Wednesday, October 7, 2015
Two weeks ago I wrote my first in a series of posts on the SEC's proposed liquidity and redemption rules for mutual funds. The first post, available here, focused on swing pricing. Today's post will focus on the liquidity management proposals contained in the proposed rules to address liquidity risk.
The proposed rules would require all open end mutual funds (not UITs, closed-end funds or money management funds) to create a written liquidity management program and to disclose it to the SEC via the proposed forms N-CEN and N-PORT. Under the plan, funds would (1) classify and conduct ongoing reviews of liquidity of each of the fund's positions in portfolio assets, (ii) assess and conduct periodic reviews of the fund's liquidity risk, and (iii) manage the fund's liquidity risk through a set-aside minimum portion of fund assets that are convertible within 3 business days at a price that does not materially affect the value of that asset immediately prior to sale.
Liquidity risk is born of concern that a fund "could not meet requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materials affecting the fund’s net asset value." (Proposed Rules at 44-45).
Fund classification of portfolio liquidity is in addition to the 15% illiquid asset cap under current SEC guidelines (Release Nos. 33-6927; IC-18612, March 12, 1992). The proposed liquidity classifications "would require a fund to assess the liquidity of its portfolio positions individually, as well as the liquidity profile of the fund as a whole” and unlike the 15% cap to take "into account any market or other factors in considering an asset’s liquidity," and assess "whether the fund’s position size in a particular asset affects the liquidity of that asset." (Proposed Rules at 62-63).
A fund would assess the relative liquidity of each portfolio position based on the number of days within which it is determined, using information obtained after reasonable inquiry, that the fund’s position in an asset (or a portion of that asset) would be convertible to cash at a price that does not materially affect the value of that asset immediately prior to sale.” (Proposed Rules at 63-64). Funds would report portfolio classification in one of 6 categories of liquidity ranging from 1 day conversion to cash to 30 days conversion to cash to be reported on proposed N-PORT form.
The liquidity factors include:
o Existence of an active market for the asset, including whether the asset is listed on an exchange, as well as the number, diversity, and quality of market participants;
o Frequency of trades or quotes for the asset and average daily trading volume of the asset (regardless of whether the asset is a security traded on an exchange);
o Volatility of trading prices for the asset;
o Bid-ask spreads for the asset;
o Whether the asset has a relatively standardized and simple structure;
o For fixed income securities, maturity and date of issue;
o Restrictions on trading of the asset and limitations on transfer of the asset;
o The size of the fund’s position in the asset relative to the asset’s average daily trading volume and, as applicable, the number of units of the asset outstanding; and
o Relationship of the asset to another portfolio asset.”
(Proposed Rules at 80).
Monday, October 5, 2015
Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*
She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.
The link to Laureate Education's S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.
Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell's Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.
*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO'd recently, is currently only a certified B corporation. Even Etsy's own PR folks confused the two terms in their initial announcement of their certification.
October 5, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, CSR, Delaware, Haskell Murray, Research/Scholarhip, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Thursday, October 1, 2015
Last night, I took my husband (part of his birthday present) to see The Illusionists, a touring Broadway production featuring seven masters of illusion doing a three-night run in Knoxville this week. I admit to a fascination for magic shows and the like, an interest my husband shares. I really enjoyed the production and recommend it to those with similar interests.
At the show last night, however, something unusual happened. I ended up in the show. I made an egg reappear and had my watch pilfered by one of the illusionists. It was pretty cool. After the show, I got kudos for my performance in the ladies room, on the street, and in the local gelato place.
But I admit that as I thought about the way I had been tricked--by sleight of hand--into performing for the audience and allowing my watch to be taken, I realized that these illusionists have something in common with Ponzi schemers and the like--each finds a patsy who can believe and suckers that person into parting with something of value based on that belief. That's precisely what I wanted to blog about today anyway--scammers. Life has a funny way of making these kinds of connections . . . .
So, I am briefly posting today about a type of affinity fraud that really troubles me--affinity fraud in which a lawyer defrauds a client. Most of us who teach business law have had to teach, in Business Associations or a course on professional responsibility, cases involving lawyers who, e.g., abscond with client funds or deceive clients out of money or property. I always find that these cases provide important, if difficult, teaching moments: I want the students to understand the applicable law of the case, but I also want them to understand the gravity of the situation when a lawyer breaches that all-important bond of trust with a client.
Friday, September 25, 2015
Regular readers of this blog know that I have chastised the SEC on several occasions for its lengthy delay in adopting rules to implement the exemption for crowdfunded securities offerings. (It has now been 1,268 days since the President signed the bill, 998 days past the statutory rulemaking deadline, and 702 days since the SEC proposed the rules.)
The long wait may soon be over. According to BNA, SEC Chair Mary Jo White said yesterday that the SEC will finish adopt its crowdfunding rules in the "very near term."
I don't know exactly what "very near term" means to a government official. Given my luck, it probably means immediately prior to the two crowdfunding presentations I'm scheduled to give in October. Nothing like a little last-minute juggling to keep me on my toes.
Wednesday, September 23, 2015
Yesterday (September 22, 2015) the SEC announced proposed rules regarding mutual funds and ETFs aimed at regulating liquidity and redemption risks as well as enhancing disclosures. Included in the 400+ pages of proposed rules and analysis, the SEC focused on swing pricing, a practice to mitigate the impact of forward pricing required under Rule 22c-1 of the Investment Company Act. Before this feels too in the weeds of securities law, let’s discuss what this means. Funds are required to redeem shareholders’ interests at NAV (net asset value pricing), when faced with redemption requests by shareholders wanting to exit the fund. The fund then sells assets to pay the NAV to the departing shareholder or keeps a certain pool of assets liquid to meet such requests. The costs of these trades or lost investment cost of the liquid assets are born by the shareholders who remain in the funds. Additionally, shareholders who purchase new shares of the fund, do so at the daily NAV, which doesn’t reflect the liquidity cost imposed by the departing shareholders. Similarly, when the fund receives the investment of new shareholders, the fund invests that money, but the purchase price NAV does not reflect the trading cost of when the fund purchases new portfolio assets. Consider these helpful examples from the proposed rules:
If a fund has valued portfolio asset X at $10 at the beginning of day 1, and market activity on day 1 (including the fund’s sale of portfolio asset X) decreases the market value of portfolio asset X to $9 at the end of day 1, the fund’s remaining holdings of portfolio asset X at the end of day 1 would be valued at $9 to reflect the asset’s market value on that day. However, staff outreach has shown that it is common industry practice, as permitted by rule 2a-4, for the fund’s current NAV to not reflect the actual price at which the fund has sold the portfolio assets until the next business day following the sale. In the example above, if the fund selling portfolio asset X sold the asset during the day at $8 on day 1, the price that the fund received for these asset sales would not be reflected in the fund’s NAV until day 2. Thus, redeeming shareholders would have received an exit price that would reflect portfolio asset X being valued at the close of the market at $9 on day 1, whereas remaining shareholders would hold shares on day 2 whose value reflects portfolio asset X being sold at $8 (the actual price that the fund received when it sold the asset on day one).
Similarly, as noted above, the price that a purchasing shareholder pays for fund shares normally does not take into account trading and market impact costs that arise when the fund buys portfolio assets to invest the proceeds received from shareholder purchases. ….. the fund’s NAV on day 1 (and the purchase price an incoming shareholder were to receive on day 1) reflects portfolio asset X being valued at $10, but the fund were to purchase additional shares of portfolio asset X on day 2 at $11, the price that a purchasing shareholder pays on day 1 would not reflect the costs of investing the proceeds of the shareholder’s purchases of fund shares. These costs instead would be reflected in the fund’s NAV on days following the shareholder’s purchase, and thus would be borne by all of the investors in the fund, not only the shareholders who purchased on day 1. p.186-187
Shareholders who exit mutual funds pay for none of these transaction costs and entering shareholders only pay a fraction of them. Who foots the long-term bill? The existing fund shareholders do. I wrote about this feature of mutual fund investment here on BLPB last December when I was thinking about the impact of mutual fund investment features on long-term shareholders like retirement and 529 College Plan investors—investors I refer to as Citizen Shareholders in my scholarship.
To address these transaction costs the SEC proposed rule 22c-1(a)(3) to allow for partial swing pricing (not mandating it) when redemptions and purchases exceed a certain threshold. In addition to enhancing the NAV’s reflection of the true value of the fund, swing pricing may deter first mover advantage incentives to redeem shares early in negative liquidity stress. To understand more about liquidity and redemption risks, you can also read the accompanying White Paper from the Division of Economic and Risk Analysis: Liquidity and Flows of U.S. Mutual Funds.
The Commission is seeking comments on the proposed partial swing pricing (and other rule amendment). These changes are proposed in conjunction with other liquidity management tools and disclosure enhancements, features that I hope to highlight here on BLPB in future posts.
For those of you interested in securities laws, this post requires no further explanation or introduction. For readers more concerned with traditional corporate governance, the proposed rules should be of interest to you as well. These rules signal an increased focus by the SEC on mutual funds and ETFs regarding pricing, risk management, and disclosure. Institutional investors wield tremendous voting power and financial clout in public companies-- pressures imposed on these investors will be felt secondarily by the operating companies whose stock is held by these funds. If there was ever a meaningful distinction between corporate governance and securities, those boundary lines are under increasing pressure in light of institutional investor ownership trends.
Finally, let me just say that after a long hiatus from blogging....it is good to be back.
Monday, September 21, 2015
Haskell Murray had an interesting post on Friday about businesses buying fake reviews, followers, or friends online. That post led me to think about another issue—if a company did that, could it be liable under Rule 10b-5 for securities fraud?
Consider this scenario: An investor is thinking about investing in a company called Ebusiness, Inc. She carefully reviews the company’s online presence and sees that Ebusiness has more followers and friends than anyone else in the industry. The reviews of its products are overwhelmingly positive. She concludes that Ebusiness is destined for greatness and buys its stock.
Later, the press discloses that most of Ebusiness’s followers and friends, and most of its online product reviews, are fake. Ebusiness paid someone else to produce them. The price of Ebusiness’s stock drops precipitously. Would Ebusiness be liable under Rule 10b-5?
Rule 10b-5 makes it unlawful "to make any untrue statement of a material fact . . . in connecton with the purchase or sale of any security. There’s no question that Ebusiness, through its paid agent, made fraudulent statements. There’s also no question that the investor relied on those fraudulent statements and suffered a loss when the truth became known. The real issue is whether those fraudulent statements were “in connection with the purchase or sale of any security,” as required by Rule 10b-5.
The courts have read the “in connection with” requirement broadly, but its meaning is still far from clear. The Second Circuit has indicated that the false statement must be disseminated “in a manner reasonably calculated to influence the investing public.” SEC v. Texas Gulf Sulphur Co. 401 F.2d 833, 862 (2d Cir. 1968). The false statements do not have to be directed specifically at investors, as long as the statement is of a sort that reasonable investors would rely on. In Re Carter-Wallace, Inc. Securities Litigation, 150 F.3d 153, 156 (2d Cir. 1998). The Carter-Wallace case held that product advertisements in medical journals could be covered by Rule 10b-5, although the primary goal of advertising is to influence consumers, not investors.
The same can be said of false "likes" and product reviews. Their primary goal is to influence consumers, not to convince investors to buy the company's stock. A reasonable investor certainly would not rely on a single "like" or product review. But, given the importance of a company's Internet presence, a reasonable investor might rely on the overall weight of likes and product reviews. Such use by an investor is certainly reasonable foreseeable.
Given the uncertainty of the case law, a definite conclusion is impossible. But it is at least possible that fraudulent product reviews or Facebook “likes” could trigger liability under Rule 10b-5. It’s probably just a matter of time before an ambitious plaintiff’s lawyer tries.
Thursday, September 10, 2015
Are Crooked Executives Finally Going to Jail? DOJ’s New White Collar Criminal Guidelines and the Questions for Compliance Officers and In House Counsel
I think my life as a compliance officer would have been much easier had the DOJ issued its latest memo when I was still in house. As the New York Times reported yesterday, Attorney General Loretta Lynch has heard the criticism and knows that her agency may face increased scrutiny from the courts. Thus the DOJ has announced via the “Yates Memorandum” that it’s time for some executives to go to jail. Companies will no longer get favorable deferred or nonprosecution agreements unless they cooperate at the beginning of the investigation and provide information about culpable individuals.
This morning I provided a 7-minute interview to a reporter from my favorite morning show NPR’s Marketplace. My 11 seconds is here. Although it didn’t make it on air, I also discussed (and/or thought about) the fact that compliance officers spend a great deal of time training employees, developing policies, updating board members on their Caremark duties, scanning the front page of the Wall Street Journal to see what company had agreed to sign a deferred prosecution agreement, and generally hoping that they could find something horrific enough to deter their employees from going rogue so that they wouldn’t be on the front page of the Journal. Now that the Yates memo is out, compliance officers have a lot more ammunition.
On the other hand, 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?
I for one think this is a good development, and I’m in good company. Some of the judges who have been most critical of deferred prosecution agreements have lauded today’s decision. But, actions speak louder than words, so a year from now, let’s see how many executives have gone on trial.
September 10, 2015 in Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Monday, August 31, 2015
Andrew Vollmer, a law professor at the University of Virginia and a former SEC deputy general counsel, has written two excellent papers on SEC enforcement.
The first, SEC Revanchism and the Expansion of Primary Liability under Section 17(a) and Rule 10b-5, is a critical look at the SEC’s decision in the Flannery administrative proceeding. If you’re a securities lawyer and you’re not familiar with Flannery, you should be. It stakes out a number of broad interpretations of liability under Rule 10b-5 and section 17(a) of the Securities Act. I (and Professor Vollmer) believe some of those positions are inconsistent with Supreme Court precedent, but the SEC’s is clearly trying to set up an argument for judicial deference under Chevron.
Professor Vollmer’s second article is Four Ways to Improve SEC Enforcement. He discusses the problems with SEC administrative proceedings and how to fix them.
Both articles are definitely worth reading.
Friday, August 28, 2015
I don't agree with SEC Commissioner Luis Aguilar on many issues. But I agree with his recent call for transparency in the disqualification waiver process.
A number of SEC rules, such as some of the offering registration exemptions, are not available to companies that have engaged in certain misbehavior in the past. But the SEC has the authority to waive those disqualifications, and it often does. Or, I should say, the SEC staff often does. As Commissioner Aguilar points out, the commissioners are often unaware that a waiver has been requested. And, as with staff no-action letters, it's often unclear why some waivers are granted and others are not.
I'm not a fan of the whole idea of discretionary waivers. Allowing government employees to waive the law on a case-by-case basis with little explanation strikes me as inconsistent with the rule of law. But, if we're going to have them, the process should be as transparent as possible.
Friday, August 21, 2015
Today’s post will discuss the DC Circuit’s recent ruling striking down portions of Dodd-Frank conflict minerals rule on First Amendment grounds for the second time. Judge Randolph, writing for the majority, clearly enjoyed penning this opinion. He quoted Charles Dickens, Arthur Kostler, and George Orwell while finding that the SEC rule requiring companies to declare whether their products are “DRC Conflict Free” fails strict scrutiny analysis. But I won’t engage in any constitutional analysis here. I leave that to the fine blogs and articles that have delved into that area of the law. See here, here here, here, here, and more. The NGOs that have vigorously fought for the right of consumers to learn how companies are sourcing their tin, tungsten, tantalum and gold have had understandably strong reactions. One considers the ruling a dangerous precedent on corporate personhood. Global Witness, a well respected NGO, calls it a dangerous and damaging ruling.
Regular readers of this blog know that I filed an amicus brief arguing that the law meant to defund the rebels raping and pillaging in the Democratic Republic of Congo was more likely to harm than help the intended recipients—the Congolese people. I have written probably a dozen blog posts on Dodd-Frank 1502 and won’t list them all but for more information see some of my most recent posts here, here, and here. The goal of this name and shame law is to ensure that consumers and investors know which companies are sourcing minerals from mines that are controlled by rebels. The theory is that consumers, armed with disclosures, will pressure companies to make sure that they use only “conflict-free” minerals in their cameras, cell phones, toothpaste, diapers, jewelry and component parts. I assume that the SEC will seek a full re-hearing or some other relief even though Chair May Jo White has said, “seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.”
I agree with Chair White even though I applaud the efforts of companies like Apple and Intel to comply with this flawed law. Indeed, the Enough Project, which with others has led the fight for this and other laws, now reports that there are 140 “conflict-free” smelters. But the violence continues as just this week the press reports that the Congolese government announced that it is investigating its own peacekeeprs/soldiers for rape in the neighboring Central African Republic and the UN acknowledged that fighting between armed militias is still a problem and that they are still resisting state authority. News reports indicated two days ago that clinics are closing because of fear of attack by Ugandan rebels. This hits particularly close to me because my connection with DRC and the conflict mineral fight stems from the work that an NGO that I work with has done training doctors and midwives in the heart of the conflict zone there.
I don’t know how effective Dodd-Frank will be if the issuers don’t have to disclose what the court has called the Scarlet letter of “non DRC-conflict free.” But more important, as I argue in my writings, I don’t think that consumers’ buying habits match what they say when surveyed about ethical sourcing. In my most recent article (which I will post once the editors are done), I point out the following:
A recent survey used to support the new UK Modern Slavery Act indicates that two-thirds of UK consumers would stop buying a product if they found out that slaves were involved in the manufacturing process and that they would be willing to pay up to 10% more for slave-free products…The numbers are similar but slightly lower for those surveyed in the United States. But note, “when asked if they would be willing to pay more for their favourite products if this ensured they were produced without the use of modern slavery: 52% of American consumers said they would pay more to ensure products were produced without modern slavery; 27% were not sure; 21% said they would not pay more.” This means that at least 20% and possibly almost half of informed consumers would not likely change their buying habits. (italics added).
I’m probably more informed than most about the situation in the DRC because I have been there and read almost every report, blog post, article, hearing committee transcript and tweet about conflict minerals. I have seen children digging gold out of the ground while armed rebels stood guard. I have met the village chiefs in the conflict zones. I have been detained by the UN peacekeepers who wanted to know what I was researching and then warned me not to visit the mines because of the five dead bodies (which I saw) lying in the road from a rebel attack the night before. I have stayed in monasteries guarded by men with machine guns and been warned that if I left after dark I was just as likely to be raped by a police officer as a rebel. I have met with many women who were gang raped by rebels and members of the Congolese army. I have had dinner with Nobel nominee Dr. Denis Mukwege, who back in 2011 wanted to know why the US wasn’t stopping the atrocities. I know the situation is terrible. But it won't change and hasn’t changed because of a corporate governance disclosure that most average consumers won’t read (even if the SEC had prevailed) and won’t necessarily act on if they did read it.
Next week I will post about my personal conflict with disclosures. Should I, who refuses to shop at a certain big box retailer, still shop at Amazon now that an expose has revealed a very harsh workplace? What about Costco and others? Stay tuned.
August 21, 2015 in Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Legislation, Marcia Narine, Nonprofits, Securities Regulation | Permalink | Comments (1)
Wednesday, August 12, 2015
This weekend I will be in Panama filling in at the last minute for the corporate law session for an executive LLM progam. My students are practicing lawyers from Nicaragua, El Salvador, Costa Rica and Paraguay and have a variety of legal backgrounds. My challenge is to fit key corporate topics (other than corporate governance, compliance, M & A, finance, and accounting) into twelve hours over two days for people with different knowledge levels and experiences. The other faculty members hail from law schools here and abroad as well as BigLaw partners from the United States and other countries.
Prior to joining academia I spent several weeks a year training/teaching my internal clients about legal and compliance matters for my corporation. This required an understanding of US and host country concepts. I have also taught in executive MBA programs and I really enjoyed the rich discussion that comes from students with real-world practical experience. I know that I will have that experience again this weekend even though I will probably come back too brain dead to be coherent for my civil procedure and business associations classes on Tuesday.
I have put together a draft list of topics with the help of my co-bloggers and based in part on conversations with some of our LLM and international students who have practiced law elsewhere but who now seek a US degree:
Agency- What are the different kinds of authority and how does that affect liability?
Key issues for entity selection
- ease of formation
- ownership and control
- tax issues
- asset protection/liability to third parties for obligations of the business /piercing the veil of limited liability
- attractiveness to investors
- continuity and transferability
Main types of business forms in the United States
-Partnership/General and Limited
- C Corporation
- S Corporation
- Limited Liability Company
Fiduciary Duties/The Business Judgment Rule
Basic Securities Regulation/Key issues for Initial Public Offering/Basic Disclosures (students will examine the filings for an annual report and an IPO)
The Legal System in the United States
-how do companies defend themselves in lawsuits brought in the United States?
-key Clauses to Consider when drafting dispute resolution clauses in cross border contracts
Corporate Social Responsibility- Business and Human Rights
Enterprise Risk Management/What are executives of multinationals worried about?
Yes, this is an ambitious (crazy) list but the goal of the program is to help these experienced lawyers become better business advisors. Throughout the sessions we will have interactive exercises to apply what they have learned (and to keep them awake). So what am I missing? I would love your thoughts on what you think international lawyers need to know about corporate law in the US. Feel free to comment below or to email me at firstname.lastname@example.org. Adios!
August 12, 2015 in Business Associations, Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Human Rights, International Business, International Law, Lawyering, Litigation, LLCs, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, August 4, 2015
The following position posting was provided to us via e-mail:
RUTGERS UNIVERSITY SCHOOL OF LAW (CAMDEN CAMPUS) invites applications from entry-level and lateral candidates for one or more tenure-track or tenured faculty positions. Possible areas of particular interest include, but are not limited to, corporate law, corporate governance, commercial law, securities regulation, and other areas of business law. We will consider candidates with an interest in building upon our newly devised Certificate Program in Corporate/Business Law. All applicants should have a distinguished academic background and either great promise or a record of excellence in both scholarship and teaching. We encourage applications from women, people of color, persons with disabilities, and others whose background, experience, and viewpoints would contribute to the diversity of our faculty. Contact: Professor Arthur Laby, Chair, Faculty Appointments Committee; Rutgers University School of Law; 217 North Fifth Street; Camden, NJ; 08102; email@example.com. Rutgers University is committed to a policy of equal opportunity for all in every aspect of its operations.
Monday, August 3, 2015
Should We Include More International Materials in the Basic Business Associations and Securities Regulation Courses?
Joan Heminway’s post last week about comparative corporate law got me thinking about international coverage in my own courses. Joan’s post reviewed a book designed for a stand-alone comparative corporate law course, but I’ve been wondering whether we should include more comparative material in the basic business associations and securities regulation courses.
The case for discussing the corporate and securities law of other countries is clear. Capital markets are becoming increasingly global. U.S. companies are selling securities in other countries and U.S. investors are investing in foreign companies. Initially, globalization affected primarily large multinational companies, but with the expanding use of the Internet to sell securities, even the smallest business can offer securities to investors in other countries.
Under the internal affairs rule, it’s the corporate law of the country of incorporation that’s important, no matter where the lawyer is practicing or where the corporation or the shareholder is located. And a company selling securities to investors outside the U.S. needs to consider the effect of other countries’ securities laws. Foreign counsel may be retained to deal with such issues, but shouldn’t the U.S. lawyer have at least a rudimentary understanding of foreign corporate and securities laws and how they differ from U.S. law?
I spend no time on comparative analysis in either my business associations or my securities regulation course.
I could blame the textbook authors. The book I use in Business Associations includes almost nothing about corporate law outside the United States. That’s typical. Franklin Gevurtz has written a wonderful supplement on comparative corporate law, Global Issues in Corporate Law, but business associations casebooks generally ignore comparative issues.
The book I use for Securities Regulation covers the application of U.S. registration requirements and antifraud rules to transactions outside the United States, but it doesn’t discuss foreign securities law. (A prior edition did, but that material was eliminated from the most recent edition.) This book’s approach is also typical. Other securities regulation casebooks cover the extraterritorial application of U.S. law, but offer little or no comparative analysis of the law of other jurisdictions.
The casebook authors ought to do more, but that’s an inadequate excuse. I include a lot of supplemental material that isn’t in the textbook, especially in Business Associations. It wouldn’t be too hard for me to create supplemental material to add a comparative perspective to my courses.
Perhaps this is just one of those areas where I have fallen into the rut of teaching what my professors taught me. My memory may be faulty, but I don’t recall any international coverage when I took those courses 30+ years ago—which is interesting, because my Corporations professor, Detlev Vagts, was a noted international law scholar.
But it’s mostly an issue of time. At most law schools, corporate and securities law is crammed into a few credit hours, unlike constitutional law other, more favored subjects I won’t name. I, like most corporate law teachers, don’t have the luxury of adding topics. It’s hard enough to cram agency, partnership, limited partnership, limited liability companies, corporations, and some securities law into a single four-hour Business Associations course.
Nevertheless, I’m going to review my coverage carefully and see if I can sneak in more comparative materials. In today’s global environment, even students in Nebraska ought to be exposed to at least some foreign corporate and securities law.
Thursday, July 30, 2015
Last week I attended a panel discussion with angel investors and venture capitalists hosted by Refresh Miami. Almost two hundred entrepreneurs and tech professionals attended the summer startup series to learn the inside scoop on fundraising from panelists Ed Boland, Principal Scout Ventures; Stony Baptiste, Co-Founder & Principal, Urban.Us, Venture Fund; Brad Liff, Founder & CEO, Fitting Room Social, Private Equity Expert; and (the smartest person under 30 I have ever met) Herwig Konings, Co-Founder & CEO of Accredify, Crowd Funding Expert. Because I was typing so fast on my iPhone, I didn’t have time to attribute my notes to the speakers. Therefore, in no particular order, here are the nuggets I managed to glean from the panel.
1) In the seed stage, it’s more than an idea but less than a business. If it’s before true market validation you are in the seed round. At the early stage, there has been some form of validation, but the business is not yet sustainable. Everything else beyond that is the growth stage.
2) The friend and family round is typically the first $50-75,000. Angels come in the early stage and typically invest up to $500,000.
3) The seed rounds often overlap with angels and businesses can raise from $500,000 to $1,000,000. If you have a validated part of a business model but are not self funding then you are at Series A investment stage. You still need outside capital despite validation. The Series A round often nets between $3-5 million and then there are subsequent rounds for growth until the liquidity event which is either the IPO or acquisition.
4) Venture capitalists are investing their LPs' money and often the LP will co-invest with the VC. Their ultimate goal is for the company to get acquired or go public.
5) At the early stages some VCs will show a deal to other investors if it looks good. Later stage VCs will become more competitive and will keep the information and good deals to themselves.
6) It’s important to find a lead investor or lead angel to champion your idea.
7) Not all funding is helpful. Some panelists discussed the concepts of “fallen angels” or “devils,” which were once helpful but now are not providing value but still take up time and energy that could be better spent focusing on building the business. “False angels” are those who could never have been helpful in the first place.
8) You don’t want to be the first or the last check the angel is writing. You want to get references on the angel investor and see where they have invested and what their plan is for you.
9) There is smart money and dumb money. Smart money gives money and additional resources or value. Dumb money just gives money and nothing else. It’s passive and doesn’t jump into the business (note the panelists disagreed as to whether this was a good or bad thing). Another panelist noted the distinction between helpful and harmful money. Harmful people think they are helpful and give advice when they don’t have a lot to add but take up a lot of time. Sometimes helpful money just gives a check and then gets out of the way. It’s the people in between that can cause the problems.
10) VCs and angels invest in teams as well as ideas. They look for the right fit and a mix of veteran entrepreneurs, a team/product fit, a mix of technical and nontechnical people, professionals whose reputations and resumes can be verified. They want to know whether the people they are investing in have been in a competitive environment and have learned from success or failure.
11) Crowdfunding can be complicated because investors don’t meet the entrepreneurs. They see everything on the web so the reputation and the need for a good team is even more important.
12) Convertible notes are the “gold standard” according to one speaker and it’s the workhorse for funding. There was some discussion of safe notes, but most panelists didn't have a lot of experience with them and that was echoed this week by attorney David Salmon, who advises small businesses and holds his own monthly meetups. One panelist said that the sole purpose of safe notes was to avoid landmines that can blow up the company. Another panelist indicated that from an investor standpoint it’s like a blackhole because it’s so new and people don’t know what happens if something goes wrong.
13) The panelists indicated that businesses need to watch out for: the maturity date for their debt (how long is the runway); when can the investors call the note and possibly bankrupt the company; how will quirky covenants affect the next round of financing and where later investors will fall in line; and covenants that are easy to violate.
14) There was very little discussion of Regulation A+ but it did raise some interest and the possibility to raise even more funds from non-accredited investors. Only 3% of the eight million who can invest through crowdfunding actually do, so Reg A+ may help with that.
16) All of the panelists agreed that entities may start out as LLCs but they will have to convert to a C Corp to get any VC funding.
There was a lot more discussion but this post is already too long. Because I've never been an angel nor sought such funding, I don’t plan to provide any analysis on what I’ve typed above. My goal in attending this and the other monthly events like this was to learn from the questions that entrepreneurs ask and how the investors answer. Admittedly, most of my students won’t be dealing with these kind of issues, but I still introduce them to these concepts so they are at least familiar with the parlance if not all of the nuances.
July 30, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Financial Markets, International Business, Law School, Legislation, LLCs, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, July 28, 2015
A lawyer representing Fordham Law School Professor (and Riverbed Technology shareholder) Sean Griffith argued in Delaware court that a class action settlement related to Riverbed Technology's $3.6 billion sale to private equity firm Thoma Bravo was bad for shareholders and good for the lawyers involved, Reuters reports.
Prof. Griffith told Reuters that "he has been buying stock of companies that have announced merger deals and intends to object to settlements if he feels the litigation is not serving stockholders." He asserts that the shareholders' attorneys "are in cahoots" to reach a settlement, without regard to value.
This raises some interesting questions of law and policy with regard to the Professor's role here. As a shareholder, Griffith has the right to object (assuming his time of ownership satisfies the applicable statute). But how should a court assess the objection of a shareholder who has admitted that he bought stock for the purpose of objecting to settlements not in the interests of shareholders, when that shareholder has expressed ideological concern about the value of all disclosure-only settlements?
Is Prof. Griffith's desire to protect shareholders a desire to enhance short- or long-term wealth of the entity from greedy lawyers and bad managers? Or is it a desire to punish those who abuse class action lawsuits to their own ends? Both would be reasonable motivations (though, for now, I reserve judgment on whether either assessment is accurate), but it seems that the law might view such motivations differently.
Take, for example, Pillsbury v. Honeywell, Inc., 191 N.W.2d 406 (1971), which strikes me as similar in concept, if not law. In that case, the court rejected Charles Pillsbury's request to access the company shareholder list and review books and records of Honeywell. The request was expressly related to Pillsbury's anti-war efforts, and Pillsbury made clear that he sought the records because he thought Honeywell's activities in weapons were immoral. The court denied access stating that
petitioner had already formed strong opinions on the immorality and the social and economic wastefulness of war long before he bought stock in Honeywell. His sole motivation was to change Honeywell's course of business because that course was incompatible with his political views. If unsuccessful, petitioner indicated that he would sell the Honeywell stock.
We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long- or short-term economic effects on Honeywell resulting from the production of war munitions. Similarly, this suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell.
If Prof. Griffith is looking to protect the long-term interests of all companies by protecting merging companies from harmful class action settlements, and his mechanism is buying shares in companies that he has reason to believe will merge, then perhaps his Robin Hood-like actions (in that the actions seek to return funds to the rightful owners) have value for shareholder wealth maximization and entity wealth maximization. The fact that he holds out the possibility that he won't object to settlements where the litigation serves the purposes of the shareholder suggests he might be in this camp.
But what if he will object to all settlement proposals? Or perhaps all disclosure-only settlement proposals, even where such settlements are allowable under the law? Does this convert his actions to more of a Charles Pillsbury-like feel in that his actions are about opposing class actions settlements, regardless of whether settlement is in the best interest of the parties?
Of course, his motivations don't necessarily matter under current law in this area, but I can't help but think the motivations will influence how a court views (and eventually decides upon) Prof. Griffith's objections. And I think they should. If, in any given case, Prof. Griffith is right that the settlement is not in the best interest of the shareholders, the court should uphold his objections. But, under current law, it's possible that a disclosure-only settlement might still be the most efficient outcome. It's the court's job to assess that in each case.
Thursday, July 16, 2015
Love him or hate him, you can’t deny that President Obama has had an impact on this country. Tomorrow, I will be a panelist on the local public affairs show for the PBS affiliate to talk about the President’s accomplishments and/or failings. The producer asked the panelists to consider this article as a jumping off point. One of the panelists worked for the Obama campaign and another worked for Jeb Bush. Both are practicing lawyers. The other panelist is an educator and sustainability expert. And then there’s me.
I’ve been struggling all week with how to articulate my views because there’s a lot to discuss about this “lame duck” president. Full disclosure—I went to law school with Barack Obama. I was class of ’92 and he was class of ’91 but we weren’t close friends. I was too busy doing sit-ins outside of the dean’s house as a radical protester railing against the lack of women and minority faculty members. Barack Obama did his part for the movement to support departing Professor Derrick Bell by speaking (at minute 6:31) at one of the protests. I remember thinking then and during other times when Barack spoke publicly that he would run for higher office. At the time a black man being elected to the president of the Harvard Law Review actually made national news. I, like many students of all races, really respected that accomplishment particularly in light of the significant racial tensions on campus during our tenure.
During my stint in corporate America, I was responsible for our company’s political action committee. I still get more literature from Republican candidates than from any other due to my attendance at so many fundraisers. I met with members of Congress and the SEC on more than one occasion to discuss how a given piece of legislation could affect my company and our thousands of business customers. My background gives me what I hope will be a more balanced set of talking points than some of the other panelists. In addition to my thoughts about civil rights, gay marriage, gun control, immigration reform, Guantanamo, etc., I will be thinking of the following business-related points for tomorrow’s show:
1) Was the trade deal good or bad for American workers, businesses and/or those in the affected countries? A number of people have had concerns about human rights and IP issues that weren’t widely discussed in the popular press.
2) Dodd-Frank turns five next week. What did it accomplish? Did it go too far in some ways and not far enough in others? Lawmakers announced today that they are working on some fixes. Meanwhile, much of the bill hasn’t even been implemented yet. Will we face another financial crisis before the ink is dried on the final piece of implementing legislation? Should more people have gone to jail as a result of the last two financial crises?
3) Did the President waste his political capital by starting off with health care reform instead of focusing on jobs and infrastructure?
4) Did the President’s early rhetoric against the business community make it more difficult for him to get things done?
5) How will the changes in minimum wage for federal contractors and the proposed changes to the white collar exemptions under the FLSA affect job growth? Will relief in income inequality mean more consumers for the housing, auto and consumer goods markets? Or has too little been done?
6) Has the President done enough or too much as it relates to climate change? The business groups and environmentalists have very differing views on scope and constitutionality.
7) What will the lifting of sanctions on Cuba and Iran mean for business? Both countries were sworn mortal enemies and may now become trading partners unless Congress stands in the way.
8) Do we have the right people looking after the financial system? Is there too much regulatory capture? Has the President tried to change it or has he perpetuated the status quo?
9) What kind of Supreme Court nominee will he pick if he has the chance? The Roberts court has been helpful to him thus far. If he gets a pick it could affect business cases for a generation.
10) Although many complain that he has overused his executive order authority, is there more that he should do?
I don’t know if I will have answers to these questions by tomorrow but I certainly have a lot to think about before I go on air. If you have any thoughts before 8:30 am, please post below or feel free to email me privately at firstname.lastname@example.org.
July 16, 2015 in Constitutional Law, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Business, Marcia Narine, Securities Regulation, Television, White Collar Crime | Permalink | Comments (0)
Wednesday, July 15, 2015
I read with interest the recently released opinion of the U.S. Court of Appeals for the Third Circuit in Trinity Wall Street v. Walmart Stores, Inc. The Wall Street Journal covered the publication of the opinion earlier in the month, and co-blogger Ann Lipton wrote a comprehensive post sharing her analysis on the substance of the decision over the weekend. (I commented, and Ann responded.) Of course, like Ann, as a securities lawyer, I was interested in the court's long-form statement of its holding and reasoning in the case. But I admit that what pleased me most about the opinion was its use of legal scholarship written by my securities regulation scholar colleagues.
Tom Hazen's Treatise on the Law of Securities Regulation is cited frequently for general principles. This is, as many of you likely already know, an amazing securities regulation resource. I also will note that many of my students find Tom's hornbook helpful when they are having trouble grappling with securities regulation concepts covered in the assigned readings in my class.
Donna Nagy's excellent article on no-action letters (Judicial Reliance on Regulatory Interpretation in S.E.C. No-Action Letters: Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921 (1998)) also is cited by the court. This piece is not praised enough, imho, for the work it does in the administrative process area of securities law. I see the citations in the opinion as an element of needed praise.
And finally, Alan Palmiter's scholarship also is cited numerous times in the opinion. Specifically, the court quotes from and otherwise cites to The Shareholder Proposal Rule: A Failed Experiment in Merit Regulation, 45 Ala. L. Rev. 879 (1994). Again, this work represents an important, under-appreciated scholarly resource in securities law.
At least one other law review article is cited once in the opinion.
[Note: Alison Frankel also points out that Vice Chancellor Laster cites formatively to a paper co-authored by Jill Fisch, Sean Griffith, and Steve Davidoff Solomon in a recent opinion. More evidence that our work matters, at least to the judiciary.]
As Ann's post notes, the Trinity opinion also is worth reading for its substance. In addition to the matters Ann mentions, the opinion includes, for example, a lengthy, yet helpful, history of the ordinary business exclusion under Rule 14a-8. And the analysis is instructive, even if unavailing (unclear in its moorings and effect in individual cases).
Finally, it's worth noting that the opinion is drafted with a healthy, yet (imv) professional, dose of humor. The opinion begins, for example, as follows:
“[T]he secret of successful retailing is to give your customers what they want.” Sam Walton, SAM WALTON: MADE IN AMERICA 173 (1993). This case involves one shareholder’s attempt to affect how Wal-Mart goes about doing that.
And the conclusion of the opinion includes the following passage that made me smile:
Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions. For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but “transcendence,” we empathize.
(This is part of the "scolding" Ann references in her post.)
Read the concurring opinion of Judge Shwartz, too. It is thoughtful (even if not entirely helpful, as Ann notes) in making some nice additional points worth considering.
Saturday, July 11, 2015
I noted with favor the other day (to myself, privately) the helpful and interesting commentary on The Glom of our trusted colleague and co-blogger, Usha Rodrigues, regarding the recent press reports on Mylan N.V.'s related-party disclosures. As the story goes, a firm managed and owned in part by the Vice Chair of Mylan's board of directors sold some land to an entity owned by one of the Vice Chair's business associates for $1, and that entity turned around the same day and sold the property to Mylan for its new headquarters for $2.9 million. Usha's post focuses on both the mandatory disclosure rules for related-party transactions and the mandatory disclosure rules on codes of ethics. Two great areas for exploration.
A reporter from the Pittsburgh Tribune-Review called me Thursday to talk about the Mylan matter and some related disclosure issues. He and I spoke at some length yesterday. That press contact resulted in this story, published online late last night. The reporter was, as the story indicates, interested in prior related-party disclosures made by Mylan involving transactions with family members of directors. This led to a more wide-ranging discussion about the status of family members for various different securities regulation purposes. It is from this discussion that my quote in the article is drawn. But our conversation covered many other interesting, related issues.
Monday, July 6, 2015
I have been reading Paul Mahoney’s brilliant new book, Wasting a Crisis: Why Securities Regulation Fails (University of Chicago Press 2015). You should too.
Mahoney attacks the traditional market failure rationale for our federal securities laws. He argues that contrary to the traditional narrative, market manipulation was not rampant prior to 1933 and the securities markets were operating reasonably well. Mahoney concludes that “‘lax’ regulation was not a substantial cause of the financial problems accompanying the Great Depression and . . . most (although not all) of the subsequent regulatory changes were largely ineffective and in some cases counterproductive.”
Mahoney looks at state blue sky laws, the Securities Act, the Exchange Act, the Public Utility Holding Company Act, and, regrettably only briefly, the Investment Company Act. He concludes by discussing the Sarbanes-Oxley and Dodd-Frank Acts. He discusses the rationales for each regulation and whether those rationales are supported by the facts. Mahoney backs up his argument with a great deal of empirical research, some of which has appeared in earlier articles. Warning: Some of that discussion may be a little difficult for those without a background in regression analysis or financial economics, but you can follow Mahoney’s conclusions without understanding all of the analytical detail.
Mahoney’s work is a nice counterpoint to the narrative that prevails in most securities treatises and casebooks. Every law library should have a copy. Everyone interested in securities regulation policy, and certainly everyone who teaches a securities law course, should read this book. Whether or not you ultimately agree with Mahoney (as it happens, I generally do), his arguments must be dealt with.
Wednesday, July 1, 2015
As I earlier noted, on June 23rd, I moderated a teleconference on proposals to shorten the Section 13(d) reporting period, currently fixed by statute and regulation at 10 days. If you don't mind registering with Proxy Mosaic, you can listen to the program. The link is here.
The discussion was lively--as you might well imagine, given that one of the participants represents activist shareholders and the other represents public companies. A number of interesting things emerged in the discussion, many (most) of which also have been raised in other public forums on Schedule 13D, including those referenced and summarized here, here, and here, among other places.
- Exactly how does the Section 1d(d) reporting requirement protect investors or maintain market integrity or encourage capital formation? Or is it just a hat-tipping system to warn issuers about potential hostile changes of control, chilling the potential for the market for corporate control to run its natural course? Of course, the answer to many questions about Section 13(d) depends on our understanding of the policy interests being served. It's hard to tinker with the reporting system if we cannot agree on the objectives it seeks to achieve . . . . (Read the remaining bullets with this in mind.)
- We're not in the 1960s, 1970s, or 1980s any more. If market accumulations are deemed to present dangers to investors today (and that case needs to be made), why are they not just an accepted risk of public market participation? Shouldn't every investor know that market accumulations are a risk of owning publicly traded securities? And how does the reporting requirement really protect them from harm? Is this just over-regulation that treats investors as nitwits?
- Not all activist investors are the same. Some act or desire to act as a Section 13(d) group; others don't. Some seek effective or actual control of an issuer; some don't.
- Provisions within the Section 13(d) filing requirements interact. So, can we really talk about decreasing disclosure time periods without also talking about triggering thresholds and mandatory disclosure requirements?
- Why is 5% beneficial ownership the triggering threshold for reporting? What's the magic in that number--and if it were to be changed, should it be lower or higher?
- Schedule 13D is a disclosure form fraught with complexity. Many important judgment calls may have to be made in completing the required disclosures accurately and completely, depending on the circumstances. Is all this complexity needed? In particular, can the Item 4 disclosure requirement be simplified? And is the group concept necessary?
- What is the value, if any, in looking at the issue from a comparative global regulatory viewpoint? Toward the end of the call, international comparisons were increasingly being made and used as evidence that a change in U.S. regulation is needed or desirable. But are other markets and systems of regulation enough like ours for these comparisons to work? E.g., although other countries require Schedule 13D-like filings fewer days after attainment of a triggering threshold of ownership, does that mean we also should reduce the time period for mandatory disclosure here in the U.S.?
Lots of questions; I am beginning to think through answers. Regardless there's much food for thought here. Any reactions? What do you think, and why?