Monday, June 30, 2014
Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time. As Chancellor Chandler noted in eBay v. Newmark (more here):
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
Note that “purely” is not an entirely accurate modifier here. Craigslist made a profit and had some ventures that raised money. They just did not monetize the majority of the endeavors
So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays). This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we choose religion over profit.
As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue. Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday? It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road.
Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity? I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.
I have been catching up on my long backlist of reading and recently read an excellent article on litigation challenging the fees of mutual fund advisers: Quinn Curtis and John Morley, The Flawed Mechanics of Mutual Fund Fee Litigation.
As you may know, section 36(b) of the Investment Company Act of 1940 gives mutual fund investors and the SEC a cause of action to challenge excessive investment adviser fees.
Section 36(b) has generated quite a bit of academic commentary; Curtis and Morley’s footnote listing those articles (fn. 4, if you’re interested) takes up more than a page of single-spaced text. The Supreme Court has also recently chimed in on section 36(b). Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) discussed the standard for reviewing advisors’ fees under section 36(b).
Don’t worry; Curtis and Morley don’t rehash all of the earlier commentary. Instead, they take the existence of a section 36(b) cause of action as a given and ask how it can be improved to better achieve its purposes. Here’s the abstract:
We identify a number of serious mechanical flaws in the statutes and judicial doctrines that organize fee liability for mutual fund managers. Originating in section 36(b) of the Investment Company Act, this form of liability allows investors to sue managers for charging fees above a judicially created standard. Commentators have extensively debated whether this form of liability should exist, but in this paper we focus instead on improving the mechanics of how it actually works. We identify a number of problems. Among other things, statutes and case law give recoveries to investors who did not actually pay the relevant fees. Statutes and case law also impose no penalties to provide deterrence; they treat similar categories of fees differently; they create an unusual settlement process that prevents litigants from settling their full claims; they expose low-cost advisers to serious litigation risk; they exhibit deep confusion about what makes fees excessive; and they provide unduly small incentives for plaintiffs’ lawyers that are only adequate in cases of low merit. Most of these problems appear to be the unintended results of accidents and confusion, rather than deliberate policy choices. We conclude by offering specific ideas for reform.
The article, to be published in the Yale Journal of Regulation, was posted on SSRN in March, but it’s been sitting in my computer reading file since then. Better late than never. If you’re interested in the regulation of mutual funds and investment advisers, it’s definitely worth reading.
Thursday, June 26, 2014
I always enjoy reading Bryan Cave partner Scott Killingsworth's comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on "The Privatization of Compliance." It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.
Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream, causing a chain reaction of proliferating and sometimes inconsistent mandates.
This essay examines the origins and the accelerating growth of the privatization of compliance requirements and oversight; highlights critical differences between compliance obligations imposed between private parties and those imposed by governmental actors; and evaluates the trend's benefits, drawbacks and likely direction. Particular attention is given to the use of supplier codes of conduct and contractual compliance mandates, often in combination; to the issue of contractual remedies for social, process-oriented, or vague obligations that may have little direct bearing on the object of the associated business transaction; to the proliferating trend of requiring business partners to "flow down" required conduct and compliance mechanisms to additional tiers within the supply chain; and to this trend's challenging implications for the corporate compliance function's role and its interaction with operations, procurement, and sales groups. Recommendations are made for achieving efficiencies and reducing system dysfunction by seeking a broad consensus on generally accepted principles for business-partner codes of conduct, compliance-related contract clauses, and remedies appropriate to each.
Wednesday, June 25, 2014
Harumph. Business as usual at the SCOTUS . . . . As a student and teacher of Basic v. Levinson and its progeny, I guess I had hoped for more from the U.S. Supreme Court's opinion in Halliburton, released two days ago. I haven't yet read all the articles on the case that were published since the release of the opinion (as usual, quite a number), so my thoughts here represent my personal reflections.
After engaging in some self-analysis, I have determined that my disappointment with the Court's opinion stems from the fact that I am a transactional lawyer . . . and the Court's opinion is about procedure. Not that civil and criminal procedure do not impact transactional law. Au contraire. The procedure and substance of Section 10(b)/Rule 10b-5 claims are intertwined in many fascinating ways. I will come back to that somewhat in a minute. But the Court's opinion in Halliburton just doesn't satisfy the transactional lawyer in me.
This also is somewhat true of the SCOTUS opinions in both Dura Pharmaceuticals and Tellabs, which deal with pleading (in)sufficiencies in Section 10(b)/Rule 10b-5 litigation rather than (as in Halliburton) class certification questions. In its class certification focus, Halliburton is much more the sibling of Amgen, which I find infinitely more satisfying because it (like Basic and Matrixx) focuses on materiality, which infuses all disclosure decisions. All of these cases, however, center on a defendant's ability to get dismissal of an action at an early stage, something that defendants in Section 10(b)/Rule 10b-5 cases desperately want to do. The longer the case goes on, the more incentive defendants have to settle--oftentimes (in my experience) foregoing the opportunity to defend themselves against specious claims because of the ongoing drain on financial and human resources.
Thursday, June 19, 2014
Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.
Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions. In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”
I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) by Representative Carolyn Maloney, which would require companies with over $100 million in gross revenues to publicly disclose the measures they take to prevent human trafficking, slavery and child labor in their supply chains as part of their annual reports.
The sentiment behind Representative Maloney’s bill is similar to what drove the Dodd-Frank conflict minerals rule (without the extensive audit requirements) and the California Transparency in Supply Chains Act (CTSA). In her announcement she stated,
“Every day, Americans purchase products tainted by forced labor and this bill is a first step to end these inhumane practices. By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices. This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking. This transparency will empower consumers with more information that could impact their purchasing decisions.”
While the Conflict Minerals and CTSA are “name and shame” laws, which aim to change corporate behavior through disclosure, the proposed federal bill has a twist. It requires the Secretary of Labor, the Secretary of State and other appropriate Federal and international agencies, independent labor evaluators, and human rights groups, to develop an annual list of the top 100 companies complying with supply chain labor standards.
I don’t have an issue with the basic premise of the proposed federal law because human trafficking is such a serious problem that the American Bar Association, the Department of Labor, and others have developed resources for corporations to tackle the problem within their supply chains. A number of states have also enacted laws, and in fact Republican Florida Governor Rick Scott, hardly the poster child for liberals, announced his own legislation this week (although it focuses on relief for victims).
Further, to the extent that companies are using the 2011 UN Guiding Principles on Business and Human Rights to develop due diligence processes for their supply chains, this disclosure should not be difficult. In fact, the proposed bill specifically mentions the Guiding Principles. I don’t know how expensive the law will be to comply with, and I’m sure that there will be lobbying and tweaks if the bill gets out of the House. But If Congress wants to add this to the list of required corporate disclosures, legislators should monitor the SEC disclosure review carefully so that if the human trafficking bill passes, the agency’s implementing regulations appropriately convey legislative intent.
I know that corporations are interested in this issue because I spoke to a reporter yesterday who was prompted by recent articles and news reports to write about what boards should know about human trafficking in supply chains. As I told the reporter, although I applaud the initiatives I remain skeptical about whether these kinds of environmental, social and governance disclosures really affect consumer behavior and whether these are the best ways to protect the intended constituencies. That’s what I will be writing about this summer.
Tuesday, June 17, 2014
A new poll, conducted by Greenberg Quinlan Rosner Research, suggests that the desire for new Wall Street regulations has not been maximized by candidates for political office. Here are some of the poll's key findings. The release about the poll states:
A strong, bipartisan majority of likely 2014 voters support stricter federal regulations on the way banks and other financial institutions conduct their business. Voters want accountability and do not want Wall Street pretending to police themselves: they want real cops back on the Wall Street beat enforcing the law.
As evidence, the release notes that David Brat's upset win over Eric Cantor in the Virginia 7th District Republican primary, may have been related to Brat's attack on Wall Street, sharing Brat's words from a radio interview: "The crooks up on Wall Street and some of the big banks — I'm pro-business, I'm just talking about the crooks — they didn't go to jail, they are on Eric's Rolodex."
The poll found that voters consider Wall Street and the large banks as "bad actors," with 64% saying, “the stock market is rigged for insiders and people who know how to manipulate the system.” Another 60% want “stricter regulation on the way banks and other financial institutions conduct their business.” Finally,
Voters believe another crash is likely and that regulation can help prevent another disaster. An 83 percent majority of voters believe another crash is likely within the next 10 years, and 43 percent very likely. Another 55 percent, however, agree “Stronger rules on Wall Street and big financial institutions by the federal government will help prevent another financial collapse.”
I don't doubt that voters believe this, but I also don't think this poll data will lead to much (if any) significant change. I concede the poll shows that the issue resonates with voters, but I think Brat's quote shows where the wiggle room is (and perhaps how other astute Republicans, particularly, may use the issue in their races). That is, I think the majority of Americans are "pro-business" and anti-crooks. That's not news. When it comes time to vote on new regulation, though, I expected Mr. Brat (should he win the election) would find that the proposals before him would only "hurt business" and "not punish crooks."
I could be wrong, of course, but I doubt it. Like "energy independence" and "good schools," I think this poll shows us another one of those issues where voters care more about hearing that the system needs to be fixed rather than an issue where voters will be keeping score to see if progress is made.
Monday, June 16, 2014
I have been working on a draft article for the University of Cincinnati Law Review based on a presentation that I gave this spring at the annual Corporate Law Symposium. This year's topic was "Crowdfunding Regulations and Their Implications." My draft article addresses the public-private divide in the context of the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act--more commonly known as the CROWDFUND Act. I am using two pieces coauthored by Don Langevoort and Bob Thompson (here and here), as well as three works written by Hillary Sale (here, here, and here) to engage my analysis.
I also will be participating in a discussion group at the Southeastern Association of Law Schools annual conference in August on the publicness theme. That session is entitled "Does The Public/Private Divide In Federal Securities Regulation Make Sense?" and is scheduled for 3:00 pm on Augut 6th, for those attending the conference. Michael Guttentag was good enough to recruit the group for this discussion.
All this work on publicness has my head spinning! There are a number of unique conceptions of pubicness, some overlapping or otherwise interconnected, with different conceptions being useful in different circumstances. I am attracted to a number of observations in both the Langevoort/Thompson and Sale bodies of work, but there's clearly a lot more to think about from the standpoint of both scholarship and teaching.
So, today I ask: What does publicness mean to you? Does there continue to be salient meaning in the distinction between piublic and private (offerings, companies, etc.)? If so, what should publicness mean in these contexts? I am curious to see what others think.
Tuesday, June 10, 2014
A few weeks ago, Tim Carney wrote a piece in the Washington Examiner that is stuck in my mind. The piece titled Conservatives, big government and the duty to care for the poor discusses what Carney sees as a shift in the rhetoric conservatives are using in reference to the poor and other vulnerable populations. Carney notes that Senate Minority Leader Mitch McConnell (R-KY) recently referenced a “shared responsibility for the weak.” Carney continues:
Step away from policy debates and think about that phrase. Do you have a responsibility to help the weak? Do you have a responsibility to feed the hungry? To aid the poor?
I think I do. I think everyone does. The Catholic Church teaches us we do.
Conservatives sometimes shy away from this idea, though. One reason is a strong (and overblown) distaste to "helping the lazy." Another reason is that conservatives fear it implies the Left’s answer: big federal programs.
But, in fact, you can grant that you have a duty to the poor and the weak, and then have a really good debate:
Is that duty individual, or some sort of a communal duty?
Does the government have the legitimate right to transfer wealth to satisfy that duty, or is it solely an individual responsibility to fulfill that duty.
If aiding the poor is a legitimate government role, at what level is the aid appropriately delivered — local, state, federal?
I really don't see this as a new debate, but I agree it is a shift from the poverty debate I have seen over the past decade or so. This shift, though, goes back (at least) to the debates of what I remember in the 1980s and early 1990s. The question then, as I recall my vigorous (sometimes informed) college and early career discussions, was not whether the poor needed help. The question was how best to provide that help. (I'll note that even then, conservatives were likely to call me liberal, and liberals often called me conservative. Some things remain the same, I guess.)
Carney frames the conversation appropriately, and asks the right questions because it starts with the right assumption: that helping the poor is required. He notes:
Then there’s plenty of very practical debates: Are federal programs inevitably too bloated and inflexible? Or alternatively, maybe only the federal government has the economies of scale (and ability to make its own money) needed to run a safety net, particularly in economic downturns.
So, what does this have to do with business law? Well, in part, if we agree there is a duty, we must talk about whose duty it is. Is it individual? Is it a communal governmental duty? A communal non-governmental duty? Is it a duty of all people, including corporate persons? To what extent?
Further, the role of government in protecting the weak extends beyond poverty programs. It applies to securities regulation, environmental regulation, and tax policy, all of which are directly, or at least very closely, related to business law. In all of these cases, I think the question of the poverty debate carries through: how do we carry out, as Sen. McConnell put it, our “shared responsibility for the weak?”
The conversation that follows that question is a good one because it does not reduce all arguments to some version of "caveat emptor" or only the "government/market will fix it." Instead, the questions can be, for example: Does less regulation increase risks to vulnerable parties or increase access to opportunities for such parties? If the answer is both, as it often is, how do we balance those risks and opportunities?
The market is often the best solution, but one still needs to explain why that's true, rather than blindly relying on some amorphous, all-knowing "market." And as those of us who work closely with regulated industries know, we need to acknowledge that all markets have rules (public and/or private), and those rules impact how effective that market will be and for whom. As such, the poverty debate is also largely a regulatory debate. In all cases, if we start in the right place, better policy is likely to follow.
Monday, June 9, 2014
Today, we finished two days of amazingly rich discourse on business law issues at the Association of American Law Schools (AALS) Workshop on Blurring Boundaries in Financial and Corporate Law in Washington, DC. (Full disclosure: I chaired the planning committee for this AALS midyear meeting.) All of the proceedings have been phenomenally interesting. I have learned so many things and been forced to think about so much . . . . For those of you who couldn't be there, I tried to faithfully pick up a bunch of salient points from the talks and discussions on Twitter using #AALSBB2014. Moreover, some of the meeting was recorded. I will try to remember to let you know when, to whom, and how those recordings are being made available. (Feel free to remind me if I forget . . . .)
One idea shared at the workshop that I am particularly intrigued by is the use of a new standard in federal securities regulation, suggested by Tom Lin in his talk as part of this morning's plenary panel on "Complexity". He argues for an "algorithmic investor" standard (working off/refining the concept of the reasonable investor) in light of the growth of algorithmic trading. It's predictable that I would be interested in this idea, given that I write about materiality in securities regulation (especially insider trading law, in articles posted here and here), in which the reasonable investor standard is central. (In fact, Tom was kind enough to mention my work on the resonable investor standard in his talk.)
Tom is not the first to argue for a securities regulation standard that better serves specific investor populations. Memorable in this regard, at least for me, is Maggie Sachs's paper arguing for a standard focused on the "least sophisticated investor". But many other fine works contending with materiality or the concept of the reasonable investor in securities regulation also question (among other things) the clarity and efficacy of the reasonable investor standard in specific contexts.
Today, rather than my usual profound insights, I’m going to pose a question to our readers. (What do you mean, what “usual profound insights”?)
I have been thinking about applying for a Fulbright to teach overseas. The problem is that Fulbright applications are country-specific and I’m having trouble deciding where I would like to teach.
There are several ways to approach this problem. The first approach would be to look for the greatest possible geographical distance from Lincoln, Nebraska. I think this would be my Dean’s preference. But, as my Dean will tell you, pleasing her is almost never one of my criteria.
The second approach would be to choose the place with the greatest beach. This seems like a sound approach to me, but there seems to be a serious shortage of teaching opportunities in places like Tahiti.
That leaves but one possibility—choosing a location that best fits my particular teaching and research interests. My primary focus is securities regulation, particularly the application of securities law to small businesses. Given that focus what would be the best country to visit? Where would I find both (1) interesting things going on in securities regulation of small businesses and (2) people interested in learning about the U.S. approach to these issues?
China is an obvious choice, but what other countries would make sense? (I’m a coward, so please don’t suggest any countries that would require me to dodge bullets.)
Here’s your chance, blog readers: tell me where to go. (Keep it nice.)
Thursday, June 5, 2014
Last week I posted about proxy advisory firm ISS and its recommendations regarding Wal-Mart and Target.
This week the US Chamber of Commerce weighed in on the two main proxy advisory firms, what the organization sees as their potential conflict of interests and the lack of transparency, and the SEC’s imminent release of guidance on the firms. It’s worth a read and has some great links.
Next week I will be blogging from Salvador, Brazil where I will be enjoying the World Cup. I will post a brief recap of some of the business-related Law and Society sessions I attended in Minneapolis last weekend. With all of the controversy that invariably surrounds a large sporting event in a country that scores high on the corruption perception index, I may even be inspired to write a law review article on the FCPA.
Monday, June 2, 2014
Thanks for the warm welcome to the Business Law Prof Blog, Stefan et al. Having avoided a regular blogging gig for many years now (little known fact: I was the first guest blogger on The Conglomerate – or at least the first one formally listed as a guest – back in 2005), I recently determined that I should sign on to work with this band of thieves scholars on a regular basis. I appreciate the invitation to do so.
I already feel right at home, given that my post for today, like Steve Bradford's, is on mandatory disclosure. Unlike Steve, however, my focus is on the creep of mandatory disclosure rules in U.S. securities regulation into policy areas outside the scope of securities regulation. I think we all know what "creep" means in this context. But just to clarify, my definition of "creep" for these purposes is: "to move slowly and quietly especially in order to not be noticed." I participated in a discussion roundtable in which I raised this subject at the Law and Society Association annual meeting and conference last week.
My concerns about this issue were well expressed by Securities and Exchange Commission Chair Mary Jo White back in early October 2013 in her remarks at the 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture at Fordham Law School:
When disclosure gets to be too much or strays from its core purposes, it can lead to “information overload” – a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets.
To safeguard the benefits of this “signature mandate,” the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements.
For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission. But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.
She goes on to note that some recent disclosure rules mandated by Congress:
. . . seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.
That is not to say that the goals of such mandates are not laudable. Indeed, most are. 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.
But, 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.
Parts of these remarks—those on information overload—were echoed in a speech that Chair White gave to the National Association of Corporate Directors Leadership Conference.
Chair White's words ring true to me. I derive from them two main contestable points for thought and commentary.
Wednesday, May 28, 2014
Professor Joan MacLeod Heminway (Tennessee) has a new article posted on SSRN entitled Investor and Market Protection in the Crowdfunding Era: Disclosing to and for the 'Crowd.' I look forward to reading the article this summer. The article abstract is posted below:
This article focuses on disclosure regulation in a specific context: securities crowdfunding (also known as crowdfund investing or investment crowdfunding). The intended primary audience for disclosures made in the crowdfund investing setting is the “crowd,” an ill-defined group of potential and actual investors in securities offered and sold through crowdfunding. Securities crowdfunding, for purposes of this article, refers to an offering of securities made over the Internet to a broad-based, unstructured group of investors who are not qualified by geography, financial wherewithal, access to information, investment experience or acumen, or any other criterion.
To assess disclosure to and for the crowd, this short symposium piece proceeds in three principal parts before concluding. First, the article briefly describes securities crowdfunding and the related disclosure and regulatory environments. Next, the article summarizes basic principles from scholarly literature on the nature of investment crowds. This literature outlines two principal ways in which the behavioral psychology of crowds interacts with securities markets. On the one hand, crowds can be “mad” — irrational, foolish, and even stupid. On the other hand, crowds can be “wise” — rational, sensible, and intelligent. After outlining these two strains in the literature on the behavioral attributes of crowds, the article assesses the possible implications of that body of literature for the regulation of disclosure in the securities-crowdfunding setting. The work concludes by asserting that, when considering and designing disclosure to and for the securities-crowdfunding crowd, the insights from this behavioral literature should be taken into account.
Tomorrow kicks off the 2014 Law & Society Annual meeting in Minneapolis, MN. Law & Society is a big tent conference that includes legal scholars of all areas, anthropologists, sociologists, economists, and the list goes on and on. A group of female corporate law scholars, of which I am a part, organizes several corporate-law panels. The result is that we have a mini- business law conference of our own each year. Below is a preview of the schedule...please join us for any and all panels listed below.
0575 Corp Governance & Locus of Power
U. St. Thomas MSL 458
Participants: Tamara Belinfanti, Jayne Barnard, Megan Shaner, Elizabeth Noweiki, and Christina Sautter
1412 Empirical Examinations of Corporate Law
U. St. Thomas MSL 458
Participants: Elisabeth De Fontenay, Connie Wagner, Lynne Dallas, Diane Dick & Cathy Hwang
1468 Theorizing Corp. Law
U. St. Thomas MSL 458
Participants: Elizabeth Pollman, Sarah Haan, Marcia Narine, Charlotte Garden, and Christyne Vachon
1:00 Business Meeting Board Rm 3
Roundtable on SEC Authority
Participants: Christyne Vachon, Elizabeth Pollman, Joan Heminway, Donna Nagy, Hilary Allen
1473 Emerging International Questions in Corp. Law
U. St. Thomas MSL 458
Participants: Sarah Dadush, Melissa Durkee, Marleen O'Conner, Hilary Allen, and Kish Vinayagamoorthy
1479 Examining Market Actors
U. St. Thomas MSL 321
Participants: Summer Kim, Anita Krug, Christina Sautter, Dana Brackman, and Anne Tucker
1474 Market Info. & Mandatory Disclosures
U. St. Thomas MSL 321
Participants: Donna Nagy, Joan Heminway, Wendy Couture, and Anne Tucker
Sunday, May 4, 2014
"Schools Try Philosophy to Get B-School Students Thinking Beyond the Bottom Line" http://t.co/umFzkKP3vF— Stefan Padfield (@ProfPadfield) May 1, 2014
May 4, 2014 in Business School, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Securities Regulation, Social Enterprise, Stefan J. Padfield, Teaching | Permalink | Comments (0)
Thursday, May 1, 2014
Last week I had the pleasure of speaking on a panel on global human rights compliance and enterprise risk management with Mark Nordstrom of General Electric and John Sherman of Shift. The panel was part of a conference entitled New Challenges in Risk Management and Compliance at the UConn School of Law Insurance Law Center.
I spoke about the lack of direct human rights obligations under international law for multinationals, the various voluntary initiatives such as the Universal Declaration of Human Rights, the ILO Tripartite Declaration, the UN Global Compact, ISO 26000, the OECD Guidelines for Multinational Enterprises, the Global Reporting Initiative, and accusations of bluewashing. I also discussed Dodd-Frank 1502 (conflict minerals), sustainable stock exchange indices, ESG reporting, SEC proxy disclosure on risk management oversight, socially responsible investors, and the roles of the Sustainability Accounting Standards Board and the International Integrated Reporting Council in spurring transparency and integrated reporting.
Sherman focused on the UN Guiding Principles on Business and Human Rights, which were unanimously endorsed by the UN Human Rights Council in 2011 and which contain three pillars, namely the state duty to protect people from human rights abuses by third parties, including business; business’ responsibility to respect human rights, which means avoid infringing on the rights of others and addressing negative impacts with which a business is involved; and the need for greater access to effective remedy for victims of corporate-related abuse, both judicial and non-judicial.
He pointed out that American Bar Association endorsed the Guiding Principles in 2011 concluding that under Model Rule 2.1 of the ABA Rules of Professional Conduct, a lawyer’s obligation to provide independent and candid legal advice includes the responsibility to go beyond the black letter of the law, and to advise the client on moral, economic, and social and political standards that can affect the lawyer’s advice. This includes the impact of the Guiding Principles when relevant. An advisory group to the Law Society for England and Wales has made even stronger recommendations. Sherman is chairing a working group of the International Bar Association that is developing guidance for bar associations around the world on the Guiding Principles. He observed that Marty Lipton of Wachtel Lipton, has strongly endorsed the Guiding Principles as a “balanced and prudent process for corporations to manage their human rights risks.” Firms such GE, Total, and Coca Cola have met to discuss how their in house counsel can implement the Guiding Principles. Interestingly, Nordtsrom from GE relayed a troubling example of a human rights dilemma in which one of their medical devices was used in China for sex selection purposes rather than for the life saving purposes for which it was intended.
A number of businesses around the world have adopted these voluntary Guiding Principles, but in 2013 Halliburton, McDonalds and Caterpillar faced shareholder proposals based on them. The Guiding Principles have influenced the Dodd-Frank conflict minerals legislation; the US regulations requiring companies investing more than $500,000 of new money in Myanmar to report on their human rights policies and due diligence; the European Commission's 2011 recommendation that all EU countries develop their own National Action Plans to implement the Guiding Principles; the European Union’s Parliament recent directive in April 2014 requiring close to 6,000 companies in the EU to disclose their environmental, social and human rights policies including their due diligence processes, outcomes, and principles risks; the proposed Canadian conflicts minerals legislation; ISO 26000; and the OECD Guidelines for Multinational Enterprises.
Although I now teach business associations and civil procedure, I used to teach a seminar in corporate governance, compliance and corporate social responsibility and found that my students really enjoyed the discussions on human rights and enterprise risk management. Some of the sessions I attended in Geneva on Business and Human Rights at the UN in Decemeber were led by lawyers from around the world who were already advising large and small businesses about the Guiding Principles and how to respond to the numerous comply or explain regimes around the world that are asking about environmental, social and governance factors.
Earlier this week, I sat in on a webinar on the role of the board in overseeing sustainability issues, including human rights, which I will write about next week. There isn’t enough time to address these kinds of issues in a traditional business associations course, but as the ABA and Marty Lipton pointed out, the time is coming for attorneys to counsel their clients on these risks. This means that we as business professors need to prepare our students for this new world.
Sunday, April 27, 2014
[The following post comes to us from Lawrence E. Mitchell, Joseph C. Hostetler - Baker & Hostetler Professor of Law at Case Western Reserve University School of Law. All formatting errors should be attributed to me, Stefan Padfield.]
The March 5, 2014 oral argument in Halliburton Co. v. Erica P. John Fund, Inc.1 made clear that one of the issues being considered by the Supreme Court is whether to supplant the "market efficiency" analysis currently required at the class certification stage in securities fraud class action cases with a "price impact" analysis instead. Our purpose is not to debate the relative merits of that potential change. Rather, it is to identify a critical point that seemed to get lost in the argument: neither the Justices nor the advocates addressed what a price impact analysis would look like in the context of the most common securities fraud scenario—the making of false statements designed to mask bad news. While some of the briefing before the Court touches on the issue, the authors of a working paper cited by proponents of both sides have supplemented their views with a recent blog post that, while brief, discusses potential approaches to measuring the "price impact" of such fraudulent statements more comprehensively than anything the parties or their amici filed with the Court. The author-bloggers are law professors, but they are not the same law professors whose amicus brief dominated the questioning at the oral argument itself.
"The Law Professors' Brief"
Given the large number of amicus briefs filed in Halliburton—ten for petitioners, twelve for respondent, and one ostensibly in support of neither party—a disproportionally large portion of the oral argument was focused on the brief Professors Adam C. Pritchard of the University of Michigan Law School and M. Todd Henderson of the University of Chicago Law School filed in support of petitioner Halliburton. Their operating premise is that the "efficient capital markets hypothesis is not necessary to the use of the fraud on the market theory—whenever the market incorporates fraudulent information into the price, a 'fraud on the market' has occurred, whether the market is efficient or not."2 They argue in favor of eliminating one of the current requirements that securities fraud class action plaintiffs must establish to invoke the fraud-on-the-market presumption at the class certification stage, namely the requirement that "the market" in which the security at issue trades be shown to be "efficient." Instead, in determining reliance, they support using event studies to examine whether an alleged misrepresentation caused a movement in the price of the stock.
Justice Kennedy posed specific questions about the "position" or "theory" of "the law professors" to counsel for both sides, Justice Scalia asked about the effect of the professors' "Basic writ small" approach on the provisions of the Private Securities Litigation Reform Act, and Justice Kagan sought from the Solicitor General's Office the government's view "if the law professors' position were adopted."3 More broadly, four of the Justices (Roberts, Kennedy, Breyer, and Alito) asked questions specifically containing the terms "event study" or "event studies."4
The Halliburton Oral Argument Did Not Contemplate The Typical Securities Fraud Case
The vast majority of securities fraud cases do not involve alleged false statements of positive news that might be expected to increase the value of the stock price. Rather, in a typical securities fraud class action, the false statement is one that conceals a development adversely affecting the issuing corporation. Under those circumstances, there is little or no "impact" on the stock at the time the false statement is made; the false statement minimizes or prevents the decline that would otherwise have occurred had investors been given the opportunity to fully consider the negative development and reassess the value of their investments. A measurable "impact" on the stock price in such circumstances would not be seen until a "corrective disclosure" occurs, which could be substantially after the fraudulent statement is made.
However, to the extent the Justices dabbled in hypotheticals from the bench, they contemplated false statements that were accompanied by stock price increases. Justice Alito appeared to suggest that a stock price increase at the time of the misrepresentation is a necessary prerequisite for fraud, although the question could equally be taken as addressing an "inefficient" market where there is a time lag until new information was absorbed. He asked:
to say that false representation affects the market price is quite different from saying that it affects the market price almost immediately, and it's hard to see how the Basic theory can be sustained unless it does affect the market price almost immediately in what Basic described as an efficient market. Isn't that true? Why should someone who purchased the stock on the day, shortly you know, an hour or two after the disclosure, be entitled to recovery if in that particular market there is some lag time in incorporating the new information?5
The Other Law Professors
The amicus brief of Professors Pritchard and Henderson makes passing reference in a footnote to the fact that the impact of a misrepresentation may occur when corrective information is disseminated to the market.6 Two other law professors, Lucian Bebchuk and Allen Ferrell of Harvard Law School, also touch on the issue in a 2013 working paper, and although their paper was cited by petitioner and in one of respondent's amicus briefs, the citations were in support of other propositions.7 In a post-argument blog entry, Professors Bebchuk and Ferrell expand on their working paper, noting that "[w]hile event studies at the time of misrepresentation are an important tool, it is crucial to emphasize that the tools available for implementing a fraudulent distortion approach are not limited to event studies at the time of misrepresentation. A fraudulent distortion approach should not be generally implemented by conducting an event study at the time of misrepresentation."8 As further explained in their blog post:
there are reasons to expect that event studies at the time of misrepresentation would fail to identify a fraudulent distortion in some cases in which it exists. This would be the case when the misstatement was a so-called confirmatory lie—that is, a misstatement made so as to meet market expectations. In such a case, failure to document a price reaction to it would not be expected even assuming the misstatement had a fraudulent impact. In such a fact situation, the confirmatory lie might prevent a stock price drop that would have occurred had the truth been told.9
Professors Bebchuk and Ferrell go on to discuss "event studies at the time of corrective disclosure" and "[a]nother potential analytical tool, with a long tradition in the finance and accounting literature [called] forward-casting."10 They conclude that "the determination of fraudulent distortion would not always be best done by conducting an event study at the time of the misrepresentation."11
* * * *
Should the Supreme Court opt to change the rules of the road by adopting a "price impact" approach, the only rule that would make sense is one that recognizes that the impact can occur not only when a false statement is made, but alternatively (and indeed more often) when the truth is revealed. A rule in which the false statement must cause a measurable "impact" on the price of a company's stock at the time the statement is made would not legitimately incorporate the "price impact" approach as a workable test.
 No. 13-317 (S. Ct.).
 Brief of Law Professors as Amici Curiae in Support of Petitioners at 2 Halliburton Co. v. Erica P. John Fund, Inc., (No. 13-317), 2014 WL 60721 at *2.
 See Oral Argument at 17:10-18; 29:15-17; 34:11-13; 41:11-13, 48:2-11 Halliburton Co. v. Erica P. John Fund, Inc. (No. 13-317), available at http://www.supremecourt.gov/oral_arguments/argument_transcripts.aspx.
 See id. at 17:10-18, 18:7-12; 20:3-9, 21:3-6; 22:8-9, 24:8-14; 29:15-17; 34:11-13; 45:1-4; 52:22 -53:4.
 Id. at 32:1-11 (emphasis added). See also, id. at 21:19-25 (hypothetical by Justice Breyer in which “everybody . . . bought on the New York Stock Exchange and our theory of this case is that the stock exchange did absorb the information and the price went up and then went down.”) (emphasis added).
 See Brief of Law Professors as Amici Curiae in Support of Petitioners at 26 n.9 Halliburton Co. v. Erica P. John Fund, Inc., (No. 13-317), 2014 WL 60721 at *26.
 Lucian A. Bebchuk & Allen Ferrell, Rethinking Basic, Discussion Paper No. 764, Harvard Olin Ctr. for Law, Bus. & Econ. (Dec. 2013), revised April, 2014, available at, http://www.law.harvard.edu/programs/olin_center/papers/764_Bebchuk.php (cited in Brief of Petitioners at 39, Brief of Securities Law Scholars as Amici Curiae in Support of Respondent at 11, 13.
 Lucian Bebchuk and Allen Ferrell, Remarks on the Halliburton Oral Argument (2): Implementing a Fraudulent Distortion Approach, The Harvard Law School Forum on Corporate Governance and Financial Regulation (March 12, 2014, 9:10 AM), (Emphasis added). https://blogs.law.harvard.edu/corpgov/2014/03/12/remarks-on-the-halliburton-oral-argument-2-implementing-a-fraudulent-distortion-approach/.
Thursday, April 24, 2014
Last week the DC Circuit Court of Appeals generally upheld the Dodd-Frank conflict minerals rule but found that the law violated the First Amendment to the extent that it requires companies to report to the SEC and state on their websites that their products are not “DRC Conflict Free.” The case was remanded back to the district court on this issue.
As regular readers of the blog know I signed on to an amicus brief opposing the law as written because of the potential for a boycott on the ground and the impact on the people of Congo, and not necessarily because it’s expensive for business (although I appreciate that argument as a former supply chain professional). I also don’t think it is having a measurable impact on the violence. In fact, because I work with an NGO that works with rape survivors and trains midwives and medical personnel in the eastern Democratic Republic of Congo, I get travel advisories from the State Department. Coinicidentally, I received one today as I was typing this post warning that “armed groups, bandits, and elements of the Congolese military [emphasis mine] remain security concerns in the eastern DRC….[they] are known to pillage, steal vehicles, kidnap, rape, kill and carry out military or paramilitary operations in which civilians are indiscriminately targeted… Travelers are frequently detained and questioned by poorly disciplined security forces [I was detained by the UN] at numerous official and unofficial roadblocks and border crossings…Requests for bribes [which I experienced] is extremely common and security forces have occasionally injured or killed people who refused to pay.”
None of this surprises me. I commend the efforts of companies to clean up their supply chains and to cut off income sources to rebel groups who control some of the mines or brutally insert themselves into the mineral trade. But what the State Department advisory makes clear (and what many people already know) is that the problem that the Dodd-Frank law is trying to solve is not something that can be cured through a “name and shame” corporate governance disclosure, especially one that may no longer have the “shame” factor of having companies brand themselves “not DRC Conflict Free.”
Earlier this week, Senator Ed Markey and eleven other members of Congress sent a letter urging SEC Chair Mary Jo White to avoid any delay in implementing the rule. The letter states in part “…the law we passed was simple. Congress said that any company registered in the United States which uses any of a small list of key minerals from the DRC or its neighbors has to disclose in its SEC filing the use of those minerals and what is being done, if anything, to mitigate sourcing from those perpetuating DRC's violence. Such transparency allows consumers and investors to know which companies source materials more responsibly in DRC and serves as a catalyst for industry to finally create clean supply chains out of Congo.”
The "law" may have been “simple,” but the implementation is not for a large number of companies. That’s probably why the EU has proposed a voluntary self-certification scheme focused on importers rather than manufacturers and sellers like Dodd-Frank. That’s probably why a large number of companies are not ready to comply, according to a recent PwC survey of 700 companies.
Chair White, who has made no secret of what she thinks of the SEC’s role in solving human rights crises, still has to reissue Dodd-Frank 1504, the resource extraction rule that was struck down after a court challenge. According to a Davis Polk report, as of April 1, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 45.7% have been missed and 54.3% have been met with finalized rules. The SEC has a lot of financial rule making to complete and should consider how to prioritize and retool the conflicts minerals rule using the agency's discretion and going beyond the fixes that may be required by future rulings on the First Amendment issue.
I will continue to monitor the future of this law. I am now on my way to a conference for businesspeople, lawyers, academics and students at UConn entitled New Challenges in Risk Management and Compliance. I will discuss regulatory issues related to global human rights and enterprise risk management on a panel with the human rights initiative leader for General Electric and the General Counsel for the Shift Project, who worked with John Ruggie on the UN Guiding Principles on Business and Human Rights. I am excited to meet and learn from them both. The Guiding Principles and earlier iterations of Ruggie’s work greatly influenced both the US and EU conflict mwinerals laws.
Next week I will report back on some of the outcomes from the conference.
Monday, April 14, 2014
In an opinion released earlier today, the D.C. Circuit Court struck down the SEC's Dodd-Frank Conflict Mineral Rule under the compelled speech doctrine for failing the least restrictive alternative prong.
We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
Not striking down the need for information about conflict minerals, but rather the required approach, the Court suggested that:
[A] centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers. The Commission has failed to explain why (much less provide evidence that) the Association’s intuitive alternatives to regulating speech would be any less effective.
In August, 2012, the SEC released final Dodd-Frank rules for conflict minerals "requir[ing] companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country."
Thursday, April 10, 2014
[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. -Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).
When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.”
Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission. Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission. Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997. The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.
Why is this important? The petition includes the following enlightening statistics:
1) The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.
2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.
3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).
4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.
5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.
6) The website shareholderactivist.com calls shareholder activism a "participatory sport" where investor activists submit similar proposals to multiple companies so that they can "advance a larger agenda.”
The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.
As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final? Must be the end of the semester.