Monday, September 16, 2019
I am pleased to announce that The University of Tennessee College of Law is again hosting editors of this blog for a symposium focusing on current topics in business law. The website for the symposium, which is sponsored by UT Law's Clayton Center for Entrepreneurial Law, is here. Faculty and students from UT Law will comment on presentations given by my fellow BLPB bloggers. Participating editors of the BLPB in this year's program include Colleen Baker, Ben Edwards, Josh Fershee, me, Doug Moll, Haskell Murray, and Stefan Padfield. The lunchtime panel features me and two of my UT Law colleagues exploring the legal meaning and understanding of mergers and other business combinations from various perspectives, including business associations law, bankruptcy and UCC law, and federal income tax law. That, alone, is surely worth the price of entry!
If you live in or near Knoxville, please come and join us. Continuing legal education credit is available to members of the Tennessee bar. If you cannot make it to the symposium, however, a video recording of the proceedings will later be available on UT Law's website, with an expected option for online continuing legal education credits. (Last year's program is available here with a continuing legal education credit option.) In addition, the written proceedings of the symposium are scheduled to be published in the spring volume of Transactions: The Tennessee Journal of Business Law.
I am looking forward to having many of my BLPB co-editors in town for this program. It's always a special time when we are together.
Saturday, September 14, 2019
Emily Strauss at Duke has posted a fascinating new paper, Crisis Construction in Contract Boilerplate (Law & Contemp. Probs., forthcoming). She examines how judges interpreted the boilerplate in RMBS contracts during the financial crisis, and finds that they relaxed their reading of certain provisions in order to enable injured investors to recover their losses, and then reverted to more strict readings when the crisis had passed.
Specifically, the RMBS contracts provided that the “sole remedy” available for loans that did not conform with quality specifications was for trust sponsors to repurchase the noncompliant loan. Of course, during the crisis, investors alleged that huge percentages of loans backing the trusts were noncompliant, and a loan-by-loan repurchase requirement would have been, as a practical matter, impossible to pursue. Strauss finds that judges interpreted the clause to permit investors to use sampling to identify noncompliant loans and claim damages, but only in the years following the crisis. By 2015, they reverted to a stricter reading of the contracts. She cites this an example of “crisis construction,” namely, the way that courts alter their readings of contracts during times of calamity in order to further some economic policy. (Strauss discusses that phenomenon in her paper, and Mitu Galati also describes it in this blog post spotlighting Strauss’s work ).
The part that really fascinates me, though, is how this trend strikes me as the opposite of what I experienced when I litigated these cases not as a matter of contract construction, but as a matter of securities law violations. As I posted a few years ago (with additional discussion here and here), I believe that courts adopted a narrow – and nonsensical – approach to class action standing when investors started suing en masse after the crisis, and they did so as a way of managing what would otherwise be incomprehensibly large liabilities for Wall Street’s major players. So I’m intrigued that when it came to securities liability, courts shut the door to plaintiffs, but when it came to contract liability, they opened it.
Thursday, September 12, 2019
My biggest takeaway is that for the attorneys in this space, if they want to be in the room where it all goes down, they've got to bro down socialize and remain well-thought of by their well-connected colleagues. A lawyer's ability to make a living in the space and generate results for clients seems to depend on relationships with other key players. So much depends on being well-connected:
- the ability to get a leadership appointment;
- the ability to get some of the work flow;
- the ability to get a decent fee allocation;
- the ability to get a settlement favoring your "inventory" of clients; and
- the ability to get other attorneys to back any play you make.
Functionally, this means that attorneys face intense incentives to get along with other attorneys in the space. This probably does not produce solid strategic behavior because attorneys may be more likely to simply agree with well-connected leaders than to press for things that might rock the boat a bit but generate better outcomes for all plaintiffs swept up in the aggregate litigation vortex. Burch does a great job of bringing stories forward about questionable litigation decisions likely driven by this process.
Burch also breaks down how pairing these incentives with known shortcomings in group decision-making poses real risks for actually getting cases ready for trial. Lawyers with better situated test cases or a different understanding than group leaders may not put their information before the group or be able to get their cases ready.
One thing that struck me was how the size of the committees managing the litigation might not be well-suited for effectively operating. I've seen this dynamic myself. A small group of 4-5 can generally work well together. When groups double in size, we don't tend to be as effective. Judges tend to appoint groups of 12 or more. Judge Eldon Fallon apparently appoints 12 because "there were 12 apostles." And I guess that makes sense if you want a group that will mostly just bow down and follow the leader around. But if you want a group to share power and operate strategically and effectively, a 12-15 lawyer committee might not be the right size.
Ultimately, I'm not convinced that the processes we have now result in adequate representation. Part of it may be that the plaintiffs in these cases need to develop discovery in different ways. Conducting consolidated discovery may result in material of some general utility but significantly less utility than a more focused preparation process. Burch tells the story of a lawyer who wanted to take a tight deposition for use at trial but couldn't because of all the other lawyers that got into the room and dragged the proceeding out. In that lawyer's telling, it produced a deposition that lots of lawyers got involved in and billed time to but also one that offered significantly less utility for actually trying a case than a more focused one.
We also generally lack actual legal authority for governing these proceedings or the duties the leading lawyers involved actually owe to claimants who are not their direct clients. It seems as though moving toward something more similar to class action processes and norms would do more to protect actual victims.
This whole area of law seems like a train wreck. This is fitting because this area of law might also be the procedural vehicle to deal with injuries arising out of a train wreck.
Wednesday, September 11, 2019
[NOTE: You should see embedded Tweets. If you don't, please try a different browser.]
"9/11 attacks, series of airline hijackings and suicide attacks committed in 2001 by 19 militants associated with the Islamic extremist group al-Qaeda against targets in the United States, the deadliest terrorist attacks on American soil in U.S. history." https://t.co/yJxM3TnYBG— Stefan Padfield (@ProfPadfield) September 12, 2019
"a for-profit Delaware corporation is not precluded from taking social issues into account in the conduct of its business, so long as the corporation’s consideration of those social issues has a sufficient nexus to shareholder welfare and value enhancement or protection" https://t.co/MSuuB5uKdx— Stefan Padfield (@ProfPadfield) September 7, 2019
"Tomorrow’s AI may permit humans to be replaced even at the apex of corporate decision-making. This is likely to happen first in what we call ‘self-driving subsidiaries’ performing very limited corporate functions." https://t.co/WhDGsIMaFL #corpgov— Stefan Padfield (@ProfPadfield) September 10, 2019
"The study of disasters & disclosures ... offers a ... reference point for thinking about ... controversies associated with bringing matters of social responsibility (e.g., law abidingness) and sustainability ... into the realm of securities law." https://t.co/qw5ljayFqg #corpgov— Stefan Padfield (@ProfPadfield) September 10, 2019
"'as a matter of agency law, a principal who delegates authority to an agent' will be deemed to maintain control over the conduct of that agent–regardless of whether the principal actually exercises control. Any conflict that disables the principal disables the agent" #corpgov https://t.co/MUODrvRXaD— Stefan Padfield (@ProfPadfield) September 9, 2019
Monday, September 9, 2019
Call for Papers for Section on Law & the Social Sciences Program at the AALS Annual Meeting
The Section on Law & Social Sciences is pleased to announce a Call for Papers from which one or two additional presenters may be selected for the section’s program panel to be held during the AALS 2020 Annual Meeting in Washington, D.C. The panel is entitled “Empirical Research in Business Law: Works in Progress,” and the panelists will summarize the methods and/or results of their current qualitative or quantitative empirical research projects as works in progress.
Form and Length of Submission:
The Section welcomes relevant submissions in the form of research proposals, preliminary pilot studies, or even nearly completed projects with results. Junior scholars are particularly encouraged to submit. Submissions should incorporate at least a brief (3-5 page) summary or abstract of the project.
Submission Method and Due Date:
Papers should be submitted electronically to David Kwok (email@example.com). The due date for submission is September, 20, 2019. Authors selected will be notified by September 27, 2019. The Call for Papers presenters will be responsible for paying their registration fee and hotel and travel expenses.
Inquiries or Questions:
Any inquiries about the Call for Papers should be submitted to David Kwok (firstname.lastname@example.org).
The following comes to us from friend of the BLPB George S. Georgiev at Emory Law:
Emory University School of Law seeks a lateral hire for a tenured position in business law to begin in the 2020-2021 academic year. Candidates should be already tenured at an ABA-approved law school.
Candidates must have a J.D., Ph.D., or equivalent degree, a distinguished academic record, and a demonstrated potential to produce outstanding scholarship. Candidates should complete the online application here, and submit a cover letter, a current CV, a published or unpublished academic article, a brief research agenda, and an indication of teaching interests (if not listed on the CV) to the chair of the Faculty Appointments Committee: Polly J. Price, Asa Griggs Candler Professor of Law, at email@example.com.
Emory Law strives for a world in which law provides a common framework for courageous leaders to engage our most complex social and economic challenges and to achieve positive social transformation by advancing the rule of law. Emory University is dedicated to providing equal opportunities and equal access to all individuals regardless of race, color, religion, ethnic or national origin, gender, genetic information, age, disability, sexual orientation, gender identity, gender expression, and veteran's status.
Sunday, September 8, 2019
I’m excited to highlight the publication of the book: FinTech: Law and Regulation, edited by Jelena Madir. Madir is the Director, Chief Counsel at the European Bank for Reconstruction and Development, in addition to having been an outstanding editor of this book, and a delight to work with (thanks, Jelena!). I’m grateful for the opportunity to contribute to this important work, and thankful to Wharton Professor Kevin Werbach for inviting me to coauthor the chapter: Blockchain in Financial Services (thanks, Kevin!). Werbach also recently published the highly-rated: The Blockchain and the New Architecture of Trust. Two great book recommendations for BLPB readers!
Saturday, September 7, 2019
Have you ever wanted to learn the basics about blockchain? Do you think it's all hype and a passing fad? Whatever your view, take a look at my new article, Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society, co-authored with Rachel Epstein, counsel at Hedera Hashgraph. I became interested in blockchain a year ago because I immediately saw potential use cases in supply chain, compliance, and corporate governance. I met Rachel at a Humanitarian Blockchain Summit and although I had already started the article, her practical experience in the field added balance, perspective, and nuance.
The abstract is below:
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, the technology also has the potential to transform the way companies look at governance and enterprise risk management, and to assist governments and businesses in mitigating human rights impacts. This Article will discuss how state and non-state actors use the technology outside of the realm of cryptocurrency. Part I will provide an overview of blockchain technology. Part II will briefly describe how public and private actors use blockchain today to track food, address land grabs, protect refugee identity rights, combat bribery and corruption, eliminate voter fraud, and facilitate financial transactions for those without access to banks. Part III will discuss key corporate governance, compliance, and social responsibility initiatives that currently utilize blockchain or are exploring the possibilities for shareholder communications, internal audit, and cyber security. Part IV will delve into the business and human rights landscape and examine how blockchain can facilitate compliance. Specifically, we will focus on one of the more promising uses of distributed ledger technology -- eliminating barriers to transparency in the human rights arena thereby satisfying various mandatory disclosure regimes and shareholder requests. Part V will pose questions that board members should ask when considering adopting the technology and will recommend that governments, rating agencies, sustainable stock exchanges, and institutional investors provide incentives for companies to invest in the technology, when appropriate. Given the increasing widespread use of the technology by both state and non-state actors and the potential disruptive capabilities, we conclude that firms that do not explore blockchain’s impact risk obsolescence or increased regulation.
Things change so quickly in this space. Some of the information in the article is already outdated and some of the initiatives have expanded. To keep up, you may want to subscribe to newsletters such as Hunton, Andrews, Kurth's Blockchain Legal Resource. For more general information on blockchain, see my post from last year, where I list some of the videos that I watched to become literate on the topic. For additional resources, see here and here.
If you are interested specifically in government use cases, consider joining the Government Blockchain Association. On September 14th and 15th, the GBA is holding its Fall 2019 Symposium, “The Future of Money, Governance and the Law,” in Arlington, Virginia. Speakers will include a chief economist from the World Bank and banking, political, legal, regulatory, defense, intelligence, and law enforcement professionals from around the world. This event is sponsored by the George Mason University Schar School of Policy and Government, Criminal Investigations and Network Analysis (CINA) Center, and the Government Blockchain Association (GBA). Organizers expect over 300 government, industry and academic leaders on the Arlington Campus of George Mason University, either in person or virtually. To find out more about the event go to: http://bit.ly/FoMGL-914.
Blockchain is complex and it's easy to get overwhelmed. It's not the answer to everything, but I will continue my focus on the compliance, governance, and human rights implications, particularly for Dodd-Frank and EU conflict minerals due diligence and disclosure. As lawyers, judges, and law students, we need to educate ourselves so that we can provide solid advice to legislators and business people who can easily make things worse by, for example, drafting laws that do not make sense and developing smart contracts with so many loopholes that they cause jurisdictional and enforcement nightmares.
Notwithstanding the controversy surrounding blockchain, I'm particularly proud of this article and would not have been able to do it without my co-author, Rachel, my fantastic research assistants Jordan Suarez, Natalia Jaramillo, and Lauren Miller from the University of Miami School of Law, and the student editors at the Tennessee Journal of Business Law. If you have questions or please post them below or reach out to me at firstname.lastname@example.org.
September 7, 2019 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Reviews, Lawyering, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)
A few weeks ago, we had an interesting opinion out of the 10th Circuit interpreting the scope of primary liability under Section 10(b) in the wake of the Supreme Court’s Lorenzo v. SEC decision. The short version is that in Malouf v. SEC, the Tenth Circuit found that scheme liability under Section 10(b) (and parallel provisions of Section 17(a) and the Investment Advisers Act) may be incurred when a defendant knowingly fails to correct someone else’s false statement. But matters are actually a bit more complicated.
More under the jump; warning, this post assumes basic familiarity with Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) and Lorenzo. If you want that backstory, see this post on Janus and the Lorenzo cert grant and my discussion of the actual Lorenzo decision.
Thursday, September 5, 2019
The chapter is titled "Quid Pro Quo Arrangements" for good reason. I finished the chapter with the sense that attorneys in the space negotiate with defendants to bargain away plaintiff rights in exchange for things the plaintiffs' attorneys want for themselves and the defense lawyers want for their clients. As someone who also teaches professional responsibility, I struggled to understand how many practices and agreements could ever be consistent with the ethics rules.
Take the settlement-recommendation provisions. Lawyers enter into settlement agreements in these cases where they agree that they will recommend to every client in their "inventory" that they accept the settlement. In many instances, they also put in writing that they will flat out drop clients and withdraw from representation if the clients do not agree to settle. The ethics rules make whether to take a settlement offer a client decision. And these "attorney-recommendation" provisions are common. 84% of the settlement agreements in the dataset have them. 53% of the time they also have the withdrawal provisions.
What do you do if you have a client who would be better served by not agreeing to the settlement? Settlements will probably be right for some clients and wrong for others. An attorney who binds herself to give a particular recommendation to a client surely impairs her ability to give independent advice. The Connecticut Bar Association issued an ethics opinion sharing my view that these provisions fall over the line. Despite this, the provisions keep showing up in these settlements. And these are not the only, shall we say, ethically complex provisions showing up.
Consider settlement "reversion" terms. Funds within the settlement pool that don't get used up will revert back to the defendant. This also creates an incentive to include terms making it harder for plaintiffs to actually access the settlement. In some instances, the agreements will set up claim review boards or other gateways plaintiffs must pass through to recover. Of course, this allows the lead attorneys involved to collect large fees off a big settlement fund and the defendant to claw most of the money back when few plaintiffs can actually collect.
These troubling practices may persist because mass tort deals work differently than their more orderly cousins--the class actions. There just isn't any procedure available for objecting to these settlement structures.
Enormous rewards await attorneys involved in striking these deals. Not only do they get "common benefit" fees premised on the idea that their leadership work gave value to all other plaintiffs, they also get other benefits. For example, in situations where a settlement matrix gets created, they design the matrix, point system, and guidance documents used to determine how much a particular plaintiff will take home. This gives them an undeniable edge when they bring their own clients to the table. They know how to position them in ways that other attorneys do not. It would not surprise me if some tilted the matrix to favor their particular inventory if they were able to sign up more plaintiffs with particular characteristics.
Wednesday, September 4, 2019
2/2 "you can call Ms. Paglia a feminist capitalist.... she says, 'I insist that capitalism has produced the glorious emancipation of women.' They can now 'support themselves and live on their own, and no longer must humiliatingly depend on [men]'" https://t.co/FbcI3oE1pM #corpgov— Stefan Padfield (@ProfPadfield) September 1, 2019
The issue is whether corporate managers can destroy SH value in furtherance of a social agenda. If they're not destroying SH value, then they don't need a "stakeholder" defense. https://t.co/JsCnkLMjBG— Stefan Padfield (@ProfPadfield) September 2, 2019
"Classical utilitarianism fell into disfavor b/c its commitment to maximizing utility is capable of justifying deprivations of basic rights .... The cure ... lay in making some basic rights 'absolute' — in ruling out some trade-offs entirely." Untenable? https://t.co/MWPMYGBOHF— Stefan Padfield (@ProfPadfield) August 30, 2019
"Given the potential opportunities and risks in taking positions, or remaining silent, on potentially divisive social issues .... consider processes similar to those used for approving corporate political contributions and lobbying activities" https://t.co/eBzhdSlseD— Stefan Padfield (@ProfPadfield) August 30, 2019
"A federal appeals court ... reinstated a challenge to Minnesota’s anti-bias law by videographers who say they can’t be required to make same-sex wedding videos because it would violate their religious beliefs." https://t.co/pX6BqyX3Ry #corpgov— Stefan Padfield (@ProfPadfield) August 30, 2019
Monday, September 2, 2019
Today marks the 125th anniversary of our celebration of Labor Day as a U.S. national holiday. As the U.S. Department of Labor reminds us:
Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country. . . .
The vital force of labor added materially to the highest standard of living and the greatest production the world has ever known and has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pays tribute on Labor Day to the creator of so much of the nation's strength, freedom, and leadership – the American worker.
Certainly, there remains much to celebrate. Yet, an online piece written two years ago that focuses in on the history in a more detailed way offers words of caution:
The original holiday was meant to handle a problem of long working hours and no time off. Although the battle over these issues would seem to have been won long ago, this issue is starting to come back with a vengeance, not for manufacturing workers but for highly skilled white-collar workers, many of whom are constantly connected to work.
[Note: I have been accused of being constantly connected to work--or the equivalent. Sometimes rightly so.] The article goes on to urge taking a day off and enjoying time at a barbecue. I want to offer an additional idea: consider adding mindfulness to your tool kit (and more specifically a simple practice).
Yes, I have extolled the virtues of mindfulness practices before, including here and here. Marcia has, too. I want to incorporate by reference here all that we have collectively said in that regard. But I also want to emphasize in today's post a new application of the concept--one that I learned in a series of beginner meditation classes that I completed yesterday.
All of us have thoughts relating to our work (and our personal lives) that niggle at us over time or disrupt our flow in the moment. They may involve, for example, a grudge against a colleague or anger at an administrator or anxiety about a student or upcoming project or event. These ongoing meddlesome thoughts interfere with our work and our lives outside work. Specifically, they distract us and make us unhappy, inefficient, and unproductive. They can lengthen our work days and extend the work week into weekends. They can ruin our time with family--even at a Labor Day barbecue.
There are ways of managing this kind of stress in our work lives. The instructor in my meditation class offered the technique (labeled, apropos of today's holiday, "The Work") suggested and promoted in Loving What Is: Four Questions That Can Change Your Life, by Byron Katie and Stephen Mitchell. As the title of the book suggests, the approach consists of four questions. They are:
- Is it true?
- Can you absolutely know that it's true?
- How do you react, what happens, when you believe that thought?
- Who would you be without that thought?
In addition to the book, a website offers guidance, including a series of videos. The same coauthors have written a follow-on book, A Mind at Home with Itself: Finding Freedom in a World of Suffering. (Byron Katie apparently has two other books--one also coauthored with Stephen Mitchell, here and here. They also may be helpful but may not be as central to using The Work.) I have not read any of the books, but I plan to practice the use of the four questions.
Why would I invest in this? If used properly and successfully, what can these four questions do for me? Here's what I have learned so far.
The four questions and the way in which they are used in The Work invite us to compartmentalize a thought that troubles us, allowing us to explore its contours and question it and ourselves. In the process, we can reduce the suffering it causes us and slow down any reaction process that we determine is needed. Ultimately, this method of addressing troubling thoughts has the capacity to free us from the drag that our niggling thoughts have on our working and personal lives. The Work also may enable us to take required action to address true concerns in the workplace and at home in a manner that is more compassionate and less driven by the exigencies of the moment.
I offer this new mindfulness process for what it may be worth to you, in the spirit of personal wellness, institutional health, and Labor Day--to allow you more "time off" from work (among other things). Regardless of the appeal--or lack thereof--The Work may hold for you, I wish you all a happy and restful Labor Day. I am making a special brunch that I will enjoy with my husband and daughter. No family or neighborhood barbecue is planned, but who knows? My hubby and I may just make our own . . . .
Sunday, September 1, 2019
I want to wish all BLPB readers a wonderful Labor Day weekend holiday! Enjoy!
I’ll also make a brief plug for the 2019 Annual Meeting of the Southeastern Academy of Legal Studies in Business (early bird deadline is September 15) in Montgomery, Alabama, November 7-9. It will be a great conference – packed full of interesting presentations, and opportunities to meet/reconnect with business law scholars writing on diverse topics. More information can be found here: SEALSB 2019. It’s an event that will always be near and dear to my heart as it ultimately led me to writing for this blog! Hope to see many of you in Montgomery in November!
Saturday, August 31, 2019
Delaware Chancery court is apparently being dragged into the presidential race, via a new attack ad against Joe Biden. As reported by Shane Goldmacher, well:
NEW: Joe Biden about to get whacked on the Iowa and New Hampshire airwaves with an ad that also features Elizabeth Warren.— Shane Goldmacher (@ShaneGoldmacher) August 28, 2019
Spot paid for by an individual, Shirley Shawe, and is about the obscure Delaware Chancery Court.
There is so much to talk about here.
First, there’s the fact that the advertisement is misleading; Biden and Warren were apparently sparring about bankruptcy courts, not Chancery.
Second, there’s the fact that Biden – as a federal legislator – has no authority over Delaware Chancery.
Third, there’s the fact that while I won’t dispute that Delaware courts are too white, Delaware Chancery, at least, now has 3 women and 4 men. I’d be delighted to see more women on Chancery – and certainly the Delaware Supreme Court – but criticizing Chancery as too male is so last year.
Fourth, there’s the shifting numbers about the size of the ad buy; original reports said $500K, then the number was upped to $1 million, with print as well, and to be honest, I suspect that by blogging it I’m probably giving it the free attention that was the real aim.
But really the salient point is the identity of the buyer: Shirley Shawe, one of the litigants involved in the long-running TransPerfect dispute, tried before Chancellor Bouchard (which is why he is singled out for criticism in the advertisement).
TransPerfect was formed by Shirley Shawe’s son, Philip Shawe, and his one time-fiancee, Elizabeth Elting. They ended their romantic relationship but continued with the business. Elting had a 50% interest, and Philip Shawe a 49% interest, with 1% going to his mother so that the business as a whole could qualify as women-owned. Since Shirley always voted with her son, this meant that authority was split 50/50.
The business was successful but the working relationship was not, leading to prolonged and acrimonious litigation. Frankly, the Delaware opinions describing the fights between Shawe and Elting read more like a stalking complaint or domestic abuse than a business falling-out; among other things, Shawe was found to have hacked into Elting’s personal email, and – on two! occasions – hidden under her bed.
Ultimately, Chancellor Bouchard ordered that the company be sold, and Philip Shawe purchased it. The matter was not settled, though, because after that, the Shawes claimed that the Skadden partner who ran the auction “looted” the company.
Even today, the Shawes can’t let the matter go. From what I can glean, Shirley Shawe is involved with this nonprofit, formed in the wake of the TransPerfect dispute and devoted to criticizing the Delaware Chancery court (the group is not officially connected to Shawe, but this article describes her as a “driving force” behind it, and reports that she funded and starred in its advertisements). And now, of course, there’s this bizarrely irrelevant advertisement in the presidential race.
What the whole thing highlights, I think, is how business disputes that are tangled with family disputes don’t unfold like ordinary business matters, because the issues are far more personal. And business courts don’t really know how to address the family dynamics. That’s very much on display in TransPerfect, and it’s also the point of Allison Tait’s article, Corporate Family Law, 112 Nw. U. L. Rev. 1 (2017). Though she doesn’t talk about TransPerfect specifically, the situation really illustrates her point.
Thursday, August 29, 2019
If you're interested in mass litigation--either through class actions or multi-district litigation--you undoubtedly know that the area can be overwhelmingly and mind-numbingly complex. Mass Tort Deals by Elizabeth Chamblee Burch cuts through with simple language and accessible stories to help frame the key policy issues. So far, I'm through the first chapter and have some thoughts.
The book frames the key issues well--how do we balance competing interests and resolve mass tort disputes. And there are plenty of interests sitting in tension with each other: judicial economy, efficiency, judicial desires for novelty and importance, plaintiffs' counsel fees, lead plaintiff counsel fees, defense interests in global resolution, and more. How we set the procedures up for these cases effectively controls how these cases will be resolved. If judges lock less cooperative litigants out and limit access to discovery or other information, it essentially forces them to come to the table and play ball with the court's chosen lawyers for a case.
From someone who has studied the class action context closely, one of the most surprising things to me about norms in the non-class mass tort space has been that the leadership arrangements seemingly operate as a lawless scrum. There are no clear rules for how to set up a mass action governance structure for moving these claims through pre-trial proceedings. This sets the stage for all sorts of jockeying by lawyers. Even the lawyers courts appoint as lead counsel cannot keep control:
Lead counsel negotiate settlements and dictate trial strategy, but few rules govern this undemocratic process. For example, Judge Susan Wigenton appointed a five-member plaintiffs' liaison counsel . . . to head lawsuits against Zimmer over its poorly designed Durom hip cup. Yet, Chris Seeger, one of those five members, quietly joined forces with nonlead lawyer Mark Lanier. Without the other counsel's members' knowledge or consent, Lanier and Seeger hashed out a global deal with Zimmer, which they signed on behalf of something they dubbed, the 'claimants' liaison counsel.' Judge Wigenton 'approved' their private deal over the real liaison counsel's objections. Seeger later suggested that instituting rules 'would take the fun out of mass torts.'
This is wild! I can see how it would be fun to steal the initiative from the other plaintiffs' lawyers and just forge the deal you think right if they don't agree with you. But you have to wonder about who really benefits from this dynamic? Defense counsel certainly has an incentive to strike a deal with a wildcat if it will give better terms to the corporation. This risks leaving money on the table for the plaintiffs.
Burch's book isn't without detractors. As I read the above paragraph, I recalled something I'd seen when I bought the book off Amazon. One reader thought the book was terrible.
You have to wonder if it's the same guy.
Wednesday, August 28, 2019
"An Oklahoma judge on Monday found Johnson & Johnson and its subsidiaries helped fuel the state's opioid crisis and ordered the consumer products giant to pay $572 million"; "could help shape negotiations over roughly 1,500 similar lawsuits" https://t.co/WKCkCMjRSs #corpgov— Stefan Padfield (@ProfPadfield) August 27, 2019
Deutsche Bank "agreed to pay $16 million to settle charges by the SEC that it violated ... the Foreign Corrupt Practices Act"; "The bank had hired relatives of foreign officials in China and Russia to obtain business, the regulator said." https://t.co/GxXHm5HRAS #corpgov— Stefan Padfield (@ProfPadfield) August 25, 2019
Is Bernie Sanders "Wrong About Sweden"? Is the "Nordic model" of socialism "more like ‘ruthless capitalism’"? Swedish author and historian Johan Norberg describes "his country’s brief but costly socialist experiment." https://t.co/jnulpheZ68 #corpgov— Stefan Padfield (@ProfPadfield) August 25, 2019
"One hiccup might be the legal doctrine currently prevalent in the Delaware courts." https://t.co/tDm8UqIUs4— Stefan Padfield (@ProfPadfield) August 23, 2019
Many CEOs wind up receiving much more than originally disclosed. (Oracle CEO from $190M to $535M.) "These gains are driven in part by ... intricate pay structures that can multiply the number of shares and options ... awards ultimately provide." https://t.co/FJnKo5sf9U #corpgov— Stefan Padfield (@ProfPadfield) August 26, 2019
Tuesday, August 27, 2019
Back in April, I posted on a leadership conference focusing on lawyers and legal education, sponsored by and held at UT Law. I also posted earlier this summer on the second annual Women's Leadership in Legal Academia conference. I admit that I have developed a passion for leadership literature and practices through my prior leadership training and experiences in law practice and in the legal academy.
Because lawyers often become leaders in and through their practice (both at work and their other communities) and because leadership principles interact with firm governance, I want to make a pitch that we all, but especially all of us teaching business associations (or a similar course), focus some attention on leadership in our teaching. It is a nice adjunct to governance. For example, management and control issues, especially director/officer processes in corporations, are a logical place to discuss leadership. Who are the managers and the rank-and-file employees inspired by in managing and sustaining the firm? Who is able to persuade the board to take action? Is it because of that person's authority, or does that person hold a trust relationship with others that motivates them to follow? And speaking of trust, it is an element of both leadership and fiduciary duty . . . .
As you consider my teaching suggestion, I offer you my latest blog post on our Leading as Lawyers blog. It involves the importance of process to effective leadership. The bottom line?
One can have a promising vision and strategy that emanate from the best of all intentions and ideas. But without engaging a process that includes effectual communication and input from, candid interchanges with, expressions of appreciation for, and buy-in from the relevant affected populations, those worthy intentions may be misinterpreted and those good ideas may die on the vine or not be implemented effectively.
We have all seen this happen in business governance. Let's let our students in on the role that leadership plays in the practical application of business law. It is bound to inform both their law practice and their lives.
Sunday, August 25, 2019
September 11, 2019, will mark the one-year anniversary of a clearinghouse-related event reported on in the NYT as: How a Lone Norwegian Trader Shook the World’s Financial System. Ironically, the story unfolded during the ten-year anniversary week of Lehman Brothers’ collapse and AIG’s $180B+ rescue by the U.S. government. Global policymakers’ clearinghouse mandates, implemented in the U.S. in Title VII of Dodd-Frank, were supposed to be the solution to the AIG problem, not potentially the next big problem.
And speaking of the financial crisis, resolving the ownership status of Fannie Mae and Freddie Mac is once again in the news. These institutions have been in government conservatorship for over 10 years. I’m skeptical that a long-term, viable solution has been found to return the housing GSEs to private ownership that will not return us right back to where we are now the next time these institutions get into trouble.
I’m no expert in housing finance, but I do know a good deal about clearinghouses. Important parallels exist between the housing GSEs and systemically-significant clearinghouses. Most such clearinghouses are privately-owned, publicly-traded corporations. Yet here too, the government holds the tail risk of these institutions. As I’ve argued in The Federal Reserve As Last Resort, this is the “why” behind the Federal Reserve’s expansive new lending authority in Title VIII of Dodd-Frank.
In Incomplete Clearinghouse Mandates, 56 Am. Bus. L. J. 507 (2019), I argue that it’s time to find a workable solution for the recovery of a troubled clearinghouse. My article focuses on the three areas of time-critical cooperation that will, at a minimum, be necessary between the clearinghouse and its members for a successful recovery: continuation of clearing member membership; assistance to the clearinghouse if one or more clearing members has defaulted; and, continuity of any critical services clearing members (or their affiliates) provide to the clearinghouse. Yet it also uses transaction cost economics to examine underlying legal and regulatory structures that will increase the cost of this necessary cooperation. Those structures include: ownership arrangements, federal lending limits for national banks, interdependent security problems, and the organization of client-clearing. It ends by proposing reforms designed to ensure that the incentives of the clearinghouse and its members promote a successful recovery.
Let’s not repeat the ongoing history of the housing GSEs in the clearinghouse area. Here’s an abstract of my article (draft recently posted to SSRN):
In the 2007-2008 financial crisis, over-the-counter (OTC) derivatives triggered the collapse of colossal financial institutions. In response, global policymakers instituted clearinghouse mandates. As a result, all standardized OTC derivatives must now use clearinghouses, and global financial market stability now depends upon these institutions. Yet certain underlying legal and regulatory structures threaten to undermine clearinghouse stability, particularly were a significant clearinghouse to become distressed. This article argues that the clearinghouse mandates are incomplete in falling short of also reforming these problematic arrangements.
As with electric utilities, the lights at the financial market infrastructures known as clearinghouses must always be on. Yet the legal frameworks for handling a distressed clearinghouse, the problem of clearinghouse recovery and resolution, remain uncertain. This article advances debate on this issue. It argues that recovery, a private market restructuring process, can be conceptualized as a bargaining game dependent upon time-critical cooperation between a clearinghouse and members. This article uses transaction cost economics to demonstrate, however, that certain underlying legal and regulatory structures could work at cross-purposes to this necessary cooperation, and actually increase its cost. Based upon this analysis, it proposes reforms designed to ensure that parties’ incentives promote efficient recovery. In the absence of efficient recovery frameworks, the path of a distressed, significant clearinghouse is likely to resemble that of the government-backed mortgage lenders whose fate more than ten years after their entry into conservatorship remains uncertain. This article aims to help avoid a repeat of this history.
Saturday, August 24, 2019
Just after I posted my paper, Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure, arguing for a stakeholder-focused corporate disclosure system, the conversation about corporate obligations to noninvestor interests exploded. That’s because the Business Roundtable released a new “statement on the purpose of a corporation” which Marie Kondo-ed the traditional focus on shareholder interests, in favor of, well:
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. - Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
The reception has been … mixed.
There are two basic schools of thought. The first is that the BR’s statement represents a real change going forward, either because it will drive business decisionmaking or, more subtly, because the fact that the BR felt it necessary to issue the statement at all illustrates a societal shift that has already occurred.
The second is that this is a public relations ploy to stave off more onerous business regulation.
I posted about “stakeholder capitalism” a few weeks ago and how it often translates into a fairly naked attempt to avoid accountability to shareholders or anyone else. Which is why the Council of Institutional Investors (CII) immediately issued its own statement decrying the BR’s attempt to disclaim any responsibility to shareholders as a unique constituency.
Right on cue, Martin Lipton* – who, as I discussed in my prior post on the subject, has a very long history of using appeals to stakeholders as a mechanism for shielding management decisions from scrutiny – posted a statement in support of the BR, in which he warned that failure to embrace its vision would bring about calamity:
The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided. The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake. It would lead to state corporatism or socialism.
The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability to use their voting power to influence the corporations in which they invest.
In other words, corporations have to appear to be good citizens to avoid being forced to be good citizens. At least he’s honest.
Meanwhile, the Wall Street Journal published its own view in which it agreed this is all fine for PR purposes but if anyone really means to pursue profits with anything less than religious devotion, that would be bad.
Let’s just say it’s an odd day when Martin Lipton is fighting both the CII and the WSJ editorial page. Usually, the alignment would be more CII versus Lipton and the WSJ, because the reality is, CII members are all about protecting corporate stakeholders – after all, the CII is an organization of employee pension plans – they just, you know, want shareholders to be the ones making those decisions, not corporate managers. And the WSJ and Lipton are very much in the opposite camp. Indeed, the BR is currently fighting to make it harder for shareholders to introduce proposals that would force corporations to focus on – you guessed it – stakeholder interests, so this looks a lot less like an issue of what is best for society than about who should be the decisionmaker.
But there’s more. First, not everyone’s on board with the BR’s statement; there are some notable absences from BR’s list of signatories. Second, the BR’s statement puts it at odds with the Trump Administration, which seems to have formally declared shareholder wealth maximization as the only appropriate corporate purpose. It also puts the BR at odds with SEC Commissioner Hester Peirce, who has done the same.
So, what do we make of all of this?
Well, first and most obviously, abstract notions of corporate purpose – and the near-unenforceable fiduciary duties that follow – are likely to have very little direct influence on corporate behavior. But that doesn’t mean they’re entirely irrelevant, because they can impact the legal regime in which corporations operate. As I discuss in What We Talk About When We Talk About Shareholder Primacy, it matters if the Trump Administration and the SEC think corporate purpose = shareholder wealth maximization, because that means they’ll develop legal rules to make it so, including defining “materiality” for securities law purposes to mean only matters relevant only to financial return, and prohibiting shareholders from pushing for greater accommodation of stakeholders. And so far, the BR is fully on board with that agenda.
That said, the true drivers of corporate decisionmaking are real-world incentives that corporate managers have to favor one constituency or the other. And because shareholders are the only constituency who get a vote, managers are particularly likely to attend to their concerns. Which brings me to this op-ed by Chief Justice Strine and Antonio Weiss, published in Friday’s New York Times. In it, they make an argument that Strine has often advanced, namely, that large mutual fund investors should vote for policies that protect the worker-beneficiaries of those funds, and thus force managers to accommodate their interests as employees and consumers. (For recent academic commentary in that vein, see Nathan Atkinson here and Michal Barzuza, Quinn Curtis, & David Webber here.)
Now, Strine has made this argument before – I posted about one iteration here – and as I pointed out at the time, Strine has also long argued that managers have fiduciary duties to shareholders alone. So there’s some tension in his argument that mutual funds should advocate for corporate policies that, at least according to formal (if not practical) Delaware law, cannot be advanced to the extent they favor employee interests over those of investors. The op-ed, though, squares that circle by equating protections for workers and the environment with the long-term best interests of the corporation itself (and thus, by extension, its investors).
(The op-ed also makes the odd argument that there are too many meaningless items on the corporate ballot. Which is unexpected because most of the non-critical items are, like, proposals that deal with corporate social responsibility, which is what the op-ed just said funds should advocate for, so, I’m confused.)
Now, the claim that long-term corporate interests are identical to those of society as a whole is an ancient way of papering over the very real conflicting interests of different stakeholders. As an example, Larry Fink’s famed letter about corporate purpose gets a lot of attention as advancing a stakeholder-primacy view, but the letter actually said that accommodating stakeholders was in the long-term interest of business, and therefore is better for investors.
That’s the (purported) thinking behind the new Long-Term Stock Exchange (LTSE), which just received SEC approval of its listing standards. Among other things, the standards require that listed companies have policies that are “consistent with” the notion that they should “consider a broader group of stakeholders and the critical role they play in one another’s success,” and requires listed companies to “adopt and publish a Long-Term Stakeholder policy explaining how the issuer operates its business to consider all of the stakeholders critical to its long-term success.”
Now, I say “purported” here because – going back to where all this began – arguments about managers accommodating corporate stakeholders are frequently code for “activist shareholders leave us alone,” which has little to do with corporate well-being and everything to do with management entrenchment. Still, we’ll see how the LTSE works out – whether it attracts listings, investors, and (most critically) whether LTSE-listed companies insist their long-term policies were merely puffery as soon as they find themselves in the crosshairs of a securities fraud lawsuit.
Where does that leave us?
In my view, the hypothesized alignment between shareholder and stakeholder interests is ... complicated. This is my argument in Not Everything is About Investors: corporate profit-seeking is only aligned with the interests of society writ large if corporations pay a price for inflicting harms on non-shareholder constituencies. Which is why I think disclosure for non-shareholder audiences, while not a cure-all, is important: it helps society extract that price so that corporate managers are incentivized to act in society’s best interest as an inherent aspect of profit-seeking.
That was a lot.
In closing, I’ll just describe one particular colloquy that occurred at Tulane’s Corporate Law Institute earlier this year. One panel was devoted to corporate social responsibility, and the panelists included Strine and Myron Steele, former chief justice of the Delaware Supreme Court.
The moderator of the panel turned to Steele and asked him directly, is it ever permissible for a board of directors to decide that they will prioritize the needs of employees over earning a higher profit? And Steele said, well, if the board sits down, and carefully studies the issue, and decides that prioritizing employees is in the best interests of the company’s long-term profitability, then yes, the board can make that decision.
And the moderator asked again, okay, but what if there’s a tradeoff between prioritizing employees and earning profits? Can the board choose to favor employees?
And Steele said, if the board studies the issue, documents its process, and comes to a reasoned determination that it’s better for the corporation’s long-term prosperity if benefits are conferred on employees, then yes, that’s permissible.
So. There you have it.
*yeah, I have to keep saying – no relation
Friday, August 23, 2019
I had planned to write about the Statement on the Purpose of a Corporation signed by 200 top CEOs. If you read this blog, you've likely read the coverage and the varying opinions. I'm still reading the various blog posts, statements by NGOs, and 10-Ks of some of the largest companies so that I can gather my thoughts. In the meantime, many of these same companies will be at the UN Forum on Business and Human Rights touting their records. I've been to the Forum several times, and it's worth the trip. If you're interested in joining over 2,000 people, including representatives from many of the signatories of the Statement, see below. You can register here:
The UN annual Forum on Business and Human Rights is the global platform for stock-taking and lesson-sharing on efforts to move the UN Guiding Principles on Business and Human Rights from paper to practice. As the world’s foremost gathering in this area, it provides a unique space for dialogue between governments, business, civil society, affected groups and international organizations on trends, challenges and good practices in preventing and addressing business-related human rights impacts. The first Forum was held in 2012. It attracts more than 2,000 experts, practitioners and leaders for three days of an action- and solution-oriented dialogue.The Forum was established by the UN Human Rights Council in 2011 “to discuss trends and challenges in the implementation of the Guiding Principles and promote dialogue and cooperation on issues linked to business and human rights, including challenges faced in particular sectors, operational environments or in relation to specific rights or groups, as well as identifying good practices” (resolution 17/4, paragraph 12).
The Forum addresses all three pillars of the Guiding Principles:
- The State duty to protect against human rights abuses by third parties, including business, through appropriate policies, regulation and adjudication;
- The corporate responsibility to respect human rights, which means to avoid infringing on the rights of others and to address adverse impacts with which a business is involved; and
- The need for access to effective remedy for rights-holders when abuse has occurred, through both judicial and non-judicial grievance mechanisms
The Forum is guided and chaired by the UN Working Group on Business and Human Rights and organized by its Secretariat at the Office of the UN High Commissioner for Human Rights (OHCHR).
If you have any questions about the value of attending the Forum, feel free to reach out to me at email@example.com.
August 23, 2019 in Conferences, Corporate Personality, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Marcia Narine Weldon, Shareholders, Social Enterprise | Permalink | Comments (0)