Friday, January 17, 2020

Securities Arbitration on the Ballot

As part of what is apparently my continuing series on developments concerning the use of corporate bylaws and charter provisions to limit federal securities claims….

Earlier this month, the Delaware Supreme Court heard oral argument on whether corporations may include provisions in their charters and bylaws requiring that federal Section 11 claims be heard only in federal court (video of oral argument here; prior posts on this issue here and here and here and here… you get the idea)

Running parallel with that, Professor Hal Scott of Harvard Law School submitted a proposal under 14a-8 requesting that Johnson & Johnson adopt a bylaw requiring that all federal securities claims against the company be arbitrated on an individualized basis. As I blogged at the time, the SEC granted J&J’s request to exclude the proposal on the ground that it appeared that NJ, the state of incorporation – following what it believed to be Delaware law – did not permit federal claims to be governed by corporate charter/bylaw provisions.  Scott filed a federal lawsuit over that, and the action was voluntarily stayed pending the Delaware Supreme Court’s ruling.

But Scott has not let the crusade rest.  As I learned from Alison Frankel’s reporting, Intuit shareholders will vote on one of Scott’s securities arbitration proposals at their January 23 meeting.  (I note that in this version of the proposal, Scott has corrected the text to acknowledge Canada’s existence – which he, ahem, previously overlooked)

Unlike J&J, Intuit did not seek to exclude the proposal from its ballot, but it does recommend that shareholders vote against.  Intuit says:

we are not aware of any other U.S. public company that has adopted the bylaw sought by the proposal and the proponent’s pursuit of the adoption of an identical bylaw by another company is currently the subject of litigation. As a result, there is significant uncertainty as to whether the adoption of such a bylaw is prudent at this time. Given this continued uncertainty, we believe that the adoption of such a bylaw likely would expose Intuit to unnecessary litigation or other actions challenging the bylaw and its consequences. Such challenges would not only be economically costly, but also would divert management’s time and focus away from Intuit’s business.

So, several things.

First, another public company did have such a bylaw, sort of, as I discuss in my Manufactured Consent paper – that company was Commonwealth REIT.   The bylaw did not bar class actions, though it did cover federal claims.

Second, Intuit’s objection is largely rooted in the uncertainty surrounding its legality.  Which is probably why Scott recently filed a comment letter with the SEC regarding its proposed amendments to Rule 14a-8, in which he asks the Commission to permit resubmission of failed proposals “if legal or regulatory circumstances relevant to the proposal have materially changed since its last submission.”  I assume he’s anticipating some losses, and wants to make sure he can resubmit these proposals if the Delaware Supreme Court - or anyone else (hint, hint) - rules his way.

Third, this is not the first time shareholders have had the opportunity to vote on arbitration bylaws.  Back in 2012, Professor Adam Pritchard at Michigan assisted shareholders at Gannett, Pfizer, Google, and Frontier Communications in filing their own proposed arbitration bylaws.  Pfizer and Gannett sought and received no-action relief to exclude the proposals, but Frontier and Google included them in their proxy statements (see here and here, respectively), though in both cases the companies recommended that shareholders vote against.  And in both cases, the bylaws were defeated (see here and here, respectively – I mean, Google has controlling shareholders, it was sort of fait accompli, but even the A shares voted against, so.)

All of which is to say – I’m betting the bylaw fails at Intuit, but (1) I’m terrible at predictions and (2) that will not be the end.  But for now, I guess, all eyes on January 23.

January 17, 2020 in Ann Lipton | Permalink | Comments (0)

Wednesday, January 15, 2020

Sharfman on Exemptions from the Proxy Rules for Proxy Voting Advice

The following comes to us from Bernard S. Sharfman. It is a copy of the comment letter (without footnotes) that he recently sent to the SEC in support of the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice.  (The comment letter with footnotes can be found here.)  An introductory excerpt is followed, after the break, by the full letter. Please excuse any formatting errors generated by my poor copy-and-paste skills.

Part I of this letter will describe the collective action problem that is at the heart of shareholder voting. Part II will discuss the problems that this collective action causes for the voting recommendations of proxy advisors, including the creation of a resource constrained business environment. Part III discusses how proxy advisors deal with such a business environment. Part IV will discuss how the market for voting recommendations is an example of a market failure, requiring the SEC to pursue regulatory action to mitigate the harm caused by two significant negative externalities. Part V will discuss how the collective action problem of shareholder voting and the market failure impacts corporate governance. Part VI will discuss the value of the proposed amendments.

Continue reading

January 15, 2020 in Corporate Governance, Current Affairs, Securities Regulation, Stefan J. Padfield | Permalink | Comments (2)

Tuesday, January 14, 2020

New Paper on Fed Governance

Wharton Assistant Professor Peter Conti-Brown recently posted another important work about the Federal Reserve System: Restoring the Promise of Federal Reserve Governance (here).  I highly recommend it to all BLPB readers, especially those wanting to quickly learn a lot about the U.S. central bank, one of the most important of U.S. institutions.  Here’s the abstract:  

The US Federal Reserve System (Fed) is famous for its organizational complexity. Overlooked in debates about the costs and benefits of this complexity for the Fed’s legitimacy, independence, and accountability is the congressional vision of what the Fed should be. The central bank is governed by a highly accountable seven-person Board of Governors to manage the rest of the system. Time and experience have eroded this authority as a matter of practice but not as a matter of law. The Fed governors are supposed to supervise the system, a legal aspiration that has increasingly been enervated by institutional drift. Using empirical and historical tools, this paper discusses the erosion of the Board of Governors over the Fed’s century-long history, including the substantial reduction in real compensation for the governors, their diminished participation in Federal Open Market Committee (FOMC) meetings, and the increased vacancies that recently have been driven by the political process. To address these problems, the paper suggests reforms across three divides: cultural, regulatory, and legislative. Remedies include changing norms of FOMC meeting participation to place nonvoting members of the FOMC as “observers”; clarifying the role of the Fed’s Board of Governors in supervising the Federal Reserve Banks, particularly with respect to the presidential search process; increasing attention to vacancies and promoting bipartisan interest in credible candidates; and increasing governor salaries to match those of their colleagues at the 12 Federal Reserve Banks, consistent with legislative intent from 1913.

January 14, 2020 | Permalink | Comments (0)

Monday, January 13, 2020

Compelling Dissolution of an At-Will Partnership (?)

A belated Happy New Year to everyone! 

I've been meaning to blog for quite some time on a partnership puzzle that Elizabeth Pollman brought to my attention.  Assume that Jack, Jill, and Jen have an at-will general partnership.  Jack gives notice to the partnership that he is withdrawing, and he demands the liquidation of the partnership business.  (Assume that there is no partnership agreement governing this dispute.)

Is Jack correct?  Does he have the ability under the default rules to compel dissolution of the partnership if Jill and Jen wish to continue the business?

Under RUPA (1997), the answer is "yes." Jack dissociated by express will under RUPA § 601(1).  It is an at-will partnership, so the dissociation is not wrongful.  RUPA § 602.  Under RUPA § 801(1), the partnership “is” dissolved and "its business must be wound up."

Under RUPA § 802(b), however, the winding up of the partnership can be avoided if the partners agree.  Who must agree?  Section 802(b) says clearly that it is “all of the partners, including any dissociating partner other than a wrongfully dissociating partner.”  So Jack’s consent is necessary to avoid winding up.  Let's assume he is not going to consent; thus, the partnership must be dissolved.

This result, by the way, is a well-known principle of partnership law.  At-will partnerships are unstable because any partner can dissociate by express will and compel dissolution.  See RUPA § 801 cmt. 3 (“Section 801 continues two basic rules from the UPA.  First, it continues the rule that any member of an at-will partnership has the right to force a liquidation.”).

RUPA, however, was amended in 2011 and 2013.  And the amendments appear to have reversed this well-known principle of partnership law.  Under the amended statute, Jack again dissociated by express will under § 601(1).  It is an at-will partnership, so the dissociation is not wrongful.  RUPA (2013) § 602.  Under RUPA (2013) § 801(1), the partnership “is” dissolved and "its business must be wound up."

Under RUPA (2013) § 803, however, a partnership may “rescind its dissolution” if it gets the “affirmative vote or consent of each partner.”  RUPA (2013) § 803(b)(1).  But here is the rub:  RUPA (2013) § 102(10) defines “partner” as someone who “has not dissociated as a partner under Section 601.”  So Jack’s consent is NOT necessary under the 2013 version because Jack, after dissociating, is no longer a partner.  It appears that Jill and Jen can rescind dissolution and continue the business.  RUPA (1997) has no definition of partner at all, and as mentioned above, it explicitly requires the dissociating partner’s consent to rescind dissolution under § 802(b).

So bottom line:  the 2013 version has made a major change.  It does not discuss this in the comments at all, and I personally think that it is an unintended consequence of the 2011/2013 harmonization effort.  The 1997 version requires Jack to consent if the partnership is going to continue.  The 2013 version does not seem to require Jack to consent because he is no longer a partner upon dissociation.

Believe it or not, the Uniform Bar Examination tested on this issue last year. I don't think they realized that the application of RUPA (1997) versus RUPA (2013) might produce a different result. To be fair, in that question, an argument could be made that a partnership agreement existed that would lead to the same result under either version of the statute, but I for one was surprised to see the issue in play.

Does anyone out there have any insight on this issue?  If so, please feel free to share in the comments.

January 13, 2020 | Permalink | Comments (3)

Question of the Day: SWM - Doctrine, Theory, Policy?

Each time I teach Advanced Business Associations, I try to engage students on the first day in an exercise that leverages their existing knowledge of business associations law but also introduces new angles and nomenclature.  I assign a reading (this year, on shareholder wealth maximization) and ask each student to write up a brief definition of the concepts of “policy” and “theory” as they may apply to and operate in business associations law. I then ask them to relate their definitions to the reading.

So, the core question before the house in that course on the first day of classes last week effectively was the following: is shareholder wealth maximization legal doctrine, policy, theory, or something else?  We had a wide-ranging discussion on the question, working off three propositions I put on the board.  The class session enabled me to review some concepts from the foundational Business Associations course while also discussing the role of theory and policy in law and lawyering, getting some creative mental juices flowing, and teaching a bit of the new vocabulary they will need for the course.

I decided that it could be beneficial to share with my students the views of others on our effective core question from class last week.  So, today, I ask you:

Shareholder wealth maximization: doctrine, theory, policy, or something else?

Offer your answers in the comments or send me a private message.  You can pick more than one category, of course, in classifying shareholder wealth maximization.  In other words, the categories are not intended to be mutually exclusive. A brief explanation for your response would be helpful.  I will not attribute the answers I pass on, unless you want me to.  I hope this post will stimulate some interesting responses, but I also know that law professors are busy with the start of the new semester.  It may go without saying, but (especially in these circumstances) a short response is appreciated as much as a long one.

January 13, 2020 in Business Associations, Corporate Governance, Joan Heminway, Teaching | Permalink | Comments (0)

Saturday, January 11, 2020

Lazy Saturday blogging - Videos

Hey, everyone.  Two very quick hits today.  First, as any follower of this blog knows, I have been avidly following the Salzberg v. Sciabacucchi litigation (see prior posts here and here and here, etc), not because I care very much about whether corporations can select a federal forum for Section 11 claims, but because I think if corporations can use their charters and bylaws to select a federal forum for Section 11 claims, the next step is using charters and bylaws to adopt provisions requiring individualized arbitration of federal securities claims, and that opens up a whole new can of worms.  (For newcomers, my article on the subject of arbitration clauses in corporate charters and bylaws is here).

In any event, on Wednesday, the Delaware Supreme Court heard oral argument on federal forum provision issue. I don't really have any insights about it - although the justices asked several questions at the beginning of each advocate's presentation, they were, for the most part, quiet - but if you want to see for yourself, the video is here.

Additionally, last week I had the opportunity to speak on a panel with Sean Griffith and Adriana Robertson, moderated by Jeremy Kidd, about the role of mutual funds in corporate governance.  I'll straight up admit that I don't think I personally said anything you haven't already heard from me in this space - either in a post or a plugged article (like, ahem, my Family Loyalty essay on conflicts among mutual funds within a single complex) - but the video is worth watching if only to hear the views of my co-panelists.  Sean describes his theory of when mutual funds should vote, and when they should abstain, or pass through their votes to retail shareholders (articulated in more detail in his paper, here), while Adriana discusses her research about how indexes don't really differ all that much from active management.  It's definitely a treat to hear them describe their work (and to hear Adriana talk about her upcoming project at the very end.)

January 11, 2020 in Ann Lipton | Permalink | Comments (0)

Thursday, January 9, 2020

Second Circuit Briefing in Reg BI Case

Briefing continues in litigation aimed at overturning the SEC's Regulation Best Interest.

After the parties filed their briefs on December 27, the amicus front heated up.  The Public Investors Arbitration Bar Association filed an amicus brief citing some academic works by Rutger's Arthur Laby, and St. John's Christine Lazaro.  Better Markets and the Consumer Federation also filed an amicus brief--also citing influential work by Arthur Laby.  Even former members of congress--notably Dodd and Frank have weighed in arguing that the SEC misread Dodd-Frank.

It's worth following the case as it continues to develop.

January 9, 2020 | Permalink | Comments (0)

Wednesday, January 8, 2020

ICYMI: #corpgov Midweek Roundup (Jan. 8, 2020)

January 8, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, January 7, 2020

More on Incorporating Negotiation Exercises Into Business Law Courses: Some Help from Professor George Siedel

I’ve previously blogged about using negotiation exercises in my undergraduate and graduate Business Law/Legal Environment courses (here).  I’ve also mentioned that, having taught both business law and negotiation courses in a law school, I know that such exercises would also work well in a law school business law course.   

Last August, at the Annual Conference of the Academy of Legal Studies in Business, I had the good fortune of catching up with Professor Susan Marsnik from the University of St Thomas Business School.  Eventually, our conversation turned to one of my favorite topics: negotiation!  Marsnik mentioned that Professor George Siedel, the Williamson Family Professor of Business Administration Emeritus and the Thurnau Professor of Business Law Emeritus at the University of Michigan, had written some great negotiation materials (here), and they were free!  Obviously, I couldn’t wait to learn more!  And now that I have, via Marsnik’s help, I wanted to pay it forward!  

Siedel’s comprehensive negotiation materials center on the sale of a house, and include Seller/Buyer roles.  He shares that “Over the years, I have developed and tested “The House on Elm Street” exercise in undergraduate and MBA courses and in executive seminars in North America, South America, Asia and Europe.  The courses and seminars have been developed for (or have included) a wide range of participants, such as athletic directors, attorneys, engineers, entrepreneurs, managers, and physicians.” (p. 2) 

What is absolutely wonderful about Siedel's materials is that he also provides not only a slide deck, but also a twenty-page teaching note, Why and How to Add Negotiation to Your Introductory Law Course, to guide you through how to teach the exercise.  This is key.  He states (and I agree) that many professors don’t include negotiation exercises in their business law courses because there is already so much material to cover, and perhaps more importantly, they don’t feel qualified to teach it.  That’s the beauty of these materials: Siedel walks you through teaching the exercise, step by step!  Many negotiation exercises for purchase do include teaching notes.  However, Siedel’s teaching notes are free, and among the most comprehensive that I’ve seen.  What are you waiting for?

In my experience, students love negotiation exercises.  Probably like many BLPB readers, I’m tweaking and finalizing my spring 2020 course syllabi as the new semester is around the corner.  I encourage you to review Siedel’s excellent materials, and consider including negotiation exercises in your business law courses.  It would be ideal if: 1) students were to be able to read at least some of a good negotiation text such as Siedel’s Negotiation for Success: Essential Strategies and Skills or Richard Shell’s Bargaining for Advantage: Negotiation Strategies for Reasonable People, and 2) you had a full 75 minutes to debrief the negotiation exercise.  However, from my perspective, you shouldn’t let the absence of either deter you, especially from trying out the negotiation exercise for the first time.  That’s exactly how I’m about to proceed, and I’ll keep you posted on how it all turns out.

Finally, a huge THANK YOU to Professor Siedel for creating and making these materials available!



January 7, 2020 in Business School, Colleen Baker, Law School, Negotiation | Permalink | Comments (1)

Monday, January 6, 2020

Advice to My Business Associations Students . . . And Maybe Yours, Too

Business Associations is a tough course to teach, whether it is taught in a three-credit-hour or four-credit-hour format.  I have written before (here, here, and here) about the challenges of teaching fiduciary duties in this course.  And I recently posted here and here about the characterization of a classic oversight conundrum as a matter of corporate fiduciary duty law in Delaware.

I just recently finished grading my Business Associations exams from last semester.  They were a good lot overall, but they evidenced several somewhat common errors that seemed to beg for broad dissemination to the class. So, I sent them all a message inviting them to come in and review their exams and highlighting certain things for their attention of a more general nature.  

Today, I offer you that general counsel that I gave to my Business Associations students based on that review of their written final exams.  It is set forth below, absent my introductory and closing remarks.  As you'll see, some of it relates to substantive law, and some of it relates to exam or other skills.  Perhaps this is of use to those of you who just taught or are about to teach the course.  Maybe some students will read it and learn from it.  Regardless, here it is.

  • Agency rules and management rules in business associations law are often confused. Agency rules express the authority of a person to act on behalf of the firm in transactions with third parties--those who enter into transactions with the firm. For example, by default under the RUPA, each partner in a RUPA partnership is an agent of the partnership that can bind the partnership to contracts with others. Management rules, by contrast address the governance and control authority of a particular firm constituent within the governance structure of the firm. Thus, agency rules relate to authority that is outward-facing (pertaining to transactional parties) and management rules relate to authority that is inward-facing (pertaining to internal constituents of the firm). For example, by default under the RUPA, each partner has an equal right to manage the partnership.

  • Similarly, the concept of "limited liability" is commonly understood to refer to the limited liability of a firm owner for the firm's obligations. For example, under the RUPA, each partner is jointly and severally liable for the obligations of the partnership, whereas under corporate law, shareholders are not personally liable for the corporation's obligations to third parties. Exculpation, which eliminates the monetary liability of directors in the corporate context, relates to corporate governance claims--legal actions for breach of the fiduciary duty of care. This is internal governance litigation that does not relate to corporate obligations to third parties. So, while exculpation does limit (eliminate) a director's personal liability for a breach of the duty of care, it is not part of what people generally refer to as "limited liability" in a corporate context.

  • Fiduciary duties are typically understood to instill or increase trust in relationships. Accordingly, they are commonly employed to provide a benefit in circumstances involving untrustworthy business associates. Yet a number of you seemed to think they were an undue burden to business venturers in circumstances where trust may be lacking (i.e., where fiduciary duties should be useful). You will need to make a solid argument to most folks to justify that the detriments outweigh the benefits.

  • If an exam or assignment question asks for you to talk about why one set of rules is better than another in addressing a specific scenario, make sure you contrast examples from the two sets of rules, applying each to the relevant facts.

  • Read questions carefully and closely. When a question asks for you to reference or rely on statutory default rules,ensure that your response references or relies on statutory default rules--not on ways on which those rules can be or have been agreed around through private ordering. When a question asks for information or an evaluation or rules relating to member-managed LLCs, ensure you directly address member-managed LLCs in lieu of (or at least before) commenting on manager-managed LLCs or the flexibility of moving back and forth between member-managed and manager-managed LLCs.

  • Don't forget to cite to an appropriate source for rules on which you rely in your legal analysis.

  • Keeping track of and managing time is important to the bar exam and other in-class timed exercises. If you ran out of time in responding to the prompts on this exam, evaluate why. I can help, if need be. But understanding how and why your time management skills may have failed you can be important.

Feel free to add your observations or advice of a similar (or different) nature in the comments.  I am teaching Advanced Business Associations this semester, so I can work on some of these things during that course.  In any event, I wish you all a happy and healthy semester and year, whatever you may be teaching or doing.

January 6, 2020 in Business Associations, Joan Heminway, Law School, Teaching | Permalink | Comments (4)

Saturday, January 4, 2020

The Watchmaker analogy, inverted

Most readers are probably familiar with the case of Morrison v. Berry.  There, Fresh Market was taken private by Apollo in a two-step tender offer.  After the deal closed, a shareholder filed a lawsuit alleging that the directors had breached their duties and failed to obtain the best price for shareholders because Ray Berry, founder of Fresh Market and Chair of the Board, along with his son, colluded with Apollo to roll over their shares in the new company and rig the sales process in Apollo’s favor.  Defendants contended that shareholders’ acceptance of Apollo’s offer cleansed any breaches under Corwin; therefore, the critical question was whether the shareholders were fully informed.  VC Glasscock held that any omissions were immaterial as a matter of law, and the Delaware Supreme Court reversed, holding that omissions regarding the Berrys’ level of precommitment to Apollo were material.

After remand, the plaintiff filed a new complaint and the defendants renewed their motions to dismiss.  And on December 31, VC Glasscock granted in part and denied in part those motions.  In particular, he held:

(1) The directors other than Ray Berry were independent and disinterested, and neither the sales process nor the omissions evinced bad faith.  In particular, enough was disclosed about Berry’s mendacity and the pressures facing the Board that any additional omissions could not have been intended to fool anyone, since, reading between the lines, shareholders could have sussed out the truth.  (“If the Director Defendants’ intent was to ensure that the 14D-9 would entice stockholders to vote for the merger in the mistaken belief that the directors were unaware of activist pressure, or to hide that Berry’s weight was behind the Apollo bid, they did a poor job, indeed. So poor, I find, that a reasonable inference of bad faith in the omissions cannot be drawn.”).  This, of course, is Glasscock’s way of reaffirming his original conclusion that the omissions were not material; the first time around, he held that enough was disclosed that shareholders did not require more details, and the second time around, he held that since so much was disclosed, the remaining omissions must not have been intentional deceptions.

(2) The plaintiff plausibly alleged that Ray Berry acted in bad faith and out of self-interest by misleading the Board about his relationship with Apollo.

(3) Two officer defendants (one of whom was also a director) were not protected by Fresh Market’s 102(b)(7) provision.  Though the plaintiff did not plausibly allege they acted disloyally/in bad faith, the plaintiff did plausibly allege at least negligence with respect to the omissions.  Again, however, Glasscock alluded to his earlier ruling: “another reasonable interpretation is that the 14D-9 represents a good faith but failed effort to make reasonable disclosures...  As [one defendant] points out, I initially and erroneously determined that the omissions in the 14D-9 were not material.”  But, since inferences on a motion to dismiss are drawn in favor of the plaintiff, these claims would survive – for now.

(4) Finally, the court reserved judgment on the plaintiff’s aiding and abetting claims.  The plaintiff alleged that JP Morgan, Cravath, Apollo, and Ray Berry’s son Brett Berry all aided and abetted breaches by concealing Ray Berry’s discussions with Apollo, contributing to the omissions in the 14D-9, and by concealing from the Board that JP Morgan secretly fed Apollo information. 

So, the things that stand out for me:

First, the case is being maintained, in part, due to the inability of corporate officers to exculpate negligence violations under 102(b)(7).  Megan Shaner has written a lot about how officer duties are underdeveloped in Delaware law (see, e.g., Officer Accountability, 32 Ga. St. U.L. Rev. 355 (2016)); this case may become one of the few that permits an exploration of the subject.

Second, I am discomfited by the suggestion that the court’s initial mistake in concluding that the omissions were immaterial might be relevant to a determination of defendants’ scienter.  The logic, apparently, is that if a court innocently believed these facts to be immaterial, corporate officers and directors may have operated under the same good faith misapprehension.

Leaving aside the difference in context – corporate insiders know far more about the business, the shareholders’ priorities, and the details of any omissions than a judge does (especially on a motion to dismiss) – I wonder how far the logic could extend.  After all, in securities cases under Section 10(b), it’s not uncommon to see dismissals on materiality grounds that are reversed on appeal.  Does the initial dismissal suggest that an inference of scienter is defeated, especially given the higher pleading standards for a 10(b) case? Couldn’t you draw exactly the opposite inference, i.e., if corporate insiders actually know a fact, and intentionally leave it out of a narrative but do hint at its existence (making “partial and elliptical disclosures,” in the Delaware Supreme Court’s phrasing), doesn’t that suggest they were strategically playing coy about the facts?

(I am also reminded of In re Ceridian Corp. Securities Litigation, 542 F.3d 240 (8th Cir. 2008), where the errors in the defendant company’s financial statements were so overwhelming that the court figured the mistakes must have been inadvertent; no intelligence could have designed them.)


Third, the court rejected the plaintiff’s allegation that director and CEO Richard Anicetti was motivated to keep the buyout price low because if he stayed with the company, he’d be compensated based on whether Apollo earned particular multiples of invested capital (MOIC) – payments that would become increasingly lucrative the less that Apollo paid Fresh Market stockholders.  Now, compensation tied to MOIC is a new tactic that Guhan Subramanian and Annie Zhao recently identified as having been adopted by private equity buyers to manipulate corporate management; here, however, Glasscock wasn’t buying the argument, in part because any such moves on Anicetti’s part would have cost him up front, to the extent he received a lower price for his own shares.  Still, I expect we’ll continue to see litigation over the practice.

And ... yeah, I don’t have a pithy wrap-up here, but I do think the aiding-and-abetting determinations will be interesting.

January 4, 2020 in Ann Lipton | Permalink | Comments (0)

Wednesday, January 1, 2020

ICYMI: #corpgov Midweek Roundup (Jan. 1, 2020)

January 1, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 31, 2019

Happy New Year & New Paper on Community Banks!

I want to get an early start on wishing a HAPPY NEW YEAR to all BLPB readers!  May 2020 be one of your best years yet!  I’m celebrating by going to my very first “Shrimp Drop” with my mom.  Turns out that Fernandina Beach, FL. is the “Birthplace of the Modern Shrimping Industry.”  I do love shrimp!

Other than this, I can’t think of a more exciting way to ring in 2020 than by reading a new, fantastic article on banking!  Fortunately, I didn't have to look far.  Jeremy C. Kress and Matthew C. Turk recently posted: Too Many to Fail: Against Community Bank Deregulation (here).  Legal scholarship has thus far paid scant attention to community banks.  After reading their work, you’ll understand why this shortfall is unfortunate, and this article so important.  Here’s the abstract:  

Since the 2008 financial crisis, policymakers and scholars have fixated on the problem of “too-big-to-fail” banks. This fixation, however, overlooks the historically dominant pattern in banking crises: the contemporaneous failure of many small institutions. We call this blind spot the “too-many-to-fail” problem, and document how its neglect has skewed the past decade of financial regulation. In particular, we argue that, for so-called community banks, there has been a pronounced and unjustifiable shift toward deregulation, culminating in sweeping regulatory rollbacks in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

As this Article demonstrates, this deregulatory trend rests on three myths. First, that community banks do not contribute to systemic risk and were not central to the 2008 crisis. Second, that the Dodd-Frank Act imposed regulatory burdens that threaten the survival of the community bank sector. And third, that community banks cannot remain viable without special subsidies or regulatory advantages. While these claims have gained near-universal acceptance among legal scholars and policymakers, none of them withstands scrutiny. Contrary to the conventional wisdom, community banks were key participants in the 2008 crisis, were not uniquely burdened by post-crisis reforms, and continue to thrive economically.

Dispelling these myths about the community bank sector leads to the conclusion that diligent oversight of community banks is necessary to preserve financial stability. Accordingly, this Article recommends a reversal of the community bank deregulatory trend and proposes affirmative reforms, including enhanced supervision and macro-prudential stress tests, that would help mitigate systemic risks in the community bank sector.


December 31, 2019 | Permalink | Comments (0)

Monday, December 30, 2019

What is Transactional Business Law?

The title of this post is the core question behind a transactional law laboratory that I am co-teaching with my amazing colleague Eric Amarante for a seven-week period starting next week.  The course is being taught to the entire 1L class (intimidating!) in one two-hour class meeting each week.  In essence, the course segments explore, principally through the subjects taught in the first-year curriculum, the nature of transactional business law.  This is our first semester teaching this course, which is a substantially revised version of a course UT Law added to its 1L curriculum three years ago.  We are pretty jazzed up about it--but understandably nervous about how our course plan will "play" with this large group.

Because 1Ls come to transactional business law from various different backgrounds and experiences (including different first-semester law professors), we plan to begin by striving to develop some common ground for our work.  To that end, I am asking for a late Christmas present or early New Year's gift from all of you: your answer to one or more of the following questions.  How would you define transactional business law?  What are some examples of this kind of practice?  What makes a good transactional business lawyer?  Why should every law student need to know something about transactional business law (and what should they need to know)?  Let me know.

These are the kinds of questions we'll be probing through discussions, drafting, problem-solving, and other in-class and out-of-class experiences in the context of contract law, property law, tort and criminal law, agency law, professional responsibility, and more.  The objective is substantive exposure, not mastery.  Although teaching 125+ students at once is a tall order (and we will be breaking the class down into small groups for various activities), I admit that I am a bit excited about this.  I hope you are, too, and that a few of you will respond in the comments or send me a private message.

In the mean time, enjoy the waning holiday season.  I wish a happy new year to all.  And (of course) I wish good luck to the many among you who also are starting a new semester in the coming weeks.

December 30, 2019 in Joan Heminway, Law School, Lawyering, Teaching | Permalink | Comments (3)

Fall 2019 Reading and Listening

This fall semester flew by. Hoping to make time to read and listen to more good content next semester. Always open to suggestions, especially podcasts because my commute is now about 30 minutes each way. 


A Guide to the Good Life: The Ancient Art of Stoic Joy - William B. Irvine (Philosophy) (2009). Review of stoicism and an attempt at modern application. “Unlike Cynicism, Stoicism does not require its adherents to adopt an ascetic lifestyle. To the contrary , the Stoics thought that there was nothing wrong with enjoying the good things life has to offer, as long as we are careful in the manner we enjoy them. In particular, we must be ready to give up the good things without regret if our circumstances should change.” (46).

Utilitarianism - John Stuart Mill (Philosophy) (1863). Reread before my spring business ethics class. “It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool or the pig think otherwise, that is because they know only their own side of the question. The other party to the comparison knows both sides.” (7). “Next to selfishness, the principal cause that makes life unsatisfactory is a lack of mental cultivation.” (10). 

Just Mercy - Bryan Stevenson (Non-fiction, Law) (2014). Stories of injustice in our criminal legal system. Reread in advance of our SEALSB Conference in Montgomery, AL. Stevenson founded the Equal Justice Institute (EJI) in Montgomery. The EJI’s museum and memorial are well worth your time; like the book, they are quite moving. 


The Dream - an investigation of multi-level marketing companies (MLM).

Road to the Olympic Trials - Peter Bromka ran just two seconds shy of the standard; he will take another shot at the Houston Marathon in January. 

Elizabeth Anscombe on Living the Truth (Jennifer Frey - University of South Carolina, Philosophy). Focuses on Anscombe’s theory of intentionality of action.

Ipse Dixit Legal Scholarship Podcasts (hosted by Brian Frye - University of Kentucky, Law)

December 30, 2019 in Books, Ethics, Haskell Murray | Permalink | Comments (0)

Saturday, December 28, 2019

More on Controlling Shareholders

I’ve previously blogged about – and written an essay about – how one of the knock-on effects of Corwin and MFW is to increase the distance between the treatment of controlling shareholder transactions, and other transactions, under Delaware law.  As a result, the outcome of many a motion to dismiss turns solely on the presence or absence of a controlling shareholder – which puts increasing pressure on the definition of control in the first place.  In particular, I’ve argued, courts uncomfortable with Corwin’s Draconian effects may be tempted to expand the definition of control in order to avoid early dismissals of cases that smack of unfairness.

The latest example of the genre comes by way of Vice Chancellor McCormick’s ruling on the motion to dismiss in Garfield v. BlackRock Mortgage Ventures et alThere, an enterprise organized as an “Up-C” sought to transform itself into an ordinary corporation, largely for the benefit of the two founding investors, BlackRock and HC Partners, as well as several directors and corporate officers.  The question was whether the transaction was fair to the public stockholders, who overwhelmingly voted in favor of the deal.  If BlackRock and HC Partners were not deemed to be controllers, the stockholder vote would cleanse the deal under Corwin and the case would be dismissed; if they were, the court would be permitted to substantively examine the transaction’s fairness.

Together, BlackRock and HC Partners controlled 46.1% of the vote, had Board representation, and had blocking rights; thus, the court easily found that if they acted together, they had control. The critical question was whether they had, in fact, agreed to act in concert, or whether they simply had concurrent, but independent, interests in the transaction.  For these sorts of inquiries, the standard on which Delaware courts have settled is that to constitute a group, the putative controllers must be “connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement—to work together toward a shared goal.”

To determine whether this standard was met, McCormick looked for both transaction-specific facts suggestive of an agreement, as well as historical facts indicting that the defendants had agreed to coordinate in the past.  Here, BlackRock and HC Partners’s long history of coordinated involvement with the company, coupled with their critical roles in approving the reorganization, created an inference of concerted action.  As a result, the plaintiff had plausibly alleged the presence of a controlling group, and Corwin did not apply.  Motion to dismiss denied.

So, there are a couple of things that interest me here. 

First, it’s another example of “controller-creep.”  The cases on which McCormick relied, Sheldon v. Pinto, 2019 WL 4892348 (Del. Oct. 4, 2019) and In re Hansen Medical Shareholders Litigation, 2018 WL 3025525 (Del. Ch. June 18, 2018), also identified “historical” ties as a factor to consider when inferring the presence of an agreement among putative members of a control group, but in those cases, the courts demanded that plaintiffs identify multiple investments in multiple companies – and refused to infer an agreement without them.  Here, by contrast, McCormick found a history just due to the defendants’ investment in this single company.

Second, there are many areas of law where the presence of an agreement among parties, rather than simply concurrent self-interest, is critical (13D filings, antitrust law, RICO), and courts therefore have to closely examine the defendants’ behavior to see if such an agreement can be inferred.  There seems to be little cross-pollination in the caselaw, however (though in Hansen, one “historical” factor used to infer the existence of an agreement was a 13D filing from a previous venture), and to be honest, that’s how it should be – there are different policies at play in different areas of law, not to mention different legal standards on a motion to dismiss, and it makes sense courts would therefore approach the analyses differently.  That said, in the Garfield briefing, I detect efforts by the BlackRock defendants in particular to import antitrust concepts into the controlling shareholder inquiry, via the suggestion that agreements can only be inferred if there’s evidence that the parties sacrificed their immediate self-interest in service of a larger goal.  Correctly, I think, McCormick chose not to pursue that argument.

Third, though, I get back to my problem with this entire line of precedent, which is well-illustrated by this case.  We’re talking about a transaction structured to benefit a small number of shareholders with outsized voting power and management control; BlackRock and HC Partners had veto rights and were intimately involved in the planning stage even before the presentation to the Board.  If the goal is to protect the public stockholders, why on earth should it matter whether these two formally agreed to act together? Whether they did or they didn’t wouldn’t make the transaction any less favorable to them, or any less coercive to the public stockholders.  And that’s because control exists on a spectrum, not as an on/off switch, and two large investors with concurrent interests, board representation, and 46.1% of the voting power are just as threatening to the public stockholders, and exert just as much influence, whether they’ve formally agreed to act together or not.  Plus, recall that the whole (purported) reason controlling shareholder transactions cannot be cleansed by a shareholder vote is that we presume shareholders are afraid to buck a controller.  Shareholders can’t be intimidated by a secret agreement they know nothing about; if we were truly serious about inquiring into shareholder coercion, we’d be asking about shareholder perceptions of an agreement, not whether there actually was one.  So what we’re seeing, again, is how the “controlling shareholder” legal analysis imposed by Corwin/MFW is often divorced from the underlying business reality, which ultimately leads courts down a garden path of irrelevance.

December 28, 2019 in Ann Lipton | Permalink | Comments (2)

Wednesday, December 25, 2019

ICYMI: #corpgov Midweek Roundup (Dec. 25, 2019)

December 25, 2019 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 24, 2019

Did A Child Die to Make Your Smartphone, Tablet, Laptop, or Car?

Happy holidays! Billions of people around the world are celebrating Christmas or Hanukah right now. Perhaps you’re even reading this post on a brand new Apple Ipad, a Microsoft Surface, or a Dell Computer. Maybe you found this post via a Google search. If you use a product manufactured by any of those companies or drive a Tesla, then this post is for you. Last week, a nonprofit organization filed the first lawsuit against the world’s biggest tech companies alleging that they are complicit in child trafficking and deaths in the cobalt mines of the Democratic Republic of Congo. Dodd-Frank §1502 and the upcoming EU Conflict Minerals Regulation, which goes into effect in 2021, both require companies to disclose the efforts they have made to track and trace "conflict minerals" -- tin, tungsten, tantalum, and gold from the DRC and surrounding countries. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. The EU and US regulators believe that consumers might make different purchasing decisions if they  knew whether companies source their minerals ethically. The EU legislation, notably, does not limit the geography to the DRC, but instead focuses on conflict zones around the world.

If you’ve read my posts before, then you know that I have written repeatedly about the DRC and conflict minerals. After visiting DRC for a research trip in 2011, I wrote a law review article and co-filed an amicus brief during the §1502 litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rule, and here about the differences between the EU and US rule. Because of the law and pressure from activists and socially-responsible investors, companies, including the defendants, have filed disclosures, joined voluntary task forces to clean up supply chains, and responded to shareholder proposals regarding conflict minerals for years. I will have more on those initiatives in my next post. Interestingly, cobalt, the subject of the new litigation, is not a “conflict mineral” under either the U.S. or E.U. regulation, although, based on the rationale behind enacting Dodd-Frank §1502, perhaps it should have been.  Nonetheless, in all of my research, I never came across any legislative history or materials discussing why cobalt was excluded.

The litigation makes some startling claims, but having been to the DRC, I’m not surprised. I’ve seen children who should have been in school, but could not afford to attend, digging for minerals with shovels and panning for gold in rivers. Although I was not allowed in the mines during my visit because of a massacre in the village the night before, I could still see child laborers on the side of the road mining. If you think mining is dangerous here in the U.S., imagine what it’s like in a poor country with a corrupt government dependent on income from multinationals.

The seventy-nine page class action Complaint was filed filed in federal court in the District of Columbia on behalf of thirteen children claiming: (1) a violation of the Trafficking Victims Protection Reauthorization Act of 2008; (2) unjust enrichment; (3) negligent supervision; and (4) intentional infliction of emotional distress. I’ve listed some excerpts from the Complaint below (hyperlinks added):

Defendants Apple, Alphabet, Dell, Microsoft, and Tesla are knowingly benefiting from and providing substantial support to this “artisanal” mining system in the DRC. Defendants know and have known for a significant period of time the reality that DRC’s cobalt mining sector is dependent upon children, with males performing the most hazardous work in the primitive cobalt mines, including tunnel digging. These boys are working under stone age conditions for paltry wages and at immense personal risk to provide cobalt that is essential to the so-called “high tech” sector, dominated by Defendants and other companies. For the avoidance of doubt, every smartphone, tablet, laptop, electric vehicle, or other device containing a lithium-ion rechargeable battery requires cobalt in order to recharge. Put simply, the hundreds of billions of dollars generated by the Defendants each year would not be possible without cobalt mined in the DRC….

Plaintiffs herein are representative of the child cobalt miners, some as young as six years of age, who work in exceedingly harsh, hazardous, and toxic conditions that are on the extreme end of “the worst forms of child labor” prohibited by ILO Convention No. 182. Some of the child miners are also trafficked. Plaintiffs and the other child miners producing cobalt for Defendants Apple, Alphabet, Dell, Microsoft, and Tesla typically earn 2-3 U.S. dollars per day and, remarkably, in many cases even less than that, as they perform backbreaking and hazardous work that will likely kill or maim them. Based on indisputable research, cobalt mined in the DRC is listed on the U.S. Department of Labor’s International Labor Affairs Bureau’s List of Goods Produced with Forced and Child Labor.

When I mentioned above that I wasn’t surprised about the allegations, I mean that I wasn’t surprised that the injuries and deaths occur based on what I saw during my visit to DRC. I am surprised that companies that must perform due diligence in their supply chains for conflict minerals don’t perform the same kind of due diligence in the cobalt mines. But maybe I shouldn't be surprised at all, given how many companies have stated that they cannot be sure of the origins of their minerals. In my next post, I will discuss what the companies say they are doing, what they are actually doing, and how the market has reacted to the litigation. What I do know for sure is that the Apple store at the mall nearest to me was so crowded that people could not get in. The mall also has a Tesla showroom and people were gearing up for test drives. Does that mean that consumers are not aware of the allegations? Or does that mean that they don’t care?  I’ll discuss that in the next post as well.

Wishing you all a happy and healthy holiday season.

December 24, 2019 in Compliance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Litigation, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Saturday, December 21, 2019

What is ESG Anyway?

I have previously commented that many investments describe themselves as “sustainable” or “ESG” (environmental, social, governance) focused, without much standardization as to what those terms mean – and I’ve criticized the SEC for failing to step in to create a set of uniform definitions.

Turns out, the SEC might finally be taking some action, though it’s not necessarily what I’d hoped for:

Many investment firms have been touting new products as socially responsible. Now, regulators are scrutinizing some funds in an attempt to determine whether those claims are at odds with reality.

The Securities and Exchange Commission has sent examination letters to firms as record amounts of money flow into ESG funds. These funds broadly market themselves as trying to invest in companies that pursue strategies to address environmental, social or governance challenges, such as climate change and corporate diversity.

But there have been critics of the growth in these funds. Some argue investment funds should focus solely on returns, and some firms have faced questions about how strictly they adhere to ESG principles….

One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for a list of the stocks it had recommended to clients, its models for judging which companies are environmentally or socially responsible, and its best- and worst-performing ESG investments, ….

The SEC also homed in on proxy voting in the letter, which some investors say is a powerful tool that can be used to influence a company’s governance and might show how an investment fund is carrying out its ESG goals. The letter asked for proxy voting records and documents that related to how the adviser decided to vote on an ESG issue….

Senior SEC officials have sometimes expressed concern that focusing too narrowly on corporate morality could undermine a money manager’s duty to act in the best interest of clients. That could become a problem for pension funds pursuing ESG strategies if their retirees and beneficiaries aren’t as interested in sustainability but are nevertheless locked into funds’ investment choices, Republican SEC Commissioner Hester Peirce said last year.

Ms. Peirce has criticized ESG for having no enforceable or common meaning.

“While financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled,” she said in a speech last year to California State University Fullerton’s Center for Corporate Reporting and Governance….

Notice there are two separate ideas here, and the article blurs them together.  One idea is that retail investors can’t tell what they’re buying when a fund is labeled “ESG.”  Another idea is that funds should not be permitted to elevate “sustainability” metrics over wealth maximization, even if investors would prefer they did.  And that confusion goes to the heart of my problem with the ESG label as applied to funds.  It can mean at least three things:

(1) I morally/ethically do not want to profit off of some kind of activities, and therefore, even if they would maximize my returns, I don’t want to invest in them;

(2) I am hoping to use my investment dollars to encourage certain kinds of socially responsible activities that might not otherwise get sufficient funding, and I am willing to accept sub-par returns to do that (“impact investing”); or

(3) I believe ESG metrics are one mechanism for maximizing returns because social responsibility is ultimately profitable.

Now, within these categories, there are lots of questions.  Like, if you’re willing to accept below-market returns in order to make socially responsible investments – either for ethical reasons, or because you’re hoping to make an impact – what counts as an ethical investment, or an unethical one?  What kinds of “impact” do you want to have – i.e., how will you define the kinds of beneficial projects that otherwise would not be funded but for your social responsibility considerations?  And how far below market are you willing to go?  Is there a point where you’ll give up and say hey, I’ll go all in on Exxon if it’ll put food on the table? 

Additionally, before investors can make any kind of ESG-investment, they need metrics that describe the characteristics of a particular instrument, so that they understand what it means to say a particular project or instrument is “green” or environmentally-friendly or “sustainable.”  That’s why Europe is working toward a taxonomy that would categorize different projects according to their environmental impact.  Notably, Europe is explicit that these categorizations are based on the greenness of the project for the purpose of advancing environmental goals; they are not categorizations based on an idea that green projects are somehow long-run more profitable.  That determination, and its relevance to a particular investor or asset manager, is left to the investor, who will now simply be informed as to whether a project that says it has certain environmental effects really in fact has those effects.

In the US, of course, we don’t have any kind of labeling system – you can call any project green or sustainable and no one will stop you, which is why market actors will pay actual cash money for a clear assessment of the environmental impact of specific projects.  And because the SEC has apparently given up on developing standardized metrics in favor of, I dunno, preventing shareholders from communicating their priorities to portfolio companies, Europe’s going to be the market leader here.

(For the record, I’m not at all persuaded by Commissioner Peirce’s claim that the SEC’s hands are tied because financial reporting is more reliable than ESG reporting; as I previously argued, modern financial reporting standards are the product of a nearly century-old public-private partnership spurred by the federal securities laws.  Regulation creates the standardization; it’s not necessarily the other way around.)

But even after an instrument is accurately described in terms of its environmental and social effects, investors can’t decide whether those effects add up to “buy” “hold” or “sell” without a clear sense of why they’re asking about those effects in the first place, namely, their higher order strategy: Are they asking so they can follow their morals, so they can make an impact, or because they think ESG is wealth-maximizing? Because until you know that, you don’t know what to do with a specific green, green-ish, or brown investment opportunity.

And in the US, we don’t even have that higher order labeling system.  Europe, again, is ahead of us: UK’s Investment Association recently put out a framework that tries to distinguish between these categories, and urged asset managers to label funds accordingly.  But there’s no common language in the US.

And the reason there isn’t, I’d argue, is because there are a lot of different groups who have an interest in obscuring the distinctions.  Just as individual companies like to claim they have a broader social purpose in order to free themselves from responsibility to one constituency (i.e., shareholders and regulators), asset managers, as well, want to earn the higher fees that come with the ESG label while avoiding any of the commitments associated with it.  See, e.g., Dana Brakman Reiser & Anne M. Tucker, Buyer Beware: Variation and Opacity in ESG and ESG Index Funds (forthcoming Cardozo L. Rev.).  Meanwhile, various advocacy and interest groups have their own (obvious) reasons to try to convince investors that it is entirely costless to insist on socially-responsible behavior from their portfolio companies. 

All of which is to say, to the extent the SEC wants to make sure that ESG funds are clear on their strategy – THIS FUND IS FOR PEOPLE WHO WILL SACRIFICE WEALTH FOR MORALS, AT LEAST UP TO A POINT, AND HERE IS OUR PLAN versus THIS FUND IS FOR PEOPLE WHO BELIEVE THEY CAN DO WELL BY DOING GOOD, AND HERE IS OUR PLAN – I am all for it and believe it would be a great improvement in the marketplace.

But there’s a second issue that I’ve discussed in this space, namely, are funds even permitted to sacrifice wealth to achieve other goals?  Normally, you’d think, if a retail investor understands what they’re doing, why shouldn’t they be able to choose a fund that prioritizes morals over money?  But the latest suggestions from the Trump administration are that, at least to the extent the fund is regulated by ERISA, namely, it’s a private retirement fund, those choices are flat-out prohibited.  

And if that’s what the SEC is after, well, I have to ask – what does the SEC have against markets?

December 21, 2019 in Ann Lipton | Permalink | Comments (3)

Wednesday, December 18, 2019

ICYMI: #corpgov Midweek Roundup (Dec. 18, 2019)

December 18, 2019 in Stefan J. Padfield | Permalink | Comments (0)