplying new footnotes and parentheticals, I will send the editors a link to this post . . . .

April 3, 2017 in Joan Heminway, Law Reviews, Writing | Permalink | Comments (4)

Sunday, April 2, 2017

Fifth Annual Workshop for Corporate & Securities Litigation: Call for Papers

UCLA School of Law, in conjunction with the University of Richmond School of Law, Boston University School of Law, and University of Illinois College of Law, invites submissions for the Fifth Annual Workshop for Corporate & Securities Litigation. This workshop will be held on October 20-21, 2017 at UCLA School of Law in Los Angeles, California.

Overview

This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible. Appropriate topics include, but are not limited to, securities class actions, fiduciary duty litigation, or comparative approaches to business litigation. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress at any stage.

Authors whose papers are selected will be invited to present their work at a workshop hosted by UCLA School of Law on October 20-21, 2017.  Hotel costs will be covered. Participants will pay for their own travel and other expenses.

Submissions

If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to corpandseclitigation@gmail.com by Friday, May 26, 2017. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by late June. 

Questions

Any questions concerning the workshop should be directed to the organizers: Jim Park (James.park@law.ucla.edu), Jessica Erickson (jerickso@richmond.edu), David Webber (dhwebber@bu.edu) and Verity Winship (vwinship@illinois.edu).

April 2, 2017 in Call for Papers | Permalink | Comments (0)

ICYMI: #corpgov Tweets From the Week (April 2, 2017)

April 2, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 1, 2017

Supreme Court to resolve circuit split over duty to disclose under Section 10(b)

The big news in securities litigation this week is that the Supreme Court has agreed to resolve the circuit split over whether a failure to disclose required information can function as a misleading omission for purposes of Section 10(b).

I've blogged about this split before; basically, my take is that courts are wary of omissions liability not simply because they distrust securities litigation in general, but because they are concerned about further blurring the line between fraud claims and claims for mismanagement.

Which, fortuitously, happens to be the subject of my new article, forthcoming in the Fordham Law Review and just posted to SSRN.  I argue that courts are using issues like puffery, loss causation/damages, and omissions liability to draw distinctions between fraud claims and mismanagement claims and - further - to sketch out a (relatively narrow) view of the proper role of shareholders within the corporate governance structure.  I hastily amended the piece before posting to account for the cert grant; my quick prediction is that if the Supreme Court does permit omitted information to serve as the basis of a Section 10(b) claim, lower courts - concerned about this fraud/mismanagement line - will find themselves narrowing the scope of what counts as a required disclosure in the first place, which will then impact not only private plaintiffs, but potentially also government enforcement efforts.

April 1, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, March 31, 2017

New SSRN Ownership

As Professor Steve Bainbridge and others reported last May, SSRN was sold to Elsevier

Until a few weeks ago, I hadn't noticed much of a difference, except for an improved layout on the article pages.

After posting my American Business Law Journal ("ABLJ") article, however, I got an e-mail that my article had been taken down. They claimed that the copyright was held by the ABLJ, which is simply incorrect, as my contract with Wiley (the publisher of the ABLJ) clearly states "The Author retains ownership of the copyright in the Article," and the contract explicity allows me to post the article (including on SSRN) with citation. (Section 2.1)

I sent SSRN my contract and waited a number of days without a response. I then called SSRN's help line and received an apology, but the person did not have the ability to post my article even though she said that they had received the contract and that everything was cleared. The article is now up (and went up shortly after my phone call to SSRN), unless they have already taken it down again.

The whole thing was quite a hassle, and I am not quite sure why they flagged this article.

I do generally find SSRN useful, and in the grand scheme of things this is not a huge deal, but if anyone has a better alternative, I may be willing to try it.

March 31, 2017 in Business School, Haskell Murray, Law School, Research/Scholarhip | Permalink | Comments (2)

Thursday, March 30, 2017

ICYMI: #corpgov SSRN Roundup (March 30, 2017)

I only had 2 relevant SSRN postings in my Twitter feed the past 7 days, so I'm starting with 3 additional items I just pulled from "SSRN Top Downloads For Corporate Governance Network ... for all papers first announced in the last 60 days" (available here).

more than 80% of IROs [Investor relations officers] report that they conduct private 'call-backs' with sell-side analysts and institutional investors following public earnings conference calls

https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2934937

Bargains between those who control corporations and those who control government institutions to benefit themselves ....

https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2909183

Lack of comparability due to the lack of reporting standards is the primary impediment to the use of ESG [environmental, social and governance] information.

https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2925310

And here are the Tweets:

March 30, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, March 29, 2017

What Compliance Officers Want to Know About Jay Clayton

I had planned to blog about SEC Chair nominee Jay Clayton's confirmation hearing, but Matt Kelly said almost everything I wanted to say so I am linking to his post below:

SEC Nominee on FCPA, Compliance Costs, More.

 

March 29, 2017 | Permalink | Comments (0)

Call for Papers: AALS Section on Agency, Partnership, LLC & Unincorporated Associations

The Section on Agency, Partnership, LLCs and Unincorporated Associations is pleased to announce a Call for Papers for the Section’s program on The Challenges and Opportunities of Exotic Hybrids—Series LLCs, Up-C’s and Master Limited Partnerships. In addition to featuring invited speakers, we seek speakers (and papers) that will be selected from this call. The AALS Sections on Taxation, Securities Regulation, and Business Associations are co-sponsoring this program.

Business entity structures continue to evolve as legal innovations mature into recognized business association forms.  For example, variants on LLC and limited partnership forms can be used to maximize asset protection, leverage tax advantages, access capital markets, and achieve other business objectives.  The program will introduce attendees to several “exotic” hybrid structures and discuss the challenges and opportunities associated with each.  The program will be informative—inviting subject matter experts to educate audience members—and exploratory, critically examining the tax, governance, private ordering, securities, and policy implications of new entity structuring tools.

Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 15, 2017. The Executive Committee of the Section on Agency, Partnership, LLCs and Unincorporated Associations, in consultation with co-sponsors, will review all submissions and select up to two papers by July 15, 2017.

All submissions and inquiries should be directed to Anne Tucker, Georgia State University College of Law, amtucker@gsu.edu .

March 29, 2017 in Anne Tucker, Call for Papers | Permalink | Comments (0)

Tuesday, March 28, 2017

NFL's Business Judgment Rules: Will Raiders' Move To Vegas Harm the League?

The Oakland/Los Angeles/Oakland Raiders are soon to become the Las Vegas Raiders. This has fans in an uproar, with some saying the move is like losing "family."  Moves of sports teams are rarely well received in the place the team leaves, and this move is no different.  

Teams move for a variety of reasons, though the primary reason comes down to money.  And there's nothing wrong with that.  Although it is a loss for long-time fans, the team will get new fans in the locations (if history is any indication), and it's certainly the right of the business owners to decide what is best for their business.  In the judgment of Raiders' ownership, it's time for Vegas Baby.  

The structure of the NFL is such that team owners need approval of the league to make such a move, which makes sense because a sports league is necessarily dependent on other teams.  As such, the teams have created some obligations to one another and agreed to give up some level of control for the good of the league.  All but one team voted to support the move to Vegas (the Miami Dolphins dissented), giving the Raiders 31 votes, when they only needed 24.  Thus, it means the other league owners (sans the Dolphins' owners) thought the move was in their best interest, too. 

This makes three recently announced NFL team moves. In addition to the Raiders, the former St. Louis Rams returned to Los Angeles, and the former San Diego Chargers are now a second L.A.-based team. This means the super majority of NFL owners feel all of these moves are in the best interest of the league, or are at least neutral to the moves.  This makes some sense, as there had been relative stability for the league teams, with the last move before these three taking place in 1997, when the Houston Oilers left for Tennessee (Memphis temporarily, then Nashville in 1999). 

Moving forward, though, how much will fans take?  If several more teams make a move in the next few years, will it upset fans to the point that they stop watching? Hard to say, but the league will be able to put a stop to it if they are concerned.  There are a number of older stadiums in the league, so there may be more moves to come. There will almost certainly be threats to move, even if teams end up staying put.

If teams keep moving, it's possible the league could be hurt, but that would require the NFL fans in the old league cities to stop watching the NFL. That could happen, but it seems unlikely.  Either way, it probably won't be a move that tells us the league is being harmed.  Instead, it will probably be when teams without a lease don't get a lucrative offer to move another city.  

March 28, 2017 in Contracts, CSR, Joshua P. Fershee, Sports | Permalink | Comments (2)

Monday, March 27, 2017

Proposed 2018 AALS Business Regulation Discussion Group - Heminway x Tucker Collab

Call for Participants

 

Proposed Discussion Group

A New Era for Business Regulation?

Joan MacLeod Heminway, The University of Tennessee College of Law

Anne Tucker, Georgia State University College of Law

2018 AALS Annual Meeting

San Diego, CA

January 3-6, 2018

This is a call for participants in a proposed discussion group on “A New Era for Business Regulation?” at the 2018 Association of American Law Schools (“AALS”) Annual Meeting.

In January 2017, the president signed an Executive Order on Reducing Regulation and Controlling Regulatory Costs. The order uses budgeting powers to constrict agencies and the regulatory process by requiring that two regulations must be eliminated for each new regulation adopted. The order also mandates that “the total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero.” While the executive order does not cover independent agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission, agencies that crafted many of the rules required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, these agencies and their regulatory agendas will likely be the subject of future reform. The co-organizers of this proposal are looking for full-time faculty of AALS member or fee-paid schools to engage in a discussion at the AALS annual meeting about changes in the business regulatory environment and assess the consequences—good and bad—of regulatory reform affecting businesses. We invite participants from diverse legal backgrounds including, but not limited to, financial regulation, securities regulation, administrative law, business finance and governance, and related fields. If there is sufficient interest in this topic, the co-organizers will submit a proposal for this discussion group to the AALS before the April 13, 2017 deadline.

To indicate your interest in participating, please send an expression of interest by email to either Joan MacLeod Heminway, The University of Tennessee College of Law, at jheminwa@tennessee.edu or Anne Tucker, Georgia State University College of Law, amtucker@gsu.edu. In the subject line of your email, please include “AALS Business Regulation Discussion Group” and your last name. In the text of your email, please provide your name, contact information, and a one-paragraph summary of your interest in the topic, stating how it connects to your current or future research or teaching interests.

If the discussion group proposal is accepted by AALS, the co-organizers may conduct a call for additional proposals before notifying the final faculty members selected to participate. Participants will not be expected to have a formal paper, but will be asked to contribute a written treatment (5-10 pages) prior to the annual meeting.

March 27, 2017 in Anne Tucker, Conferences, Joan Heminway | Permalink | Comments (0)

Sunday, March 26, 2017

ICYMI: #corpgov Tweets From the Week (March 26,2017)

March 26, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, March 25, 2017

Kissing Cousins: MERS and DTC

This semester, I’m teaching a seminar on the financial crisis.  And because my specialty is corporate and securities law, not property, I brought in a ringer – in the form of Chris Odinet of Southern University Law Center – to talk to my class about the Mortgage Electronic Registration System (MERS) and foreclosures.  MERS is a private organization that mortgage bankers have used to track mortgage assignments in the age of securitization, but after the housing bubble burst, it wreaked havoc in the foreclosure process because of sloppy recordkeeping and its inconsistency with the traditional manner in which interests in land have been recorded.  See generally Christopher Lewis Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L. Rev. 111 (2011).

As Chris Odinet described it to my class, MERS was formed when several financial institutions (including, as it turns out, the Mortgage Bankers Association, Fannie Mae, Freddie Mac, the Government National Mortgage Association, the Federal Housing Administration, and the Department of Veterans Affairs) decided that publicly recording mortgage assignments in county property offices was too expensive and cumbersome.  Instead, these institutions decided to form a shell corporation that would “own” all mortgage interests.  Then, instead of formally transferring mortgages from one financial institution to another, MERS would electronically track transfers of ownership.  That way, expensive and anachronistic paper recording systems could be bypassed, and mortgages could be quickly transferred to meet the needs of the age of securitization.

It occurred to me that this is exactly what occurred with stock ownership.  Stock transfers, too, used to be conducted via paper endorsements, which created a literal paper crisis in the 1960s.  See In re Appraisal of Dell.  In response, Congress and the SEC adopted a system of “share immobilization,” namely, that almost all stock today is actually owned by a company called DTC.  DTC is owned by broker dealers, and DTC electronically tracks which shares are allocated to which brokerage.  Those brokerages, in turn, allocate the shares among their clients. 

After class, I looked into the history, and it turns out I wasn’t wrong to draw the comparison: MERS was actually explicitly modeled on DTC.   See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho L. Rev. 805 (1995).  But – and I suppose hindsight is 20/20 – it’s easy to see why the stock transfer system could not simply be wholesale transferred to mortgages,  which is precisely why MERS has created so many headaches.

For starters, the share immobilization system was mandated by Congress, to deal with a federally-regulated system of stock ownership.  As a result, the regulatory system adapted to the change, and federal rules were created to allow a “look-through” to the beneficial owner of the security instead of focusing on the formal record holder.  See, e.g., 17 C.F.R. § 240.14a-13.  Nothing like that happened with MERS, because it was created without the imprimatur of any legislative or regulatory body.  As a result, there are no formal procedures that permit a look past MERS to the beneficial owner of the mortgage, which is part of the reason why MERS’s legal status has been so uncertain.

Relatedly, MERS often includes only the name of the servicer in its system, and does not require its members to record transfers between mortgagees (although, Chris tells me, MERS recently has tried to improve its practices in this regard).  As a result, MERS records simply do not contain information about who actually owns the mortgage, and these private transfers create opportunities for confusion and mischief.  By contrast, stock transfers are heavily regulated, and settlement is required by SEC rule – within 3 days (soon to become 2).

Beyond these regulatory points, mortgage ownership is simply more complex than stock ownership.  A stock transfer is a personal property transfer.  There is a relatively minimal ongoing relationship with the issuing corporation – more on that below – but for the most part, it’s just property being transferred from A to B.

Mortgages, however, involve transfers between lenders, who must carry on complex and financially significant relationships with borrowers and servicers.  Payments from the borrower must be made and applied to the loan; two-way lines of communication must be maintained; in extreme cases, foreclosures must be managed.  On top of that, arcane rules govern the distinction between the mortgage itself and the note that represent the debt.  It is precisely in these areas that MERS has broken down.

Additionally, America has long had a commitment to creating public, transparent records of interests in real estate, including the chain of title; MERS destroyed that by creating an opaque system that fails to keep track of past transfers.  Stock ownership, by contrast, has never been publicly accessible, and the only area where chain of title is relevant is Section 11 (which, incidentally, has also been undermined by DTC).

That said, even the DTC-share immobilization system has been plagued by recordkeeping and legal problems; it is simply that at the end of the day, these problems are far less devastating to the lives of individual people than are the problems with MERS.

For example, stock ownership does involve an ongoing relationship with the issuing corporation (though one far more attenuated than in the ongoing relationships between borrowers and lenders in a mortgage loan), and errors/gaps in recordkeeping can affect that relationship.  Marcel Kahan and Edward Rock wrote about the “Hanging Chads of Corporate Voting,” detailing how voting procedures may be inadequate to keep up with share immobilization.  Moreover, the DTC system – which operates at the federal level – has created uncertainty with respect to state-level recordkeeping systems.  See In re Appraisal of Dell; Dole Case Illustrates Problems in Shareholder System.

But ultimately, a lost or miscounted shareholder vote, or even lost payments in a merger, are peanuts compared someone losing their home in a legally defective foreclosure, or simply the inability of a homeowner to develop a workout plan.

Perhaps fundamentally, then, the difference is about the power imbalances.  The corporate issuer of stock - the constant at the center of shifting shareholder bases - ultimately is the one with control over resources; shareholders' rights and powers are fairly minimal.  By contrast, the "issuer" of the mortgage note - the individual borrower who remains constant at the center of shifting lenders - is the most vulnerable player in the lending system, at the mercy of a rotating cast of sophisticated mortgagees and servicers.  A trading scheme like DTC/share immobilization, designed to accommodate those with very little power vis a vis the obligor, is not one that will do justice when the power relationships are reversed.

Point being, there were a lot of red flags - that might have been evident earlier - in trying to privately model a mortgage transfer system on the federally-mandated system for transferring stock, but here we are.  The banks weren't wrong about the problems with dealing with local recording systems in today's economy; but a true fix will require public mandates and coordination across all jurisdictions.

March 25, 2017 in Ann Lipton | Permalink | Comments (1)

Friday, March 24, 2017

Impact Esq. and Kickstarter's 2016 Benefit Statement

Attorney Kyle Westaway has started a monthly e-mail that compiles information about social enterprise and impact investing law. You can subscribe here.

In the latest Impact Esq. newsletter, Kyle included a link to the Kickstarter’s 2016 Benefit Statement. Kyle wrote that he had “never seen [a benefit report] as strong as Kickstarter’s.” Personally, I am not sure I would go that far. I think Greyston Bakery’s Report and Patagonia’s Report are at least as good. I do think the Kickstarter report is relatively good, but the bar is incredibly low, as many benefit corporations are ignoring the statutory reporting requirement or doing a pathetically bad job at reporting.

While the Kickstarter report is more detailed than most, it still reads mostly like a PR piece to me. The vast majority of the report is listing cherry-picked, positive statistics. That said, Kickstarter did note a few areas for possible improvement, which is extremely rare in benefit report. Kickstarter stated that they could do more to promote “sustainability,” that they could do more to encourage staff to “take advantage of the paid time off we provide for volunteering,” and that they wanted to “encourage greater transparency from creators, better educate backers about the risks and rewards of this system, and further empower our Integrity team in their work to keep Kickstarter safe and trusted.” These “goals” for improvement are quite vague, and I would have liked to see more specific goals.

A few other things to note:

  • University of Pennsylvania produced a study, which was cited and used in the report. I think involving universities in the creation of these reports could be a good idea, though possible conflicts should be considered.
  • “Including both salary and equity, our CEO's total compensation equaled 5.52x the median total compensation of all non-CEO, non-founder employees in 2016. For context, a 2015 study examining the executive pay gap found that the average CEO earns 204 times that of the median worker for the same company.” I would be interested in how Kickstarter’s number compares to companies in their industry, especially direct competitors. I imagine the CEO/Employee compensation ratio is lower in the technology industry, where the market demands fairly high employee compensation, but even considering the industry, Kickstarter's ratio still seems quite low.
  • “Kickstarter overall team demographics: 53% women; 47% men. 70% White/Caucasian; 12% Asian; 12% two or more races; 4% Hispanic or Latino; 2% Black/African American.” This seems to be a good bit more diverse, especially as to gender, than other technology companies who have released similar data.
  • “Everyone who works at Kickstarter receives an annual Education Stipend to explore their interests outside the office. In 2016, our employees used their stipends towards blacksmithing classes, a bookmaking class, a synthesizer, pottery courses, an herbal medicine workshop, art supplies, improv classes, a neon light making seminar, and embroidery.” I didn’t see how much the education stipend was, but this seems like a good perk.
  • “We donated 5% of our after-tax profits to six organizations working to build a more creative and equitable world.” Profits are easier to manipulate than revenues; I’d like to see a revenue floor (as Patagonia does – donating the greater of 10% of profits and 1% of revenues). That said 5% of profits can be significant and does show some commitment to these causes.

March 24, 2017 in Business Associations, Corporate Governance, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Thursday, March 23, 2017

ICYMI: SSRN Roundup (March 23, 2017)

March 23, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, March 22, 2017

What does the EU know that the U.S. Doesn’t About the Effectiveness of Conflict Minerals Legislation?

Earlier this month, the EU announced plans to implement its version of conflict minerals legislation, which covers all “conflict-affected and high-risk areas” around the world. Once approved by the Council of the EU, the law will apply to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold (with some exceptions). Compliance and reporting will begin in January 2021. Importers must use OECD due diligence standards, report on their progress to suppliers and the public, and use independent third-party auditors. President Trump has not yet issued an executive order on Dodd-Frank §1502, aka conflict minerals, but based on a leaked memo, observers believe that it's just a matter of time before that law is repealed here in the U.S. So why is there a difference in approach?

In response to a request for comments from the SEC, the U.S Chamber of Commerce, which led the legal battle against §1502, claimed, “substantial evidence shows that the conflict minerals rule has exacerbated the humanitarian crisis on the ground in the Democratic Republic of the Congo…The reports public companies are mandated to file also contribute to ―information overload and create further disincentives for businesses to go public or remain public companies. Accordingly, the Chamber strongly supports Congressional repeal of Section 1502 due to its all-advised and fundamentally flawed approach to solving a geopolitical crisis, and the substantial burden it imposes upon public companies and their shareholders.”

The Enough Project, which spearheaded the passage of §1502, submitted an eight-page statement to the SEC last month stating, among other things, that they “strongly oppose[] any suspension, weakening, or repeal of the current Conflict Minerals Rule, and urge[] the SEC to increase enforcement of the Rule….The Rule has led to improvements in the rule of law in the mining sectors of Congo, Rwanda, and other Great Lakes countries, contributed to improvements in humanitarian conditions in Congo and a weakening of key insurgent groups, and resulted in tangible benefits for U.S. corporations and their supply chains.”

I agree that the Rule has led to increased transparency and efficiency in supply chains (although some would differ), and less armed control of mines. But I’m not sure that the overall human rights conditions have improved as significantly as §1502’s advocates (and I) would have liked.

As Amnesty International’s 2016/2017 report on DRC explains in graphic detail, “armed groups committed a wide range of abuses including: summary executions; abductions; cruel, inhuman and degrading treatment; rape and other sexual violence; and the looting of civilian property... various ... armed groups (local and community-based militias) were among those responsible for abuses against civilians. The Lord’s Resistance Army (LRA) continued to be active and commit abuses in areas bordering South Sudan and the Central African Republic. In… North Kivu, civilians were massacred, usually by machetes, hoes and axes. On the night of 13 August, 46 people were killed … by suspected members of the Allied Democratic Forces (ADF), an armed group from Uganda that maintains bases in eastern DRC…Hundreds of women and girls were subjected to sexual violence in conflict-affected areas. Perpetrators included soldiers and other state agents, as well as combatants of armed groups…Hundreds of children were recruited by armed groups...”

Human Rights Watch’s 2017 report isn’t any better. According to HRW, “dozens of armed groups remained active in eastern Congo. Many of their commanders have been implicated in war crimes, including ethnic massacres, killing of civilians, rape, forced recruitment of children, and pillage. In … North Kivu, unidentified fighters continued to commit large-scale attacks on civilians, killing more than 150 people in 2016 … At least 680 people have been killed since the beginning of the series of massacres in October 2014. There are credible reports that elements of the Congolese army were involved in the planning and execution of some of these killings. Intercommunal violence increased as fighters … carried out ethnically based attacks on civilians, killing at least 170 people and burning at least 2,200 homes.

Finally, according to a February 17, 2017 statement from the Trump Administration, “the United States is deeply concerned by video footage that appears to show elements of the armed forces of the Democratic Republic of Congo summarily executing civilians, including women and children. Such extrajudicial killing, if confirmed, would constitute gross violations of human rights and threatens to incite widespread violence and instability in an already fragile country. We call upon the Government of the Democratic Republic of Congo to launch an immediate and thorough investigation, in collaboration with international organizations responsible for monitoring human rights, to identify those who perpetrated such heinous abuses, and to hold accountable any individual proven to have been involved.”

Most Americans have no idea of the atrocities occurring in DRC or other conflict zones around the world. I have spent the past few years researching business and human rights, particularly in conflict zones in Latin America and Africa. I filed an amicus brief in 2013 and have written and blogged about the failure of disclosure regimes a dozen times because I don’t believe that name and shame laws stop the murder, rape, conscription of  child soldiers, and the degradation of innocent people. I applaud the EU and all of the NGOs that have attempted to solve this intractable problem. But it doesn't seem that enough has changed since my visit to DRC in 2011 where I personally saw 5 massacre victims in the road on the way to visit a mine, and met with rape survivors, village chiefs, doctors, members of the clergy and others who pleaded for help from the U.S. Unfortunately, I don’t think this legislation has worked. Ironically, the U.S. and EU legislation go too far and not far enough. I hope that if the U.S. and EU focus on a more holistic, well-reasoned geopolitical solution with NGOS, stakeholders, and business.

March 22, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)

Tuesday, March 21, 2017

Abolishing Veil Piercing Is for Legislatures, Not Courts

I write often about how courts often incorrectly treat LLCs as corporations.  Last week, I reported on a case about a court that misstated, in my view, the state of the law regarding LLCs and veil piercing.  When I do so, I often get comments about how veil piercing should go away. Prof. Bainbridge replies similarly here

I am on record as being open to the elimination of veil piercing (I am actually, at least in theory, working on an article tentatively called Abolishing Veil Piercing Without Abolishing Equity), and I am especially open to the idea of abolishing veil piercing with regard to contract-based claims.  (Texas largely does this by requiring "actual fraud" for cases arising out of contract. For a great explanation of Texas law on the subject, please see Elizabeth Miller's detailed description here.)

Several courts over the years, most notably the Wyoming court in Flahive, have extended the concept of veil piercing to LLCs, even where a statute did not explicitly provide the concept of veil piercing. Although I think these courts got it wrong, now that concept of veil piercing is well established for corporations and LLCs in virtually all (if not all) U.S. jurisdictions, I think any rollback must properly be done by statute. 

In the past, I have been critical of courts like the one in Flahive, because I agree with Prof. Bainbridge and others who argue that veil piercing, when not expressly stated, may well have not been intended.  Minnesota, for example, has at least made the concept clear. Minnesota LLC law provides: 

322B.303 PERSONAL LIABILITY OF MEMBERS AS MEMBERS.

Subdivision 1. Limited liability rule. 

Subject to subdivision 2, a member, governor, manager, or other agent of a limited liability company is not, merely on account of this status, personally liable for the acts, debts, liabilities, or obligations of the limited liability company.

Subd. 2. Piercing the veil.

The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies.  . . . .

Like most states, Minnesota courts are willing to pierce the corporate veil where (1) an entity ignores corporate formalities and serves as the alter ego of a shareholder and (2) enforcing the liability limitations of the corporate form leads to injustice or is fundamentally unfair. I have often used this example of how a state should, if they want to have LLC veil piercing, proceed. That is, although I would not advocate for doing so, if a state is going to have veil piercing of LLCs, it should be expressly stated. The statute may be flawed in concept, but that's a call for the legislature.  

The Minnesota statute is well crafted to achieve its apparent goals, in that it makes clear that one can, in fact, be "personally liable for the acts, debts, liabilities, or obligations of the limited liability company" merely on account of being a member of an LLC.  That is, the general rule is that members are not liable for the LLC's debts, but where an LLC veil is pierced, all members become personally liable for the debts, regardless of the their actions.  In Minnesota, this includes "corporate formalities" as a factor for corporate veil piercing and thus it applies to LLCs, even though LLCs have few, if any, statutory formalities (and many states disclaim formalities as an obligation to maintain limited liability for an LLC).  

This seems wrong to me, especially the part about making those who did not participate in the bad behavior potentially liable and adding a corporate-formalities requirement to an entity that is not supposed to have them.  As Prof. Bainbridge argues in Abolishing Veil Piercing,  "Abolishing veil piercing would refocus judicial analysis on the appropriate question-did the defendant-shareholder do anything for which he or she should be held directly liable."  I agree.  

Still, because veil-piercing of entities is well-settled law, I don't think judges have latitude to eliminate it. Judges must focus on proper limitations and clarity of the law that is still subject to interpretation (or plainly inconsistent with the law), where possible.  At this point, abolishing veil piercing must be done by statute. Maybe some bold legislators will heed the call.

March 21, 2017 in Corporate Personality, Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Monday, March 20, 2017

What I Did On My Spring Break

Ringling1

No.  This is not a travelogue.  Rather, it's a brief additional bit of background on a case that business associations law professors tend to enjoy teaching (or at least this one does).

In Ringling Bros. Inc. v. Ringling, 29 Del. Ch. 610 (Del. Ch. 1947), the Delaware Chancery Court addresses the validity of a voting agreement between two Ringling family members, Edith Conway Ringling (the plaintiff) and Aubrey B. Ringling Haley (the defendant).  The fact statement in the court's opinion notes that John Ringling North is the third shareholder of the Ringling Brothers corporation.

I spent two days in Sarasota Florida at the end of Spring Break last week.  While there, I spent a few hours at The Ringling Circus Museum.  It was fascinating for many reasons.  But today I will focus on just one.  I noted this summary in one of the exhibits, that seems to directly relate to the Ringling case:

Ringling2

Interestingly, 1938 is the year in which the plaintiff and defendant in the Ringling case created their original voting trust (having earlier entered into a joint action agreement in 1934).  The agreement at issue was entered into in 1941.  Could it be that, perhaps, the two women entered into this arrangement as a reaction to John Ringling North's desire to acquire--or successful acquisition of--management control of the firm?  I want to do some more digging here, if I can.  But I admit that the related history raised some new questions in my mind.  John Ringling North was all but forgotten in my memory and teaching of the case, until the other day . . . .  The case takes on new interest in my mind (more broadly as a close corporation case) because of my museum visit and discovery. 

[Postscript - March 21, 2017:  Since posting this, I have been blessed by wonderful, helpful email messages offering general support, PowerPoint slides (thanks, Frank Snyder), a video link (thanks, Frances Fendler), and referrals to/copies of Mark Ramseyer's article on the Ringling case, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus, which offers all the detail I could want (thanks, again, Frances, and thanks, Jim Hayes) to help fill in the gaps--while still creating a bit of mystery . . . .  I am a much better informed instructor as a result of all this!  Many thanks to all who wrote.]

March 20, 2017 in Business Associations, Corporate Governance, Corporations, Joan Heminway, Shareholders, Teaching | Permalink | Comments (0)