Sunday, June 26, 2022
Abortion is obviously one of our most divisive political issues. Thus, when corporate leaders make decisions related to abortion laws, such as moving out of a pro-life state (see, e.g., CEO: Duolingo will move operations should Pennsylvania ban abortion), a specter of political bias is arguably raised. One normative question that then arises is whether such a decision is sufficiently conflict-prone to warrant enhanced scrutiny, as I have argued here. There is certainly a shareholder-wealth-maximization case to be made for moving out of a pro-life state -- specifically, the argument that high-value employees demand such action. But this determination should be supported by something more than trending Twitter comments or the personal biases of decision-makers. Corporate fiduciaries are required to consider all material information reasonably available, and where decision-making is sufficiently prone to conflicts of interest the accountability concerns of corporate governance should trump its protection of discretion.
As a perhaps related aside, one may compare the argument against state universities having official positions on whether the Constitution should be read as protecting abortion. As Prof. Leslie Johns noted in an e-mail she sent to the UCLA Chancellor following his related public statement asserting that Dobbs “is antithetical to the University of California's mission and values” (via The Volokh Conspiracy here):
As a faculty member in both the political science department and the Law School, I feel compelled to remind you that Americans (and even Californians) have diverse and complicated viewpoints on the issue of abortion. The legal issues involved in the recent US Supreme Court ruling cannot be simply reduced to a statement about restrictions on "women's reproductive rights."
Abortion is not a simple matter of access to health care. It is a complex moral and political question that involves balancing fundamental rights to life and physical autonomy. By denying this reality, you are asserting a political position. Yet your employment as a public employee explicitly prohibits you from using your office for political purposes. It is both inappropriate and illegal for you (and for me) to use our official capacity to make claims that specific abortion policies or constitutional interpretations are "antithetical to the University of California's mission and values."
Given UCLA's professed commitment to "diversity, equity, and inclusion," I respectfully ask you to carefully consider the implications of declaring that a conservative viewpoint is "antithetical to the University of California's mission and values."
Saturday, June 25, 2022
Last year, several BLPB posts focused on the GameStop market event (for example, here, here, here, here, and here). For BLPB readers with continuing interest in this topic, I wanted to flag that yesterday, a report prepared by the Majority Staff of the Committee on Financial Services of the U.S. House of Representatives was released: Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Legislative and Regulatory Reform. I look forward to reviewing the report in more detail!
Friday, June 24, 2022
Rethinking Insider Trading Compliance Policies in Light of the SEC's New "Shadow Trading" Theory of Insider Trading Liability
In August 2021, the SEC announced that it had charged Matthew Panuwat with insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934. Panuwat was the head of business development at Medivation, a mid-sized biopharmaceutical company when he learned that his company was set to be acquired by Pfizer at a significant premium.
If Panuwat had purchased Medivation stock in advance of the announcement of the acquisition, it is likely he would have been liable for insider trading under the classical theory. Liability for insider trading under the classical theory arises when a firm issuing stock, its employees, or its other agents strive to benefit from trading (or tipping others who then trade) that firm’s stock based on material nonpublic information. Here the insider (or constructive insider) violates a fiduciary duty to the counterparty to the transaction (the firm’s current or prospective shareholders) by not disclosing the information advantage drawn from the firm’s material nonpublic information in advance of the trade.
If Panuwat had purchased shares of Pfizer in advance of the announcement, then it is likely he would have been liable under the misappropriation theory. Liability for insider trading under the misappropriation theory arises when one misappropriates material nonpublic information and trades (or tips another who trades) on it without first disclosing the intent to trade to the information’s source. As the Supreme Court held in United States v. O’Hagan, 521 U.S. 642, 652 (1997), the “misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information” by duping them out of “the exclusive use of that information.”
But Panuwat did not trade in either Medivation or Pfizer. Instead, he purchased stock options in Incyte, another pharmaceutical company that was similar in size and market focus to Medivation. According to the SEC’s litigation release, “Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s stock price.” Panuwat’s gamble paid off. Incyte’s stock price increased 8% when Pfizer’s acquisition of Medivation was announced. Panuwat earned $107,066 from his trade.
Panuwat moved to dismiss the SEC’s insider trading charges, arguing that his trading in the shares of an unrelated third-party issuer did not violate any recognized theory of insider trading liability. While the district court acknowledged this was a case of first impression, it denied Panuwat’s motion and permitted the SEC to proceed with its first enforcement action under the "shadow trading" theory of insider trading liability.
The principal basis for the court’s decision seems to be that Panuwat’s trading arguably violated the misappropriation theory by breaching the broad terms of Medivation’s insider trading policy, which includes the following language:
During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. … For anyone to use such information to gain personal benefit is illegal.
To me, the most interesting question raised by the Panuwat case, and the problem of shadow trading more generally, is why would Medivation (or any company) adopt such a broadly worded insider trading policy? How did this broad proscription on employee trading benefit Medivation’s shareholders?
Medivation’s shareholders could not have been harmed by Panuawat’s trading. Such trading could not affect Medivation’s stock price, nor could it put the acquisition in jeopardy. So why is the blanket proscription against trading in “another publicly traded company” in the policy at all? The final sentence of the policy as quoted above suggests that the drafters were under the impression that such trading would be illegal under the securities laws. This may be true under the misappropriation theory, but only because Medivation chose to make it so by including the language in the policy. What if Medivation’s policy had instead provided something like the following language:
Because of your access to this information, you may be in a position to profit financially by trading in the Company’s securities, or the securities of its customers and suppliers. Such trading is strictly prohibited. Nothing in this policy should, however, be read as prohibiting your trading or dealing in any other issuers’ securities unless expressly restricted by the Company.
Under this policy, the SEC would have had no basis for the charge that Panuwat’s trading violated the misappropriation theory. In other words, it is entirely up to issuers whether they want to expose themselves and their employees to “shadow trading” liability. But if such exposure to liability does not benefit an issuer’s own shareholders, it can only hurt them (by needlessly exposing the company’s employees and the company itself to direct or derivative insider trading liability). So what business justification is there for issuers to include the broader language in their insider trading compliance policies? I hope readers will offer their thoughts in the comments below.
Thursday, June 23, 2022
In February 2021, Samuel Gregg argued (here) that: “To expect the rest of the world simply to accept whatever stakeholder-corporatist insiders have decided to be the new global consensus on any given topic seems disconcertedly utopian. It also increases the possibility of more populist backlashes on an international level.”
Yesterday, George Will published an op-ed in the Washington Post that appears to capture some more of this sentiment. You should go read the whole thing (here), but here is a brief excerpt:
The New York Times recently interviewed two advocates of ESG investing. One said, in effect, that only such investing fulfills fiduciary obligations because the welfare of those whose money is being used depends on “a planet that is livable.” Meaning: Politically enlightened ESG advocates know what unenlightened investors would want if they were as intelligent and virtuous as the advocates. The other ESG enthusiast the Times interviewed said “social justice investing” is “the deep integration of four areas: racial, gender, economic and climate justice.” And the “single-issue CEO” — the kind focused on maximizing shareholders’ value — is “not the way of the future.” This is often the progressives’ argument-ending declaration: Non-progressives are on the wrong side of history, so they can be disregarded until history discards them. The Times’s interviewer observed that “defining justice seems messy these days.” These days? Actually, justice has been a contested concept since Plato wrote. For today’s ESG advocates, however, the millennia-long debate is suddenly over: Justice is 2022 American progressivism, period.
Tuesday, June 21, 2022
Monday, June 20, 2022
Having just come back from the first in-person National Business Law Scholars Conference since 2019 (at The University of Oklahoma College of Law, pictured here), I have many thoughts swirling through my head. I always love that conference. The people, whom I dearly missed, are a big part of that. And Megan Wischmeier Shaner was an awesome planning committee host. But the ideas that were shared . . . . Wow. So many great research projects were shared by these wonderful law teachers and scholars! Over time, I hope to share many of them with you.
But for today, I want to focus on one thing that I heard in a few presentations at the conference: that the shareholder wealth maximization norm is and always has been the be-all and end-all of corporate purpose and board decision making. I am posting on that topic today not only because of my engagement with the conference, but also because the issue is implicated in Ann's post on Saturday (Bathrooms are About Stakeholders) and by Stefan's post yesterday (ESG & Communism?). I want to focus on a part of Stefan's post (and Stefan, you may that issue with my remarks here, based on your response in the comments to your post), but I promise to work in a reference to Ann's post, too, along the way.
Like Paul, I am somewhat troubled by the connections made in abstract for the article featured in Stefan's post—albeit perhaps for different reasons. I will read the article itself at some point to learn more about the issues relating to the Fed. And I agree with Stefan's commentator Paul that the Elizabeth Warren reference in the abstract is a bit of a stalking horse. I want to address here, then, only the asserted corroboration of an “incipient trend” offered as an aside at the end of the abstract excerpted in Stefan's post.
As readers may know from my published work and commentary on the BLPB, I do not accept that there is a legal duty to maximize shareholder wealth embedded in corporate law. (Articles have pointed out that the shareholder wealth maximization mantra has not existed consistently over the course of corporate history, but I will leave commentary on that literature for another day.) Regardless, to be sustainable, a corporation must make profit that inures to the benefit of shareholders, while also understanding and being responsive to the corporation's other shareholder commitments—commitments that may vary from corporation to corporation. But that does not mean that the board must maximize shareholder wealth, especially in each and every board decision. (Let's leave Revlon duties aside, if you would, for these purposes.). It also does not mean that shareholder wealth is properly ignored in corporate decision making, but in my experience, few firms actually completely ignore short-term and long-term effects on shareholder wealth in making decisions.
In essence, the standard shareholder wealth maximization trope would have us believe that the board's task is too simple, as I have noted in some of my work. A compliant, functional board engaged in corporate decision making first needs to understand as well as it can the firm's business and the markets in which the firm operates and then needs to assess in that context how the corporation should proceed. Some of the board's decisions may require it taking a stand on what have (regrettably, imv) become highly politicized social justice and commercial issues. It involves weighing and balancing. It is hard work. But that is the board's job. The board may want to inform itself of which political party likes what (especially as it relates to its various constituencies), but the board's decisions ultimately need to be made in good faith on the basis of what, after being fully informed in all material respects, they collectively believe to be in the best interest of the corporation (including its shareholders).
Some folks seem to ignore that reality. Instead, they assume (in many cases without adequate articulated foundation) that a board is catering to or rejecting, e.g., ESG initiatives based on a political viewpoint. I have more faith in corporate boards than that. I urge people to check those assumptions before making them (and to leave their own political preferences behind in doing so). Although I have seen a few dysfunctional boards in my 37 years as a lawyer and law professor, I have seen many more that are looking out for the long-term sustainability of the firm for the financial and other benefit of shareholders. That does require that employee interests, customer/client interests, and the interest of other stakeholders be understood and incorporated into the board’s decision making. Ann seems to agree with this last point when she writes in her post that: "despite occasional rhetoric to the contrary, it may very well be profit-maximizing to bow to employee demands; it doesn’t mean the CEO is pursuing a personal political agenda, it simply means that restive employees make a company difficult to run."
In concluding, I do not see an “incipient trend” or any “diametric opposition” of the kind noted in the abstract posted by Stefan. I also see board (and overall corporate management) support for ESG—although I admittedly am not a fan of looking at all the E, S, and G together—as the probable acknowledgement of an economic or financial reality in or applicable to those firms. Economies and markets are changing, and firms that do not respond to those changes one way or another will not survive. And that will not inure to the benefit of shareholders or other corporate stakeholders. The Business Roundtable Statement on the Purpose of the Corporation acknowledges the importance of corporations in our local, national, and global economies and, in light of that, articulates management’s recognition of the need to create sustainable economic and financial symbiosis through the firm's decision making: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
As scholars, we should recognize the realities of the boardroom and of firm management in general, which optimally involve complex, individualized decision-making matrices. Moreover, as we theorize about, and assess the policy objectives of, the laws we study and on which we comment, we should keep those realities in mind. Rather than assuming why boards (and C-suite officers, for that matter) act the way they do based on our theoretical and political viewpoints, we should interrogate their management decisions thoroughly, understanding and critiquing the actual bases for those decisions and, when possible, suggesting a "better way."
Thanks to the National Business Law Scholars Conference participants for their stimulating presentations and to Ann and Stefan for their posts. I hope that this post serves to illuminate my perspective on shareholder wealth maximization a bit. The conversation is important, even if a common understanding may not be forthcoming.
Sunday, June 19, 2022
Joel Slawotsky has published The Impact of Geo-Economic Rivalry on U.S. Economic Governance: Will the United States Incorporate Aspects of China's State-Centric Governance?, 16 Va. L. & Bus. Rev. 559 (2022). An excerpt:
China's corporate governance model emphasizes an extensive governmental role in the construction of economic markets. The paradigm consists of an economic-political syndicate of collaborative actors creating profit but whose critical core mission is to advance state objectives as defined by the ruling authority, the CCP. Economic interests thus serve political interests pursuant to a template of state direction and partnership with the private sector encompassing share ownership; industrial policies; governmental representatives embedded in the private sector; and discipline imposed for failing to comply with syndicate rules…. [S]ome in the U.S. political establishment are in favor of more governmental control to prevent corporate abuse …. To a remarkable degree, the dissatisfaction is already being manifested by attempts to engender greater government involvement in U.S. central bank policy by expanding the Federal Reserve's (“the Fed”) mandate to encompass a wider spectrum of goals to address social justice objectives…. Moreover, efforts to expand the Fed's mandate to encompass social goals should also be viewed in the context of proposals to embrace a model which modifies the existing U.S. capitalist framework. For example, Elizabeth Warren's Accountable Capitalism Act calls for employees of large firms to elect forty percent of all board members. Further corroborating this incipient trend is the fact that the CEOs of some of the largest U.S. businesses have declared their disagreement with the “shareholder-value” model, opining that a corporation's purpose is far more extensive and embraces many stakeholders. Such a view is diametrically opposite to long-standing U.S. economic governance. Another indication of a more state-centric economic model is the popularity of environmental, social, and governance (ESG).
Id. at 559, 578-79.
Saturday, June 18, 2022
Recently, the New York Times reported that Howard Schultz wants to rescind the open bathroom policy that Starbucks adopted in 2018. The backstory, as some may remember, is that two black men in Philadelphia were waiting to meet someone in a Starbucks and they sought to use the bathroom without buying anything. A store employee ended up calling the cops; they were arrested; protests ensued; and the company announced that anyone would be permitted to use Starbucks bathrooms going forward.
Now, however, Schultz is reconsidering that policy. Here’s what he said about it:
We serve 100 million people at Starbucks, and there is an issue of just safety in our stores in terms of people coming in who use our stores as a public bathroom, and we have to provide a safe environment for our people and our customers. And the mental health crisis in the country is severe, acute and getting worse.
Today, we went to a Starbucks community store in Anacostia, five miles from here, which is a community that unfortunately is emblematic of communities all across the country that are disenfranchised, left behind. And here’s Starbucks building a store for the community. Now, we had a round-table discussion with the manager and other people, and we were told that from 12 to 6 p.m. today — every day — there’s no one on the street. Why? Because people are afraid that their children are going to get shot — five miles from the White House.
I think we’ve got to provide better training for our people. We have to harden our stores and provide safety for our people. I don’t know if we can keep our bathrooms open.
Starbucks is trying to solve a problem and face a problem that is the government’s responsibility.
Let’s remember why the open-bathroom policy was adopted in the first place. I, for one, used Starbucks bathrooms for years without buying anything, well before 2018. That’s because a customer-only bathroom policy doesn’t actually mean that only customers can use the bathroom; it is, in practical effect, a policy of employee discretion, via selective enforcement. Some people who are not customers can use the bathroom, and some cannot. In general, we can surmise it will be black non-customers who are asked to leave; white non-customers will be permitted to go. Perhaps some degree of employee training may mitigate the racial impact of a closed-bathroom policy, but it’s unlikely to eliminate it entirely. So, Starbucks opened up its bathrooms.
Still, let’s assume Schultz is right, and the open-bathroom policy does, in fact, attract some people who are actual threats to Starbucks employees.
That means Starbucks has to balance stakeholder interests. Does it favor the employees and their safety? Or does it recognize the disparate racial impact of a closed-bathroom policy, and favor the public interest of keeping them available?
Right now, Starbucks is fighting off a union campaign; very likely, the profit-maximizing strategy is to favor the employees. This article, for example, reports safety as a key issue surrounding union organization.
This illustrates a couple of things. First, despite occasional rhetoric to the contrary, it may very well be profit-maximizing to bow to employee demands; it doesn’t mean the CEO is pursuing a personal political agenda, it simply means that restive employees make a company difficult to run. Second, as is often mentioned when stakeholder-governance is discussed, not all stakeholders have the same interests, and favoring some groups may wind up disfavoring others (which is one of the reasons shareholder primacists argue stakeholder governance is impractical; absent that profit-maximization decision rule, there’s no obvious way to choose among stakeholders).
But now, let’s complicate the narrative.
Is employee safety really Schultz’s motivation here? Starbucks does not have a janitorial staff; part of the job of being a barista is cleaning, including cleaning the bathrooms. I assume an open-bathroom policy means there is simply more work, and more unpleasant work, for the baristas. It wouldn’t at all surprise me if the union organizing campaign does not just include safety discussions, but also the question whether baristas should receive more pay, or more benefits, or whether stores should simply hire more staff, to deal with that extra work. Schultz, by closing the bathrooms, placates the employees on this point but also avoids additional expenditures by the company.
If that’s the real story here – and I don’t know that it is, I’m speculating – then what essentially is going on is that Starbucks’s original policy had a disparate racial impact, and remedying that problem is expensive. Schultz would rather just leave the racism in place; it’s cheaper.
That’s definitely a shareholder primacist approach, but it’s one where the company profits by externalizing the costs of doing business on to the public. And in particular, black members of the public.
Friday, June 17, 2022
Cunningham: "Twenty-Two National Professors of Law and Finance Renew Request that SEC Withdraw Climate Disclosure Proposal"
Today's press release from Prof. Lawrence Cunningham states in part:
Twenty-two of the nation’s leading professors of law and finance today wrote the Securities and Exchange Commission (SEC) to renew their doubts about the agency’s authority to adopt a new far-reaching climate disclosure regime and to urge an immediate withdrawal of the proposal. Initially writing in response to the SEC’s proposed rule requiring U.S. public companies to create and disclose extensive information on greenhouse gas emissions, the professors submitted a public letter in April questioning the authority of a federal financial regulator to collect climate-related information and identifying numerous reasons the proposal may face a challenge in federal courts. Since then, the debate has been joined by a number of other professors who have submitted letters supporting the SEC's authority. In the letter filed today, the professors weigh these arguments and explain their contrary conclusion.
The full comment letter can be found here. A relevant excerpt:
[T]he clear purpose (and certain effect) of these disclosures is to give third parties information for use in their campaigns to reduce corporate emissions, regardless of the effect on investors…. Imposing substantial costs on some companies to prepare for a “potential transition to a lower carbon economy” that Congress has not and may never mandate will harm investors who prioritize financial returns over social goals…. As Commissioner Peirce’s dissenting statement put it, the Proposal will put the SEC’s weight behind “an array of non-investor stakeholders” demanding changes in company operations. We believe, however, that the SEC and the courts can and should consider predictable consequences when deciding whether the Proposal will protect investors and whether it involves a “major question” that Congress should decide. Only by ignoring the long and contentious history of debates over the appropriate policy response to climate change could one conclude that the Proposal is a mere “business as usual” tweak to the disclosure system.
UPDATED: Another worthwhile excerpt:
An analysis of the SEC’s authority to adopt the Proposal must grapple with the substantial differences between it and the 2010 Guidance. Here we find helpful a framework set out in the Coates Letter, which distinguishes disclosures about the impact of climate on a company with disclosures about the impact of a company on the climate. This is a simple rubric for separating disclosures focused on investor protection from those focused on social goals. The Proposal manifestly requires the second type of disclosure. A core element of the Proposal, one highlighted in the SEC’s Fact Sheet accompanying the Proposal, is disclosure of greenhouse gas (“GHG”) emissions. This is a quintessential measure of a company’s contribution to climate change. It is not a measure of the impact of climate change on the company.
On the June 16, 2022, episode of the Capital Record podcast, David Bahnsen and Oren Cass have a lively and stimulating conversation about the social utility of private equity. You can find the episode here. Below is a brief description.
David is joined once again by Oren Cass of American Compass, this time to discuss the state of American financial markets. The two have a congenial conversation about private equity and venture capital, what is going wrong with the two, and what the solutions may be. There is more disagreement than agreement, but there is a mutual and sincere effort to identify issues and present thoughtful remedies. Whatever your view may be on what is right or wrong in the evolution of financial markets, you’ll find this robust discussion thoughtful, provocative, and engaging.
Wednesday, June 15, 2022
In December 2018, in one of my earliest posts on the BLPB, I shared “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.” And I’ve continued to highlight this issue with posts such as “Master Accounts at the Fed: An Arcane But Highly Important Issue” and “Professor Hill on Bank Access to Federal Reserve Accounts and Payment Systems.” And I’m going to continue to do so today and in the future. It's just that important.
So today, I want to highlight that Custodia Bank, Inc. recently filed a lawsuit against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City. Custodia alleges that the defendants have unlawfully delayed – for more than 19 months now – processing its application for a Fed master account. A few related news stories are: here, here, and here. Recall that TNB USA Inc. sued the Federal Reserve Bank of New York for related reasons (here), but this lawsuit was dismissed. I’ll be sure to keep BLPB readers posted regarding what happens in Custodia’s case.
Monday, June 13, 2022
In a post last month, I mentioned my recently published article on teaching change leadership in law schools. That article, Change Leadership and the Law School Curriculum, 62 Santa Clara L. Rev. 43 (2022), offers some ideas about preparing our students for leading change. The SSRN abstract follows.
Lawyers, as inherent and frequent leaders in professional, community, and personal environments, have a greater-than-average need for proficiency in change leadership. In these many settings, lawyers are charged with promoting, making, and addressing change. For example, one commentator observes that, “as stewards of the family justice system and leaders of change, family law attorneys have an ongoing responsibility to foster continuous system improvement.” Change is part of the fabric of lawyering, writ large. Change leadership, whether voluntarily assumed or involuntarily shouldered, is inherent in the lawyering task. Yet, change leadership—well known as a focus for attention in management settings and related academic literature—is rarely called out for individual or focused attention in the traditional law school curriculum. This article presents a brief argument for the intentional and instrumental teaching of change leadership to law students.
Many of our students already have been in or are assuming leadership roles. Others are leading from where they stand. And, as the abstract indicates, all will likely find themselves leading--in and outside the profession--at a later date.
Moreover, the world has been in, and continues to be in, a state of seemingly constant evolution. Some of that evolution can be catalyzed or channeled by lawyers who have a compelling vision for the future. Legal training can help foster that kind of vision.
As we all know, however, merely having a good idea is not enough. The process of change-making can be critical to its success. Change leadership can play an important role, and we can expose students to successful change leadership models while they are in law school. That's what this article advocates. I am interested in your reactions . . . .
Friday, June 10, 2022
The battle for Spirit Airlines is fascinating. Frontier offered to buy Spirit at a price of roughly $22 per share, payable mostly in Frontier stock. Then JetBlue swooped in with a topping bid of $33 per share in cash. Spirit's board maintained its preference for Frontier's bid, and Glass-Lewis recommended in favor of Frontier, but ISS recommended against. ISS's argument was, in part, that if shareholders liked the sector, they could take JetBlue's cash and reinvest it.
Spirit's argument was that the combination with Frontier not only stood a greater chance of surviving antitrust review, but there would be substantial operating synergies such that the combined entity would be expected to outperform the sector in the long term.
There was some interesting jousting over the reverse break fees if DoJ refused either combination - including Jet Blue's highly unusual offer to pay part of the break fee in cash as a special dividend to Spirit shareholders as soon as they voted for a deal between Spirit and JetBlue (I mean, it's kind of complicated given the numbers floating around, JetBlue offered $33, then lowered it to $30 when it made a tender offer for Spirit, and then added back $1.50 as a prepay on the break fee, which means one has to query whether the current JetBlue structure counts as vote-buying) - but ultimately, leaving aside antitrust risk, the fundamental question to shareholders is whether they can reinvest the extra cash offered by JetBlue (including potentially in the Jet Blue/Spirit combination itself) more profitably than whatever long term appreciation in the stock price they could expect from a combined Frontier/Spirit entity.
Which is why this column in the Wall Street Journal stood out for me:
The bidding war over Spirit Airlines shows why “stakeholder capitalism” is a hard sell for investors.
On Wednesday, the U.S. carrier postponed a shareholder meeting scheduled for Friday that would have included a vote on the acquisition bid made by its competitor Frontier Airlines. Spirit’s board of directors retains a strong preference for this merger, which seems like a perfect cultural fit, over a rival one proposed by JetBlue Airways. But the board’s latest move betrays hesitation that shareholders might not put the same value on non-pecuniary factors.
…[S]haring DNA is precisely what could make a Spirit-Frontier combination successful. Both carriers’ networks are similar and complementary: Only in 2% of routes did they compete fiercely for market share in 2021, a data analysis shows. Conversely, JetBlue’s higher-cost model is a harder fit.
Spirit shareholders might still get their cake and eat it too if the company wrangles more concessions out of Frontier before the rescheduled June 30 vote. If not, they face a dilemma between more money in the short term and a stake in a merged company that could, speculatively, offer higher longer-term returns.
The situation illuminates two distinct ways of understanding capitalism. First is the standard “shareholder theory” popularized by Milton Friedman, which gives primacy to measurable investment returns and laments the “agency problem” of executives serving other priorities. The second, sees professional managers wresting control from shareholders—a phenomenon documented by business historian Alfred Chandler, among others, since at least the 1920s—as necessary for the survival of corporations. It links with the “stakeholder theory” in which firms should serve all involved parties.
Literally nowhere in Spirit’s pitch to investors does Spirit suggest that the Frontier transaction is anything but shareholder value-maximizing. Nothing in Spirit's argument has anything to do with the merger's effect on nonshareholder interests. In fact, Spirit’s position is not unlike the position of the Time board when it rejected Paramount’s bid in favor of a merger with Warner – and in that case, the Delaware Supreme Court famously gave the Time board leeway to pursue a long term strategic vision. So, you know, unless you believe the Delaware courts are stakeholderists now, the mere fact that corporate directors want to reconstitute the entity rather than cash out does not a stakeholder-merger make.
What does the columnist mean by "stakeholderism," then? Apparently, he means something like the idea that managing for the long term is, in fact, value-maximizing for shareholders, in part because the long-term view theoretically includes building relationships with, and thereby benefitting, other constituencies. That version of stakeholderism is often used to defend managerial control against shareholder interference (while staving off business regulation). The irony of this concept of "stakeholderism" is that it is often opposed by other stakeholderists, including stakeholderists who share a vision of long-term value creation as benefitting all parties, because they object to giving management that much discretion.
Professor Steve Bainbridge chimed in with a different definition of stakeholderism. He pointed out that the JetBlue flight attendants’ union opposes a merger with Spirit on the ground that it will cost jobs, while the union that represents both Frontier and Spirit favors a merger between those companies, and he concludes that a true stakeholder investor would follow the union recommendation. He predicts that shareholders are only motivated by profit and won’t pursue the union position, which he implicitly associates with the absence of shareholder wealth-maximization.
Notice, then, that Prof. Bainbridge's definition of stakeholderism is very different than the one offered in the Wall Street Journal. In his view, it's not about managerial control or long-term value maximization; it's about whether shareholders are willing to sacrifice profits in order to benefit nonshareholder constituencies. But whatever the unions' position, this is not really the choice that the shareholders in this instance are being asked to confront. I.e., this is not a salient part of the pitch to investors.
That said, it's possible the reason the union position is not part of the pitch to investors is because no one thinks investors would find the unions' preferences persuasive (or, worse, they think that shareholders would do the opposite of what unions want). But that's entirely consistent with the stakeholderism-as-profit-sacrificing theory, because profit-sacrificing stakeholderism is a movement for change; the whole point is that it functions as an objection to the way the current system operates. In a case like this, the argument often concludes there is an actual agency problem between the institutional investors who vote the shares, and the retail shareholders who they represent. If that’s right, the fact that the institutions who own Spirit Airlines – 70% of the stock - may vote for the JetBlue deal tells us very little. That’s precisely why so many academics argue that institutions should determine retail preferences before voting, and why the SEC wants greater disclosure from funds that market themselves as ESG. I mean, at this point I'd kind of be remiss if I didn't mention that Prof. Bainbridge just recently signed a letter arguing that institutional investors do not share the preferences of their own beneficiaries, and recommended that those beneficiaries be polled as to their true preferences, so he's familiar with this line of reasoning.
Now, to be fair, I share Prof. Bainbridge's view that, faced with a takeover bid at a premium that favors shareholders over everyone else, shareholders as a group are unlikely to reject it in order to benefit nonshareholder constituencies. That dynamic is, in fact, is why we're losing local news coverage in this country. But to give the stakeholder argument its due, if shareholders really did force companies to operate with a view to benefitting nonshareholder constituencies, consistently and across the board, we'd also see fewer rapacious takeover bids in the first place, because the acquirer would expect that its own shareholders would refuse to let it enact its rapacious wealth-maximizing plans.
Which means, there's not a whole lot in the Spirit battle that sheds light on the stakeholderism debate. This fight is more of a throwback to Paramount: as between the board and the shareholders, who gets to decide the future of the company, and the timeline for achieving it?
There have been number of recent BLPB posts representing a diversity of viewpoints concerning the SEC's proposed rule to "Enhance and Standardize Climate-Related Disclosures for Investors". For example, co-blogger Joan MacLeod Heminway recently posted on a comment letter drafted by Jill E. FIsch, George S. Georgiev, Donna Nagy, and Cynthia A. WIlliams (and signed by Joan and 24 others) that affirms the proposed rule is within the SEC's rulemaking authority. I have offered a couple posts raising concerns about the proposed rule from the standpoint of utility and legal authority (see here and here). One of the concerns I have raised is that the SEC's proposed disclosure regime may compel corporate speech in a manner that runs afoul of the First Amendment. SEC Commissioner Hester Pierce raised this same concern, and now Professor Sean J. Griffith has posted a new article, "What's 'Controversial' About ESG? A Theory of Compelled Commercial Speech under the First Amendment", which offers a more comprehensive treatment of this problem. Professor Griffith has also submitted a comment letter to the SEC raising this issue. Here's the abstract for Professor Griffith's article:
This Article uses the SEC’s recent foray into ESG to illuminate ambiguities in First Amendment doctrine. Situating mandatory disclosure regulations within the compelled commercial speech paradigm, it identifies the doctrinal hinge as “controversy.” Rules compelling commercial speech receive deferential judicial review provided they are purely factual and uncontroversial. The Article argues that this requirement operates as a pretext check, preventing regulators from exceeding the plausible limits of the consumer protection rationale.
Applied to securities regulation, the compelled commercial speech paradigm requires the SEC to justify disclosure mandates as a form of investor protection. The Article argues that investor protection must be conceived on a class basis—the interests of investors qua investors rather than focusing on the idiosyncratic preferences of individuals or groups of investors. Disclosure mandates that are uncontroversially motivated to protect investors are eligible for deferential judicial review. Disclosure mandates failing this test must survive a form of heightened scrutiny.
The SEC’s recently proposed climate disclosure rules fail to satisfy these requirements. Instead, the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation. Having created controversy, the proposed rules are ineligible for deferential judicial review. Instead, a form of heightened scrutiny applies, under which they will likely be invalidated. Much of the ESG agenda would suffer the same fate, as would a small number of existing regulations, such as shareholder proposals under Rule 14a-8. However, the vast majority of the SEC’s disclosure mandates, which aim at eliciting only financially relevant information, would survive.
Prior to joining academia, I served as a compliance officer for a Fortune 500 company and I continue to consult on compliance matters today. It's an ever changing field, which is why I'm glad so many students take my Compliance, Corporate Governance, and Sustainability course in the Fall. I tell them that if they do transactional or commercial litigation work, compliance issues will inevitably arise. Here are some examples:
- In M&A deals, someone must look at the target's bribery, money laundering, privacy, employment law, environmental, and other risks
- Companies have to complete several disclosures. How do you navigate the rules that conflict or overlap?
- What do institutional investors really care about? What's material when it relates to ESG issues?
- What training does the board need to ensure that they meet their fiduciary duties?
- How do you deal with cyberattacks and what are the legal and ethical issues related to paying ransomware?
- How do geopolitical factors affect the compliance program?
- Who can be liable for a compliance failure?
- What happens when people cut corners in a supply chain and how can that affect the company's legal risk?
- What does a Biden DOJ/SEC mean compared to the same offices under Trump?
- Who is your client when representing an organization with compliance failures?
- and so much more
I'm thrilled to be closing out the PLI Compliance and Ethics Essentials conference in New York with my co-panelist Ben Gruenstein of Cravath, Swaine, & Moore. It's no fun being the last set of presenters, but we do have the ethics credits, so please join us either in person or online on June 28th. Our areas of focus include:
- Risk assessment, program assessment, and attorney-client privilege
- Ethical obligations for lawyers and compliance officers
- Which compliance program communications can (and should) be privileged?
In addition to discussing the assigned issues, I also plan to arm the compliance officers with more information about the recent trend(?) of Caremark cases getting past the motion to dismiss stage and compliance lessons learned from the Elon Musk/Twitter/Tesla saga.
Here's the description of the conference, but again, even if you're not in compliance, you'll be a better transactional lawyer from learning this area of the law.
Compliance and ethics programs are critically important to the success of any organization. Effective programs allow organizations to identify and mitigate legal risks. With an increasingly tough enforcement environment, and greater demands for transparency and accountability, an effective compliance program is no longer just “nice-to-have.” It’s essential.
Whether you are new to the area or a seasoned compliance professional, PLI’s program will give you the tools you need to improve your organization’s compliance program. We will review the principal elements of compliance programs and discuss best practices and recent developments for each. Our distinguished faculty, drawn from major corporations, academia, law firms and the government, can help you improve your program, increase employee awareness and decrease legal risk. Compliance and Ethics Essentials 2022 is highly interactive and includes case studies, practical tools and real-time benchmarking.
What You Will Learn
- Designing and conducting effective compliance risk assessments that enhance your program
- Structuring your program for appropriate independence and authority
- The evolving role of the board
- ESG and your compliance program
- Using data analytics to improve your program
- Encouraging reporting and investigating allegations of wrongdoing
- Best practices in compliance codes, communications, training and tools
- Ethics for compliance professionals
Who Should Attend
If you are involved in any aspect of corporate compliance and ethics as in-house counsel, a compliance and ethics officer, human resources executive, outside counsel, or risk management consultant, this event should be on your annual calendar.
Special Feature: Special luncheon presentation with guest speaker
If you do come to the conference, I would love to grab a cup of coffee with you, so reach out.
June 10, 2022 in Compliance, Conferences, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Lawyering, Legislation, M&A, Marcia Narine Weldon | Permalink | Comments (0)
Wednesday, June 8, 2022
Elisabeth Haub School of Law at Pace University invites applications for a Visiting Professor for Spring 2023
The Elisabeth Haub School of Law at Pace University is currently seeking applicants for a Visiting Professor to teach during the Spring 2023 semester. We are particularly interested in applicants who can teach Constitutional Law, Corporations and other courses in the business law area.
All applicants should have excellent academic credentials as well as demonstrated skill and experience in teaching. The position is a temporary, non-tenure-track appointment.
Applicants should be willing and available to teach using in-person or hybrid formats, depending on changing circumstances and the needs of the particular classes.
Applications are encouraged from people of color, individuals of varied sexual and affectional orientations, individuals who are differently-abled, veterans of the armed forces or national service, and anyone whose background and experience will contribute to the diversity of the law school. Pace University is committed to achieving completely equal opportunity in all aspects of University life.
Please apply via https://careers.pace.edu/postings/22602. Applications will be considered on a rolling basis.
Pace University’s Elisabeth Haub School of Law offers J.D. degrees, Masters of Law degrees in both Environmental and International Law, and a series of joint degree programs including a Doctor of Juridical Science (SJD) in Environmental Law. The school, housed on the University’s campus in White Plains, NY, opened its doors in 1976 and has over 8,000 alumni around the world. The school maintains a unique philosophy and approach to legal education that strikes an important balance between practice and theory. For more information, visit http://law.pace.edu.
Please direct any questions via email to Senior Associate Dean for Academic Affairs and Law Operations, Professor Jill Gross, at email@example.com.
Tuesday, June 7, 2022
Comment Letter of Securities Law Scholars on the SEC’s Authority to Pursue Climate-Related Disclosure
This post alerts everyone to a comment letter, drafted by Jill Fisch, George Georgiev, Donna Nagy, and Cindy Williams (signed by the four of them and 26 other securities law scholars, including yours truly and Ann Lipton), affirming that the Securities and Exchange Commission’s recent proposal related to the enhancement and standardization of climate-related disclosures for investors is within its rulemaking authority. The letter was filed with the Commission yesterday and has been posted to SSRN. The SSRN abstract is included below.
This Comment Letter, signed by 30 securities law scholars, responds to the SEC’s request for comment on its March 2022 proposed rules for the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Proposal”). The letter focuses on a single question—whether the Proposal is within the SEC’s rulemaking authority—and answers this question in the affirmative.
The SEC’s authority for the Proposal is grounded in the text, legislative history, and judicial interpretation of the federal securities laws. The letter explains the objectives of federal regulation and demonstrates that the Proposal’s requirements are properly understood as core capital markets disclosure in the service of those objectives. The statutory framework requires the SEC to adjust and update the content of the federal securities disclosure regime in response to the evolution of the economy and markets, and, in recent decades, the SEC has done so to require disclosures on a variety of subjects from Y2K readiness, to cybersecurity, to human capital management, to the effects of the Covid-19 pandemic. Rules mandating climate-related disclosure fit with this pattern of iterative modernization. Such rules do not represent a foray into new and uncharted territory, since the SEC has a long history of requiring disclosure on environmental and climate-related topics dating back more than 50 years. Finally, the federal securities laws do not impose a materiality constraint on the SEC’s authority to promulgate climate-related disclosure requirements.
The Comment Letter therefore concludes that the SEC has the statutory authority to promulgate the Proposal, and that the climate-related disclosure rules under consideration are consistent with close to nine decades of regulatory practice at the federal level and with statutory authority dating back to 1933 that has been repeatedly reaffirmed by Congress and the courts.
There is more that has been, can, and will be said about the Commission's rulemaking proposal as a matter of process and substance. But I will leave that for another day. For now, we just wanted you to know about the filing of the letter and offer you an easy way to find it and review it.
Monday, June 6, 2022
I am excited to be promoting here an inventive and interesting paper, Total Return Meltdown: The Case for Treating Total Return Swaps as Disguised Secured Transactions, written by friend-of-the-BLPB Colin Marks (St. Mary's School of Law). The SSRN abstract follows.
Archegos Capital Management, at its height, had $20 billion in assets. But in the spring of 2021, in part through its use of total return swaps, Archegos sparked a $30 billion dollar sell-off that left many of the world’s largest banks footing the bill. Mitsubishi UFJ Group estimated a loss of $300 million; UBS, Switzerland’s biggest bank, lost $861 million; Morgan Stanley lost $911 million; Japan’s Nomura, lost $2.85 billion; but the biggest hit came to Credit Suisse Group AG which lost $5.5 billion. Archegos, itself lost $20 billion over two days. These losses were made possible due to the unique characteristics of total return swaps and Archegos’ formation as a family office, both of which permitted Archegos to skirt trading regulations and reporting requirements. Archegos essentially purchased beneficial ownership in large amounts of stocks, particularly ViacomCBS Inc. and Discovery Inc., on credit. Under Regulation T of the Federal Reserve Board, up to 50 percent of the purchase price of securities can be borrowed on margin. However, to avoid these rules, Archegos instead entered into total return swaps with the banks whereby the bank is the actual owner of the stock, but Archegos would bear the risk of loss should the price of the stock fall and reap the benefits if the stock were to go up or were to make a distribution. Archegos would still pay the transaction fees, but the device permitted Archegos to buy massive amounts of stock without having the initial margin requirements, thus making Archegos heavily leveraged. This article argues that the total return swap contracts are analogous to and should be re-characterized as what they really are – disguised secured transactions. Essentially the banks are lending money to enable the Archegoses of the world to buy stocks, and are simply retaining a security interest in the stocks. Such a re-characterization should place such transactions back into Regulation T and the margin limits. But re-characterization also offers another contract law approach that is more draconian. If the structure of the contract violates a regulation, then total return swaps could be declared void as against public policy. This raises the specter that a court could apply the doctrine of in pari delicto and leave the parties where they found them in any subsequent suits to recover outstanding debts.
I do not teach, research, or write in the secured transactions space, but this work engages corporate finance and contract law as well. (I am grateful that Colin, among others, has encouraged my forays into contract law research over the years.) I was privileged to have the opportunity to preview Colin's arguments and offer some feedback during his research and writing of this paper, which is forthcoming in the Pepperdine Law Review. I find his argument creative and intriguing. I think you may, too.
Saturday, June 4, 2022
Recently, I published a short piece for the Nashville Institute for Faith and Work (NIFW) about Business Ethics in a Pandemic.
As mentioned there, I have found teaching Business Ethics courses extremely challenging, but important. While law can be unclear, the boundaries of business ethics are even more vague.
Perhaps it is simply because one of my younger brothers is an English professor, but I have been increasingly drawn to using literature in the teaching of business ethics as a way to grapple with the lack of clarity.
So far, I have used the fiction and poetry of Derrick Bell, Wendell Berry, Octavia Butler, Anton Chekov, Ross Gay, Ursula Le Guin, Cormac McCarthy, Mary Oliver, Ranier Maria Rilke, May Sarton, George Saunders, and Leo Tolstoy. Admittedly, this is a bit of an odd mix, but I think each of these writers have something important to say, even if I do not use each of them every semester.
I remain open to other suggestions, and I plan to rotate in other authors as I continue to teach our business ethics course. (I also hope to write a few longer pedagogy articles in the law & literature and ethics & literature space).
(Photo of Bass Lake in Blowing Rock, NC, which is perhaps my favorite place to read).
Friday, June 3, 2022
I just posted Does Stakeholder Capitalism Have a (Viewpoint) Diversity Problem?, U. Puerto Rico Bus. L.J. (forthcoming) on SSRN (here). The abstract:
Does stakeholder capitalism have a viewpoint diversity problem? What follows constitutes an initial inquiry into that issue.
Following the Introduction, Part II provides an overview of the Free Enterprise Project’s (FEP’s) 2021 Investor Value Voter Guide, which focuses at least in part on both stakeholder capitalism and viewpoint diversity in a way that provides a good introduction to a perceived tension between the two. This part of the essay contains three sub-parts. Sub-parts A and B provide at least some support for connecting stakeholder capitalism (in all its forms) to partisanship as well as a lack of relevant viewpoint diversity. Sub-part C then unpacks specific proposals that the FEP is submitting and/or recommends supporting/opposing. This sub-part is further broken down into brief overviews of the FEP’s viewpoint diversity and stakeholder capitalism proposals.
Part III shifts attention to related research and commentary. This part includes four sub-parts (A-D). Sub-part A addresses the issue of stakeholder capitalism as greenwashing. Sub-part B addresses some of the possible problems caused by a lack of viewpoint diversity in stakeholder capitalism, including increasing societal divisions. Sub-part C then addresses the related issue of whether stakeholder capitalism is a partisan movement. Sub-part D proceeds to delve into some of the potential costs of stakeholder capitalism, including political backlash, increased litigation, loss of competitive advantage in the marketplace, and even potentially providing an on-ramp for some type of totalitarianism. Part IV provides concluding remarks.