Monday, July 4, 2022
Stefan's Independence Day post is far more erudite than mine. Kudos and thanks to him for the substantive legal content. This post covers more of a teaching point--one that I often think about in the background but want to being to the fore here.
I am focused in writing this on things like family reunions, local holiday festivities, grilling out, and fireworks. It has been a rocky road to the Fourth in these and other aspects this year. Overlapping causes can easily be identified. As if the continuing COVID-19 nightmare were not enough . . . .
I will start with COVID-19, however. I have heard of many who are missing family and other events this weekend because of positive COVID-19 diagnoses, test results, or exposures. I was sad to learn, for example, that Martina Navratilova had to miss the historic Wimbledon centennial celebration, including the Parade of Champions, yesterday. But there is more.
The air travel debacles have been well publicized. Weather, labor shortages, and other issues contribute to the flight changes and cancellations airlines need to make on this very popular travel weekend--expected to set records. And gas prices have stymied the trips of some by land (again, at a time during which travel was expected to be booming), although news of some price drops in advance of the weekend was certainly welcomed. Even for those who are well and able to travel to spend holiday time with family, it has been a challenge.
The cost of your cookout this year also may be higher, should you choose to have one. Supply chain turmoils and the effects of inflation and the war in Ukraine all are listed as contributing factors. (The linked article does note that strawberries are a good buy, nevertheless, which is welcome news to me.)
And yes, fireworks displays also have been disrupted. The causes include both concerns about weather (dry conditions and flammables do not mix well!) as well as the impact of labor shortages, inflation, and other factors influencing the supply of goods. Of course, there also is a high demand for fireworks in the re-opened socio-economic environment. All have been widely reported. See here, here, here, and here.
These holiday weekend disappointments create personal strife. But why should a business law prof care about all of this?
I find that stepping back and looking at the state of business at given times can be instructive in reflecting on the ways in which business law policy, theory, and doctrine do and should operate in practice. In an inflationary period with labor shortages, what profit-seeking business would not be looking at customers, clients, and employees as an important constituencies? In an era of supply chain dislocations, what business managers would not be focused on strong, positive relationships with those who sell them goods and services significant to their business? And, of course, with investment returns of direct and indirect import to the continued supply of funding to business ventures, firms need to pay heed to investor concerns. Note how these observations allow for commentary on principles of/underlying contract law, contract drafting, securities regulation, fiduciary duty in (and other elements of) business associations law, insurance law, and more.
Looking at legal theory, policy, and doctrine in practical contexts can useful to a business law prof for teaching, scholarship, and service--depending on the nature of a person's appointment and the institution at which the prof teaches. The current Fourth of July woes are but one example of how those connections can be made. But I want to invite folks to make them, especially in their teaching--in current courses (if you are teaching over the summer) and in fall and spring course planning, which I know many folks are now doing.
In closing, I send sympathetic vibes to all who had plans foiled by (or who decided to have a "staycation" and avoid) some or all of the holiday weekend dislocations I highlight in this post. I hope you found joy in your Independence Day weekend nonetheless.
July 4, 2022 in Business Associations, Contracts, Corporate Finance, Current Affairs, Financial Markets, Insurance, Joan Heminway, Law School, Lawyering, Research/Scholarhip, Service, Teaching | Permalink | Comments (0)
Over at Law & Liberty (here), John Berlau has posted a comment on Jarkesy v. SEC, in which the Fifth Circuit recently ruled that "(1) the SEC's in-house adjudication of Petitioners' case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I's vesting of 'all' legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II." Jarkesy v. Sec. & Exch. Comm'n, 34 F.4th 446, 449 (5th Cir. 2022). What follows is a brief excerpt from Berlau's post, but please go read the whole thing.
Critics and proponents of the ruling by the U.S. Court of Appeals for the Fifth Circuit in Jarkesy v. SEC have called revolutionary the new limits it places on federal regulatory agencies’ use of administrative law judges, a core tool of the administrative state…. Jarkesy is indeed revolutionary—both in the jurisprudence it could usher in limiting the power of the administrative state and in its concern for issues involved in the American Revolution. The ruling “has taken what could be a historic step toward restoring the Constitution’s checks and balances,” predicts Mario Loyola, professor at Florida International University and … [a] senior fellow at the Competitive Enterprise Institute (CEI), writing for the Wall Street Journal.
These checks and balances—including the right to a jury trial for common law offenses and a separation of powers of the different branches of government—came about due to the abuses the Founding generation suffered at the hands of Great Britain. Documents of the Founding era from the writings of George Washington to the Declaration of Independence itself list as grievances the quasi-courts created by the British to prosecute tax and trade offenses. These courts, which bypassed jury trials and due process for the colonists, and were under the rhetorical thumb of the British officials prosecuting the alleged offenses, bear a striking resemblance to the administrative venues run by regulatory agencies today.
Sunday, July 3, 2022
UNIVERSITY OF CALIFORNIA, DAVIS SCHOOL OF LAW invites applications from both entry-level and experienced candidates for possibly several positions to begin July 1, 2023. Our hiring goals are flexible, but we have especially strong teaching needs in intellectual property, evidence, and international law, in addition to classes in the first-year curriculum. We seek candidates with scholarly distinction or promise, as well as a commitment to excellence in teaching. Candidates must hold a J.D., Ph.D., or equivalent degree by the date of their application. All candidates must apply through the UC Recruit system at the following link: https://recruit.ucdavis.edu/JPF05036.
For full consideration, applicants should apply by September 1, 2022, although we recommend that you submit your materials at your earliest convenience. We require a cover letter, curriculum vitae, research agenda, writing sample, as well as teaching evaluations and/or transcripts and contact information for three references. Candidates must also include a Statement of Contributions to Diversity, Equity, and Inclusion. Information about the Statement can be found at http://academicaffairs.ucdavis.edu/diversity/equity_inclusion/diversity_statements_writin g.html. Please note that we may require further documentation at a future date, including, but not limited to, letters of recommendation, which will be treated as confidential under University of California Policy and California state law.
Please direct questions to Professor Brian Soucek, Chair of the Faculty Appointments Committee, by email at email@example.com. Inquiries about visiting positions should be submitted to Senior Associate Dean for Academic Affairs Afra Afsharipour, also at firstname.lastname@example.org.
The University of California is an Equal Opportunity/Affirmative Action Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity and expression, national origin, disability, age, marital status, citizenship, protected veteran status, or other protected categories covered by the UC nondiscrimination policy, available at http://policy.ucop.edu/doc/4000376/NondiscrimAffirmAct.
Saturday, July 2, 2022
The Delaware Supreme Court just decided an interesting new case, Diep v. Trimaran Pollo Partners et al., on director independence, over the dissent of Justice Valihura.
El Pollo Loco is a publicly-traded restaurant chain controlled by Trimaran Pollo Partners, a holding company, which itself is controlled by private equity firm Trimaran Capital Partners, founded in part and controlled in part by Dean Kehler. The plaintiff filed a derivative action alleging that after the IPO, El Pollo Loco received unfavorable news about the effects of certain price increases, and before this news was made public, several officers and directors – and Trimaran Pollo Partners – were permitted to sell stock. Trimaran in particular did not receive written preclearance, in violation of the company’s insider trading policy.
After a different, earlier derivative action concerning the same events was filed, Kehler invited two new independent directors to join the board, Floyd and Lynton. Kehler had prior relationships with each – especially Lynton, with whom he had longstanding social ties – and when interviewing each, he mentioned the pending litigation.
Once they were on the board, the Diep case was filed, and the earlier derivative action voluntarily dismissed. The company and the other defendants filed motions to dismiss the Diep action, both for failure to make a demand under Rule 23.1, and for failure to state a claim under Rule 12(b)(6). Floyd and Lynton, as newly-added directors, were not personally named as defendants.
Chancery denied the motions, finding, among other things, that the board was majority conflicted due to the number of board members who were personally accused of wrongdoing.
El Pollo Loco sought to appoint an SLC to investigate the claims, and the case was stayed. The SLC consisted of Floyd and Lynton, and one additional director who joined the board after the motion to dismiss was denied, Babb. Eventually, the SLC produced a report concluding that the case was not worth pursuing; the insiders had not acted with scienter, and there was little to be gained from further litigation. The SLC moved to dismiss the action and, while that motion was pending, the individual defendants settled, leaving only the claims against Trimaran Pollo Partners.
The Chancery Court concluded that the SLC was independent and had acted reasonably and in good faith, in accordance with the Zapata standard, and dismissed the action. The plaintiff appealed, and most of the arguments turned on Floyd’s and Lynton’s independence.
The main issue concerned the effects of the original motion to dismiss, prior to the formation of the SLC. Since Floyd and Lynton had both been on the board at that point – and the company had filed a motion to dismiss, which contained many of the same arguments that ultimately were made by the SLC – could it be inferred that Floyd and Lynton had prejudged the case’s merits, before joining the SLC, such that they were biased from the outset?
The majority of the Delaware Supreme Court said no. The evidence that the board, including Floyd and Lynton, had given any thought to the motion to dismiss was scant; though some kind of litigation update was mentioned in the board minutes, neither could recall much discussion about it. Justice Valihura, by contrast, believed that it was a fair inference that the board as a whole – including Floyd and Lynton – had authorized the filing. Given that the SLC had the burden of proving its independence, Floyd and Lynton were charged with showing they had not prejudged the allegations, and simply claiming ignorance of the original motion to dismiss – which, by hypothesis, they had authorized – was not sufficient to meet that burden.
So, just to spin this out: Valihura based her opinion on a kind of presumptive set of board responsibilities, which included having a basic familiarity with serious and credible claims against the company, as well as the company’s responses to those claims. The majority, by contrast, did not really … weigh in … on what the board’s actual responsibilities were with respect to authorizing litigation filings; instead, it accepted evidence that the board in fact had little role, and from there concluded Floyd and Lynton were untainted. One cannot help but wonder if the majority believed that Floyd and Lynton’s purported ignorance of litigation, and company filings in its own defense, was sufficient to meet their own duty of care with respect to company litigation – it wasn’t the subject of the plaintiff’s claims, and so the majority did not have to address it.
You see this a lot in the securities fraud space. Company statements are false; a corporate officer is accused of intentionally defrauding investors; the critical question is whether the officer knew of the underlying facts that made the statements false, giving rise to an inference of scienter. In that scenario, the corporate officer usually claims ignorance – “you can’t prove I was actually competent at my job,” argues the officer, “and it’s a stronger inference that I was simply uninformed of corporate shenanigans, than that I was in fact fulfilling my basic work responsibilities and therefore must have known about them.”
Doctrinally, federal courts are usually bound to accept this argument; they must, in practical effect, presume the corporate officer was negligent in order to defeat inferences of scienter.
(They don’t say that explicitly, of course; doctrinally, the concept is known as the “core operations” inference. Plaintiffs may not rely on a presumption that corporate officers knew of internal facts about the corporation simply by dint of their positions with the company – they must specifically show the officers were informed of those facts – unless the facts concerned huge and central “core operational” matters. It’s a crap shoot whether any particular facts are huge and central enough to count as “core operations,” and many courts won’t accept the inference altogether, no matter how central the facts were.)
In any event, it seems a majority of the Delaware Supreme Court, too, is willing to presume something like director negligence in order to defeat an inference of director bias. So, may plaintiffs bring a claim alleging that a particular corporate decision was so damaging that it must have been the product of a lack of care? No; their claims will be dismissed on the presumption that directors acted on an informed basis. But, may plaintiffs presume that directors act on an informed basis in order to allege bias? Also no.
Leaving that aside, though, what actually stood out for me was something else, the “dog that didn’t bark,” if you will. Notice the timeline here: Both Floyd and Lynton were acquaintances/friends of the controlling shareholder’s controller (Kehler), and were invited to join the board at a time when litigation was pending. Kehler also likely knew that Floyd and Lynton would play important roles in that litigation as “independent” directors, though there was no discussion of SLC service at the time they joined. The third member of the SLC, Babb, was specifically invited to join the board with the knowledge he would be an SLC member (Valihura infers that Babb was invited because the board was concerned the SLC lacked independence, see Op. at 14 n.62)
In other words, all three members of the SLC were invited to join the board by the defendants with the knowledge they would likely play key roles in passing judgment on the defendants’ conduct, and neither the majority, nor the dissent, took issue with that fact. This has come up before; I flagged it when I posted about Flood v. Synutra, and the WeWork litigation; I’m sure there are other examples. In both cases, new board members were recruited in contemplation of blessing tainted transactions, by the conflicted persons themselves, and yet no one cast doubt on their impartiality. VC Laster has recently begun to raise concerns about activists who have repeat ties to purportedly “independent” directors who do their bidding, but this is a slightly different scenario, and I have to say, Delaware’s assumption that the newly-recruited board members will be impartial under these circumstances is somewhat, umm, heroic.
Wednesday, June 29, 2022
Dear BLPB Readers:
"The Legal Studies and Business Ethics Department of the Wharton School, University of Pennsylvania, is seeking applicants for a full-time, tenure-track faculty position at any level: Assistant, Associate, or Full Professor. The appointment is expected to begin July 1, 2023. Information about the Legal Studies and Business Ethics Department and the research expertise of its current faculty may be found at: https://lgst.wharton.upenn.edu
JOB QUALIFICATIONS: Applicants must have either a JD (or equivalent) or a PhD from an accredited institution or both (expected completion by June 30, 2024 is acceptable). We seek outstanding researchers and teachers with a commitment to business-relevant scholarship. The Department’s faculty hold graduate degrees in a variety of areas, including law, philosophy, sociology, history, psychology, and political science. They teach courses in business ethics and law to undergraduates, MBAs, Executive MBAs, and PhD students."
The complete job posting is here.
Monday, June 27, 2022
The University of Oklahoma College of Law
Hiring For Associate/Full Professor of Law
The University of Oklahoma College of Law seeks outstanding applicants, entry-level or lateral, for up to three full-time tenure-track positions beginning fall 2023. We welcome candidates in all subject areas, with particular interest in filling curricular needs in tax, patents, wills & trusts, evidence, civil procedure, antitrust, and alternative dispute resolution (ADR).
OU Law is a high-quality, affordable, and forward-looking institution committed to developing a socially-involved and inclusive legal profession. We boast world-class facilities and a diverse student body. Our strong national reputation is buttressed by a commitment to attracting and supporting excellent faculty with summer research grants, publication placement bonuses, course reductions based on productivity, and an extraordinary number of endowed positions.
Our law school sits on the main OU campus in Norman, a university town alive with entertainment, arts, food, and sports. A perennial “best place to live,” Norman has excellent public schools and low cost-of-living. Neighboring Oklahoma City features a dynamic economy, outstanding cultural venues, and a major airport. Visit http://www.ou.edu/flipbook and http://soonerway.ou.edu for more information.
- Must have a J.D. or equivalent academic degree.
- Must have strong academic credentials.
- Must have a commitment to excellence in teaching and demonstrably outstanding potential for scholarship.
To apply, please submit a CV and job-talk paper to email@example.com. Cover letter optional. If selected for an interview, teaching evaluations will be requested if available. Application review will begin immediately, and the positions will remain open until filled.
Equal Employment Opportunity Statement
The University of Oklahoma, in compliance with all applicable federal and state laws and regulations, does not discriminate on the basis of race, color, national origin, sex, sexual orientation, genetic information, gender identity, gender expression, age, religion, disability, political beliefs, or status as a veteran in any of its policies, practices, or procedures. This includes, but is not limited to: admissions, employment, financial aid, housing, services in educational programs or activities, or health care services that the University operates or provides.
The University of Oklahoma is committed to achieving a diverse, equitable and inclusive university community by recognizing each person's unique contributions, background, and perspectives. The University of Oklahoma strives to cultivate a sense of belonging and emotional support for all, recognizing that fostering an inclusive environment for all is vital in the pursuit of academic and inclusive excellence in all aspects of our institutional mission.
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.