Thursday, April 9, 2020
Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler. The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.
In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading. He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives. This approach should help manage ordinary securities transactions by members of Congress and their staff. He also advocates for limiting Congressional investing to U.S. index funds and treasuries. This would reduce the incentive to favor one market participant over another.
The proposed reforms would be a substantial improvement over the status quo. We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy. We should also not subsidize public service by tolerating Congressional trading on Congressional information.
Of course, we'll still face some implementation challenges. When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios? What kinds of exceptions would we make for private-company investments where no ready, liquid market exists? These implementation challenges strike me as mild compared to the benefits.
And Congressional adoption of the proposal would certainly yield substantial benefits. Although difficult to quantify, two broad benefits seem clear. First, adopting the proposal would generally increase confidence in government's integrity. As we're seeing with the pandemic, public trust in public officials can shift how society responds in times of collective crisis.
Allowing federal officials to trade securities generates real harm, confusion, and suspicion. Consider the hubbub over Trump's indirect ownership of a tiny stake in drug-maker Sanofi. Some have seized on the small, indirect interest to contend that he now hypes a particular drug for personal gain. A public-trust-focused regime limiting all elected officials to only broad index funds and U.S. Treasuries would likely cut down on the fear that officials recommend particular things to the public because of their economic interests. To be clear, it strikes me as extremely unlikely that the President now hypes the drug because of his minuscule ownership stake. The much likelier explanation is simply disordered magical thinking.
Many politicians have been targeted by similar attacks. This particular type of ill-informed charge has also been leveled at Senator Elizabeth Warren. One deeply misleading headline claimed she "invested in private prisons" before going on to explain that she owned a Vanguard index fund. It would be better to remove this line of attack entirely by sharply limiting the ways public officials invest.
Limiting Congressional ownership would also advance another vital national interest by increasing confidence in American securities markets. Our ability to attract capital and move it from investors to the real economy depends on confidence in the system. If investors fear that Congressional insiders have a leg up, they may not be as likely to participate in our markets.
As Congress considers how to regulate on these issues in the future, it should pay close attention to Shill's recommendations.
The American Business Law Journal (ABLJ) is a triple-blind peer review journal published quarterly “on behalf of the Academy of Legal Studies in Business (ALSB).” Its articles explore a range of business and corporate law topics, and it is a great resource for academics, industry professionals, and others. Its “mission is to publish only top quality law review articles that make a scholarly contribution to all areas of law that impact business theory and practice…[and it] search[es] for those articles that articulate a novel research question and make a meaningful contribution directly relevant to scholars and practitioners of business law.” I’ve previously posted about the journal (here).
The ABLJ has issued an invitation to ALSB members to apply for the position of Articles Editor. Not currently a member of the ALSB? No worries, you can easily become a member (here)! Below is the complete invitation to apply sent from Terence Lau, the ABLJ Managing Editor.
We invite ALSB members who are interested in serving on the Editorial Board of the American Business Law Journal to apply for the position of Articles Editor. The new Articles Editor will begin serving on the Board in August 2020. Board members serve for six years—three years as Articles Editor, one year as Senior Articles Editor, one as Managing Editor, and one as Editor-in-Chief. Articles Editors supervise the review of the articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. In the case of manuscripts that are accepted, the Articles Editor is responsible for working with the author and overseeing changes in both style and substance. In the case of manuscripts that are believed to be publishable but need further work, the Articles Editor outlines specific revisions and/or further lines of research that should be pursued. The Articles Editors’ recommendations for works-in-process are perhaps the most important and creative aspect of the job because they provide the guidance necessary for such works to blossom into publishable manuscripts. An applicant for the position of Articles Editor should have an established track record of publishing articles in law reviews and should have published at least one article with the ABLJ. Experience serving as a Reviewer for the ABLJ or as a Staff Editor is helpful. Please send a resume and letter of interest to Terence Lau, ABLJ Managing Editor, at firstname.lastname@example.org by May 31, 2020, for full consideration.
Wednesday, April 8, 2020
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It's been four weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally = 1,426,096; Deaths = 81,865.
In the past, we "more or less accepted the basic liberal premise of separating the public from the private," but we've "now so pervasively blended public and private identities and powers that the traditional liberal divide has all but collapsed." 120 Colum. L. Rev. 465 #corpgov— Stefan Padfield (@ProfPadfield) April 5, 2020
"right-of-center populists find themselves increasingly at odds w/ an emergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists" 98 Neb. L. Rev. 543 #corpgov— Stefan Padfield (@ProfPadfield) April 5, 2020
"Stop Blaming Milton Friedman!" The "shareholder-first mentality ... would only take hold in the mid-1980s.... due to an unprecedented wave of hostile takeovers rather than anything Friedman said." https://t.co/8IaD4ialut #corpgov— Stefan Padfield (@ProfPadfield) April 6, 2020
"With Nevsun Resources Ltd. v. Araya, 2020 SCC 5 (Nevsun), the Supreme Court of Canada has changed the way that senior business decision makers must think about the human rights impacts of their decisions on people abroad." https://t.co/2O70tjmTSI #corpgov— Stefan Padfield (@ProfPadfield) April 2, 2020
2/2: "the [Business Roundtable] shift says nothing about actually being accountable, truly transparent, or giving stakeholders any real power, and so adheres to the long-standing managerialist goal of autonomy over all else" Langevoort, 43 Seattle U. L. Rev. 377 #corpgov— Stefan Padfield (@ProfPadfield) April 7, 2020
Monday, April 6, 2020
In my post last week, I mentioned the President's invocation of the Defense Production Act during the current COVID-19 crisis. I was immediately curious about this law when news of the President's March 27 memorandum focused on General Motors and ventilator production hit my radar screen (a/k/a, my laptop, which has effectively become my lap these days). Surely, it must be unusual for the U.S. government, I thought, to direct the nature, means, and timing of production and supply. That seems antithetical to the spirit, if not the letter, of U.S. capitalism. However, the more I read, the less curious and concerned I am, at least for the moment. Perhaps some of the reporting in this area is more geared to generating a splashy news item than, well, alerting us to something truly unusual or troubling. Nevertheless, I will make a few foundational points on the Act here. I may have more to say later.
The Defense Production Act of 1950 can be found in Chapter 55 of Title 50 of the U.S. Code. The Act recognizes that "the security of the United States is dependent on the ability of the domestic industrial base to supply materials and services for the national defense and to prepare for and respond to military conflicts, natural or man-caused disasters, or acts of terrorism within the United States." 50 U.S.C. § 4502(a)(1). To meet these and other requirements, the Defense Production Act "provides the President with an array of authorities to shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base." Id. at § 4502(a)(4).
The President's highly publicized General Motors memorandum referenced above is only one of a number of formalized presidential actions citing to or using the Defense Production Act in the war against COVID-19. That memorandum directs the Secretary of Health and Human Services to "use any and all authority available under the Act to require General Motors Company to accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary determines to be appropriate." The General Motors memorandum follows on a March 16 executive order delegating specified presidential powers under Section 101 of the Act to the Secretary of Health and Human Services. An April 2 memorandum directs the Secretary of Homeland Security "through the Administrator of the Federal Emergency Management Agency (Administrator), . . . [to] use any and all authority available under the Act to acquire, from any appropriate subsidiary or affiliate of 3M Company, the number of N-95 respirators that the Administrator determines to be appropriate." A second April 2 memorandum directs the Secretary of Health and Human Services, "in consultation with the Secretary of Homeland Security, . . . [to] use any and all authority available under the Act to facilitate the supply of materials to the appropriate subsidiary or affiliate of the following entities for the production of ventilators: General Electric Company; Hill-Rom Holdings, Inc.; Medtronic Public Limited Company; ResMed Inc.; Royal Philips N.V.; and Vyaire Medical, Inc." Finally, an April 3 memorandum directs the Secretary of Homeland Security "through the Administrator of the Federal Emergency Management Agency, in consultation with the Secretary of Health and Human Services, . . . [to] use any and all authority available under section 101 of the Act to allocate to domestic use, as appropriate, . . . [specified] scarce or threatened materials designated by the Secretary of Health and Human Services . . . ." The President also issued a related statement on April 3 that decries "wartime profiteering."
Although the use of the Defense Production Act in directing production during the ongoing COVID-19 crisis may be novel in its nature or scale, Fortune reports that the Act is used "routinely" to prioritize contracts relating to military procurements and in response to natural disasters. Other past uses also are mentioned in that Fortune article. None of the President's actions to date invoking the Act as to production by specific firms is in the form of an executive order. However, the President is afforded many powers under the Act, see 50 U.S.C. § 4554(a) (providing in relevant part that "the President may prescribe such regulations and issue such orders as the President may determine to be appropriate"), although they are subject to certain limitations (including, e.g., broad-based restrictions relating to "wage or price controls" and "chemical or biological weapons" under 50 U.S.C. § 4514).
Even without the issuance of enforceable presidential orders, however, those charged with manufacturing under the various presidential memoranda are (and in some cases, prior to presidential action, were) scrambling to make up for lost time. A report published over the weekend in The Washington Post describes the status of some of their efforts. CNBC's similar report is here. Time weighed in a few days earlier with its story. Finally, an earlier report from The New York Times offers historic details relevant at that time. Private industry has been stepping up in so many ways during the pandemic. With all the hullabaloo around the Defense Production Act, we all should know about and be proud of that.
As for the actual COVID-19 business operational effects of the powers afforded to the President under the Defense Production Act, they remain to be seen. My interest has been whetted, however, and I will be paying attention to future invocations of the Act not only in the COVID-19 crisis, but also in other contexts. My perception is that it is one of the lesser-known laws that can impact business in a significant ways if the full force of its provisions is employed. It is legislation--even 70 years out--that all of us business lawyers and law professors should be aware of.
Sunday, April 5, 2020
The tenuous link to business law is this…I was blessed to have a phenomenal first-year contracts professor. Over the years, one of my closest friends (also in that course) and I have reminded each other of the professor’s pearls of wisdom about contracts and life. “Life is a marathon, not a sprint,” he would assure us.
I would imagine that many of us feel in the midst of a marathon these days. As another week in these unusual times begins, I was thinking about a few of the lessons I’ve learned in distance running that were helping me to run the course we’re all on these days. First, the importance of paying attention to your breath (Joan Heminway has written about breath and mindfulness here). Second, if you just keep putting one foot in front of the other, you’ll eventually reach the destination/be done. Third, the need for pacing (likely the point my contracts prof was making). Fourth, you’ve always got one more mile in you than you think you have. Fifth, running with others pushes you to be your best and makes the miles fly by. While this is harder to do at the moment, I know that staying connected (via zoom, Skype, Strava etc.) to encouraging, positive people is especially important in these challenging times.
While Haskell went to the 2020 Olympic men’s marathon trials (here), I only read about them in his post and in Runners World. I first learned about the surprise, unsponsored, second-place finisher, Jake Riley, from the article Jake Riley and His Coach Were ‘Broken.’ Now, They’re Going to the Olympics (here). Amazingly, over the past three years, Riley has apparently dealt with a serious bacterial infection, major Achilles surgery, and a divorce. The article ends by quoting his coach as saying “‘There’s nothing better than seeing a broken man come back,’ Troop said. ‘And when they come back, they’ve got nothing to lose.’” Of course, Riley will now have to wait an additional year for his Olympic run. His story of grit, perseverance, and hope really inspired me. As another week in these unusual times begins, I hope that it might offer inspiration to some of you too.
[Revision: actually, I think my last running post is here, but Haskell has still written two since I wrote it!]
Saturday, April 4, 2020
One of the things that’s fascinated me about this strange time we’re living in is how it’s altered our buying habits.
For sure, some alterations were pretty predictable: more demand for work-from-home tools, computers, sanitizers, and protective gear (certainly, some people seem to have made very accurate forecasts.)
But some of the reports are less intuitive. For example, lots of people have turned to home baking – either because they have more time or because they don’t/can’t buy in stores – leading to a yeast shortage. (Except, as this Twitterer explains, you can always make your own, a philosophy that many have apparently extended to eggs).
You’ve all heard about the toilet paper shortages, but I appreciated this explanation for them.
And then, we have handy lists of the things that even in times of desperation, no one seems to want.
Thursday, April 2, 2020
Due to the uncertain length of the COVID-19 global pandemic, and out of an abundance of caution, we have decided to cancel the Transactional Law and Skills Education Conference currently scheduled for June 5-6, 2020.
We will re-schedule the Conference and revisit our theme – “Hindsight, Insight, and Foresight: Transactional Law and Skills Education in the 2020s” – when it is appropriate and safe to do so.
If you have already registered for the Conference, we will refund your money. If you have submitted a proposal or a nomination for the Tina L. Stark Award for Teaching Excellence, you will have the opportunity to resubmit your proposal or nomination when we establish the new Conference date.
If you have already reserved a room at the Emory Conference Center Hotel please call them at 800.933.6679 to cancel your reservation. For other Conference-related questions, please contact our Conference Coordinator, Kelli Pittman at email@example.com.
During this period of “social distancing,” we are proud to be members of a community of transactional law and skills educators dedicated to excellence. We look forward to re-scheduling the Conference and welcoming you back to Emory.
Wednesday, April 1, 2020
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It's been three weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally: 857,487; Deaths: 42,107.
"federal prosecutors have learned that they have better and more effective weapons than Rule 10b-5": "(1) the STOCK Act; (2) wire fraud (18 U.S.C. §1343); (3) conversion of governmental property (18 U.S.C. §641); and (4) a new securities fraud charge (18 U.S.C. §1348)" #corpgov https://t.co/Ji7Ge6dOWg— Stefan Padfield (@ProfPadfield) March 31, 2020
"Months before the Coronavirus, Georgetown law professor @ChrisBrummerDr warns of the fragility of non-bank mortgage loans and servicers and that taxpayer bailouts would be needed if the economy slowed." https://t.co/vE7sqszB44 #corpgov #shadowbanking— Stefan Padfield (@ProfPadfield) March 31, 2020
"The Court's use of the concept of public rights in Oil States has profound implications not only for patent law but also for ... bankruptcy, federal regulation of employment contracts and other commerce ...." 95 Notre Dame L. Rev. 1281 #corpgov— Stefan Padfield (@ProfPadfield) March 29, 2020
"some of the nation’s largest brokers are warning that transferring shares from a brokerage account into record name to be eligible to nominate a director may take a number of weeks" https://t.co/Y2eR8ZdPTG— Stefan Padfield (@ProfPadfield) March 31, 2020
"The states’ positions as to the market exception can be grouped in four general categories."; "States use widely varying criteria in determining whether a corporation is to be deemed public" https://t.co/phCKMqRckj— Stefan Padfield (@ProfPadfield) March 30, 2020
This post comes to us from friend-of-the BLPB Nadia B. Ahmad. Many thanks to her for this contribution. Her post follows nicely on the spirit of my "Teaching through the Pandemic" posts, which can be found here and here. My favorite part may be the bit on "Troubleshooting Life and Expectations."
As I begin this post on Sunday, March 29, 2020, there are currently 674,466 confirmed cases of coronavirus (COVID-19). Immunology and infectious disease researchers are working round the clock with their heads down for a cure and a vaccine, but we have nothing in the near term for an end to this situation. The markets have been a tumbling since January 2020 and spiraling downward since March 2020. Even Brexit and the deceleration of China's economy could not have expected this downturn in the market.
On March 12, 2020, I taught my last in person Business Organizations class for the semester. For the first half of the class, I had the students complete a practice essay in Canvas on the business judgment rule. The remainder of the time, I had them join via WebEx on their laptops. In that class, approximately 40 percent of the students were able to login to WebEx via Canvas for a lecture of derivative litigation. The rest could join with a direct link. During that triage session while they were in the room, I learned how to troubleshoot connectivity issues with the help of my students. For the past two weeks of online learning, I have had 100 percent attendance in both my classes and student engagement is up as well.
I wanted to share some insights related to teaching via WebEx as well as online teaching generally.
Learning WebEx’s Virtual Classroom
Spending some time on YouTube helped me with figuring out how the platform works. The university also offered some training sessions, but I found YouTube video easier to help me.
Periodically, WebEx may be down altogether because of the load on its system, you can check WebEx’s global status here.
For troubleshooting WebEx audio issues, visit here.
For WebEx video support, visit here.
Some students may have a weak Wifi connection. To alleviate this issue, I also provide the dial-in number. Only one or two students have this issue, but it is also a reliable backup if students cannot connect via WebEx. To locate the dial-in number for your WebEx meeting, visit here.
Checking Hardware and Connectivity (WiFi and Audio)
Some issues with WebEx meeting will be unrelated to the platform itself. While your computer’s existing audio and video functionalities may work, I have found that using a microphone enhances the audio experience. I used Professor Josh Blackman recommendation of the Blue Snowball USB microphone.
Check your high speed internet connection here. You should be running at around 50 mbps. If your internet connection is slower, consider an upgrade in speed.
Troubleshooting Life and Expectations
As an introvert, I welcome this scaling back on social interactions on some levels. At the same time, I miss my students. I have chosen to do hybrid asynchronous/synchronous sessions. I record part of my lectures, but also have live class sessions as well. I was bit nervous to record the classes until I actually did do it and later read a post by Professor William Fischer (Harvard) on Emergency Online Pedagogy. Recording classes is considerate of not only students, but the server. Fischer writes:
First, the quality of a pre-recorded lecture is likely to be substantially higher than that of lecture delivered live. Pre-recorded lectures can be constructed in segments — which can then either be posted online separately (like this) or stitched together and posted online as a single unit. If you are not happy with one segment, you can discard and replace it. Equally important, it is much easier to integrate graphics and audiovisual material in a pre-recorded lecture. (Some techniques for doing this will be discussed shortly.) Last but not least, pre-recorded lectures can be edited.
Having used both formats, I am now strongly in favor of pre-recorded rather than live lectures. Feedback from my students over several years makes clear that they share this preference. My lectures are significantly tighter and clearer when I record them in advance. You may think that you can produce an elegant lecture in “one take,” and perhaps you are right — but I confess that I thought so as well until I watched a recording of one of my unedited presentations.
The second advantage of a pre-recorded lecture is that it is not vulnerable to a major technological threat posed by the sudden and massive shift to online education prompted by the pandemic. … Betting a class on the availability of Zoom [or WebEx] at a particular time is thus risky. By contrast, a pre-recorded lecture can be uploaded to the Internet at any time. In addition, students need not “stream” it, but instead can download it to their computers and then watch it at their convenience. This delivery method is far less vulnerable to technological overload. In addition, the larger the number of teachers who rely on pre-recorded lectures, the smaller will be the aggregate burden imposed on Zoom [and other platforms] and thus the greater the likelihood that it will be available when we need it.
Part of wanting to record a portion of the lectures is also a practical matter for me. I have three kids (ages 2.5, 6, and 9) and my partner is a health care worker and is still working. At any rate, I look forward to welcoming week #4 of online learning and will share tips on integrating current events into discussion on business organizations, the markets, and derivative litigation.
Tuesday, March 31, 2020
The Social Enterprise Alliance (SEA) previously defined "social enterprise" as businesses that (1) Directly address social need; (2) Commercial activity [not donations] drives revenue; and (3) Common good is the primary purpose. SEA's definition has evolved to be more inclusive, now recognizing three different models based on -- (1) opportunity employment, (2) transformative products/services, or (3) donations. While the first definition could be criticized for being too narrow (Ben & Jerry's would not qualify because their product does not directly address a "social need"), SEA's new definition is likely too broad because it seems to cover all donating businesses.
Personally, I am most fond of social enterprises that produce products/services that lead directly to human flourishing.
For Lent, I gave up Facebook/Twitter/Instagram. While these products have their uses, on the whole they tend distract me from what is truly important. Perhaps social media has improved since the advent of Covid-19, and I admit to feeling somewhat out of the loop. But I also feel much more at peace, and may not return to those forms of social media after Easter, or, if I do, I hope it will be on a much more limited basis.
In contrast, Strava is one form of social media that has been a constant positive in my life. Strava, for those who don't know, is a free app to log all kinds of physical exercise. I credit Strava (and my friends on Strava) with keeping me accountable to exercise 4+ times a week for the past 4+ years. The community on Strava is unlike any social media I have seen or heard of elsewhere. People are relentlessly encouraging, and the focus is on fitness not controversy. Also, as a Strava friend recently posted -- "love Strava because it’s the only social media platform with almost 100% factually accurate information and statistics. (Besides minor GPS errors and the occasional ‘wrong activity type’)." Strava has truly created a product that likely improves the lives of nearly all of its users.
Anyway, no sponsorship for me for this post, but I do hope to see more readers on Strava!
Monday, March 30, 2020
COVID-19's effects on financings and M&A, as well as contracts more generally (as covered here, here, and here among many other places), the rapid adoption of the Coronavirus Act, Relief, and Economic Security Act, a/k/a the “CARES Act” (key terms summarized briefly here and elsewhere), and the President's invocation of the Defense Production Act have me feeling like I am drinking business law water out of a fire hose this past week. Anyone else feeling that way? Whew!
I am still sorting through it all. I am sure that I will have more to say on some of this as time passes. However, earlier today, in the process of reading online resources and watching and listening to others talk about the many legal aspects of the current pandemic, I came across this YouTube video, done by one of my former students, a local attorney who works with entrepreneurs, start-ups, and small businesses.
I have not fact-checked this video. And he jumps in to correct himself. But what I like about it is that it represents unvarnished, even humorous, boots-on-the-ground legal public service. He does not want businesses in the local community to miss out or waste time/money shooting in the dark--or in the wrong direction.
Sometimes, our students do great things after they leave the hallowed halls of law school. Many times, those good deeds go unrecognized. Haseeb has always been passionate. It makes me so happy to see him using his passion to help the local business community. I want to offer a "shout out" to him here. (And his dog, Simon, is the cutest! ♥)
Here is the latest on this summer's annual conference for the Southeastern Association of Law Schools (SEALS), scheduled for July 30 - August 5 at the Marriott Fort Lauderdale, from SEALS Executive Director Russ Weaver:
Dear Deans, Program Committee members and SEALS friends,
First, and foremost, I hope that everyone is staying well and adjusting to the new normal in legal education (with all classes being taught online).
Second, I want to let you know that SEALS’ Board of Trustees is meeting regularly to assess how to move forward on this summer’s meeting. At this point, the situation is uncertain and no decision has been made. However, the Board is meeting regularly and constantly assessing/reassessing the situation. As the situation becomes clearer, we will be making further announcements.
Third, I also want to let you know that, in order to ensure that no attendee is placed in a difficult situation, SEALS has moved the registration cancellation date back to July 1st. In other words, you can cancel your registration and receive a full refund through July 1st. Hopefully, by that time, we will be able to more accurately assess whether our meeting will go forward and in what form.
In the meantime, please stay safe!
Russell L. Weaver
Professor of Law & Distinguished University Scholar
University of Louisville
Louis D. Brandeis School of Law
Louisville, KY 40292
PH: (502) 852-6559
FAX: (502) 852-0862
I currently serve as an officer of SEALS. Fee free to contact Russ, me, or any SEALS officer or board member if you have any questions.
Sunday, March 29, 2020
In a December 2018 post (here), I noted that “although esoteric, such issues as who has access to an account at the Fed are critical social policy choices with real world implications that merit broad-based public debate.”
This past week, a federal district court judge granted the Federal Reserve Bank of New York’s (FRBNY) motion to dismiss The Narrow Bank’s (TNB) complaint in TNB USA Inc. v. Federal Reserve Bank of New York (USDC SDNY) (here). In light of this recent opinion, I wanted to reiterate my invitation to BLPB readers to think about seemingly technical, arcane issues such as who gets an account at the Fed – a master account is essentially a bank account at a regional Federal Reserve Bank enabling access to the Federal Reserve Payments System – and how such decisions should be made. The importance of this critical policy issue is only set to increase. A few months ago, the Federal Reserve announced plans to develop FedNow Service (here).
TNB is a financial institution with an innovative business model. Professor Peter-Conti Brown has written about it (here). It’s model is essentially this: open an account at the Federal Reserve, deposit customer funds (financial institution customers), receive interest on the funds deposited at the Fed’s Interest on Excess Reserves Rate (“IOER rate”), keep a slice of the gains, and pay out the remainder to customers. The Federal Reserve is a risk-free counterparty, but it is not limited to paying the risk-free interest rate. So, TNB has a really clever business model. TNB’s Chairman & CEO, James McAndrews spent 28 years working in the Federal Reserve System (19 at the FRBNY). Its Board members also includes two highly respected finance professors: Gary Gorton at Yale University and Darrell Duffie at Stanford University.
TNB received a “temporary Certificate of Authority” from the Connecticut Department of Banking, contingent on several things, including “that the FRBNY would open a master account for TNB.” As the opinion explains, the FRBNY has not actually denied TNB’s application for a master account…though at least 18 months have passed since TNB applied for it! However, as the opinion notes, “the FRBNY’s delay is not TNB’s cause of action.” Hence, United States District Judge Andrew L. Carter, Jr. granted the FRBNY’s motion to dismiss, writing that “TNB lacks standing to pursue its claim, which is also constitutionally and prudentially unripe.”
The decision strikes me as technically correct, and it will be interesting to see TNB’s strategy from here. I’m not taking a position on whether TNB should/should not have a master account without additional research and thought. However, what I am taking a position on is the importance of greater public debate about the underlying policy questions surrounding who does/doesn’t get an account at the Fed.
In Regulating the Invisible: The Case of Over-the-Counter Derivatives (here), I noted that ICE US Trust LLC, an uninsured NY trust company clearing credit default swaps – controversial financial instruments that had just played a huge role in the financial crisis of 2007-08 – had been granted membership in the Federal Reserve System in 2009 (here). ICE Trust was essentially the predecessor of ICE Clear Credit, which essentially has the monopoly on CDS clearing today. Dodd-Frank’s Title VIII explicitly provides the Federal Reserve with the ability to provide accounts and services to clearinghouses designated as systemically important under that title. But prior to Dodd-Frank, I think that granting ICE Trust membership in the Federal Reserve System was a questionable decision.
The Fed obviously has its hands full at the moment with much more urgent issues. In the future, however, it should provide additional clarity about the granting of master accounts and the general timing of such decisions.
Saturday, March 28, 2020
We just reached the part of my M&A class where I teach The Williams Companies v. Energy Transfer Equity LP, 159 A.3d 264 (Del. 2017). It’s a difficult case – I try to explain the tax aspects which makes part of it a slog – but I do it anyway because I find both the facts and the opinions endlessly fascinating.
The basic set up is that Energy Transfer Equity (“ETE”) and The Williams Companies (“Williams”) had agreed that Williams would be acquired by ETE for a combination of cash and ETE partnership units. One condition of closing, however, was that ETE’s tax counsel at Latham would issue an opinion to the effect that the second leg of the deal should be non-taxable under IRS regulations. The Latham Tax Lawyer did not issue the opinion, ETE refused to close, and Williams sued, alleging that ETE breached the merger agreement by failing to use its best efforts to obtain the opinion. After a trial in Chancery, VC Glasscock ruled for ETE, and the Delaware Supreme Court affirmed, Strine dissenting.
So, the deal itself is complicated but it’s worth explaining. The actual transaction was to proceed in two steps. First, Williams merged into a shell company, ETC, and former Williams shareholders received 81% of ETC’s stock. ETE purchased the remaining 19% of ETC’s stock for $6.05 billion cash, which was immediately distributed to the former Williams shareholders, so now they would have cash plus an 81% interest in a company that was essentially just a reorganized version of Williams itself.
In the next step, ETC planned to sell all of the Williams assets to ETE, in exchange for ETE partnership units, leaving ETC a shell company whose only assets were ETE partnership units, 81% owned by the former Williams shareholders.
Originally, ETE’s tax counsel at Latham had opined that the transaction was not taxable, but that changed after the energy industry took a downturn. The deal suddenly became very unfavorable to ETE, and ETE was looking for an exit ramp.
At that point, ETE’s in-house tax lawyer, Whitehurst, purportedly noticed that the first leg of the transaction required ETE to pay $6.05 billion for a fixed amount of ETC stock – 19% - rather than a floating percent. This meant, thought Whitehurst, that ETE would now be massively overpaying for ETC stock given the industry downturn, and the overpayment would trigger IRS scrutiny. He conveyed his concerns to Latham, and a Latham Tax Lawyer (discreetly never identified by name in the Delaware Supreme Court opinion although he is named in Chancery) decided he could not issue the opinion, and the deal collapsed.
There’s a lot to talk about here, and first is the doubtfulness ETE’s claim that Whitehurst, experienced tax guy, suddenly just “noticed” that the deal called for a fixed rather than floating exchange rate, or that the Latham counsel just “noticed” the same.
It all starts with asking why a simple acquisition – ETE buys Williams shares in exchange for cash and equity interest in its partnership – was accomplished through such a convoluted set of maneuvers. And the reason for that is, Williams was a publicly traded corporation with a lot of mutual fund shareholders who could not hold ETE partnership units. Why? Because partnership units have a complex tax structure that mutual funds can’t handle. If ETE simply issued cash and partnership units in exchange for Williams shares, the mutual funds would have been forced to sell those units immediately, and they would have paid tax on that sale for a merger that would have otherwise had a tax-free equity component. And if Williams simply sold assets to ETE, then that sale itself would have been taxable.
So the whole point of the deal was to transfer ETE partnership units to a shell entity that was taxable as a corporation, and distribute stock in that entity to the former Williams shareholders, so that mutual funds could hold a financial interest in ETE without holding ETE directly and dealing with its tax structure, without making anything seem like an asset sale.
In other words, every single thing about this deal, down to its bones, was designed to avoid taxes.
I’m not saying that as a criticism, I’m saying that to highlight how carefully the tax aspects were integrated into the structure from the get-go, making it extremely unlikely that anyone would be “surprised” by any tax aspects of the deal without an intervening change in the law.
But there’s more.
Notice that in that first leg, Williams shareholders end up with 81% of ETC while ETE ends up with 19%. Those are very odd numbers; they suggest that someone is trying to avoid a regulatory cut-off at 80/20. And that seems to be the case; because as I understand it – and I am not a tax person so I genuinely welcome comments from anyone who understands the tax aspects better than I do – 80/20 is a common cut off needed to make deals nontaxable, according to this document drafted by – oh look, Latham.
Thus, to my uninformed eye, if it was previously doubtful, it now becomes actually incredible that Whitehurst suddenly noticed, several months in, that the deal called for a fixed rather than floating exchange rate. The fixed rate – 19% - seems to have been necessary to avoid taxes. If it was floating – if ETE acquired more of ETC as ETC’s value dropped – the deal would have been taxable in the first leg. So the fixed rate was a fundamental aspect of the deal’s design.
But that’s not actually the most interesting part of the opinion. No one believed Whitehurst was truly surprised by the fixed rather than floating structure; indeed, Glasscock was openly skeptical of Whitehurst’s testimony. But Glasscock’s view – and also the view of the Delaware Supreme Court – was that Whitehurst’s good faith or lack thereof was irrelevant. Yes, said the Delaware Supreme Court, ETE breached its covenant to use its best efforts to obtain the tax opinion, but Williams could only succeed if ETE’s breach was proximately related to the failure of the condition itself. And, whatever machinations it took to get there, the Latham Tax Lawyer acted in good faith when he said he could not issue the opinion. Therefore, ETE’s breach was not the cause of the failure. The Latham Tax Lawyer’s good faith functioned as an intervening event that broke the chain of causation from ETE’s lack of enthusiasm to the failure of the closing condition.
What’s critical, then, to both Delaware courts’ analyses, is their implicit belief that the Latham Tax Lawyer’s good faith was independent of his client’s behavior or obvious desire to escape a newly-disfavored deal.
Strine, dissenting, saw the matter differently. In his view, lawyers strive to please their clients, and their good faith on complex legal issues is therefore somewhat malleable. If ETE had used its best efforts to obtain the opinion – if it had not suggested to Latham that it wanted out of the deal, and pressured it in that direction – the Latham Tax Lawyer’s “good faith” may have led him to a different conclusion.
So what intrigues me about all of this are the fundamentally different views of law that are reflected in the majority and the dissenting opinions. The majority endorses classical legal theory: in its view, the law is a fixed point, perhaps reflected – like the shadows in the cave – in an attorney’s good faith, but still existing as a universal truth to which the lawyer aspires. As a result, despite any client bullying or cajoling, in the end, if the lawyer acts in good faith with all available facts, his or her position is immutable – it is a function of The Law itself.
Strine, however, appears to view the law itself as something either manipulable or at the very least unknowable, and thus any particular opinion is as subject to motivated reasoning as any other opinion might be. In true Legal Realist fashion, Strine’s view is that “law” is inherently indeterminate, constructed out of the policy preferences and incentives of the decisionmaker, which is why something as banal as a client’s preferred outcome will affect even the good faith judgments of the advocate.
So yeah, what I am saying is: Williams v. ETE is ultimately a battle about the nature of law itself, miniaturized in a dispute about commercially reasonable efforts to obtain a tax opinion.
Friday, March 27, 2020
Although this is a little off-brand for the BLPB, I thought readers might appreciate a puppy break. This is Lucky, the newest addition to the family.
She's excellent at giving me so much to worry about that I stop thinking about the pandemic! But that does not mean that stuff stops happening!
Notably, FINRA has a rule proposal out to alter its exiting suitability standard in light of the SEC's new Regulation Best Interest. FINRA summarized the proposal as doing two things:
- amend the FINRA and CAB suitability rules to state that the rules do not apply to recommendations subject to Regulation Best Interest (“Reg BI”), and to remove the element of control from the quantitative suitability obligation; and
- conform the rules governing non-cash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and non-cash compensation.
Because Reg BI so closely resembles the FINRA Suitability Rule, firms may not have to do too much to comply with the text of the rule. This leaves me wondering about guidance. FINRA has many notices to members and other explanations available to give context to the suitability rule. With regulation moving from the self-regulator to the regulator, will the guidance move as well and will it have the same force? This may be unknowable because so many customer issues get resolved in arbitrations without explained decisions.
What will happen in the future when FINRA has to manage compliance or enforcement for activity covered by Reg BI? In the past, FINRA could simply determine what its own rules meant. Now, new issues may need to be addressed by the SEC instead. FINRA may still simply opt to apply Rule 2110 for conduct it would have deemed over the line under the suitability standard. Essentially, it's a catch-all for requiring all members to "observe high standards of commercial honor and just and equitable principles of trade."
Regulation Best Interest is now set to go into effect this July. Whether the date will get bumped back remains uncertain. Financial Planning has reported that the SEC is now mulling whether to extend the deadline. My bet is that the SEC will probably extend the deadline event though there probably isn't much of a need to because it didn't seem as though Reg BI actually required any major changes to most firms' business practices.
Wednesday, March 25, 2020
If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).
It's been two weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally: 417,966; Deaths: 18,615.
"As of this week, we estimate that there are just under 150 significant M&A transactions ... waiting to close .... corporate lawyers everywhere are spending their shelter-in-place hours scouring the terms of these deals in a frenzied search for an escape hatch" #corpgov https://t.co/EA3Zzg6F0O— Stefan Padfield (@ProfPadfield) March 19, 2020
BlackRock: "Key steps towards increased transparency include 1) moving from annual to quarterly voting disclosure, 2) prompt disclosure around key votes including an explanation of our voting decisions, and 3) enhanced disclosure of our company engagements." https://t.co/HnULcurK6z— Stefan Padfield (@ProfPadfield) March 20, 2020
"The more modern corporate social responsibility scholarship ... is dominated by Panglossians who believe that moral choices have essentially no economic cost ...." 41 Cardozo L. Rev. 1081 #corpgov— Stefan Padfield (@ProfPadfield) March 22, 2020
There are many places (including faculty meetings) where decision-making goes: (1) it's a good idea; (2) let's do it -- w/o ever asking what we will do less of in order to shift resources (assuming no new tech/synergy). Then we act surprised when some valued thing deteriorates.— Stefan Padfield (@ProfPadfield) March 22, 2020
"Awesemo will stream an NBA 2K game each night at 8pm/et between two computer controlled teams and FanDuel is giving users a free Single Game DFS contest to play alongside it. Boom: The ability to watch a game and follow your DFS lineup during it." https://t.co/oIeskPjZcS #degen— Stefan Padfield (@ProfPadfield) March 22, 2020
I am taking a free online course from Coursera and Yale University on the Science of Well-Being. The course is taught by Professor Laurie Santos.
I may blog about the course at a later date. I am taking the course both for the content and for online teaching strategies.
Tuesday, March 24, 2020
Like so many law schools, we're navigating our way to online and other remote teaching and learning in a rapid and unexpected way. We started classes yesterday, and it's gone fairly well. Our faculty has worked hard, and our students have been incredibly resilient in the face this adversity we all, unfortunately, share. It does, though, impact people in many different ways.
Some people face additional health risks, financial challenges, childcare problems, technology limitations, learning disabilities, and more, and I have been so impressed with the strength and composure I have seen in our community. I suspect it's that way a lot of places, and I hope so, but it has been remarkable to see.
The Harvard Business Review posted a piece yesterday that framed this whole COVID-19 experience in a way I had not considered. The piece is titled, That Discomfort You’re Feeling Is Grief. I would not have framed it the way, but I think it's an important perspective. The whole piece is worth a read, but here are some important points worth considering:
Anticipatory grief is the mind going to the future and imagining the worst. To calm yourself, you want to come into the present. This will be familiar advice to anyone who has meditated or practiced mindfulness but people are always surprised at how prosaic this can be. You can name five things in the room. There’s a computer, a chair, a picture of the dog, an old rug and a coffee mug. It’s that simple. Breathe. Realize that in the present moment, nothing you’ve anticipated has happened. In this moment, you’re okay. . . . .
You can also think about how to let go of what you can’t control. What your neighbor is doing is out of your control. What is in your control is staying six feet away from them and washing your hands. Focus on that.
Finally, it’s a good time to stock up on compassion. Everyone will have different levels of fear and grief and it manifests in different ways. A coworker got very snippy with me the other day and I thought, That’s not like this person; that’s how they’re dealing with this. I’m seeing their fear and anxiety. So be patient. Think about who someone usually is and not who they seem to be in this moment.
This all makes sense to me, and it is a helpful way to think about things when everything feels a little off. And right now, that seems to be often. Another thing I have tried to do is find some routine and ways to share with one another. We have been having family dinners and family movie night most nights. And we have been reconnecting with friends around the country via phone calls, but more often on Zoom. Sharing some time with friends works remarkably well, at least now that we lack other options interaction.
In the interest of sharing, here are a few recommendations. As to movies and music, if periodic coarse language, drug references, etc., are not for you, my recommendations may not be for you. So in closing, I will share some (mostly new) songs you may not have heard (and I think you should). Be safe, be well, and be good to each other.
1. I think I'm OKAY, Machine Gun Kelly, et al., -- seems about right.
2. how will i rest in peace if i'm buried by a highway?, KennyHoopla (for old guys like me, there's a modern edge with an old techno, maybe New Order, feel)
3. Hit the back, King Princess (sultry, smooth, with a 70s dance vibe, not too sappy).
4. Celoso, Lele Pons (chill Latin dance that's upbeat yet goes well with a cocktail)
5. Don't You (Forget About Me), beabadoobee (Okay, you've probably heard this one, but not this version. Like I said, I'm Gen X).
I am publishing this call for papers below with permission from the editor.
In 2018, I published with the Virginia Sports & Entertainment Law Journal (out of UVA), and I think it is fair to say that they are a leader in this specialty area.
My name is Blake Steinberg and I am the current Editor-in-Chief of the Virginia Sports & Entertainment Law Journal at UVA Law. I am reaching out to you because you have published with our Journal in the past. We are currently looking for submissions, and would be glad to review any piece that you hope to publish.
Although we received a large number of student notes this year, our Journal has received fewer pieces from professors and practitioners than we would like. If you are a professor or practitioner who focuses on legal issues arising in the sports or entertainment industries, we would be especially interested in reviewing a submission from you.
In the past, published pieces have addressed topics such as video game licensing, basketball arena and team owners’ tort liability for spectator injuries, negotiations over cell phone ringtone revenue, and copyright law's treatment of entertainers as compared to its treatment of other types of authors.
To submit a piece, please send an email to me at firstname.lastname@example.org, with a Word document version of your submission along with your resume. If you know of anyone else who might be interested in publishing with our Journal, feel free to forward this email to them as well.
Monday, March 23, 2020
I write today to share some Zoom connectivity tips that I have accumulated since my first post on this topic. I spent class time before (and personal time during) Spring Break, which concluded for us yesterday, testing Zoom connections with students--working with them to overcome barriers to clear Internet communications using Zoom. My collected tips, which I shared with my students yesterday, are pasted in below.
Some items on my tip list may not be applicable to you and your students. Most are mentioned elsewhere; and if you already have been teaching using Zoom for a week or more, you may well have already figured all this out in any case. Nevertheless, I thought it might be useful to share my "top five" here.
1. Close out of open files and applications before you join in on our class meeting. Allow your computer to focus its activity on our class exclusively.1
2. If you are sharing bandwidth in your household, ask your household members if they can schedule their usage around your class meetings. Internet speed issues can have a real effect on the performance of video conferencing software.2
3. Log in through the campus's Zoom page, [the url for that page was included here in the original]. It seems to work better than than logging in through the Zoom app directly. But each of us may want to try each way on our own to see if it makes a difference.3
4. Download the Zoom app for your phone. If your Internet connection fails, you may be able to join or re-join class from your phone, assuming your data plan can support that use.4
5. Remember that you can test your audio or video on Zoom by clicking on zoom-us in the tool bar and clicking on Audio or Video. You will see the test options there. Please run those tests before class!5
I also reminded my students to log into class about ten minutes early to best ensure that their links to the class meeting are as strong as possible once class begins.
Nothing in my tip list is Earth-shattering. But if you are troubleshooting Zoom connection issues with a student, perhaps one or more of these tips will help. Regardless, I hope that everyone settles into a productive, happy online teaching experience. If you are like me, you'll figure out a way to ensure that your students are getting what they need, one way or another.
Leave your own tips in the comments. They are appreciated. Footnotes are included below.
1 From the Zoom blog:
During a meeting, other applications have a way of intruding and asking for attention from your CPU or broadband connection. While downloading information through a broadband connection, the application doing the downloading is competing with Zoom. The same occurs when you use CPU-intensive applications: they steal precious ticks from your processor.
When streaming 30 frames per second, your camera is taking 30 pictures of you each and every second, then sending them to the processor with instructions to forward the images through Zoom. Zoom uses your processor to send the images to your network card, which transmits the data to its destination. This process requires the energy of your CPU. To engage in the smoothest possible meetings, close any applications you don’t need to use for the meeting itself. It’s that simple.
2 Zoom's recommended system requirements can be found here.
3 Our campus has a super webpage dedicated to Zoom with a list of linked support documents. Yours probably does, too.
4 Zoom has a webpage dedicated to information for mobile users.
5 Zoom offers a streamlined process for testing audio and video from the view screen at this webpage (which includes, among other things, a brief video).