Thursday, January 16, 2014

Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?

In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts.  I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here). 

For the past few months, I have been working on an article outlining one potential solution.  But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:

Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain?  Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.

Corporations respond to incentives and penalties. Governments can and should  require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.

Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs.  The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.



January 16, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Social Enterprise | Permalink | Comments (1)

1 Report, 4 Issues

(1) Corporate Disclosures, (2) Indirect Advocacy, (3) Climate Change, and (4) Institutional Investors 

The Union of Concerned Scientists, an alliance of more than 400,000 citizens and scientists, released a report today: Tricks of the Trade: How Companies Influence Climate Policy Through Business and Trade Associations.  The report is based on data collected by CDP, an international not-for-profit that “works with investors, companies and governments to drive environmental disclosure”.  CDP administers an annual climate reporting questionnaire to more than 5,000 companies worldwide with the support of various institutional investors (722 institutional investors with over $87 trillion in capital). The 2013 questionnaire asked companies about climate policy influence, including board membership in trade associations, lobbying, and donations to research organizations.

Tricks of the Trade highlights outsourced political influence through the use of trade associations and interest groups that lobby on behalf of their members rather than the members engaging in these activities in their own name.  The report highlights 3 main issues:  (1) lack of transparency, (2) incongruence with the outsourced message among responding companies, and (3) the continued role that the Citizens United decision has on corporate spending and political discourse.


  • Of the 5,557 companies that received the climate change questionnaire (through either CDP’s request or their voluntary participation), 2,323 responded, and only 1,824 (33 percent) of them replied publicly.
  • Ninety-seven Global 500 companies—the top 500 companies in the world by revenue—including Apple, Amazon, and Facebook, did not participate.  
  • In the Standard & Poor’s (S&P) 500—a market value index of large U.S. companies—166 companies, including Comcast and the Southern Company, did not participate.

The report highlights that proposed rules before the SEC for corporate political spending disclosures would address some transparency concerns and notes that the SEC has no plans to address this issue in 2014.  This is no small issue considering the number of institutional investors and amount of invested capital ($87 trillion, with a "T"!!) behind this initiatve.  CDP sends its survey to corporations on behalf of the signatory institutional investors who are shareholders.

These shareholder requests for information encourage companies to account for and be transparent about environmental risk. Transparency of this data throughout the global market place ensures the financial community has access to the best available corporate climate change information to help drive investment flows towards a low carbon and more sustainable economy


  • Ninety-five companies noted that at least one of their trade groups had a climate policy position that was partially or wholly inconsistent with their own, for a total of 172 such responses across all trade groups.

The 2013 questionnaire, while focused on climate change issues, is relevant to broader questions of corporate political influence and spending, the SEC’s agenda for 2014, and the role of corporate disclosures.   If you are teaching corporations/BA this semester, this 12 page report raises several issues that, in my opinion, would elicit a great classroom discussion when you get to the role and purpose of corporations,  sections on the disclosure regime of our securities markets, and even on shareholder rights to information.

-Anne Tucker

January 16, 2014 in Business Associations, Anne Tucker, Constitutional Law, Corporate Governance, Corporations, Financial Markets, Securities Regulation, Teaching | Permalink | Comments (0)

Thursday, January 9, 2014

Aaron Rodgers, Intel and the “Scarlet Letter” of Dodd-Frank- Part 2

On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.

I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC  had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction- if the SEC loses, they will have to rewrite this section to comport with Congressional intent.

The second main issue concerned the SEC’s failure to apply a de minimis exception to the rule. NAM’s lawyer provided a real-life example of a catalyst used in producing automobiles that sometimes washed away during production but at other times could leave just one part per million of tin in the finished product. Judge Srinivasan pointed out that if the mineral could wash away but the product could still function, then perhaps it wasn’t “necessary” as the law required for reporting. Judge Sentelle raised a concern about “breaking new ground” by requiring the SEC to enact a de minimis exception. The SEC bolstered its argument by indicating that no commentator that had proposed such an exception during the rulemaking process  had provided a workable threshold. My prediction- this is a toss up. This was the SEC’s most successful argument of the day.

Many commenters believed that the third argument—the First Amendment claim-- was spurious and/or a Hail Mary plea when NAM first raised it last year. Yet this argument provided the most interesting discussion of the day, especially since Judge Randolph specifically reminded NAM’s counsel to discuss it and not save it for rebuttal as NAM had planned. NAM argued that by requiring companies to declare on their websites that their products were not “DRC-Conflict Free,” thereby denouncing their own products, this amounted to a “scarlet letter.” NAM conceded that the government could ask for the information and could post it, but maintained that requiring companies to “shame” themselves was unconstitutional. This argument gained traction with both judges Randolph and Sentelle, who called it “compelled speech.” The judges also questioned the SEC on: whether the SEC had ever or should focus its efforts on communications to consumers; how the SEC would enforce the rule, asking whether a group of scientists would do product inspections; how this rule would achieve Congress’ intent of securing the safety of the Congolese people; whether the government could require companies to indicate whether they had used child labor overseas; and whether the intent of the shaming provision was to cause a boycott- bingo! My prediction- the SEC loses on this provision.

If the SEC does have to go back to the drawing board, it will be interesting to see how current Chair Mary Jo White influences the rule given her public statements about the rule being out of the SEC’s purview. I hope that the European Commission, which has done an impact analysis, will pay close attention as they roll out their own conflict minerals legislation to the EU.

Many have asked what I think the government should have done to help the people of Congo. Put simply, the government could and should fund and enforce the DRC Relief, Security, and Democracy Promotion Act of 2006, which has over a dozen provisions addressing security sector reform, minerals, infrastructure and other matters that could provide a more holistic solution. Next week, I will blog about other ways that the government could incentivize business to address human rights issues around the world.

January 9, 2014 in Constitutional Law, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (1)

Tuesday, January 7, 2014

CFTC and FERC Finally Play Nice(ish)

News Release

The Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) have signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect energy market competitors and consumers.

Finally, the CFTC and FERC seem to have resolved some serious jurisdictional overlap problems between the agencies related to Dodd-Frank (section 720(a)(1)), which required the agencies to adopt a Memorandum of Understanding (MOU) to resolve several key issues. It’s taken a while to get here.  Recall that settling (or at least improving) jurisdictional questions became especially acute in the wake of the Brian Hunter case, where the CFTC joined the defendant against FERC claiming that the CFTC had exclusive jurisdiction over Hunter’s alleged trading violations.  The DC Circuit agreed with Hunter and the CFTC (opinion pdf). 

At long last, there are two MOUs, one related to jurisdiction (pdf) and the other related to information sharing (pdf). According to the FERC news release, the jurisdiction MOU provides a process the agencies will use to notify one another of  issues “that may involve overlapping jurisdiction and coordinate to address the agencies’ regulatory concerns.“  The information sharing MOU creates procedures for the agencies to share information “of mutual interest related to their respective market surveillance and investigative responsibilities, while maintaining confidentiality and data protection.”

Perhaps the more interesting news (H/T: Craig Silverstein & Nathan Endrud) is the possibility of new licensing for wholesale power and natural gas market participants to deal with the people actually committing fraud and/or manipulating markets.   There is not agreement from all the commissioners that this is necessary, but it is an idea of note for this continually evolving market. 

January 7, 2014 in Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation | Permalink | Comments (0)

Monday, January 6, 2014

Osovsky on Secondary Trading Markets and Investor Protection

Adi Osovsky, an S.J.D. candidate at Harvard Law School, has posted an interesting new article on SSRN, The Curious Case of the Secondary Market with Respect to Investor Protection.

Here's the abstract:

The primary mission of the U.S. Securities and Exchange Commission is to protect investors. However, current securities regulation clearly separates between public markets and private markets with respect to investor protection. While the federal securities laws impose strict and costly disclosure and anti-fraud requirements on issuers that offer their securities to the public, they exempt private offerings from such rigid regime. The liberal approach toward private offerings is based on the assumption that investors in private markets are sophisticated and thus can "fend for themselves".

This Article explores the validity of such traditional dichotomy between the public market and the private market in a relatively new, organized secondary market for ownership interests in private companies with retail investor access (the "Secondary Market"). The Secondary Market provides investors and employees with an opportunity to sell their holdings even before the first exit event. It also allows greater flexibility in capital formation, which may enhance productivity and job growth. However, the Secondary Market raises serious problems with regard to investor protection.

As this Article shows, the rise of the Secondary Market has revealed conspicuous cracks in the wall traditionally separating the public and the private markets and the two markets’ participants – the sophisticated investors versus the unsophisticated investors. This separation was undermined by the penetration of unsophisticated investors to the private market sphere and by the erosion of the assumptions regarding the ability of Secondary Market’s participants to fend for themselves.

The Article suggests that the erosion of the sophistication presumption deems the classic dichotomy between the heavily regulated public market and the lightly regulated private market artificial. It calls for a reexamination of the current regulatory regime with respect to investor protection. Such reexamination is of particular importance in light of the new Jumpstart Our Business Startup (JOBS) Act that would enable private companies to stay private longer, and the Secondary Market to thrive.

I haven't read the article yet, but the issue Osovsky addresses is an important one. Even if accredited investors are able to protect themselves in exempted private offerings, the Internet (in conjunction with the liberalization of Rule 144) now makes it much easier for them to resell those securities to unsophisticated investors.

Secondary purchasers will have access to at least some information about the issuer. Rule 144 protects those resales only if the issuer is a reporting company [Rule 144(b)(1)(i)] or if current public information is available about the issuer [Rule 144(b)(1)(ii) and (b)(2), in conjunction with 144(c)]. But is the information required by Rule 144(c)(2) for non-reporting companies sufficient?

January 6, 2014 in C. Steven Bradford, Securities Regulation | Permalink | Comments (0)

Thursday, January 2, 2014

Can loyalty-driven securities solve the problem of short-termism? Probably not, according to a study.

The Generation Foundation (the “Foundation”), which focuses on sustainable capitalism, commissioned Mercer and Canadian law firm Stikeman Elliott LLP to study ways to foster more long-term thinking in the capital markets. In a prior report the Foundation proposed five actions to counteract the effects of short-termism including: (1) identifying and incorporating risks from stranded assets; (2) mandating integrated reporting; (3) ending the default practice of issuing quarterly earnings guidance; (4) aligning compensation structures with long-term sustainable performance; and (5) encouraging long-term investing with loyalty-driven securities. 

Loyalty-driven securities provide differentiated rights or rewards to shareholders based on their tenure of shareholding.  These rewards could include extra dividends, warrants or additional voting rights for owners who held shares for three years (or some other time period), limiting proxy access to shareholders of a specified minimum duration, or inferior voting rights for short-term shareholders.   The idea is not far-fetched. Apparently, the European Commission is considering proposals to reward certain shareholders with additional voting rights. 

In a report issued in December 2013 the Foundation, Mercer and the law firm outline the results of their legal review of almost a dozen countries and the interviews of over 120 experts. Interviewees included academics, pension funds, investors, and stakeholders such as GMI, Blackrock, UBS Global Asset Management, Ceres, the Conference Board, the Office of NYC Comptroller, Johnson & Johnson, Fidelity, Ira Millstein, CalSTRS, Aviva Investors and academics from Columbia and the London School of Economics. 

The report starts with the premise that “heightened interest in ‘short-termism’ also reflects the belief that causes of short-termism… are products of poorly designed organizational incentives and failures of corporate governance systems rather than simply a result of information asymmetry, technological innovation, or the cognitive limits of decision-makers.”

The study revealed that proposals to consider loyalty-driven securities --which are already allowed by law and in use in France -- met with considerable resistance.  Those who opposed them mentioned potential discrimination between shareholders; the risk of unintended consequences because it would favor certain types of investors such as passive investors; administrative complexities around share transfers, tracking of tenure and custody; the weakness of the incentive because the nature of the reward would not be enough to forego revenue; and finally a concern that loyalty-driven securities would not address the root causes of short-termism.

Three themes emerged from the interviews for continued study. First, the authors suggest longer time horizons for investment analysis and a review of different forms of capital including financial, physical and human.  Second, they recommend realigning frameworks for performance measurement and reward so that individuals will not be penalized for their longer-term decision-making. Third, they believe that investors may need more information and stronger relationships with companies so that they can have faith in long-term value creation and strategies and the executives in charge of implementation.

To effectuate this kind of change they recommend: better-informed fiduciary oversight; board and investment committee education programs; a database of sustainable financial market-certified candidates for board, trustee and investment committees; focus by policymakers and regulators on shaping laws conducive to long-term thinking; a live shadow-monitoring pilot to establish a set of metrics against which to monitor and report fund manager performance to clients; alignment of incentives related to executive compensation; a formal investor-issuer council for systemic risk; and a campaign to educate and encourage analysts and investors to question companies about their long-term strategy during  quarterly earnings calls.

Given my focus on corporate governance and sustainability, I read the report with great interest. Whether or not you favor loyalty-driven securities, the full report and appendices are worth a read. 

January 2, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Sunday, December 29, 2013

Bebchuk & Ferrell on “Rethinking Basic”

Lucian A. Bebchuk & Allen Ferrell recently posted “Rethinking Basic” on SSRN.  Here is the abstract:

In the Halliburton case, the United States Supreme Court is expected to reconsider next spring the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory and has facilitated securities class action litigation. In this paper we seek to contribute to the expected reconsideration.

We show that, in contrast to claims made by the parties, the Justices need not assess, or reach conclusions regarding, the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. We explain that class-wide reliance should not depend on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. Indeed, based on our review of the large body of research on market efficiency in financial economics, we show that, even fully accepting the views and evidence of efficiency critics such as Professor Shiller, it is possible for market prices to be distorted by fraudulent disclosures. Conversely, even fully accepting the views and evidence of market efficiency by supporters such as Professor Fama, it is possible that market prices were not distorted by a fraudulent disclosure. In short, the academic debate on market efficiency, even assuming the Court was somehow in a position to adjudicate the relative merits, should not be the focus in determining class-wide reliance.

We put forward and analyze the merits and applicability of a modified rule that would make class-wide reliance depend on the existence of fraudulent distortion of market prices. We further discuss (i) how such a rule would retain some of the key insights behind the Basic rule but would avoid key drawbacks of it (including those identified by Justice White in his critique of the Basic opinion); (ii) the tools that would enable the federal courts to apply it effectively; and (iii) the allocation of the burden of proof.

December 29, 2013 in Current Affairs, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Thursday, December 19, 2013

Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners

On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo.  The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:

Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.  

Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme  (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.

I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.

Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.

Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability.  Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses.  Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.

A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds.  One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model.  Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.

Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.

The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.

Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.





December 19, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Science, Securities Regulation, Social Enterprise | Permalink | Comments (0)

Monday, December 16, 2013

Crowdfunding Intermediaries' Duty to Protect Against Fraud

I have been pondering one of the provisions in the SEC's proposed crowdfunding rules, and I have decided that it's extremely dangerous to crowdfunding intermediaries.

Reducing the Risk of Fraud: The Statutory Requirement

Section 4A(a)(5) of the Securities Act, added by the JOBS Act, requires crowdfunding intermediaries (brokers and funding portals) to take steps to reduce the risk of fraud with respect to crowdfunding transactions. The SEC is given rulemaking authority to specify the required steps, although the statute specifically requires "a background and securities enforcement regulatory history check" on crowdfunding issuer's officers and directors and shareholders holding more than 20% of the issuer's outstanding equity.

Proposed Rule 301

Proposed Rule 301 of the crowdfunding regulation implements this requirement.

A couple of the requirements of Rule 301 don't really relate to fraud, even though the section is captioned "Measures to reduce risk of fraud." Rule 301(a) requires the intermediary to have a reasonable basis for believing that the issuer is in compliance with the statutory requirements and the related rules. Rule 301(b) requires the intermediary to have a reasonable basis for believing that the issuer has means to keep accurate records of the holders of the securities it's selling. Neither of these requirements is particularly onerous because, in each case, the intermediary may rely on the issuer's representations unless the intermediary has reason to doubt those representations.

Rule 301(c)(2) enforces the background check requirement, as well as the "bad actor" disqualifications in Rule 503. The intermediary must not allow any issuer to use its crowdfunding platform unless the intermediary has a reasonable basis for believing that the issuer, its officers and directors, and its 20% equity holders are not disqualified by Rule 503.  To satisfy this requirement, the intermediary "must, at a minimum, conduct a background and securities enforcement regulatory history check" on each such person.

The Problematic Provision

The part of Rule 301 that really troubles me is the final requirement, in Rule 301(c)(2). The intermediary must deny issuers access to its platform if the intermediary "[b]elieves that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection." If an intermediary becomes aware of such information after its has already granted access to the issuer, the intermediary "must promptly remove the offering from its platform, cancel the offering, and return (or, for funding portals, direct the return of) any funds that have been committed by investors in the offering."

If this was all the regulation said, it would make sense: an intermediary can't let known or suspected bad actors use its platform. But that's not all it says. Rule 301(c)(2) adds this little nugget:

"In satisfying this requirement, an intermediary must deny access if it believes that it is unable to adequately or effectively assess the risk of fraud of the issuer or its potential offering."

It's one thing to say an intermediary should shut down the issuer if it's aware of problems or if there are red flags that should reasonably cause concern. But this last provision requires the intermediary to refuse access to the issuer unless it can affirmatively determine that the issuer poses no risk of fraud. And, of course, the only way to "adequately or effectively assess the risk of fraud" is through a full investigation of the issuer and its principals. The cost of fully investigating every issuer on the platform would be prohibitive, and certainly too much for the returns likely to be generated by hosting offerings of less than $1 million.

Intermediaries should be required to deny their platforms to issuers who they know pose a risk of fraud and intermediaries should be required to pursue any red flags that arise. But that should be it. Crowdfunding intermediaries should not be insurers against fraud, which is what this provision is trying to make them.

December 16, 2013 in C. Steven Bradford, Financial Markets, Securities Regulation | Permalink | Comments (2)

Sunday, December 15, 2013

Jay Brown on the Proxy Advisory Services Roundtable

Over at The Race to the Bottom, Jay Brown has compiled a series of post on the recent proxy advisory services roundtable.  Here are the relevant links:

  • Introduction ("To be frank … roundtables do not often move the issue forward.  Comments can be random or incomplete. In a room full of experts, they can be woefully unprepared and tendentious. Statements can be predictable and provide little additional value to the debate.  This Roundtable, however, was different. It was very well done.").
  • The Participants ("There was a good cross section of views to say the least.").
  • The Data ("[T]he evidence presented at the Roundtable indicated that the largest asset managers (BlackRock for example) viewed the recommendations as an input, not a controlling influence.").
  • Voting Decisions and the Need for Data Tagging ("Mutual funds must file voting data on Form N-PX…. [we should] require the filing of the data in an interactive format.").
  • The Issue of Concentration (“Concentration is … a structural issue that exists in many places in the securities markets and the proxy process.”).
  • Plumbing Problems (“Michelle Edkins from BlackRock … noted that BlackRock retained ISS not only for advice but for other services as well. Some of these services arose out of the ‘operating environment.’ She described the voting environment as ‘highly complex, terribly inefficient’ and ‘prone to error.’”).
  • The View of Consumers (“The discussion brought home several points.  First, investors want the services provided by the proxy advisory firms, an obvious enough point given that they pay for it.  But the comments demonstrated the role that demand played in the structure of the proxy process.”).
  • The View of Issuers (“Issuers and their allies raised a number of concerns about proxy advisory firms.  They ranged from industry concentration to conflicts of interest to the propensity to make mistakes in making recommendations.  The fact that the firms make recommendations yet seek business from issuers raised concerns, as Trevor Norwitz (2:37) said, about being 'shaken down when approached by the governance side . . .'”).
  • The Regulatory Privilege (“An interesting issue that arose off and on during the day was the role played by the Commission in connection with the use of proxy advisory firms and the creation of the current market structure.”).

December 15, 2013 in Corporate Governance, Current Affairs, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Friday, December 13, 2013

Call for Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC) will be held on Thursday, June 19th and Friday, June 20th at Loyola Law School, Los Angeles. This is the fifth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, especially law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at with an abstract or paper by April 4, 2014. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late May.  More information is available here:,81539,en.html


Conference Organizers

Barbara Black (The University of Cincinnati College of Law)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff (The Ohio State University Moritz College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)


December 13, 2013 in Business Associations, Anne Tucker, Corporate Governance, Corporations, Financial Markets, Merger & Acquisitions, Securities Regulation, Unincorporated Entities | Permalink | Comments (0)

Thursday, December 12, 2013

Human Rights- What is the Proper Role for Business?

Last week I attended the UN Forum on Business and Human Rights in Geneva.  The Forum was designed to discuss barriers and best practices related to the promotion and implementation of the non-binding UN Guiding Principles on Business and Human Rights, which discuss the state’s duty to protect human rights, the corporation’s duty to respect human rights, and the joint duty to provide access to judicial and non-judicial remedies for human rights abuses. This is the second year that nation states, NGOs, businesses, civil society organizations, academics and others have met to discuss multi-stakeholder initiatives, how businesses can better assess their human rights impact, and how to conduct due diligence in the supply chain.

Released in 2011 after unanimous endorsement by the UN Human Rights Council, the Guiding Principles are considered the first globally-accepted set of standards on the relationship between states and business as it relates to human rights. The US State Department and the Department of Labor have designed policies around the Principles, and a number of companies have adopted them in whole or in part, because they provide a relatively detailed framework as to expectations.  Some companies faced shareholder proposals seeking the adoption of the Principles in 2013, and more will likely hear about the Principles in 2014 from socially responsible investors.  Several international law firms discussed the advice that they are now providing to multinationals about adopting the Principles without providing a new basis for liability for private litigants.

Although the organizers did not have the level of business representation as they would have liked of one-third of the attendees, it was still a worthwhile event with Rio Tinto, Unilever, Microsoft, Google, Nestle, Barrick Gold, UBS, Petrobras, Total, SA, and other multinationals serving as panelists. Members of the European Union Parliament, the European Union Commission and other state delegates also held leadership roles in shaping the discussion on panels and from the audience.

Some of the more interesting panels concerned protecting human rights in the digital domain; case studies on responsible investment in Myanmar (by the State Department), the palm oil industry in Indonesia and indigenous peoples in the Americas; the dangers faced by human and environmental rights defenders (including torture and murder); how to conduct business in conflict zones; public procurement and human rights; developments in transnational litigation (one lawyer claimed that 6,000 of his plaintiffs have had their cases dismissed since the Supreme Court Kiobel decision about the Alien Tort Statute); mobilizing lawyers to advance business and human rights; the various comply or explain regimes and how countries are mandating or recommending integrated reporting on environmental, social and governance factors; tax avoidance and human rights; human rights in international investment policies and contracts; and corporate governance and the Guiding Principles.

As a former businessperson, many of the implementation challenges outlined by the corporate representatives resonated with me. As an academic, the conference reaffirmed how little law students know about these issues.  Our graduates may need to advise clients about risk management, international labor issues, corporate social responsibility, supply chain concerns, investor relations, and new disclosure regimes. Dodd-Frank conflict minerals and the upcoming European counterpart were frequently mentioned and there are executive orders and state laws dealing with human rights as well.

Traditional human rights courses do not typically address most of these issues in depth and business law courses don’t either. Only a few law firms have practice areas specifically devoted to this area- typically in the corporate social responsibility group- but many transactional lawyers and litigators are rapidly getting up to speed out of necessity. Small and medium-sized enterprises must also consider these issues, and we need to remember that “human rights” is not just an international issue. As business law professors, we may want to consider how we can prepare our students for this new frontier so that they can be both more marketable and more capable of advising their clients in this burgeoning area of the law.  For those who want to read about human rights and business on a more frequent basis, I recommend Professor Jena Martin’s blog.  

December 12, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (1)

Wednesday, December 4, 2013

SEC Excludes Political Spending Disclosures from 2014 Rule Making Agenda

Earlier this week the SEC released its 2014 rulemaking agenda and excluded from the list is a proposal for public companies to disclose political spending.  In 2011, the Committee on Disclosure of Corporate Political Spending, comprised of 10 leading corporate and securities academics, petitioned the SEC to adopt a political spending disclosure rule.  This petition has received a historic number of comments—over 640,000—which can be found here.

The Washington Post reported that after the petition was filed,

A groundswell of support followed, with retail investors, union pension funds and elected officials at the state and federal levels writing to the agency in favor of such a requirement. The idea attracted more than 600,000 mostly favorable written comments from the public — a record response for the agency.

Omitting corporate political spending from the 2014 agenda has received steep criticism from the NYT editorial board in an opinion piece written yesterday declaring the decision unwise “even though the case for disclosure is undeniable.” Proponents of corporate political spending disclosure like Public Citizen are “appalled” and “shocked” by the SEC’s decision, while the Chamber of Commerce declares the SEC’s omission a coup that appropriately avoids campaign finance reform.

Included in the 2014 agenda are Dodd-Frank and JOBS Act measures, as well as a proposal to enhance the fiduciary duties owed by broker-dealers.  More on the agenda in future posts….

-Anne Tucker

December 4, 2013 in Anne Tucker, Corporate Governance, Corporations, Current Affairs, Financial Markets, Securities Regulation | Permalink | Comments (0)

Thursday, November 28, 2013

The Superrich and the SEC

On Saturday evening I leave for Geneva to attend the United Nations Forum on Business and Human Rights with 1,000 of my closest friends including NGOs, Fortune 250 Companies, government entities, academics and other stakeholders.  I plan to blog from the conference next week.  I am excited about the substance but have been dreading the expense because the last time I was in Switzerland everything from the cab fare to the fondue was obscenely expensive, and I remember thinking that everyone in the country must make a very good living. Apparently, according to the New York Times, the Swiss, whom I thought were superrich, "scorn the Superrich," and last March a two-thirds majority voted to ban bonuses, golden handshakes and to require firms to consult with their shareholders on executive compensation. Nonetheless, last week, 65% of voters rejected a measure to limit executive pay to 12 times the lowest paid employee at their company. According to press reports many Swiss supported the measure in principle but did not agree with the government imposing caps on pay.

Meanwhile stateside, next week the SEC closes its comment period on its own pay ratio proposal under Section 953(b) of the Dodd-Frank Act. Among other things, the SEC rule requires companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts. It does not specify a methodology for calculation but does require the calculation to include all employees (including full-time, part-time, temporary, seasonal and non-U.S. employees), those employed by the company or any of its subsidiaries, and those employed as of the last day of the company’s prior fiscal year.  A number of bloggers have criticized the rule (see here for example), business groups generally oppose it, and the agency has been flooded with tens of thousands of comment letters already.

The SEC must take some action because Congress has dictated a mandate through Dodd-Frank.  It can’t just listen to the will of the people (many of whom support the rule) like the Swiss government did.  It will be interesting to see what the agency does. After all two of the commissioners voted against the rule, and one has publicly spoken out against it.  But the SEC does have some discretion. The question is how will it exercise that discretion and will the agency once again face litigation as it has with other Dodd-Frank measures where business groups have challenged its actions (proxy access, resource extraction and conflict minerals, for example). More important, will it achieve the right results? Will investors armed with more information change their nonbinding say-on-pay votes or switch out directors who overpay underperforming or unscrupulous executives? If not, then will this be another well-intentioned rule that does nothing to stop the next financial crisis?


November 28, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (1)

Sunday, November 17, 2013

Bhattacharya Provides a Literature Review of Insider Trading Controversies

A quick review of the top 10 Papers for Corporate, Securities & Finance Law eJournals on SSRN for the period of September 18, 2013 to November 17, 2013 (here), led me to Utpal Bhattacharya’s paper “Insider Trading Controversies: A Literature Review.”  Here is the abstract:

Using the artifice of a hypothetical trial, this paper presents the case for and against insider trading. Both sides in the trial produce as evidence the salient points made in more than 100 years of literature on insider trading. The early days of the trial focus on the issues raised in the law literature like fiduciary responsibility, the misappropriation theory and the fairness and integrity of markets, but the trial soon focuses on issues like Pareto-optimality, efficient contracting, market efficiency, and predictability raised in the financial economics literature. Open issues are brought up. A jury finally hands out its verdict.

November 17, 2013 in Corporate Governance, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 16, 2013

Eric Chaffee Re-Launches Securities Law Prof Blog

Congratulations to Eric Chaffee, former BLPB contributing editor & friend of the blog, for taking over the Securities Law Prof Blog reins from Barbara Black.  Barbara has left some big shoes for Eric to fill, having single-handedly built the Securities Law Prof Blog into one of the staple blogs for business law folks, but if anyone is up to the task it's Eric.  Make sure you add the Securities Law Prof Blog to your personal blogroll.

November 16, 2013 in Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Thursday, November 14, 2013

Crime and Punishment: Prosecuting Executives and Forcing Companies to Admit Guilt


“Man grows used to everything, the scoundrel!” 
― Fyodor DostoyevskyCrime and Punishment

This week two articles caught my eye.  The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.

Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the economy. He questioned why the government hadn’t used RICO to pursue more criminal cases.  Former prosecutor and now private lawyer Allen Goelman pointed out rather bluntly that prosecutors aren’t cozy with Wall Street—they just won’t bring a case when the evidence won’t allow them to win. He also reminded us that greed and stupidity, which he claimed was the cause of the “overwhelming majority of the risky and irresponsible behavior by Wall Street,” are not crimes.  Professor Lawrence Friedman wrote that  the law “announces the community’s conceptions of right and wrong,” and if we now treat corporations like people under Citizens United then we should likewise make the executives who run them the objects of the community’s condemnation of wrongdoing.

Finally, Senator Elizabeth Warren concluded that if corporations know that they can break the law, pay a large settlement, and not admit any guilt or have any individual prosecuted, they won’t have any incentive to follow the law. She also argued for public disclosure of these settlements including whether there were tax deductions or releases of liability.

This brings me to the second interesting article. Former SEC enforcement chief and now Kirkland & Ellis partner Robert Khuzami recently said, “I didn’t think there was much doubt in most cases that a defendant engaged in wrongdoing when you had a 20-page complaint, you had them writing a big check, you may well have prosecuted an individual in the wrongdoing.” While not endorsing or rejecting current SEC Chair Mary Jo White’s position to require certain companies to admit wrongdoing in settlements, he raised a concern about whether this change in policy would place undue strain on the agency’s limited resources by forcing more cases to go to trial.  He also raised a valid point about the legitimate fear that firms should have in that admitting guilt could expose them to lawsuits, criminal prosecution, and potential business losses.  Chair White did not set out specific guidelines for the new protocol, but so far this year 22 companies have benefitted from the no admit/no deny policy and have paid $14 million in sanctions. But we don’t know how many executives from these companies lost their jobs. On the other hand, would these same companies have settled if they had to admit liability or would they have demanded their day in court?

Should the desire to preserve agency resources trump the need to protect the investing public—the stated purpose of the SEC? If neither the company nor the executive faces true accountability, what will be the incentive to change? In a post-Citizens United world, will Congressmen strengthen the laws or bolster the power and resources of the regulators to go after the corporations that help fund their campaigns? Have we, as Dostoyevsky asserted, become “used” to the current state of affairs where drug dealers and murderers go to jail, but there aren’t enough resources to pursue financial miscreants?

What will make companies and executives “do the right thing”? Dostoyevksy also wrote “intelligence alone is not nearly enough when it comes to acting wisely,” and he was right. Perhaps the fear of the punishment for clearly enumerated and understood crimes, and the fear of the admission of wrongdoing with the attendant collateral damage that causes will lead to a change in individual and corporate behavior.  I agree with Professor Podgor that there is clearly room for prosecutorial abuse of power and that the myriad of laws can lead to a no-mans land for the unwary executive forced to increase margins and earnings per share (while possibly getting a healthy bonus).  While I have argued in the past for an affirmative defense for certain kinds of corporate crimial liability, I also agree with Professor Black and Senator Warren.  At some point, people and the corporations (made up of people) need more than “intelligence” to act “wisely.” They need the punishment to fit the crime.






November 14, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Film, Financial Markets, Marcia L. Narine, Securities Regulation | Permalink | Comments (0)

Wednesday, November 13, 2013

Mom & Pop Investors

We live in a world where most working individuals have some retirement savings invested in the stock market.  The stock market funds, in part, college educations, and serve as the primary wealth accumulator for post-baby boom generations.  My parents—an elementary school teacher and a furniture salesman—lived in Midwestern frugality and invested their savings from the mid-80’s until 2006 when they pulled out of the market.  They retired early, comfortably (so I believe), and largely because of consistent gains in the stock market over a 30 year period.  The question is whether this story is repeatable as a viable outcome for working investors now. 

The Wall Street Journal ran a story on Monday “Stocks Regain Appeal” documenting the number of dollars flowing into markets from retail investors as well as the anecdotal confidence of investors.  The WSJ reports that:

“U.S. stock mutual funds have attracted more cash this year than they have in any year since 2004, according to fund-tracker Lipper. Investors have sent $76 billion into U.S. stock funds in 2013. From 2006 through 2012, they withdrew $451 billion.” 

This seems indisputably good right?  Maybe.  The real question for me is why is more money flowing into the markets and confidence high?  Is this behavior driven by information, emotion, or herd mentality?  Robert Shiller, recent Nobel Prize winner and author of Irrational Exuberance, wrote in March in a column for the NYT that investors were confident, but who knows why.  Shiller’s conclusions were based on data from the cyclically adjusted price-earnings ratio, CAPE, of 23 suggesting that the market was priced high, which is interesting when compared with his data that 74% of individual investors did not think that the market was overpriced.  Shiller strengthened his cautionary stance on the market last month when the CAPE held at 23.7, and Shiller warned that stocks were the “most expensive relative to earnings in more than five years.”

This is business law blog, not a market blog, yet the role of the market interests me greatly.  As corporate law scholars, we teach students and write about the legal limits, obligations and assumptions that establish the market and dictate how individuals and institutions interact with the market and corresponding corporate-level controls.  In 2007 the market collapsed (self-corrected if we want to use the economists’ terms) and what was the result?  Dodd-Frank and a series of legislation aimed at policing the market.  If we are interested in the laws that govern the market, surely some attention must be paid to how and why the market works the way that it does.

Shiller stock CAPE

 -Anne Tucker

November 13, 2013 in Anne Tucker, Corporations, Current Affairs, Financial Markets, Securities Regulation | Permalink | Comments (1)

Monday, November 11, 2013

The Crowdfunding Rules and Other Offerings

The SEC’s crowdfunding proposal offers small, startup businesses a new way to raise capital without triggering the expensive registration requirements of the Securities Act of 1933. But the capital needs of small businesses are often uncertain. They may need to raise money again shortly after an exempted offering. Or they may want to sell securities pursuant to another exemption at the same time they’re using the crowdfunding exemption. How do other offerings affect the crowdfunding exemption? The proposed crowdfunding rules are unexpectedly generous with respect to other offerings, but they still contain pitfalls.

Other Securities Do Not Count Against the $1 Million Crowdfunding Limit

The proposed rules make it clear that the crowdfunding exemption’s $1 million limit is unaffected by securities sold outside the crowdfunding exemption. As I explained in an earlier post, only securities sold pursuant to the section 4(a)(6) crowdfunding exemption count against the limit.

Crowdfunding and the Integration Doctrine

But the integration doctrine, the curse of every securities lawyer, poses problems beyond determining the offering amount.

Briefly, the integration doctrine defines what constitutes a single offering for purposes of the exemptions from registration. The Securities Act exemptions are transactional; to avoid registration, the issuer must fit its entire offering within a single exemption. It cannot separate what is actually a single offering into two or more parts and fit each part into different exemptions.

Unfortunately, the application of the integration doctrine is notoriously uncertain and unpredictable, making it difficult for issuers who do two offerings of securities at or about the same time to know whether or not those offerings qualify for an exemption. (For a critical review of the integration doctrine, see my article here.)

The SEC’s crowdfunding proposal begins with what appears to be absolute protection from integration. The proposal says (p. 18) that “an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied on for the particular offering.”

However, the SEC giveth and the SEC taketh away. First, this isn’t really a rule, just a pledge by the SEC. The anti-integration language does not appear anywhere in the rules themselves; it’s only in the release discussing the rules. Other integration safe harbors, such as Rule 251(c) of Regulation A and Rule 502(a) of Regulation D, appear in the rules. It’s not clear why the SEC was unwilling to write an integration provision into the crowdfunding rules, but an actual rule would provide much more comfort to issuers than the SEC’s bare promise.

And, unfortunately, the SEC doesn’t stop with the broad anti-integration pledge. It adds (pp. 18-19) that

An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, however, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of the offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.

These qualifications may prove particularly mischievous. Assume, for example, that an issuer is offering securities pursuant to section 4(a)(6) and, around the same time, offering securities pursuant to Rule 506(b), which prohibits general solicitation. The issuer would have to verify that none of the accredited investors in the Rule 506(b) offering saw the offering on the crowdfunding platform. Since crowdfunding platforms are open to the general public, that might be difficult.

As a result of the second sentence quoted above, there’s also a potential problem in the other direction. Assume that an issuer is simultaneously offering the same securities pursuant to both section 4(a)(6) and Rule 506(c). Rule 506(c) allows unlimited general solicitation, but the crowdfunding rules severely limit what an issuer and others may say about the offering outside the crowdfunding platform. The SEC seems to be saying that a public solicitation under Rule 506(c) would bar the issuer from using the crowdfunding exemption to sell the same securities. Since the same securities are involved in both offerings, the 506(c) solicitation would arguably “include an advertisement of the terms of the offering made in reliance on Section 4(a)(6).”

Double-Door Offerings Redux

Before the SEC released the crowdfunding rules, I questioned whether “double-door” offerings using the crowdfunding exemption and the new Rule 506(c) exemption were viable. I posited a single web site that sold the same securities (1) to accredited investors pursuant to Rule 506(c) and (2) to the general public pursuant to the crowdfunding exemption. I concluded that, because of the integration doctrine, such offerings were impossible. The SEC anti-integration promise may change that result, if the SEC really means what it says.

The anti-integration promise doesn’t exclude simultaneous offerings, even if those offerings involve the same securities. And I don’t see anything in the rules governing crowdfunding intermediaries that would prevent both 506(c) and crowdfunding offerings on a single web platform, with accredited investors funneled to a separate closing under Rule 506(c). Funding portals could not host such a double-door platform, because they’re limited to crowdfunded offerings, but brokers could.

However, both the issuer and the broker would have to be careful about off-platform communications. Ordinarily, an issuer in a Rule 506(c) offering may engage in any general solicitation or advertising it wishes, on or off the Internet. But the SEC crowdfunding release, as we saw, warns that “any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of the offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.” To avoid ruining the crowdfunding exemption, any off-platform communications would have to be limited to what the crowdfunding rules allow, and that isn’t much.

November 11, 2013 in C. Steven Bradford, Securities Regulation | Permalink | Comments (0)

Friday, November 8, 2013

The Economist on “Rise of the distorporation”

The Economist has an interesting piece on how “[a] mutation in the way companies are financed and managed will change the distribution of the wealth they create.”  You can read the entire article here.  A brief excerpt follows.

The new popularity of the [Master Limited Partnership] is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works…. Collectively, distorporations such as the MLPs have a valuation on American markets in excess of $1 trillion. They represent 9% of the number of listed companies and in 2012 they paid out 10% of the dividends; but they took in 28% of the equity raised…. [The] beneficiaries, though, are a select class. Quirks in various investment and tax laws block or limit investing in pass-through structures by ordinary mutual funds, including the benchmark broad index funds, and by many institutions. The result is confusion and the exclusion of a large swathe of Americans from owning the companies hungriest for the capital the markets can provide, and thus from getting the best returns on offer….

Another booming pass-through structure is that of the “business development company” (BDC). These firms raise public equity and debt much like a leveraged fund.… What they all share is an ability to do bank-like business—lending to companies which need money—without bank-like regulatory compliance costs….

Andrew Morriss, of the University of Alabama law school, sees the shift as an entrepreneurial response to a century’s worth of governmental distortions made through taxation and regulation. At the heart of those actions were the ideas set down in “The Modern Corporation and Private Property”, a landmark 1932 study by Adolf Berle and Gardiner Means. As Berle, a member of Franklin Roosevelt’s “brain trust”, would later write, the shift of “two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers and …almost necessarily involves a new form of economic organisation of society.” … Several minor retreats notwithstanding, the government’s role in the publicly listed company has expanded relentlessly ever since.

November 8, 2013 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Financial Markets, LLCs, Partnership, Securities Regulation, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (0)