Friday, July 15, 2016

Drinker Biddle's Analysis of the First 50 Crowdfunding Offerings

Robert Esposito (Drinker Biddle) passed along his firm's interesting report on early crowdfunding offerings. The report is available here. Be sure to download the firm level detail spreadsheet available via the data download on the top right of the page.  

The report shows that social enterprise and breweries/distilleries account for outsized portions of the early offerings. A group of us (including co-blogger Joan Heminway) predicted, at the University of Colorado's business school in July 2013, that social entrepreneurs would gravitate to equity crowdfunding. Separately, in my social enterprise law seminar, I was surprised by how many students presented on breweries that were social enterprises, and looking at this list it appears that there is at least one company (Hawaiian Ola Brewing Corporation - a Certified B Corporation) that falls into both the social enterprise and brewery categories highlighted below. It may be that both areas appeal to younger entrepreneurs who may also be eager to try this new form of capital raising. 

Go read the entire report, but I provide a teaser quote below the dotted line with some emphasis added.

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

In general. As of June 30, 2016, 50 companies have filed a Form C with the SEC to offer securities under the Regulation Crowdfunding exemption. Minimum target offering amounts range from $20,000 to $500,000 per offering, with a median of $55,000. All but one of these issuers, however, have disclosed that they will accept offers in excess of the target amount, including 27 issuers that say they will accept investments at or near the maximum permitted offering amount of $1,000,000.  In contrast, 18 of the first 50 issuers elected to cap their offering at just $100,000, with the remainder setting an offering cap of between $200,000 and $500,000.  In the aggregate, if this first wave of retail crowdfundings is successful, 50 small companies will raise an aggregate of $6 to $30 million in new capital to fund their businesses. 

While announced offering durations range from 21 days to one year, the median period that issuers say they will keep their offerings open is just under six months, with about half electing an offering duration between 166 and 182 days.

Eighteen different jurisdictions of incorporation are represented among the first 50 issuers; however, nearly half of the initial filers (24) are Delaware entities. Early data shows that issuers tend to be early-stage startups, with a median issuer age of just 354 days. Nevertheless, nine of the issuers were more than five years old, and the oldest was incorporated in 2003. . . . 

While a total of 12 funding portals have registered with FINRA to date, the early mover Wefunder portal hosts more than half (26) of the first 50 offerings. The StartEngine portal has secured eight offerings, with the remainder split among other portals, including SeedInvest, Next Seed, Flashfunders, and Venture.co

Early Adopters.

  • Social Enterprises. According to the Global Entrepreneurship Monitor’s Special Topic Report on Social Entrepreneurship, social enterprises account for only 5.7 percent of entrepreneurial activity in the United States. However, early crowdfunding data shows that social enterprises are strongly represented among crowdfunding issuers. Seven issuers, representing 14 percent of the first 50 offerings, are either registered as benefit corporations or benefit LLCs, or are certified by B Lab as B Corps, and at least an additional nine issuers operate within traditional corporate forms with strong social and/or environmental missions. Combined, these issuers represent 32 percent of the first 50 offerings.
     
  • Raise a Glass. Craft breweries, distilleries, and licensed establishments are also disproportionately represented among the first 50 issuers. Eight issuers, representing 16 percent of the first 50 offerings, fall into this category, including 2 distilleries, 2 craft breweries, 2 bars, as well as a frozen alcohol producer and a producer of ginger liqueur. 

July 15, 2016 in Business Associations, Crowdfunding, Delaware, Haskell Murray, Social Enterprise | Permalink | Comments (2)

Thursday, July 14, 2016

Caremark, Compliance, and Cooperation

Two weeks ago, I blogged about the potential unintended consequences of (1) Dodd-Frank whistleblower awards to compliance officers and in-house counsel and (2) the Department of Justice’s Yates Memo, which requires companies to turn over individuals (even before they have determined they are legally culpable) in order to get any cooperation credit from the government.

Today at the International Legal Ethics Conference, I spoke about the intersection of state ethics laws, common law fiduciary duties, SOX §307 and §806, and the potential erosion of the attorney-client relationship. I posed the following questions regarding lawyer/whistleblowers and the Yates Memo at the end of my talk:

  • How will this affect Upjohn warnings? (These are the corporate Miranda warnings and were hard enough for me to administer without me having to tell the employee that I might have to turn them over to the government after our conversation)
  • Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ?
  • Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ?
  • Will companies turn people over to the government before proper investigations are completed just to save the company?
  • Will executives cooperate in an investigation? Why should they?
  • What’s the intersection with the Responsible Corporate Officer Doctrine (which Stephen Bainbridge has already criticized as "running amok")?
  • Will there be more claims/denials for D & O coverage?
  • Will individuals who cooperate get cooperation credit in their own cases?
  • Will employees turn on their superiors without proper investigation?
  • How will individuals/companies deal with parallel civil/criminal enforcement proceedings?
  • What about indemnification clauses in employment contracts?
  • Will there be more trials because there is little incentive for a corporation to plead guilty?
  • What about data privacy restrictions for multinationals who operate in EU?
  • How will this affect voluntary disclosure under the US Federal Sentencing Guidelines for Organizational Defendants, especially in Foreign Corrupt Practices Act cases?
  • What ‘s the impact on joint defense agreements?
  • As a lawyer for lawyers who want to be whistleblowers, can you ever advise them to take the chance of losing their license?

I didn’t have time to talk about the added complication of potential director liability under Caremark and its progeny. During my compliance officer days, I used Caremark’s name in vain to get more staff, budget, and board access so that I could train them on the basics on the US Federal Sentencing Guidelines for Organizations. I explained to the Board that this line of cases required them to have some level of oversight over an effective compliance program. Among other things, Caremark required a program with “timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning the [company’s] compliance with law and its business performance.”

I, like other compliance officers, often reviewed/re-tooled our compliance program after another company had negotiated a deferred or nonprosecution agreement with the government. These DPAs had an appendix with everything that the offending company had to do to avoid prosecution. Rarely, if ever, did the DPA mention an individual wrongdoer, and that’s been the main criticism and likely the genesis of the Yates Memo.

Boards will now likely have to take more of a proactive leadership role in demanding investigations at an early stage rather than relying on the GC or compliance officer to inform them of what has already occurred. Boards may need to hire their own counsel to advise on them on this and/or require the general counsel to have outside counsel conduct internal investigations at the outset. This leads to other interesting questions. For example, what happens if executives retain their own counsel and refuse to participate in an investigation that the Board requests? Should the Board designate a special committee (similar to an SLC in the shareholder derivative context) to make sure that there is no taint in the investigation or recommendations? At what point will the investigation become a reportable event for a public company? Will individual board members themselves lawyer up?

I will definitely have a lot to write about this Fall. If you have any thoughts leave them below or email me at mnarine@stu.edu.

July 14, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Ethics, Lawyering, Marcia Narine, Securities Regulation, Shareholders, White Collar Crime | Permalink | Comments (1)

Wednesday, July 13, 2016

Let Corps Be Corps: Follow-Up on Entity Tax Status

This is just me musing a bit, but in following up my post on how LLCs can choose to “be corporations” for federal tax purposes, meaning they get C corp tax treatment, I was thinking that maybe the IRS could just stop using state-law designations at all.  That is, stop having “corporate” tax treatment at all. 

My proposal is not abolishing corporate tax – that’s a much longer post and one I am not sure I’d agree with.  Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax

This post deals with the tax code, which means I am in over my head, and because this is tax related, it means the solution is a lot more complicated than this proposal.  But now that the code provisions are not really linked to the state law entity, I think we should try refer to state entities as state entities, and federal tax status with regard to federal tax status.  Under such a code, it would be a little easier for people to understand the concept behind state entity status, and it would make more sense to people that a “C Corp” does mean “publicly traded corporation” (a far-too common misunderstanding).  Thus, we could have C Tax corporations, S Tax LLCs, K Tax LLCs, for example.  We'd know tax status and state-entity status quite simply and we'd separate the concepts. 

A guy can dream, right?

July 13, 2016 in Corporations, Joshua P. Fershee, Legislation, LLCs, Unincorporated Entities | Permalink | Comments (0)

Book Spotlight: Empire of the Fund by William Birdthistle

Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press.  A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons.  I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.

Empire of the Fund is segmented into four digestible parts:  anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”.  As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy.  And now, from Professor Birdthistle:

Things that the audience might learn:

The SEC does practically zero enforcement on fees.  [pp. 215-216]  Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees.  Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris?  Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees).  So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.

The only justification for 12b-1 fees has been debunked.  [pp. 81-83]  Most investors don't know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors.  The industry's response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale.  The SEC's own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds' investors.  I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.

Target-date funds are more dangerous than most people realize.  [pp. 172-174]  Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such.  But I point out some serious drawbacks with them.  First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that's a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes).  Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we're heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we'll be in very large danger with a somnolent investing population

Continue reading

July 13, 2016 in Anne Tucker, Corporations, Current Affairs, Financial Markets, Law and Economics, Securities Regulation, Shareholders | Permalink | Comments (0)

Monday, July 11, 2016

Innovative Teaching in Bankruptcy and Reorganizations

OK.  I know it's not yet quite time to panic about syllabi and such for the fall semester.  But that first day of class does approach, and I know some of you out there have already given some thought to innovating your teaching for the fall.  Maybe you're new to teaching or teaching a new (or new-to-you) course.  Maybe you're trying to spice up or change the direction of a course you've taught for a while.  Maybe this post will give you some new food for thought . . . .

For a number of years, my colleague George Kuney, the Director of the business law center at UT Law, has asked students to invest in a particular Chapter 11 bankruptcy case as a capstone experience in his Bankruptcy and Reorganizations course.  The students, working in pairs or small groups,  are required to review all of the documents in the case docket and provide summaries that integrate those filings with learning from the course and supplemental research.  George makes the resulting case studies available to the public.  The cumulation of case studies created by students in this course has gotten quite impressive over the years.  And the case studies get significant readership.

I often have said that it's hard for a law student to identify gaps in knowledge unless the student undertakes to write or speak about the law.  George's exercise offers students the opportunity to both write and speak about the law in a practical setting.  The final work product is a joint writing, but along the way, the students engage verbally to discuss between or among themselves what to present and how to present it in the final case study.

The project also helps students to see the immediate relevance of the law they are learning to find and apply in the course.  Someone out there is using that law right now in a context that requires issue and rule identification and legal analysis and judgment.  The students review and assess the decisions and actions of legal counsel and their clients real-time--just as the news media is reporting on those decisions and actions, in some cases.  Wow.

I see a lot of value in this method of teaching.  I am playing around with changing my Securities Regulation course (which next will be offered in the spring) to incorporate a smaller-scale version of an exercise like this.  It may take me a while to come up with something that works, but I am going to give it a go.  Let me know if you've used a project like this in any of your classes.  I would be curious to know what folks are doing in this regard.

July 11, 2016 in Bankruptcy/Reorganizations, Joan Heminway, Teaching | Permalink | Comments (0)

Sunday, July 10, 2016

ICYMI: Tweets From the Week (July 10, 2016)

July 10, 2016 in Stefan J. Padfield | Permalink | Comments (1)

Saturday, July 9, 2016

Marist College, School of Management - Assistant/Associate Professor of Law/Business Law Opening

I am stealing Haskell's thunder on this one (at his suggestion) to promote this position at Marist College.  Little known facts (other than for folks, like Haskell, who know my family well): my daughter is a Marist Red Fox (that's the school's mascot) having graduated from there with a degree in Media Studies.  It's a lovely small liberal arts college in Poughkeepsie, NY.  And its new President is David N. Yellen, the former Dean and Professor of Law (criminal law expert) at Loyola University Chicago School of Law.  Here are key points from the position announcement (linked to from the first sentence below):


Marist College invites applications and nominations for the position of Assistant /Associate Professor of Law/Business Law to join the School of Management beginning Fall, 2016.

Duties and Responsibilities:
This tenure track position will involve teaching both undergraduate and graduate courses (including online courses) and maintaining a high level of professional activity through research and service in the candidate’s area of emphasis

Qualifications:
Candidates must have a commitment to excellence in teaching and research and should have a JD degree and previous experience teaching legal related and business law courses in a School of Management and/or Business. Professional experience as a practitioner is also desirable.

Required Applicant Documents:
Resume, Cover Letter, References

Position Open Date:
07/08/2016

July 9, 2016 in Haskell Murray, Joan Heminway, Jobs | Permalink | Comments (0)

Dead Hand Proxy Puts

Speaking of tactics that managers use thwart shareholder activists -

Sean Griffith and Natalia Reisel have posted a new paper to SSRN, Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital, analyzing the effects of dead hand proxy puts.  These are loan covenants that allow the lender to require complete loan repayment in the event of a change of control that results from an actual or threatened proxy contest, and that cannot be waived by the borrower – i.e., the incumbent directors cannot settle with the dissident, give their blessing to the new directors, and thereby avoid the provisions (the “dead hand”).

Now my instinct on these provisions has always been that they improperly interfere with shareholder suffrage by insulating the incumbent board from the market for corporate control.  I wondered whether these provisions were in fact valued by lenders, or whether they were inserted at the behest of management to protect themselves from challenge, with lender acquiescence/indifference.

But the authors find that these provisions do, in fact, have value to lenders – and thus to corporations.  They are more likely to be adopted by firms that are potential targets of shareholder activists (unsurprising), and, critically, they lower the cost of the firm’s debt. 

The authors also find that though the provisions tend to be found in loan agreements – where they can be easily waived or modified if the lenders believe a change of control will not imperil the loan – their presence may be valued by bondholders, who cannot use such provisions as easily because it is more difficult for them to overcome collective action problems to modify them later.  (Question: is it likely activists would bargain with the lenders in advance, and make the lenders’ endorsement part of their platform when soliciting shareholders?  Is that a thing activists do?  I admit my ignorance.  If not – if the activist intends to bargain after gaining control – that would be a helluva risk for shareholders to take.) 

In any event, the upshot appears to be, directors can preempt a proxy fight and increase corporate value by adopting this kind of financial technology, which is different than the financial technology that activists would likely adopt, but - unlike typical activist tactics - benefits both shareholders and creditors.  

The critical question, then, is whether the value to shareholders generated by these provisions is equal to the value that would be generated by a shareholder activist.   The authors state that they will analyze this question in connection with an upcoming paper – and I look forward to seeing what they come up with.

July 9, 2016 in Ann Lipton | Permalink | Comments (1)

Friday, July 8, 2016

Thoughts on the Berle Symposium: Doing Well by Doing Good?

Like Anne and Joan, I enjoyed the Berle Symposium and found it incredibly valuable. As they have mentioned, former Chancellor Chandler's presentation was definitely a highlight, and it was affirming to hear Delaware law described as I understand it, if much more eloquently expressed than I have managed. Former Chancellor Chandler appeared to make clear that directors of Delaware firms could be at risk if they admit to taking an action that is not aimed at (eventually) meeting the short or long-term financial interests of shareholders.  

Former Chancellor Chandler's description of Delaware law, both in the symposium and in his eBay case, coupled with the law review writings of Delaware Supreme Court Chief Justice Leo Strine, confirm, in my mind, that benefit corporations could be useful, at least in Delaware, for entrepreneurs who want to admit pursing strategies that are not aimed at benefiting shareholders in the short or long run. For example, I think some companies, like Patagonia, make decisions that benefit the environment, even though the directors may honestly believe that financial costs will far exceed financial benefits, even in the long-term. 

Interestingly, however, much of what I heard from the B Lab representatives at the symposium was about how benefit corporations can do just as well, if not better, than traditional corporations from a financial perspective. This obviously poses an empirical question that we may get better answers to in the coming years. But if you can "do well by doing good" then then entrepreneurs, even under Delaware law, seem likely to avoid legal problems given the protection of the business judgment rule and the argument that financial benefits will eventually follow from their society-focused actions.

The benefitcorp.net website has a list of reasons to become a benefit corporation, which are:

  • Reduced Director Liability

  • Expanded Stockholder Rights

  • A Reputation For Leadership

  • An Advantage in Attracting Talent

  • Increased Access to Private Investment Capital

  • Increased Attractiveness to Retail Investors and Mission Protection as a Publicly Traded Company

  • Demonstration Effect

I am a bit surprised that more of these reasons are not focused on societal and environmental benefit (and am not sure why mission protection is limited to publicly traded companies, especially when there are no stand-alone publicly traded benefit corporations today -- though there will likely soon be some soon.) I question whether all of these benefits are true. For example, I have heard mixed things about benefit corporations from investors, and the liability issue is completely untested. But if all of these things are true, and social entrepreneurs do get better access to capital and an advantage attracting employees, etc., then I think the benefit corporation form is less necessary as a legal matter. Maybe the thought is that benefit corporations have expressive value or that they provide an extra layer of protection. But, as a legal matter, if you can justify your social actions by pointing to potential long-term financial benefits, you do not really need a new form, even in Delaware (and, of course, many other states are even more permissive with social actions). Maybe benefit corporation proponents see the real value in the M&A context when facing Unocal/Revlon, but Page & Katz showed ways around those issues, especially if focused on long-term value. Entrepreneurs could also incorporate outside of Delaware, in a state that has expressly rejected Revlon.

Personally, while it is possible for some firms to do well by doing good, I think social entrepreneurs will often be openly sacrificing financial returns---they will be doing good through purposeful financial sacrifice. As such, an benefit corporation option, at least in states like Delaware.

There was quite a lot of good discussion at the Berle Symposium, and I may have more to write about it in later posts. 

July 8, 2016 in Business Associations, Conferences, CSR, Delaware, Haskell Murray, Social Enterprise | Permalink | Comments (1)

Thursday, July 7, 2016

Revising Regulation S-K

SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”

Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:

  • whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
  • whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
  • whether, and if so how, we could revise our requirements to enhance the protection of investors;
  • whether our current requirements appropriately balance the costs of disclosure with the benefits;
  • whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
  • whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
  • any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.

As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:

[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:

  • Investment beliefs and investment policy development
  • Manager selection and monitoring
  • Portfolio-wide exposure to material ESG risks
  • Education and analysis on macro and micro issues
  • Proxy voting and engagement

This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.

SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.

July 7, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Human Rights, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (2)

Wednesday, July 6, 2016

Teaching: "Are You Not Entertained?"

    When a law professor receives student feedback that his class is boring, should he care?  I once had a discussion with a colleague about this topic who was insistent that students care too much about being “entertained” in class and too little about actually learning the material that is conveyed to them.  While I agree that the ultimate measure of a successful class should be whether the students have learned (and can apply) the material, we shouldn’t downplay the importance of entertainment in facilitating that learning.  Indeed, I think it is wrong to think that our job description does not include “entertainer” almost as much as it does “teacher.”  (If you don’t believe me, try sitting through a colleague’s 75-minute class, as I recently had to do for evaluation purposes.  While time seems to fly as the professor, it moves at a decidedly slower pace when you are in the student’s shoes.)      

    But what does it mean to be an entertainer in class?  Must the professor tell jokes, sing songs, or swallow fire?  While I have no doubt that this would help, of course not.  Students will learn the material better when they are interested and engaged, and being an entertainer is simply shorthand, in my view, for creating a classroom environment that facilitates student interest and engagement.  Such entertainment might include problem sets, hypotheticals, simulations, or flipping the classroom.  But it would incorporate simpler devices too, such as humor, personal stories, or even just changing inflection on key points. 

    One doesn’t have to entertain every second of every class, of course, as sometimes the material is just boring and there isn’t much that can be done with it (believe me, as I teach some UCC classes).  But it is wrong, in my view, to think that our role as a teacher doesn’t include a role as an entertainer.  Students will learn better when we present the material in an interesting and engaging manner, and that means that we need to think about entertaining as part of our efforts to be an effective teacher.  Fortunately, entertaining does not require one to be a showboat in the classroom, or to have a stand-up comedy routine on a daily basis.  But it does require a consistent effort to think of our job description as something more like “facilitator of student learning” than “conveyer of useful information.”  So while it is true that some students care too little about learning the material, it is also true that we as law professors need to think about how entertaining might make that material easier to learn.  

    And now, if you’ll excuse me, I have to get back to my fire-swallowing trick . . . .

July 6, 2016 | Permalink | Comments (3)

Re-post: Securities Litigation Developments

It's family vacation week, and I am letting securities experts provide you interesting and exciting information far beyond what I could put together (frankly regardless of whether I am away from the office or not).  The D&O Diary (a great blog) hosted a guest post by Michael Klausner, Professor of Law, Stanford Law School, and Jason Hegland, Executive Director of Stanford Securities Litigation Analytics reporting on data collected on securities litigation.  Read the full post, Deeper Trends in Securities Class Action Litigation 2006-2015, and look for these highlighted trends:

  • Increased securities class action filing and dismissals
  • Types of cases (overstated earnings and product/operations cases)
  • Targeted industries (technology and health)
  • Role of plaintiffs' law firms; and
  • Settlement timing (discovery) and amounts

Happy Summer!

-Anne Tucker

July 6, 2016 | Permalink | Comments (0)

Tuesday, July 5, 2016

Pepperdine University, Seaver College - Business Law Professor Position

Today, the following business law professor position at Pepperdine University's Seaver College was brought to my attention. Further information is available here and below.

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

Assistant Professor of Business Law

The business administration division of Pepperdine University seeks a candidate with a terminal degree in law for a tenure-track position in business law. Candidates are expected to complete all requirements for the JD before the date of appointment, which is August 1, 2017. A documented research interest in law is required and teaching experience is preferred. The expected courses taught would be undergraduate classes in business law and international business. The flexibility to teach occasionally in another field is preferred.

The business program at Seaver College, is accredited by The Association to Advance Collegiate Schools of Business (AACSB). USA Today ranked Seaver's business program as the 7th best undergraduate business program in the country. We have approximately 775 undergraduate students in the Business Administration Division. Despite the large number of majors, our classes are small (rarely more than 25 students) and our faculty is collegial and collaborative. The division offers Bachelor of Science degree programs in accounting, business administration, and international business, and a contract major in finance. Degree programs are offered on a full-time, residential basis at the campus in Malibu, California. Seaver College has an enrollment of approximately 3,200 students. Please visit our website for more information.

Pepperdine University was established in 1937 by Mr. George Pepperdine, a Christian businessman, who stressed the desirability of a complete education built on a Christian value system. The institution is committed to the ideals of the founder. Successful candidates also must demonstrate an active commitment to Pepperdine's Christian mission and tradition. Located near Los Angeles in Southern California, Pepperdine University is especially interested in candidates who can contribute through their teaching, research and service to the diversity and excellence of the University and our surrounding community.

Applicants should apply at apply.interfolio.com/35896.  A background check will be required as a condition of employment.

For more information, please contact the chair of the search committee:

Keith Whitney (keith.whitney@pepperdine.edu )

Chair, Recruiting Committee

Business Administration Division

Seaver College, Pepperdine University

24255 Pacific Coast Highway

Malibu, CA 90263

July 5, 2016 in Business Associations, Business School, Haskell Murray, Jobs, Religion | Permalink | Comments (0)

When LLCs Can Be Corporations (For Tax Purposes Only)

So, readers of this blog know that I despise the misuse of the term "limited liability corporation" when the writer or speaker means "limited liability company," which is the correct term for an LLC.  There is a time, though, when an LLC can be a corporation, and that is for federal tax purposes if the entity makes such a choice.  

Entity choice is a state law decision, but and LLC can elect to be treated as a corporation under the Internal Revenue Code. The Internal Revenue Service recently issued Publication 3402, which explains: 

Classification of an LLC Default classification.

An LLC with at least two members is classified as a partnership for  federal income tax purposes. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later.

Elected classification.

An LLC can elect to be classified as an association taxable as a corporation or as an S corporation. After an LLC has determined its federal tax classification, it can later elect to change that classification. For details, see Subsequent Elections, later. LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U.S. Return of Partnership Income. Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. See the Instructions for Form 1065 for rep

Still, this should really be called an LLC that has elected federal tax status as a corporation or an "LLC FCorp." Or something like that. But at least in this situation, an LLC is something of a corporation.  

July 5, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (5)

Monday, July 4, 2016

Berle VIII and a Delaware Law Puzzle

Anne Tucker (who, together with Haskell Murray, me, and many others, attended the 8th Annual Berle Symposium in Seattle a week ago) penned an excellent post last week on the importance of shareholder value under Delaware law.  Her post covers important outtakes from the symposium presentation given by former Delaware Chancellor William (Bill) Chandler and Elizabeth Hecker, both lawyers in the Wilmington, Delaware office of Wilson Sonsini Goodrich & Rosati. In the post, Anne accurately and succinctly summarizes a key take-away from the former Chancellor's remarks:

[A] Delaware court will invalidate a board of directors' other serving actions only if they are in conflict with shareholder value, but never when it is complimentary. And there is a expanding appreciation of when "other interests" are seen as complimentary to, and not in competition with, shareholder value maximization.

Specifically, as Anne's summary indicates, Chancellor Chandler stated his view that a Delaware corporate board must place shareholder financial wealth (whether in the short term or the long term) ahead of any other value in its decision making.  This is hardly a surprise to anyone who follows Delaware corporate law judicial opinions (although the former Chancellor's statement of the law was among the clearest and most definite I have heard).  After all, Chancellor Chandler's opinion in the eBay case is widely cited for this proposition.

The Berle symposium focused on benefit corporations this year, and my draft paper for the symposium highlights the central importance of a corporation's charter-based corporate purpose in that type of firm.  So, I asked the former Chancellor for his personal view on how a Delaware court might handle a specific type of corporate purpose clause in a non-benefit-corporation Delaware corporate law context.  The specific corporate purpose clause I had in mind is one that expresses a clear "second bottom line" (other than the promotion of shareholder value) and clearly indicates that neither bottom line is to be given constant or presumed precedence over the other in decisions made by the board of directors or the corporate officers.

Continue reading

July 4, 2016 in Business Associations, Conferences, Corporate Governance, Corporations, Delaware, Joan Heminway, Shareholders | Permalink | Comments (0)

Happy Fourth of July Y'All. Red, White, and Blue, for You and You and You!

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As an expression of love for my country, I do try to wear red, white, and blue on Independence Day and, in fact, for the entire holiday weekend.  This causes some wardrobe challenges for obvious reasons.  And it's probably more than a bit hokey.

However, I did not plan on coordinating my food choices for the weekend with my sartorial selections!  So, when I opened the lovely yogurt parfait that I made to take to Starbucks for breakfast on Saturday morning, I was delighted and surprised to note its appropriate color scheme (and promptly posted a picture memorializing the same to Facebook).  I include the picture above.

Happy Fourth of July to one and all.  Regardless of whether you are as crazy as I am about celebrating with the colors of the day, I wish you a safe and pleasant holiday.  Happy Birthday, U.S.A.!

July 4, 2016 in Joan Heminway | Permalink | Comments (0)

Sunday, July 3, 2016

"Socio-Economics: Challenging Mainstream Economic Models and Policies"

The University of Akron Law Review recently published its Symposium on Law and SocioEconomics.  You can find a full list of the contributions here (Volume 49, Issue 2).  As one of the organizers of the symposium, I had the honor of writing a conclusion to the issue, titled Socio-Economics: Challenging Mainstream Economic Models and Policies.  I provide the abstract below, and you can read the entire piece here.

At a time when many people are questioning the ability of our current system to provide economic justice, the Socio-Economic perspective is particularly relevant to finding new solutions and ways forward. In this relatively short conclusion to the Akron Law Review’s publication, Law and Socio-Economics: A Symposium, I have separated the Symposium articles into three groups for review: (1) those that can be read as challenging mainstream economic models, (2) those that can be read as challenging mainstream policy conclusions, and (3) those that provide a good example of both. My reviews essentially take the form of providing a short excerpt from the relevant article that will give the reader a sense of what the piece is about and hopefully encourage those who have not yet done so to read the entire article.

July 3, 2016 in Behavioral Economics, Current Affairs, Financial Markets, Law and Economics, Law Reviews, Philosophy, Research/Scholarhip, Stefan J. Padfield | Permalink | Comments (5)

Saturday, July 2, 2016

Dual Class Share Structures in the News

There have recently been several high profile news items about companies using dual class share structures.

First, Facebook announced that it would issue a class of nonvoting shares so that Mark Zuckerberg could maintain his control over the company via his supervoting shares, in a move reminiscent of a similar tactic by Google a couple of years ago.

(A fun game I like to play with my students: compare the stock prices of voting shares of Google with the prices of nonvoting shares, and then talk about the two, in light of the fact that Sergey Brin and Larry Page control the majority of the voting power regardless due to their supervoting shares.)

Second, Lionsgate announced it would be acquiring Starz, in a partially cash, partially stock deal.  Because Starz has a dual class structure – with supervoting power held by John Malone – the arrangement involves Lionsgate creating a new class of nonvoting shares.  Holders of Starz A shares will get cash and nonvoting Lionsgate shares, while holders of Starz B shares (e.g., Malone) get less cash, but both voting and nonvoting Lionsgate shares.

Third, Mondelez just made a bid to buy Hershey – one that could be blocked by the Hershey Trust that controls 80% of the voting power via dual class shares.

Dual class share structures are all the rage these days.   The growing popularity of dual class structures suggests that as investors gain more power in the governance structure – via legal changes, and via the increasing concentration of share ownership – corporate managers are fighting back with new tools to cabin investors’ influence.

But dual class structures carry some fairly obvious dangers – some of which are now on full display in the show trials regarding Sumner Redstone and Viacom.  In brief, Viacom has a dual class structure with most of the voting stock held by a company called National Amusements, which itself is controlled by Sumner Redstone.  Redstone is 93 years old and recently ousted the Chair of Viacom, as well as other Viacom directors, setting up court battles in Delaware and Massachusetts regarding his competency.

With dual class structures' increasing popularity, I’m sure we can expect a lot more conflicts (and more development of the law).  It will be interesting to see whether there will be enough institutional investor pushback to cabin their use, and/or create some standardized features (sunset provisions, limits on the creation of new nonvoting share classes, etc).

July 2, 2016 in Ann Lipton | Permalink | Comments (5)

Friday, July 1, 2016

Legal Strategy: Boris Berian, Nike, and New Balance

Today a number of athletes will compete in various track & field events in the Olympic Trials.

One of those events is the qualifying round of the 800m, and one of the 800m runners, Boris Berian, was recently caught in a legal dispute with his old shoe sponsor (Nike) because of his attempt to sign with a new shoe sponsor (New Balance). The story of the dispute even made The Wall Street Journal

You can read the details of the case here, here, and here, but I will attempt to summarize briefly.

As I understand the timeline from the reporting and legal filings:

  • After the 2012 season, Boris dropped out of his division II college (Adams State) to pursue pro-running.
  • For a couple of years, Boris struggled to find world class success, and he worked at McDonald's.
  • Boris didn't have a real breakthrough until mid-2015, when he ran the fastest time for an American that year.
  • On June 17, 2015, shortly after his breakthrough race, Boris signed a short-term exclusive sponsorship deal with Nike (chosen from among many suitors).
  • On December 31, 2015, the Nike-Boris contract expired, though the contract gave Nike the right to match any competitor's bona fide offer within 180 days of 12/31/15.
  • On January 20, 2016, Boris' agent notified Nike than New Balance had made Boris a 3 year, $375,000 offer ($125,000 per year guaranteed).
  • Nike's response to New Balance offer is disputed and at the center of a breach of contract lawsuit that Nike filed on April 29.
  • Nike supposedly served Boris with notice of the lawsuit at a track meet.
  • In short, Boris claimed that New Balance's $375,000 offer was guaranteed, while Nike's "match" was full of potential reductions. Nike claims that the contract they sent was simply a standard form. Nike claimed that guaranteed money is unusual in track contracts and Boris' agent had not shown proof of the lack of reductions in New Balance's offer, and that if the lack of reductions was proven, Nike would have matched those terms within the deadline.
  • On June 7, a judge granted Nike's TRO, restraining Boris from competing in non-Nike gear until June 21.
  • On June 22, a judge declined to extend the TRO and stated that he would rule on June 29.
  • On June 23, Nike dropped its lawsuit (without prejudice), claiming that they wanted to "eliminate this distraction for Boris" given the upcoming Olympic Trials.
  • On June 30, Boris Berian signed with New Balance.

In the fall of 2014, Robert Bird (UConn) and David Orozco (Florida State) published a nice short article in the MIT Sloan Management Review entitled Finding the Right Corporate Legal Strategy. This has been a key article in the growing Law & Strategy area. The article notes five main legal strategies; "The five, in order of least to greatest strategic impact, are: (1) avoidance, (2) compliance, (3) prevention, (4) value and (5) transformation."

This Nike v. Boris Berian situation, in my opinion, is an interesting example of the use of corporate legal strategy. In particular, Nike appears to be using litigation as a move for firm-wide value (#4 on the Bird & Orozco list).

Why did Nike sue?  In my opinion, Nike likely sued not just because they believed Boris breached the contract, but also to send a message to its other athletes that Nike "plays hardball." This message may have been especially important given Kara Goucher's doping allegation against the Nike Oregon Project and its coach; a number of prized Nike athletes may have been watching Boris' situation and may have defected (right before the Olympics!) if Boris was treated with a light touch. Also, especially given that Boris claimed that he would rather sit out that run for Nike, perhaps Nike was simply trying to distract what could soon be a potential star for its competitor New Balance. While Nike has a number of track athletes with the star power of Boris, New Balance has a shallow bench of star track athletes and a good bit would ride on Boris' performance for NB. If Boris medals, especially with his McDonald's to track star story, that could be a huge deal for New Balance. Nike, on the other hand, has a absurd number of track stars with good stories and a high likelihood of medaling.

Why did Nike drop its lawsuit? I think the press was getting worse for Nike than Nike originally imagined. Also, perhaps the case was not resolving as quickly as Nike had guessed, and if Nike pursued the lawsuit into the Olympic Trials, the negative coverage may have exploded. That said, Nike must have known the coverage was going to be negative, so I imagine that factored into their original calculation, to some degree. Their lawyers might have gotten the impression that the judge was not going to rule in their favor when he decided against extending the TRO, so maybe Nike decided to try to win back some fans by dropping the lawsuit voluntarily. I agree with this author, eliminating the distraction for Boris was likely not Nike's main motivation, if so, they would have not sued him during the Olympic Trials build-up. As any runner knows, the months before a meet are much more important than the week before (at least as a physical matter). More likely, and perhaps unanticipated at the filing of the lawsuit, 19-year old Donavan Brazier of Texas A&M announced that he was turning pro just a few days before Nike dropped its lawsuit. Brazier, who had recently won the NCAA championships in the 800m in record time, was probably even a bigger signing target for Nike than Boris. By dropping the lawsuit, Nike may have been able to come off as altruistic to Brazier (saying something like - we had legal grounds to pursue the Boris lawsuit, but we want to do what is best for our current and former athletes). A few days after Nike dropped the lawsuit, Brazier signed with Nike. In addition, around the same time, Nike also signed another 800m star, Clayton Murphy. Both Braizer and Murphy were underclassmen and it was uncertain, until recently, whether they would turn pro. Not only did dropping the lawsuit against Boris likely help Nike in pursuing these two young athletes, but the recent strength of these athletes in the 800m made it possible that Boris would not even make the team, much less medal in Rio.

Personally, I think Boris is going to race well today (we will know in a few hours) and over the next few days, but maybe the stress of the legal battle took a toll. Brazier and Murphy and the entire field will both be tough, but the field will be a bit more open given that two-time Olympian Nick Symmonds scratched from the 800m Olympic Trials field with an injured ankle. Boris has the best qualifying time (1:43:34 v. 1:43:55), but Brazier has the best time this season (1:43:55 v. 1:44.20). Should be exciting to watch and now you know the legal background.   

Finally, perhaps of interest to some readers, Boris Berian was using crowdfunding to pay for his legal defense. Boris even got this shout-out from Malcolm Gladwell on Twitter: "Nike earned 30 billion in 2015. Berian was flipping burgers at McDonalds two years ago. Isn't one bully in American public life enough?"

Update #1: In one of the biggest surprises of the Trials, Donavan Brazier was knocked out in the first round of the 800m, running roughly 5 big seconds slower than he did in the NCAA Championships. Boris Berian won his heat. Nike was diversified with Clayton Murphy who won his heat, and Nike also had four others who qualified for the next round in the 800.

Update #2: Boris Berian led his 800m semi-final from start to finish. Looked strong. Clayton Murphy won the second semi-final race, in a bit slower race, but he also looked strong. Finals are Monday.

Update #3: In the finals, Boris Berian grabbed the lead around 400m and held on until the final 10m or so. He placed second to Clayton Murphy (Nike) who out-kicked him. Charles Jock (Nike OTC) finished third. Those top three finishers will represent the US in Rio in the 800m. 

Nike Lawsuit

Boris' Response

Declaration in Support of Boris' Opposition to Nike's TRO

Second Declaration in Support of Boris' Opposition to Nike's Motion to Show Cause (Includes proposed Nike contract) (updated)

Nike's Reply in Support of its TRO

July 1, 2016 in Current Affairs, Ethics, Haskell Murray, Litigation, Sports | Permalink | Comments (3)

Have the DOJ and SEC Complicated the Attorney-Client Relationship?

This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.

Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:

…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing, as a former in house counsel and compliance officer, I believe that those with a fiduciary duty should be excluded and have an “up before out” requirement to inform the general counsel, compliance officer or board of the substantive allegation or any inadequacy in the compliance program before reporting externally.

Thankfully, the final rule does have some limitations, in part, I believe because of my testimony and the urgings of the Association of Corporate Counsel, the American Bar Association and others. In a section of the SEC press release on the program discussing unintended consequences released a few weeks after the testimony, the agency stated:

    However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become     whistleblowers when:

  • The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
  • The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
  • At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

At least two compliance officers or internal audit personnel have in fact received awards—one for $300,000 and another for $1,500,000. When I served on a panel a couple of years ago with Sean McKessy, Chief of the Office of the Whistleblower, he made it clear that he expected lawyers, auditors, and compliance officers to step forward and would not hesitate to award them.

Compliance officers have even more incentive to be diligent (or become whistleblowers) because of the DOJ Yates Memo, which requires companies to serve up a high ranking employee in order for the company to get cooperation credit in a criminal investigation. I blogged about my concerns about the Memo’s effect on the attorney-client relationship here, stating:

The Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?

The US Chamber of Commerce shares my concerns and issued a report last month that echoes the thoughts of a number of defense attorneys I know. I will be discussing these themes and the Dodd-Frank Whistleblower aspect at the International Legal Ethics Conference on July 14th at Fordham described below:

Current Trends in Prosecutorial Ethics and Regulation

Ellen Yaroshefsky, Cardozo School of Law (US) (Moderator); Tamara Lave, University of Miami Law School (US); Marcia Narine, St. Thomas University School of Law (US);Lawrence Hellman, Oklahoma City University School of Law (US); Lissa Griffin, Pace University Law School (US); Kellie Toole, Adelaide Law School (Australia); and Eric Fish,Yale Law School (US)

Nationally and internationally, prosecutors' offices face new, as well as ongoing, challenges and their exercise of discretion significantly affects individuals and entities. This panel will explore a wide range of issues confronting the modern prosecutor. This will include certain ethical obligations in handling cases, organizational responsibility for wrongful convictions, the impact of the exercise of prosecutorial discretion in whistleblower cases, and the cultural shifts in prosecutors' offices.

To be clear, I believe that more corporate employees must go to jail to punish if not deter abuses. But I think that these mechanisms are the wrong way to accomplish that goal and may have a chilling effect on the internal investigations that are vital to rooting out wrongdoing. If you have any thoughts about these topics, please leave them below or email me at mnarine@stu.edu. My talk and eventual paper will also address the relationship between Sarbanes-Oxley, the state ethical rules, and the Catch-22 that in house counsel face because of the conflicting rules and the realities of modern day corporate life.

July 1, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)