Sunday, April 1, 2018
"though knowledge is present in all economic interaction, it is also dispersed in the economy such that no individual mind can ever centralize it all. This 'knowledge problem' implies, as Hayek has argued, the impossibility of central planning" https://t.co/3qkGEenj6E #corpgov— Stefan Padfield (@ProfPadfield) March 28, 2018
"market power gains enable the merged entity to increase the price of..goods..Wealthy SHs..benefit more frm share price increases than they are harmed by the increased cost of goods..However, the reverse may be true for less wealthy SHs & society" https://t.co/3YEyRCHpCn #corpgov— Stefan Padfield (@ProfPadfield) March 29, 2018
Saturday, March 31, 2018
Another week, another Delaware Chancery decision in which a powerful, visionary minority blockholder is deemed to have “control” over a corporate board’s decision to acquire a company in which he has an interest.
In In re Oracle Corporation Derivative Litigation, which I blogged about last week, Larry Ellison’s control was enough to show that demand was excused for the purpose of a derivative lawsuit, while the court avoided the question whether Ellison should be formally deemed a controlling stockholder.
In In re Tesla Motors Stockholder Litigation, however, the question could not be avoided. That’s because – unlike in Oracle – the remaining stockholders voted in favor of the acquisition, which led the defendants to argue that the entire deal had been cleansed under Corwin v. KKR Financial Holdings LLC. Since Corwin does not apply to controlling stockholder transactions, Elon Musk’s status became critical.
Briefly, Elon Musk is the Chair, CEO, largest stockholder (22% at the time of the acquisition), and dominant face of Tesla. He was also one of the founders of SolarCity, along with his cousins. When SolarCity neared bankruptcy, Tesla acquired SolarCity at a significant premium to its market price. Though Musk formally recused himself from the Tesla board’s vote, he badgered the board into considering the acquisition (proposing it on three separate occasions within three months), hired the board’s financial and legal advisors, and ran the deal process. Meanwhile, the board voted to approve the deal without forming a special committee. (Sidebar: If the documents are made available under Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, I cannot wait to find out what Wachtell – the board’s deal advisor – had to say about that.) Tesla shareholders sued, alleging that the transaction was a bailout of Musk’s company, paid for with Tesla’s assets.
The court, per VC Slights, concluded that, at least for pleading purposes, plaintiffs had alleged that Musk was a controlling shareholder. Slights rested his decision on Musk’s status as a visionary CEO, his substantial stockholdings, his close business and personal ties to Tesla board members who earned multi-million dollar salaries for their service, his domination of the process which led to the acquisition, the board members’ own ties to SolarCity, and SolarCity’s precarious financial position.
Slights recognized the awkwardness of his holding when compared with the Delaware Supreme Court’s recent conclusion in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd that Michael Dell was not a controlling stockholder of the company that bore his name. Nonetheless, he justified his conclusion on the ground that the buyout in Dell involved several procedural protections (including the use of an independent special committee and Michael Dell’s pledge to cooperate with any buyer) that the Tesla board’s decision lacked.
But that reasoning collapses two separate ideas: whether someone has controlling shareholder status, which requires them to utilize heightened procedural protections to win business judgment deference, and whether a controlling stockholder has, in fact, employed such protections.
What both Tesla and Oracle really illustrate, then, is the inadequacy of pinning the level of judicial scrutiny to a bright line distinction between controlling and noncontrolling stockholder status in the first place. Yes, Musk was a large stockholder, but his stockholdings were the least important mechanism by which he dominated the board (and potentially influenced voting stockholders as well). We can call this yet more Corwin fall out: by heightening the significance of the stockholder vote only for transactions that fall into a specific category, the Delaware Supreme Court wound up placing pressure on the boundaries of that category.
What also stands out about the Tesla opinion – as with Oracle before it – is Delaware’s continued willingness to cast a gimlet eye on the webs of social and business relationships (especially with venture capital firms) that often tie boards together, particularly in tech companies. This is a point that Chief Justice Strine has been pushing, most recently at Tulane’s Corporate Law Institute, and what we are apparently seeing is that such relationships may not only evince a lack of independence, but may even count toward controlling shareholder status, as courts try to grapple with Corwin’s constraints.
Friday, March 30, 2018
Corporate Boycotts, A Change of Heart from CEOs, and H & M's Diversity Initiative- A Roundup of The Week's News Stories
Within the past 24 hours, I've seen at least three news article that led me to reflect on my past blog posts. Rather than write a full post on each article, I've decided to note some observations.
The Tweet That Launched A Boycott (And Maybe a Buycott)
I've been skeptical in the past about whether boycotts work. Perhaps times are changing. This week, Parkland shooting survivor David Hogg tweeted that advertisers on Laura Ingraham's cable show should pull out after she tweeted, "David Hogg Rejected By Four Colleges To Which He Applied and whines about it. (Dinged by UCLA with a 4.1 GPA...totally predictable given acceptance rates.) https://www.dailywire.com/news/28770/gun-rights-provocateur-david-hogg-rejected-four-joseph-curl …" On March 28th, the 17-year old activist responded with "Soooo
@IngrahamAngle what are your biggest advertisers ... Asking for a friend. #BoycottIngramAdverts." He then provided a list of her top twelve sponsors.
As of 8:00 p.m. tonight, the following companies dumped the Fox show, eleven after the talk show host had apologized, stating “On reflection, in the spirit of Holy Week, I apologize for any upset or hurt my tweet caused him or any of the brave victims of Parkland... For the record, I believe my show was the first to feature David immediately after that horrific shooting and even noted how ‘poised’ he was given the tragedy ... As always, he’s welcome to return to the show anytime for a productive discussion.”
The companies that have pulled their advertising include Nutrish, Office Depot, Jenny Craig, Hulu, TripAdvisor, Expedia, Wayfair, Stitch Fix, Nestlé, Johnson & Johnson, Jos A Bank, Miracle Ear, Liberty Mutual and Principal. But will they ever return to the show after the attention moves to something else? Will the sponsors face a "buycott," where Ingraham's fans boycott the boycotters or increase their support of the advertisers that Hogg specifically named but have chosen to stay with Ingraham? Time will tell.
Silicon Valley CEOs Warm to President Trump
Last year, I posted about various CEOs choosing to distance themselves from President Trump by resigning from advisory councils because they disagreed with his actions or positions on everything from immigration to his reaction to the events in Charlottesville. Today, the New York Times reported that some of the same CEOs that bemoaned Trump's election and/or publicly condemned him have now had a change of heart. Apparently, they have more common ground than they thought on areas of tax reform, infrastructure, and looser regulation. I look forward to seeing whether any of these companies or CEOs refrain from criticizing him in the future or, more tellingly, whether they choose to use PAC money or personal funds to support his re-election.
H & M Asks One of Its Lawyers To Lead Diversity Initiative
H & M has lots of problems from underperforming designs (billions in unsold clothes) to continued fallout from its "coolest monkey in the jungle" hoodie. As you may recall, in January, a number of consumers, public figures, and other called for a boycott of the company after a young black boy advertised a green hoodie with the word "monkey." H & M even had to close its store in South Africa. The fast fashion company has now turned to one of its in-house lawyers to lead a 4-person team to focus on diversity and inclusiveness. The lawyer will report directly to the CEO in Stockholm. Notably, the board is all white. Should the board diversify as well? It's hard to say. While I support diversity in the executive ranks and the boardroom, there is no evidence that the monkey hoodie led to the 62% drop in operating profit in Q1. Instead, experts note that consumers just didn't like the selections, even at steep discounts. Further, the average H & M customer probably has no idea about this new diversity initiative and even if the customer knew, it'sdoubtful that would change buying habits. Even so, I applaud H & M for taking concrete steps. The company already produces a compelling Sustainability Report. I look forward to seeing if the company can return to profitabiity while keeping its commitment to diversity.
Thursday, March 29, 2018
The University of Richmond School of Law, in conjunction with Boston University School of Law, University of Illinois College of Law, and UCLA School of Law, invites submissions for the Sixth Annual Workshop for Corporate & Securities Litigation. This workshop will be held on October 19-20, 2018 at the University of Richmond School of Law in Richmond, Virginia.
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, including securities class actions, fiduciary duty litigation, and comparative approaches. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress.
Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Richmond. Hotel costs will be covered. Participants will pay for their own travel and other expenses.
If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to firstname.lastname@example.org by Friday, May 25, 2018. 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.
Any questions concerning the workshop should be directed to the organizers: Jessica Erickson (email@example.com), David Webber (firstname.lastname@example.org), Verity Winship (email@example.com), and Jim Park (James.firstname.lastname@example.org).
Interest rate risk seems to puzzle some students when they first encounter it. It's the idea that fixed-rate assets decline in value when interest rates rise. I've started using a simplified bond trading exercise to help students get the concept quickly. This is how it works.
Give A Student A Bond
I find a few victims/volunteers and give them brightly colored pieces of paper. These, I tell them, represent fixed rate bonds with a $10,000 value, paying 5% a year for the next twenty years. We run through some basic questions. How much money do they get each year ($500). How much money will they get if they hold the bond to maturity? ($20,000. This is the amount of the bond plus another $10,000 in interest). For the exercise, we keep it simple and just look at the cash flow coming off the one bond.
Change The Rates
After everyone gets the idea, I clap my hands and change the prevailing market interest rate from 5% to 8%. This leaves our initial volunteer holding a 5% bond in an 8% market. With a flourish, I pull out more brightly colored paper of a different shade and announce that I'm now a corporation selling a 20-year bond paying 8% a year to the general market (the class). I round on our unfortunate volunteers and inform them that they have fallen on hard times and have a sudden need for more cash! They have a child and, well, the baby needs braces, the roof requires repairs, or their wastrel nephew desperately needs funds to develop his plan to sell dehydrated water to the masses. Putting the cause to the side, the students with 5% bonds now need to sell them to the open market. Declaring that they paid $10,000 for the bond, I ask them how much they want to sell it? Often, they respond that they want to get their money back and sell the bond for $10,000. Such hopes!
Think of the Pensioners
I designate another random student as a money manager for a pension fund and give a little backstory. She loves her job. She invests to take care of municipal retirees. Her steady work and prudent fiscal management means that retired firefighters with creaky knees live dignified, independent lives without the need to take odd jobs installing ceiling fans on precarious ladders. It's a noble profession. She's an unsung hero.
With the money manager understanding her role and her obligation to do right by her pensioners, I ask her if she wants to pay $10,000 for the 5% bonds held by our hapless initial volunteers, or if she would rather put her pensioners' money to work with the glorious 8% bond I hold in my hand. It may help to pop the paper for effect. Our diligent pension manager reliably opts for the better bond deal.
Back to the Initial Bondholders
Once their initial efforts to liquidate their 5% bonds have failed, I ask the bondholders about their options. They still need to cash. I ask if they want to lower the price on their bonds. Often they do, frequently by significant amounts to $7,000 or $8,000. As a class, we discuss the bargain! An investor can pick up a $10,000 bond for $7,000. What a deal! It's practically free money. Sometimes the money manager may be tempted to bite on this juicy reduction in price.
Run the Numbers
Before the money manger and 5% bondholders can close the deal, I renew my sales pitch. I declare that the money manager is smart, diligent, and hardworking and note that she would never close a deal without running the numbers. I ask if the 5% bond pays $500 a year, how much does the 8% bond pay? The jump is easy and we can all agree that getting $800 is better than getting $500 for our pensioners. With a 3% difference, we're looking at an extra $300 a year coming off my splendid 8% bond. What does that come out to over twenty years, I ask? A moment as the gears turn and everyone fires up the more calculating parts of their brains. Suddenly, we've got it. It's a stunning extra $6,000. (This does not take into account the time value of that money.)
The Market Price
With that in mind I ask how much our initial bondholders need to discount their suddenly shabby wares to compete with magnificent 8% bond. It's an ugly, ugly day for them and they're grumbling about how unfair selling $10,000 for $4,000 seems.
Some points worth covering here for students with little familiarity with markets. We talk about how bonds can be traded like stocks and how their prices change with prevailing interest rates. I candidly admit that we're unlikely to see a sudden lurch from 5% to 8% and that most changes are smaller. It seems to work well for helping students without much background knowledge of finance see the time value of money in a more approachable way.
It's worth pointing out that this is also a very simplified way of looking at it. The ultimate returns to think about would also include the time value of the money received in each year from the bond's interest payments. For example, the $800 in year three is worth much more than the $800 to come later in year 17.
If you want to cover call risk, simply run the exercise in reverse. Start the bondholders out with an 8% bond and then change the rates to 5%. Make the class the corporation and ask if they would like to refinance and keep more of that money for their shareholders.
Wednesday, March 28, 2018
Job Description Summary:
The Southern University Law Center welcomes applications for the appointment of two to three visiting professors for the 2018-2019 academic year. We welcome applications from all individuals whose backgrounds and experiences will enhance the diversity of our faculty. Our primary curricular needs are as follows:
Louisiana Civil Law Courses:
We are interested in candidates with experience teaching Sale & Lease, Obligations, and Security Devices. Individuals with a background in the civil law are preferred.
Business Law, Procedure, and Constitutional Law Courses:
We are also interested in candidates with experience teaching Contracts, Commercial Paper, Federal Civil Procedure, Federal Courts & Procedure, Business Entities, and Constitutional Law.
- JD degree
- Experience and demonstrated success in law school teaching
- Demonstrated ability in mentoring students
- Commitment to the mission of the Southern University Law Center and its instructional methods and goals
Instructions to Applicants:
Candidates should submit the following to Professor Donald North, chair of the Faculty Appointments Committee, at email@example.com:
- Cover letter
- Contact information for three professional references
Benefits: The Southern University Law Center offers a comprehensive benefits package to full-time faculty members that includes health, dental, vision, life insurance, and retirement. Salary will be commensurate with qualifications.
EMPLOYMENT NON-DISCRIMINATION POLICY: Southern University Law Center (SULC) is an Equal Opportunity Employer, committed to a diverse and inclusive work environment. SULC is committed to a policy against discrimination in employment based on sex, actual or perceived gender, age, race, color, religion, creed, national or ethnic origin, disability, sexual orientation, gender identity and expression, genetic information; or parental, marital, domestic partner, civil union, military, or veteran status.
"a remarkable shift in Uber's strategy": "Uber quits 8 countries in...Asia, selling out to rival Grab....it will get a 27.5% stake...[in] Grab....SoftBank agreed to buy a 15% stake in Uber...last year. SoftBank is also a major investor in Grab" https://t.co/dKO3KECcsj #corpgov— Stefan Padfield (@ProfPadfield) March 26, 2018
"Apple CEO Tim Cook on Facebook data leak: Regulation is necessary .... Unlike Google or Facebook, whose revenue is driven by ads, Apple mainly makes money by selling premium devices like iPads and iPhones." https://t.co/1mwXsstPOm #corpgov— Stefan Padfield (@ProfPadfield) March 26, 2018
Munger, Tolles & Olson is committed to the highest standards of conduct. In this case, we were wrong, and we are fixing it. We will no longer require any employees, including summer associates, to sign any mandatory arbitration agreements.— MTO (@mungertolles) March 25, 2018
Tuesday, March 27, 2018
International law is usually not my thing (only in a few instances), but it's definitely Larry Catá Backer's thing. He has a new article out that may be of interest. If it's your thing, I recommend checking it out. He knows his stuff.
"Theorizing regulatory governance within its ecology: the structure of management in an age of globalization,"
Larry Catá Backer
Contemporary Politics 24(3):-- (2018)
Abstract: This article examines regulatory governance (‘RG’) within its own ecology. It considers RG as an ideology of governance, as its own set of techniques to that end, and as a methodology andpsychology of the relations of regulatory organisms to one another and to their context. The object is first to chart the structures and modalities of this ecology, and second to understand the properties that makes RG both coherent (singularly as the method of regulating a field, as the framework for the use of RG techniques, and as an ideology of governance), and structural (as a means of structuring regulation as an exercise of ordering power. After a brief introduction, the article introduces the regulatory context through a close reading of the operation of global garment supply chains in Bangladesh, examining RG in action within the ecology of global production. It then theorizes the meta structures of RG within this ecology as a mechanics for governance within institutions, and as an ideology for ordering systems of governance among institutions.
Monday, March 26, 2018
I am committed to introducing my business law students to business law doctrine and policy both domestically and internationally. The Business Associations text that I coauthored has comparative legal observations in most chapters. I have taught Cross-Border Mergers & Acquisitions with a group of colleagues and will soon be publishing a book we have coauthored. And I taught comparative business law courses for four years in study abroad programs in Brazil and the UK.
In the study abroad programs, I struggled in finding suitable texts, cobbling together several relatively small paperbacks and adding some web-available materials. The result was suboptimal. I yearned for a single suitable text. In my view, texts for study abroad courses should be paperback and cover all of the basics in the field in a succinct fashion, allowing for easy portability and both healthy discussion to fill gaps and customization, as needed, to suit the instructor's teaching and learning objectives.
And so it was with some excitement--but also some healthy natural skepticism--that I requested a review copy of Corporations: A Comparative Perspective (International Edition), coauthored by my long-time friend Marco Ventoruzzo (Bocconi and Penn State) and five others (all scholars from outside the United States), and published by West Academic Publishing. I am pleased to say that if/when I teach international and comparative corporate governance and finance (especially in Europe) in the future, I will/would assign this book. It is a paperback text that, despite its 530 pages, is both reasonably comprehensive and manageable.
The book is divided into ten chapters, starting with basic "building blocks" of comparative corporate law and ending (before some brief final thoughts) with unsolicited business combinations. U.S. law is, for the most part, the centerpiece of the chapters, which consist principally of original text, cases, statutes, law journal article excerpts, and (in certain circumstances) helpful diagrams. The methodological introduction, which I found quite helpful and user-friendly, notes that the coauthors "often (not always) start our analysis with the U.S. perspective." (xxvi) Yet, despite the anchoring use of U.S. law throughout the book, it somehow has a very European feel. The coauthors note the emphasis on "U.S., U.K., major European continental civil law systems (France, Germany, Italy) and European Union law, and Japan," (id.) but my observation is that the words and phrasing also have a European flair. Of course, this is unsurprising, given that all but one of the coauthors hail from European universities. I note this without praise or criticism, but I mention it so others can assess its impact in their own teaching environments.
I recommend that those teaching in study abroad (or other courses focusing on comparative corporate law) review a copy of this book. I will look forward to teaching from it the next time I need an international or comparative law teaching text for use in or outside the United States.
March 26, 2018 in Business Associations, Comparative Law, Corporate Finance, Corporate Governance, Corporations, International Business, International Law, Joan Heminway, Teaching | Permalink | Comments (0)
Brent Horton of Fordham University's Gabelli School of Business recently posted his American Business Law Journal article on pre-Securities Act prospectuses.
For interested readers, the abstract is below and the article can be downloaded here.
Some legal scholars—skeptics—question the conventional wisdom that corporations failed to provide adequate information to prospective investors before the passage of the Securities Act of 1933 (Securities Act). These skeptics argue that the Securities Act’s disclosure requirements were largely unnecessary. For example, Paul G. Mahoney in his 2015 book, Wasting A Crisis: Why Securities Regulation Fails, relied on the fact that the New York Stock Exchange (NYSE) imposed disclosure requirements in the 1920s to conclude that stories about poor pre-Act disclosure are “demonstrably wrong”. (Likewise, Roberta Romano argued in Empowering Investors that “there is little tangible proof” that disclosure was inadequate pre-Securities Act.)
This Article sets out to determine who is correct, those that accept the conventional wisdom that pre-Securities Act disclosure was inadequate, or the skeptics?
The Author examined twenty-five stock prospectuses (the key piece of disclosure provided to prospective investors) that predate the Securities Act. This primary-source documentation strongly suggests that—contrary to the assertions of skeptics—pre-Act prospectuses did fail to provide potential investors with financial statements, as well as information about capitalization and voting rights, and executive compensation.
Sunday, March 25, 2018
"Eighty-five percent of the nation’s largest public companies reported on climate change, diversity, and other sustainability issues in 2017" https://t.co/MhuSESQm8h #corpgov ht @nminow @KristynHyland— Stefan Padfield (@ProfPadfield) March 22, 2018
"Through pension reform, traditional pension funds are being replaced by individual 401(k)s. Thus, by severing this source of united power, workers are losing their vehicle for collective action." https://t.co/CvOXjZwvt4 #corpgov— Stefan Padfield (@ProfPadfield) March 23, 2018
"Researchers disagree about which, if any, antitakeover provisions affect firms’ takeover likelihoods.... we find that 11 of the 24 G-index provisions are robustly and negatively related to takeover likelihood" https://t.co/ZyLMwr74a6 #corpgov— Stefan Padfield (@ProfPadfield) March 23, 2018
"A Public Choice Analysis of the Department of Justice’s Use of Deferred- and Non-prosecution Agreements: A Policy to Promote Public Interest or an Opportunity to Extract and Seek Rents?" https://t.co/6q2uswIFkB #corpgov— Stefan Padfield (@ProfPadfield) March 23, 2018
Saturday, March 24, 2018
I am intrigued by VC Glasscock’s recent decision in In re Oracle Corporation Derivative Litigation, where he found that demand was excused with respect to a claim that Larry Ellison breached his fiduciary duties by functionally directing that the company acquire Netsuite, in which he owned a 39% stake.
First, the treatment of Larry Ellison: He only owns 27% of Oracle and, though he remains Chair of the Board, he no longer occupies the role of CEO. Nonetheless, the court was willing to draw the pleading-stage inference that he functionally has control of the company, such that both the outside and inside directors would fear for their positions if they crossed them. Yet at the same time, the court was unwilling to go so far as to formally designate him as a “controlling shareholder,” with all of the scrutiny that role would attract. In some ways, this is a welcome recognition that control is not simply an on/off switch: degrees of control may exist along a spectrum, and may compromise (nominally) independent directors’ judgment only so long as the relevant decision is not too extreme. At the same time, Delaware law tends to treat control status as binary, and in the past has only recognized the existence of control under a fairly narrow set of circumstances (cf. Corwin v. KKR, 125 A.3d 304 (2015), where the court refused to recognize KKR as a controlling shareholder of Financial Holdings, despite the fact that Financial Holdings was run by a KKR affiliate and existed to provide financing services to KKR).
Second, the treatment of the Board members: The court concluded that 6 board members were conflicted, in large part because – following Sandys v. Pincus and Delaware County Employees Retirement Fund v. Sanchez – nominally independent directors in fact were entangled in a web of business and social relationships with Ellison and Oracle that would likely hinder their ability to impartially consider whether to file suit against Ellison. None of these relationships would, by themselves, have disqualified any of the Board members (such as, for example, dependence on Ellison for participation in a cross-firm consulting initiative, and involvement in venture capital firms that look to Oracle as a potential acquirer), but the court found that the relationships collectively functioned to render the directors beholden to Ellison. This holding signals that going forward, corporate directors are taking a risk if they tolerate or encourage extensive relationships with each other outside of the boardroom.
Thirdly, the treatment of shareholder votes: In determining that one board member lacked independence from Ellison, the court took into account the fact that as a member of the compensation committee, he had ignored repeated shareholder “withhold” votes and shareholder votes to reject Oracle’s executive pay practices. In previous decisions, courts have refused to treat precatory shareholder votes on pay as having any legal significance, see Lisa Fairfax, Sue on Pay: Say on Pay’s Impact on Directors' Fiduciary. Duties, 55 Ariz. L. Rev. 1 (2013); it seems someone found a use for them. (I do wonder if there’s bitter with this sweet: Do approvals of "comically large" pay packages signal that directors’ actions have been approved by shareholders and therefore merit less judicial scrutiny?)
Finally, the court reserved judgment on the question whether In re Cornerstone Therapeutics Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) requires it to dismiss the complaint as to board members who lacked independence from Ellison for demand purposes, but against whom no claim had been stated regarding the underlying transaction.
All in all, it’s a fraught opinion and I look forward to seeing how it influences other decisions going forward.
Thursday, March 22, 2018
As many readers have likely seen from the client updates going out from law firms, the Fifth Circuit struck down the Department of Labor's fiduciary rule on March 15th. A divided panel ruled that Labor overstepped its authority when issuing the rule. A copy of the opinion is available here.
One thing that jumped out to me as I read the opinion was the characterization of persons that hold themselves out to the public and advertise their services as financial advisers as mere "salespeople." Admittedly, the law here is a mess. The biggest problem I see is that the SEC never held the line on only allowing stockbrokers to give "incidental" advice to make use of the broker-dealer exception to the Investment Advisers Act. That provisions exempts brokerage houses from the Investment Advisers Act if it's "a “broker or dealer” whose advice is “solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” 15 U.S.C. § 80b-2(a)(11)(C). Of course, one wonders why someone would work with a self-described financial adviser if not for the advice.
Labor has until April 30 to make a decision about whether to seek en banc review.
Wednesday, March 21, 2018
"There is now a counter-expertise of economics, which broadly supports many progressive critiques of neoliberal, or Washington Consensus globalisation. And this counter-expertise comes at the highest academic level in the economics profession." 5 London Rev. Int'l L 187 #corpgov— Stefan Padfield (@ProfPadfield) March 18, 2018
"Securities trading has ... migrated from private networks to public forums and appears to be returning to private networks again.... arguably reducing market quality for ... issuers, investors, regulators and the taxpayers" https://t.co/BFRJwbfh5i #corpgov— Stefan Padfield (@ProfPadfield) March 19, 2018
"Why do American lawyers and Supreme Court justices, at least, find the personification of states so much less troubling than the personification of business associations?" 4 Savannah L. Rev. 71 #corpgov— Stefan Padfield (@ProfPadfield) March 20, 2018
"with the proportion of female tech workers remaining under 30% across the board, we hope that this study will enrich the conversation concerning equality in this industry" https://t.co/LxEnEoFF5v #corpgov— Stefan Padfield (@ProfPadfield) March 21, 2018
Tuesday, March 20, 2018
My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company. It is NOT a partnership (as the court correctly notes), but ...
Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.
Nevertheless, Yiming argues the same duty applies, which is correct if Bling were a closely held corporation. See, e.g., Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-29 (1997) (explaining that in Massachusetts, close corporations shareholders owe one another the duty of utmost good faith and loyalty); Zimmerman v. Bogoff, 402 Mass. 650, 657 (1988). In Massachusetts, a closely held corporation is “typified by: (1) a small number of stockholders; (2) no ready market for corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”Demoulas, 424 Mass. at 529 n.34 (quoting Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975)).
In this context, the duty of “utmost good faith and loyalty” applies to majority and minority shareholders alike. See Zimmerman, 402 Mass. at 657-58. Although Yiming did not affirmatively plead that Bling is a close corporation, he did plead that this duty applied to Bling Defendants. D. 16 ¶ 70. Bling Defendants did not contest that they owed a fiduciary duty to Yiming. See D. 26 at 8-9. Accordingly, the Court declines to dismiss this claim.
Monday, March 19, 2018
As you may recall, I posted back in January on Emory Law's upcoming biennial conference on transactional law and skills, “To Teach is to Learn Twice: Fostering Excellence in Transactional Law and Skills Education.” The conference is scheduled for Friday, June 1, 2018 and Saturday, June 2, 2018.
I learned earlier today that the conference organizers are offering one last chance for interested transactional law and skills instructors to submit a proposal and have extended the proposal deadline through Friday, March 30, 2018. They do ask that folks submit proposals as soon as possible. Even if you do not submit a proposal, you can register for the conference now.
Our friends at Emory Law desire to reach far and wide to embrace the whole community of transactional law and skills educators, so please pass this on and encourage your colleagues–including new teachers and adjunct professors (both able to participate at reduced registration fees)–to attend. I plan to be there again, although I can only attend the first day of the conference this year. I always learn something at these conferences. They attract a great, thoughtful community of teachers and scholars.
Sunday, March 18, 2018
Interesting comparison of state statutes' default definition of "person," particularly as to express inclusion or exclusion of "government." If both corporations & government are just "people, my friend," then the real issue is power. https://t.co/1VvQRYoSiA #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"some States adopted -or are in the process of adopting- legislations that establish or reinforce the duty of care or vigilance of parent companies directly towards victims" https://t.co/DWbyp2uYEo #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"In recent years, parties to mergers and other transformational transactions have begun inserting into their deal documents provisions allocating post-transaction control of the attorney-client privilege for pre-transaction communications." https://t.co/JbIDaUBtS2 #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
"Judicial consideration of choice of law is rare in veil-piercing cases, but a brief survey leads to the discovery that state courts often apply their own local laws, regardless of where the subject entities are formed." https://t.co/rfgtbt79oR #corpgov— Stefan Padfield (@ProfPadfield) March 15, 2018
The internal affairs doctrine: "why law should cleave an enterprise in this way is a puzzle. Economic theories of the firm can’t explain it, and the academic literature is short on answers." https://t.co/JOfymWy5JY #corpgov— Stefan Padfield (@ProfPadfield) March 17, 2018
Friday, March 16, 2018
It’s that time of year again! Tulane is hosting its 30th Annual Corporate Law Institute, a 2-day conference devoted to developments in corporate law, particularly mergers & acquisitions.
I was only able to attend some of the panels on the first day, but I very much enjoyed getting a sense of what lawyers – and judges – are thinking about these days. Below is a summary of some of the highlights that I found most intriguing:
[More after the jump]
Matt Kelly of Radical Compliance has posted on the costs and benefits of regulation. His post is timely considering this week's rollback of certain Dodd-Frank banking provisions by the Senate. Among other things, Kelly notes that according to a draft OMB report, "across 133 major rules, the average annualized cost (in 2015 dollars) was $92.8 billion, average annualized benefit $554.8 billion. Benefits were six times larger than costs." He further writes, with some skepticism, that the OMB is seeking comment from "peer reviewers with expertise... in regulatory policy" on its cost-benefit analysis as it finalizes its report.
He also cited GW public policy professors who looked at over two hundred major rules adopted between 2007-2010 and found that "The design of the rulemaking process can both increase the pace with which rules are promulgated and reduce the level of detail in which they are presented, but only when care is taken to ensure the individuals intimately involved have greater breadth – relative to depth – in the competencies they bring to the endeavor." As Kelly, observed, " Teams with more “breadth of competencies” (one subject matter expert, one lawyer, one economic analyst, one regulatory affairs specialist, and so forth) tended to write rules more quickly and keep them simpler. In contrast, teams with depth of competency (a whole bunch of lawyers, or policy analysts, or subject matter experts) tended to take more time and, as the authors wonderfully phrased it, “elongated the resulting rules.”'
Although Kelly looks at these issues through the lens of a compliance expert, his post is worth a read as Congress and the SEC look at regulatory reform. He correctly focuses on the need to look at the quality rather than the quantity of regulation.
Thursday, March 15, 2018
I had the pleasure of taking a group of students to Washington for the most recent meeting of the SEC's Investor Advisory Committee. Among other things, they discussed issues with dual class shares. In a nutshell, dual class shares give one set of shareholders much greater voting control than other sets. In practice, it provides a means for insiders to permanently entrench themselves and retain control over a corporation even as their economic stake declines. A number of leading companies (Facebook, Snapchat, and Google) have pursued similar structures aimed at entrenching existing founders and owners.
The committee issued a recommendation and suggested that the Commission take a close look at the kinds of risks these arrangements may create. It also highlighted how these developments could widen the separation between ownership and control for many corporations:
For instance, while Snap disclosed the major governance provisions it planned to adopt, its IPO registration statement did not clearly disclose that those provisions would enable each of the co-founders to reduce his equity stake to below 1% of total economic ownership without relinquishing control. The fact that the governance structure adopted by Snap could – without further shareholder check – lead over time to such a dramatic divergence between economic and voting interests could be made significantly more salient and clear to investors. A reasonable investor might (wrongly) presume that existing SEC rules, state laws or listing requirements would prevent such a dramatic change over time.
It's an issue worth keeping a close eye on as more and more corporations adopt dual-class structures. In particular, it's worth thinking about whether the justifications for having founders retain more control extends to indefinite control.